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Consolidation of a Real Estate Development Company | 3 Months Ended
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Mar. 31, 2017
Organization, Consolidation and Presentation of Financial Statements [Abstract] |
Consolidation of a Real Estate Development Company | Consolidation of a Real Estate Development Company The Partnership, indirectly through certain Carlyle real estate investment funds, has an investment in Urbplan Desenvolvimento Urbano S.A. (“Urbplan”), a Brazilian residential subdivision and land development company. In late 2012, it was determined that Urbplan was facing serious liquidity problems and would require additional capital infusions to continue operations. The Partnership and certain of its senior Carlyle professionals provided capital to Urbplan through one of the Carlyle investment funds starting in 2013. The Partnership concluded that Urbplan was a VIE as of September 30, 2013 because Urbplan’s equity investment at risk was not sufficient to permit it to finance its activities without additional financial support. The Partnership also concluded that it was the primary beneficiary of Urbplan since the Partnership has the power to direct the activities of Urbplan that most significantly impact its economic performance and the Partnership’s investments in Urbplan will absorb losses incurred by Urbplan. As such, the Partnership began consolidating Urbplan into its consolidated financial statements as of September 30, 2013. Due to the timing and availability of financial information from Urbplan, the Partnership consolidates the financial position and results of operations of Urbplan on a financial reporting lag of 90 days. The Partnership will disclose the effect of intervening events at Urbplan that materially affect the financial position or results of operations of the Partnership, if any. The assets and liabilities of Urbplan are held in legal entities separate from the Partnership; the Partnership has not guaranteed or assumed any obligation for repayment of Urbplan’s liabilities nor are the assets of Urbplan available to meet the liquidity requirements of the Partnership. Urbplan has substantially completed construction of its development projects, and no new development projects have been approved. At this time, Urbplan's projected revenues and cash flow may be insufficient to timely satisfy all of Urbplan's debt obligations, necessitating a restructuring of its debt obligations or a potential bankruptcy reorganization or insolvency proceeding. Furthermore, while the Partnership has not expressly assumed any of Urbplan's obligations or liabilities, in any such proceeding customers or other creditors in certain circumstances might seek to assert claims against the Partnership and its affiliate assets unrelated to Urbplan under certain consumer protection, labor or other laws. Urbplan is currently a party to a significant number of claims filed against Urbplan by its customers. In addition, Urbplan is a party to various other litigation, government investigations and proceedings, disputes and other potential claims. As of March 31, 2017, the Partnership has recorded liabilities of approximately $70 million related to such matters in other liabilities of a consolidated real estate VIE. The Partnership does not believe it is probable that the outcome of any existing Urbplan litigation, disputes or other potential claims will materially affect the Partnership or these consolidated financial statements. From 2013 through March 31, 2017, $375.8 million has been funded to Urbplan by the Partnership and its senior Carlyle professionals (including losses from related foreign currency forward contracts). The Partnership has funded $128.3 million of the $375.8 million and the remaining $247.5 million has been funded by senior Carlyle professionals indirectly through the Partnership. For the three months ended March 31, 2017, $6.7 million was funded to Urbplan by the Partnership. No contractual or other obligations exist to provide additional financial support to Urbplan from the Partnership. Urbplan continues to seek opportunities to restructure its existing debt obligations to reduce its cash requirements. The Partnership does not anticipate providing any additional financial support to satisfy Urbplan's debt obligations. The Partnership may consider providing additional financial support for other purposes, depending on the circumstances at the time, including the ability of Urbplan to satisfactorily restructure its debt obligations with its financial creditors. The Partnership does not expect any such additional funding to exceed $25 million. The assets and liabilities recognized in the Partnership’s condensed consolidated balance sheets as of March 31, 2017 and December 31, 2016 related to Urbplan were as follows:
| As of
| March 31, 2017 |  | December 31, 2016
| (Dollars in millions)
Receivables and inventory of a consolidated real estate VIE: |  |  |
Customer and other receivables | $ | 114.7 |  |  | $ | 99.4 |
Inventory costs in excess of billings and advances | 59.1 |  |  | 46.0 |
| $ | 173.8 |  |  | $ | 145.4 |
Other assets of a consolidated real estate VIE: |  |  |
Restricted investments | $ | 13.8 |  |  | $ | 12.7 |
Fixed assets, net | 0.2 |  |  | 0.2 |
Deferred tax assets | 4.3 |  |  | 9.1 |
Other assets | 14.4 |  |  | 9.5 |
| $ | 32.7 |  |  | $ | 31.5 |
Loans payable of a consolidated real estate VIE, at fair value (principal amount of $141.5 million and $144.4 million as of March 31, 2017 and December 31, 2016, respectively) | $ | 77.8 |  |  | $ | 79.4 |
Other liabilities of a consolidated real estate VIE: |  |  |
Accounts payable | $ | 13.1 |  |  | $ | 14.6 |
Other liabilities | 164.4 |  |  | 109.9 |
| $ | 177.5 |  |  | $ | 124.5 |
The revenues and expenses recognized in the Partnership’s condensed consolidated statements of operations for the three months ended March 31, 2017 and 2016, respectively, related to Urbplan were as follows:
| Three Months Ended March 31, 2017 |  | Three Months Ended March 31, 2016
| (Dollars in millions)
Revenue of a consolidated real estate VIE |  |  |
Land development services | $ | 91.8 |  |  | $ | 19.1 |
Investment income | 0.8 |  |  | 5.3 |
