Five Point Holdings LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF ORGANIZATION AND OPERATIONS

Heritage Fields LLC, a Delaware limited liability company (the “Company”), was formed on January 20, 2005. On July 12, 2005, the Company purchased property that was the site of the former Marine Corps Air Station, El Toro from the United States Department of the Navy (“Navy”), located in Irvine, California (the “Property”). On December 22, 2005, the Company conveyed its rights, title, and interests in the Property to the Company’s subsidiary, Heritage Fields El Toro, LLC, a Delaware limited liability company (“HF El Toro”) at the Company’s original cost for the purpose of developing and selling homesites and certain commercial sites in a mixed-use and residential community located on the Company’s Property (the “Project”).

The Company previously had two classes of membership interests, Percentage Interests and Legacy Interests. The Company is managed by an Executive Committee comprised of representatives appointed by only the holders of Percentage Interests. The holders of Legacy Interests were entitled to receive certain priority distributions, which were fully satisfied during the year ended December 31, 2024, and as a result of which, the Legacy Interests are no longer deemed to be outstanding (see Note 6). The holders of the Percentage Interests will receive all other distributions.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidation—The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the Company’s accounts and all of its direct and indirect wholly-owned subsidiaries’ accounts. All intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates—The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.

Concentration of Credit Risk—The Company’s inventories are all located in Irvine, California. The Company is subject to risks incidental to the ownership, development, and operation of commercial and residential real estate. These include, among others, the risks normally associated with changes in the general economic climate in the communities in which the Company operates, trends in the real estate industry, availability of land for development, changes in tax laws, interest rate levels, availability of financing, and potential liability under environmental and other laws.

The Company’s credit risk relates primarily to cash and cash equivalents, notes receivable and contract assets. Cash accounts at certain institutions are currently insured by the Federal Deposit Insurance Corporation up to $250,000 in aggregate. At various times the Company maintained cash account balances in excess of insured amounts.

Cash equivalents—Cash equivalents are short-term investments that have original maturity dates of three months or less. The carrying amount approximates fair value due to the short-term nature of these investments.

Land under development—Land under development is stated at cost, unless it is determined to be impaired, in which case the impaired land under development is written down to fair value. Land under development includes land, land development costs, real estate taxes, and interest related to development. Included in land development costs are costs to entitle and permit the land for its intended use; costs incurred for infrastructure projects, such as schools, sewer, and roads; and site costs such as grading and amenities to bring the land to a finished state. Certain land development costs are reimbursable through development agreements or other agreements with City of Irvine (the “City”) or other agencies or recoverable through insurance or other agreements and offset development costs when received. Total reimbursements and recoveries were $167.3 million, $89.6 million and $43.7 million for the years ended December 31, 2024, 2023 and 2022, respectively. Development overhead and selling expenses are expensed as incurred.

Cost of land sales are allocated to residential homesites and commercial sites within the Project using the relative sales value method. Since this method requires the Company to estimate future development costs and expected revenue for the entire Project, the profit margin on subsequent land sales will be affected by both changes in the estimated total revenues, as well as any changes in the estimated total development costs of the Project. Accordingly, these estimates are reviewed regularly and revised for changes in actual experience, changes in revenue and cost estimates and changes in development plans. Given that development expenditures are capitalized to land under development and reflected in the consolidated statements of operations over the periods in which the Company has land sales, which generally includes future periods, the non-cash cost of land sales are reflected as an add back to net income in the consolidated statements of cash flows.

Land under development is reviewed for potential impairment when events or changes in circumstances indicate that the carrying value of land under development may not be recoverable. Impairment indicators for the Project include, but are not limited to significant increases in land development costs, significant decreases in pace and pricing of home sales within the Project and surrounding areas, and political and societal events that may negatively impact the local economy. There were no impairments identified for the years ended December 31, 2024, 2023 and 2022.

Homes under construction—Homes under construction were a result of a fee build agreement with an unrelated third-party (“Fee Builder”) that the Company contracted to build and act as a sales agent for a population of residential homes within the Project. Land, land development, amenities and home construction costs attributed to the fee build agreement were capitalized to homes under construction and allocated to cost of sales using the relative sales value method when homes were sold. The Company set and approved the price at which the completed homes were sold to homebuyers. Costs incurred for tangible assets constructed solely for model homes directly used in the sale process were capitalized and depreciated over the expected selling life of the fee build community which was complete as of December 31, 2022. All other selling and marketing costs, such as commissions and advertising, were expensed as incurred.

Investment in joint venture—For investments in entities that the Company does not control, but exercises significant influence, the Company uses the equity method of accounting. The Company’s judgment with regard to control involves consideration of various factors including the form of ownership, representation of the entity’s governance, and the ability to participate in policy-making decisions. Investments accounted for under the equity method of accounting are recorded at cost and adjusted for the Company’s share of cash contributions, cash distributions, and gain or loss of the entity’s earnings. The Company eliminates a portion of intra-entity profits resulting from land sales between the Company and the joint venture until the assets are sold to a third-party.

In 2021, the Company obtained a 10% interest in an entity (the “Landbank Venture”) organized for the purpose of taking assignment from homebuilders land purchase and sale agreements and purchasing residential lots within the Project while concurrently entering into option and development agreements with homebuilders in which the homebuilder retains the option to purchase the land to construct and sell homes. The Company sold land to the Landbank Venture in 2021 and eliminated its pro-rata share of the intra-entity profits generated from the sale through earnings (loss) from unconsolidated entities until the land was sold by the Landbank Venture to third-party homebuilders.

As of December 31, 2023, the third-party homebuilders had exercised all the options from the option and development agreements with the Landbank Venture, and the Landbank Venture had distributed all available cash. The Company’s investment in the Landbank Venture had no carrying value at December 31, 2024 and 2023.

Note Receivables—Note receivables held by the Company are reflected at principal and accrued interest amounts due, net of an allowance for expected credit losses or discounts, if any. Interest payments are accrued in the period earned based on the stated interest rate and the outstanding principal balance, less any interest discounts stipulated by the note. Included in contract assets and receivables, net on the accompanying consolidated balance sheets are notes and accrued interest receivables that the Company has with builders that are constructing affordable housing apartments on the Project (“Affordable Notes”). The Company records a discount on the principal balance for Affordable Notes when the note is zero interest bearing or contains other terms that are below market rate. Any such discount on Affordable Notes is capitalized as a project cost. The Company monitors the payment provisions of each note when determining past due or delinquency status.

Revenue Recognition—Under Accounting Standards Codification (“ASC”) Topic 606, Revenue From Contracts With Customers (“ASC 606”), revenues from land sales are recognized when the Company satisfies the performance obligation at a point in time, which typically occurs when the control of the land passes to its customers. Revenue is recognized in an amount that reflects the consideration the Company expects to be entitled to receive (i.e. the transaction price) in exchange for the transfer of land. The transaction price typically contains fixed and variable components in which the fixed consideration represents the stated purchase price for the land. Some of the Company’s purchase and sale agreements contain a profit participation provision, a variable form of consideration, whereby the Company receives from homebuilders a portion of profit after the builder has received an agreed-upon margin from home sales. If the project profitability falls short of the participation threshold, no additional revenues are received. Profit participation revenue of $39.8 million, $21.0 million and $19.6 million were recognized for the years ended December 31, 2024, 2023 and 2022, respectively. In addition, some residential homesite sale agreements contain a price participation provision, a variable form of consideration, requiring the homebuilder to pay additional consideration as a percentage of the home sale price. Price participation revenue of $67.6 million, $144.9 million and $2.0 million were recognized for the years ended December 31, 2024, 2023 and 2022, respectively. The Company estimates the amount of variable price and profit consideration it expects to be entitled to receive and recognizes revenue and a contract asset at the time of land sale to the extent that it is not probable that a significant reversal of revenues would result when the contingency of the variable consideration is resolved. The Company utilizes current home sale pricing offered by homebuilders in the community along with estimates of price appreciation and construction costs when determining the estimate of the amount of variable consideration to recognize.