| $ | 92.6 |  |  | $ | 24.4 |
Interest and other expenses of a consolidated real estate VIE: |  |  |
Costs of products sold and services rendered | $ | 55.9 |  |  | $ | 10.7 |
Interest expense | 8.9 |  |  | 7.5 |
Change in fair value of loans payable | 0.6 |  |  | 0.7 |
Compensation and benefits | 1.4 |  |  | 1.7 |
G&A and other expenses | 52.8 |  |  | 2.8 |
| $ | 119.6 |  |  | $ | 23.4 |
The following is a summary of the significant classifications of assets and liabilities of Urbplan: Customer and other receivables – This balance consists primarily of amounts owed for land development services using the completed contract method. Customer receivables accrue interest at rates ranging from 9% to 12% per year and are secured by the underlying real estate. Most of the receivables are pledged as collateral for Urbplan’s borrowings. The carrying value of the receivables includes an appropriate allowance for estimated uncollectible accounts to reflect any loss anticipated on the balances. Urbplan calculates this allowance based on its history of write-offs, the level of past-due accounts based on the contractual terms of the receivables, and its relationships with, and the economic status of, Urbplan’s customers. Inventory costs in excess of billings and advances – This balance consists primarily of capitalized land development cost, net of approximately $29.2 million and $91.5 million of customer advances received as of March 31, 2017 and December 31, 2016, respectively, and lots returned or otherwise recovered by Urbplan. Urbplan records valuation adjustments on inventory when events and circumstances indicate that the inventory may be impaired and when the cash flows estimated to be generated by the real estate project are less than its carrying amount. Real estate projects that demonstrate potential impairment indicators are tested for impairment by Urbplan by comparing the expected undiscounted cash flows for the real estate project to its carrying value. For those real estate projects whose carrying values exceed the expected undiscounted cash flows, Urbplan estimates the fair value of the real estate projects. Impairment charges are recorded if the fair value of the inventory is less than its carrying value. The estimates used in the determination of the estimated fair value of the real estate projects were based on factors known to Urbplan at the time such estimates were made and the expectations of future operations and economic conditions. Should the estimates or expectations used in determining estimated fair value deteriorate in the future, Urbplan may be required to recognize additional impairment charges and write-offs related to real estate projects. Loans payable of a consolidated real estate VIE – This balance consists of Urbplan’s borrowings for its real estate development activities. The estimated fair value approximates 55% of the outstanding principal amounts of the loans as of March 31, 2017. The fair value of the loans was based on discounted cash flow analyses which considered the liquidity and current financial condition of Urbplan and applicable discount rates. The Partnership has elected to re-measure the loans at fair value at each reporting period through the term of the loans. The principal amounts of the loans accrue interest at a variable rate based on an index plus an applicable margin. Interest rates are based on: (i) CDI plus a margin of 4.0% (16.2% as of March 31, 2017); (ii) IGP-M plus a margin of 12.0% (16.9% as of March 31, 2017); or (iii) IPCA plus a margin ranging from 8.8% to 15.0% (13.4% to 19.6% as of March 31, 2017). Outstanding principal amounts on the loans based on current contractual terms are payable as follows (Dollars in millions):
2017 | $ | 15.5 |
2018 | 14.8 |
2019 | 22.1 |
2020 | 22.0 |
2021 | 20.1 |
Thereafter | 47.0 |
| $ | 141.5 |
Most of Urbplan’s customer and other receivables and investments have been pledged as collateral for the loans. As of March 31, 2017, substantially all of Urbplan’s loans payable are not in compliance with their related debt covenants or are otherwise in technical default. These violations do not cause a default or event of default under the Partnership’s senior credit facility or senior notes. All of the loans payable of Urbplan are contractually non-recourse to the Partnership. Other liabilities – This balance consists of amounts owed to landowners, commissions payable to brokers, real estate taxes, social charges and other liabilities. This balance also includes amounts accrued for various litigation, government investigations and proceedings, disputes and other potential claims, including claims filed against Urbplan by its customers. Revenue of a consolidated real estate VIE – This balance consists primarily of amounts earned for land development services using the completed contract method and investment income earned on Urbplan’s investments. Under the completed contract method of accounting, revenue is not recorded until the period in which the land development services contract is completed. Interest and other expenses of a consolidated real estate VIE – This balance consists primarily of interest expense on Urbplan’s borrowings, general and administrative expenses, compensation and benefits, and costs associated with land development services. Also included in this caption is the change in the Partnership’s estimate of the fair value of Urbplan’s loans payable during the period. Interest expense is recorded on Urbplan’s borrowings at variable rates as defined. Costs related to Urbplan’s land development services activities are capitalized until the services are complete. Costs associated with advertising, marketing and other selling activities are expensed when incurred. Impairment – Urbplan evaluates its assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such asset may not be recoverable, but not less than annually. Impairment charges are recorded in general and administrative expenses within interest and other expenses of a consolidated real estate VIE. As of March 31, 2017, Urbplan's outstanding commitments for land development services are estimated to be less than $10.0 million of future costs to be incurred.

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