A contract asset or liability is recognized when the timing of the satisfaction of a performance obligation is different from the timing of the payments made by customers. Contract assets typically consist of estimates of contingent or variable consideration that has been included in the transaction price and recognized as revenue before the contingency is resolved and the contractual payment is due. Contract liabilities typically consist of payments received prior to satisfying the associated performance obligation, including land sale deposits received from a customer. Changes in estimates of variable components of transaction prices could result in cumulative catch-up adjustments to revenue and contract assets in periods after the Company transfers control of the land to the builder.

Home sale revenues are recognized at the time of escrow closing, when title to and possession of the home is transferred to the homebuyer, and the single performance obligation of the Company, the delivery of a completed home, has been satisfied.

Fair Value Measurements—The accounting guidance for fair value measurements and disclosures emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the guidance establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions. The hierarchy classifies the inputs used to determine fair value into three levels as follows:

Level 1—Quoted prices for identical instruments in active markets.

Level 2—Quoted prices for similar instruments in active markets or inputs, other than quoted prices, that are observable for the instrument either directly or indirectly.

Level 3—Significant inputs to the valuation model are unobservable.

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset or liability.

Income Taxes—The consolidated financial statements contain no provision for income taxes since the income or loss of the Company flows through to the members who are responsible for including their share of the taxable results of operations on their respective tax returns.

Accounting Standards Updates—In November 2024, the FASB issued ASU 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses, which primarily requires disclosure of disaggregated information about certain income statement expense line items in the notes to the financial statements on an interim and annual basis. For entities that meet the definition of a public business entity, the standard is effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027, with early adoption permitted and can be applied on either a prospective or retrospective basis. The Company is currently evaluating the effect of this update on the Company’s financial statement disclosures.

3. CONTRACT ASSETS AND RECEIVABLES, net

Contract assets and receivables, net as of December 31, 2024 and 2023, consisted of the following (in thousands):

Affordable Notes, net

Principal and interest collected on affordable notes, net, was $0.6 million, $0.9 million and $3.1 million for the years ended December 31, 2024, 2023 and 2022, respectively. Interest income on affordable notes, net, was $0.4 million, $0.5 million and $0.3 million for the years ended December 31, 2024, 2023 and 2022, respectively, and are included in interest income on the accompanying consolidated statements of operations. At December 31, 2024 and 2023, the Company had an allowance for credit losses of $1.5 million and $1.5 million, respectively, associated with the affordable notes.

Contract Assets

Contract assets consist of variable consideration such as price participation and profit participation. The opening and closing balances of the Company’s contract assets for the year ended December 31, 2024 were $150.8 million and $153.6 million, respectively. The net increase of $2.9 million between the opening and closing balances of the Company’s contract assets primarily resulted from additional price participation revenue recognized during the period that resulted from changes in the estimated constrained variable consideration that reflects updated pricing and absorption assumptions used to calculate expected price participation payments, partially offset by the receipt of $63.7 million in price participation payments from homebuilders attributed to prior land sales.

The opening and closing balances of the Company’s contract assets for the year ended December 31, 2023 were $25.6 million and $150.8 million, respectively. The net increase of $125.2 million between the opening and closing balances of the Company’s contract assets primarily resulted from variable consideration related to a residential sale that closed in 2023 in the form of price participation that will be payable when homes are sold to homebuyers, partially offset by $21.5 million in receipts related to prior land sales.

4. CASH FLOW PARTICIPATION DEBT

In 2010, HF El Toro entered into an unsecured cash flow participation agreement in connection with a series of transfers, payoffs, and pay downs related to its then outstanding loan facility (“Debt Restructure”). The cash flow participation agreement, was determined to be a new debt instrument and in accordance with ASC 470-50, Modifications and Extinguishments was recorded at its fair value on the date of the Debt Restructure. Under the terms of the participation agreement, 4.66% of capital distributions (as defined in the participation agreement) made by HF El Toro are due to the holder of the participation agreement. When a participation payment is made or reasonably assured to be made, the Company used a proportional interest method to determine the portion of the payment that represents interest expense and the portion applied to the principal. The full amount of the principal balance had been satisfied as of December 31, 2024 and $1.0 million was outstanding as of December 31, 2023 and is included in debt on the accompanying consolidated balance sheet. Future participation payments will be recognized fully as additional interest on the original principal.

Total interest incurred related to the participation agreement during the years ended December 31, 2024, 2023 and 2022 was$26.6 million, $23.4 million and $7.8 million, respectively, and was capitalized to land under development in the accompanying consolidated balance sheets.

5. ACCOUNTS PAYABLE AND OTHER LIABILITIES

Accounts payable and other liabilities as of December 31, 2024 and 2023, consisted of the following (in thousands):

6. REDEEMABLE LEGACY INTERESTS

The Legacy Interest was classified as temporary equity and reported on the consolidated balance sheet as Redeemable Legacy Interests. The Legacy Interests were not reported as permanent equity within Members’ Capital as management believed that it was probable that the Legacy Interests would be fully redeemed through distributions of available cash in accordance with the terms of the amended and restated limited liability company agreement.

The holders of Legacy Interests were entitled to receive i) $476.0 million in priority distributions over Percentage Interests, plus ii) an amount up to $89.0 million in distributions paid jointly with distributions to holders of Percentage Interests. Distributions of $18.1 million, $48.2 million and $16.5 million were made to holders of the Legacy Interest during the years ended December 31, 2024, 2023 and 2022, respectively. As of December 31, 2021, the $476.0 million priority distributions had been fully paid, and with the distributions to the holders of Legacy Interests during the year ended December 31, 2024, the Company fully satisfied the $89.0 million maximum participating Legacy Interest distribution rights, as a result of which, the Legacy Interests are no longer deemed to be outstanding.

7. RELATED PARTY TRANSACTIONS

Management Fee

HF El Toro and Five Point Communities Management, Inc., as nominee for the benefit of Five Point Communities, LP (the “Management Company”), are parties to a development management agreement in which the Management Company has been engaged to manage the development of the Project and to generally supervise the day-to-day affairs of the Project. The Management Company is an affiliate of a member of the Company that holds a 37.5% Percentage Interest. The development management agreement was amended and restated on May 2, 2016 and subsequently amended and restated on April 21, 2017 (“A&R DMA”) to among other things, extend the initial term until December 2021. The A&R DMA’s initial term was extended by mutual agreement of the parties to December 31, 2022 (the “2022 Extension”) and in December 2022, an amendment to the A&R DMA was entered into in which the A&R DMA was renewed through December 31, 2024 (the “First Renewal Term Amendment”). In September 2024, an amendment to the A&R DMA was entered into in which the A&R DMA has been renewed through December 31, 2026 (the “Second Renewal Term”). Under the Second Renewal Term, the annual fixed base management fee will be $13.5 million beginning in 2025, which reflects an increase from the $12.0 million annual fixed base management fee under the First Renewal Term. The incentive compensation provisions (described below) of the A&R DMA were not changed pursuant to the Second Renewal Term.

The total annual base management fee incurred for the years ended December 31, 2024, 2023 and 2022 was $12.0 million, $12.0 million and $9.3 million, respectively, and is included in management fee in the accompanying consolidated statements of operations. Incentive compensation payable to the Management Company is calculated generally as 9% of distributions in excess of the priority $476.0 million Legacy Interests. If the A&R DMA is not extended by mutual agreement of the Company and the Management Company beyond December 31, 2026, then the Management Company will remain entitled to future incentive compensation payments at a reduced rate equal to 6.75% of Distributions paid thereafter. Total incentive compensation management fee expense incurred with respect to the A&R DMA for the years ended December 31, 2024, 2023 and 2022 was $82.0 million, $43.4 million and $34.8 million, respectively, and is included in management fee in the accompanying consolidated statements of operations. The amount incurred for the years ended December 31, 2024, 2023 and 2022 represents an estimated amount of incentive compensation attributed to services provided during the periods that are determined to be probable of being paid. Management’s estimate is based on various underlying assumptions which include but are not limited to, the current and projected performance of the Project and the resulting cash that will be available for distributions. Changes in the estimated amount of aggregate payments probable of being made are recognized as a cumulative adjustment in the period the estimate changes. Actual payments of incentive compensation may differ materially from current estimates. During the years ended December 31, 2024, 2023 and 2022, the Company paid $49.1 million, $41.6 million and $14.2 million, respectively, in non-legacy incentive compensation and $1.8 million, $4.9 million and $1.7 million, respectively, in legacy incentive compensation to the Management Company. Non-legacy incentive compensation reflects incentive payments that resulted from distributions to Percentage Interest holders, and legacy incentive compensation reflects incentive payments that resulted from distributions to Legacy Interest holders. As of December 31, 2024 and 2023, $123.9 million and $92.8 million, respectively, was accrued for incentive compensation management fees due to the Management Company, and is included in accrued management fees in the accompanying consolidated balance sheets.

Included in selling, general and administrative costs and expenses in the accompanying consolidated statements of operations for the year ended December 31, 2022 is $3.1 million for general and administrative expenses incurred by the Management Company on behalf of the Company that were reimbursable under the A&R DMA prior to the 2022 Extension. General and administrative expense reimbursements were settled in cash on a monthly basis. In connection with the 2022 Extension of the A&R DMA, the variable cost reimbursement component was eliminated from the A&R DMA, and the annualized base fee was increased to a fixed $12.0 million. At December 31, 2024 and 2023, no balance was accrued for general and administrative expense reimbursements.

Commercial Sub-Management Agreement

Effective June 30, 2013, HF El Toro terminated its commercial development sub-management agreement (“Sub-MA”) with a member of the Company that holds a 12.5% Percentage Interest in the Company. Under the terms of the Sub-MA, certain incentive compensation provisions were vested upon termination. Incentive compensation payments become payable, calculated generally, as 2% of distributions (as defined in the Sub-MA) in excess of the first $476 million of priority Legacy Interests. During the years ended December 31, 2024, 2023 and 2022, total incentive compensation management fee expense incurred pertaining to the Sub-MA was $20.0 million, $10.0 million and $9.1 million, respectively, and is included in management fee in the accompanying consolidated statements of operations. As of December 31, 2024 and 2023, $36.8 million and $28.1 million, respectively, of incentive compensation management fee pertaining to the Sub-MA was accrued and is included in accrued management fees in the accompanying consolidated balance sheets. The amount accrued at December 31, 2024 and 2023 represents an estimated amount of incentive compensation determined to be earned and probable of being paid. Management’s estimate is based on various underlying assumptions which include but are not limited to, the current and projected performance of the Project and the resulting cash that will be available for distributions. Changes in the estimated amount of aggregate payments probable of being made in future periods will be recognized as a cumulative adjustment to management fee expense in the period the estimate changes. Actual payments of incentive compensation may differ materially from current estimates. During the years ended December 31, 2024, 2023 and 2022, the Company paid $11.3 million, $10.3 million and $3.5 million, respectively, in incentive compensation pertaining to the Sub-MA.

Purchase and Sale Agreements

In the normal course of business, the Company may enter into purchase and sale agreements or other contracts with the Company’s members or affiliates of members.

Land sale revenues recognized from related party transactions was $22.6 million, $16.2 million and $12.5 million during the years ended December 31, 2024, 2023 and 2022, respectively, and is included in land sales in the accompanying consolidated statements of operations. The related party land sale revenues primarily relate to profit participation.

8. COMMITMENTS AND CONTINGENCIES

In the routine conduct of its business, the Company is subject to the usual obligations associated with entering into contracts for the purchase, development, and sale of real estate.

In the ordinary course of business and as a part of the entitlement and development process, the Company is required to provide performance bonds to ensure completion of certain development obligations. The Company had outstanding performance bonds of $54.0 million and $20.5 million as of December 31, 2024 and 2023, respectively.

On September 8, 2009, the Irvine City Council approved an Amended and Restated Development Agreement (the “ARDA”) between HF El Toro and the City (on behalf of itself and now as successor agency to the dissolved Irvine Redevelopment Agency, which Irvine Redevelopment Agency was an original party to the ARDA). The ARDA became effective on December 27, 2010 and obligated the Company to construct certain defined public infrastructure improvements (i.e. joint backbone improvements) in and around the Project. The Company will have the right to reimbursement for a portion of the public infrastructure improvement costs from the City of Irvine Community Facilities District No. 2013-3 (“CFD”). The CFD is supported by special taxes levied on landowners within the improvement areas of the CFD. The CFD will also fund certain improvements, operations and maintenance costs of the Orange County Great Park (the “Park”). The Company, as a landowner within the improvement areas will be subject to the special taxes while it owns land within the improvement areas.

On November 26, 2013, HF El Toro and the City entered into a second adjacent landowner agreement (“ALA II”) in which HF El Toro committed to construct or cause the construction of a portion of the Park (the “Great Park Improvements”), which otherwise would have been an obligation of the City to construct under the terms of the ARDA. In addition to the Great Park Improvements, the ALA II and a memorandum of understanding (“MOU”) regarding funding of Marine Way infrastructure improvements committed HF El Toro to perform on certain other defined items as well as it committed HF El Toro to make $20.0 million of certain direct payments to the City beginning in August 2016. As also defined in the agreements, HF El Toro will have the right to receive up to an additional $40.0 million in CFD reimbursements for public infrastructure components of the Great Park Improvements.

During 2019, the Company and the City entered into an amendment to ALA II. The amendment altered the scope of the Great Park Improvements to include water polo, basketball and volleyball facilities that would initially be paid for by the Company and ultimately reimbursed to the Company by the CFD.

In October 2022, the Company and the City entered into the Framework Plan Implementation Agreement (“FPIA”). The FPIA terminated ALA II, as amended, upon the effective date of the FPIA and restructured the Company’s remaining development obligations to the City. Additionally, the Company agreed to pay $18.0 million to the City upon the City completing certain administrative steps but no sooner than 2025. The FPIA became effective on May 16, 2023, subsequent to the completion of a series of approvals and administrative actions in connection with the formation of the new City of Irvine Communities Facilities District No. 2013-3B (“CFD 2013-3B”). CFD 2013-3B replaced the existing CFD for those development districts where development by the Company has not yet occurred. Upon the effective date of the FPIA, the Company’s remaining obligations under the ALA II were terminated. At each of December 31, 2024 and 2023, the carrying balance of amounts payable to the City related to the FPIA totaled $18.0 million and is included within accounts payable and other liabilities on the consolidated balance sheets.

The Company may be a party to various claims, legal actions, and complaints arising in the ordinary course of business. The Company believes, the disposition of these other matters would not have a material adverse effect on the Company’s consolidated financial condition, results of operations, or cash flows.

As a significant landowner, developer, and holder of commercial properties, there exists the possibility that environmental contamination conditions exist that would require the Company to take corrective action. The Company believes any potential costs will not materially affect its consolidated financial statements.

9. SUBSEQUENT EVENTS

The Company has evaluated subsequent events through February 21, 2025 the date the consolidated financial statements were issued, and has determined that, other than as disclosed, no events or transactions have occurred subsequent to December 31, 2024 that require adjustments to or disclosure in the Company’s consolidated financial statements.