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REAL ESTATE ACTIVATIONS, ACQUISITIONS, DEVELOPMENTS, AND CLOSURES | 9 Months Ended
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Sep. 30, 2014
REAL ESTATE ACTIVATIONS, ACQUISITIONS, DEVELOPMENTS, AND CLOSURES |
4. | REAL ESTATE ACTIVATIONS, ACQUISITIONS, DEVELOPMENTS, AND CLOSURES
On July 31, 2013, CCA acquired in a business combination all of the stock of CAI, a privately held San Diego, California community corrections company that specializes in residential re-entry, home detention, and work furlough programs for San Diego County, the Federal Bureau of Prisons, and United States Pretrial and Probation. CCA acquired CAI as a strategic investment in a complementary business that broadens the scope of solutions it provides, from incarceration through release, and supporting its belief in helping offenders successfully transition to society. The consideration paid for CAI consisted of approximately $36.5 million in cash, excluding transaction related expenses of $0.8 million. The purchase price was allocated based on fair value for the assets acquired and the liabilities assumed. In allocating the purchase price, CCA recorded $7.0 million of goodwill, $26.9 million of identifiable intangible assets, $7.9 million of intangible liabilities, $17.7 million of net tangible assets, and $7.2 million of deferred tax liabilities. Several factors gave rise to the goodwill recorded in the acquisition, such as the expected benefit from synergies of the combination and the long-term contracts within a complementary business that broadens the scope of solutions CCA provides. The results of operations for CAI have been included in the Company’s consolidated financial statements from the date of acquisition. CCA has eight idled facilities that are currently available and being actively marketed to other customers. The following table summarizes each of the idled facilities and their respective carrying values, excluding equipment and other assets that could generally be transferred and used at other facilities CCA owns without significant cost (dollars in thousands):
|  | Design Capacity |  |  | Date Idled |  |  | Net Carrying Values |
Facility |  |  |  | September 30, 2014 |  |  | December 31, 2013 |
Shelby Training Center |  |  | 200 |  |  |  | 2008 |  |  | $ | 452 |  |  | $ | 751 |
Queensgate Correctional Facility |  |  | 850 |  |  |  | 2009 |  |  |  | 11,533 |  |  |  | 11,808 |
Prairie Correctional Facility |  |  | 1,600 |  |  |  | 2010 |  |  |  | 18,516 |  |  |  | 19,366 |
Huerfano County Correctional Center |  |  | 752 |  |  |  | 2010 |  |  |  | 19,214 |  |  |  | 19,800 |
Diamondback Correctional Facility |  |  | 2,160 |  |  |  | 2010 |  |  |  | 43,217 |  |  |  | 44,223 |
Otter Creek Correctional Center |  |  | 656 |  |  |  | 2012 |  |  |  | 24,178 |  |  |  | 24,805 |
Mineral Wells Pre-Parole Transfer Facility |  |  | 2,103 |  |  |  | 2013 |  |  |  | 17,358 |  |  |  | 17,856 |
Marion Adjustment Center |  |  | 826 |  |  |  | 2013 |  |  |  | 13,090 |  |  |  | 13,429 |
|  |  | 9,147 |  |  |  |  |  |  | $ | 147,558 |  |  | $ | 152,038 |
During the three months ended September 30, 2014 and 2013, CCA incurred approximately $2.0 million and $1.4 million, respectively, in operating expenses during the periods such facilities were idle. During the nine months ended September 30, 2014 and 2013, CCA incurred approximately $6.2 million and $4.4 million, respectively, in operating expenses during the periods such facilities were idle. The operating expenses incurred in all periods exclude expenses incurred in connection with the activation of the Diamondback facility which began in the third quarter of 2013 and continued until near the end of the second quarter of 2014, as further described hereafter. CCA considers the cancellation of a contract as an indicator of possible impairment and tested each of the aforementioned facilities for impairment when it was notified by the respective customers that they would no longer be utilizing such facility. CCA concluded in each case that no impairment had occurred. CCA updates the impairment analyses on an annual basis for each of the idled facilities and evaluates on a quarterly basis market developments for the potential utilization of each of these facilities in order to identify events that may cause CCA to reconsider its most recent assumptions. In the third quarter of 2014, CCA entered into a purchase and sale agreement with a third party to purchase its idled Houston Educational Facility in Houston, Texas for $4.5 million. The Houston Educational Facility was one of CCA’s non-core assets that was previously leased to a charter school operator. CCA expects to close on the sale during the fourth quarter of 2014. The net book value of this facility prior to the evaluation for impairment was $6.4 million and, as a result of the impairment indicator resulting from the potential sale of the facility, CCA recorded an impairment of $2.2 million during the second quarter of 2014 to write-down the book value of the facility to the estimated fair value. The potential sale price was used as a proxy for the fair value of the facility. CCA continues to evaluate potential customers and strategic alternatives for its three other non-core idle facilities, the Shelby Training Center, Queensgate Correctional Facility, and Mineral Wells Pre-Parole Transfer Facility. CCA considers these facilities to be non-core because they were designed for uses other than for adult secure correctional purposes. In order to retain federal inmate populations CCA currently manages in the 1,154-bed San Diego Correctional Facility, CCA is constructing the 1,492-bed Otay Mesa Detention Center in San Diego. The existing San Diego Correctional Facility is subject to a ground lease with the County of San Diego. Under the provisions of the lease, the facility is divided into different premises whereby, pursuant to an amendment to the ground lease executed in January 2010, ownership of the entire facility reverts to the County upon expiration of the lease on December 31, 2015. As of September 30, 2014, CCA has invested approximately $102.9 million in the new facility. CCA has developed plans to build the Otay Mesa Detention Center within a construction timeline that coincides with the expiration of the ground lease with the County of San Diego. CCA plans to offer this new facility to house the existing federal inmate populations at the San Diego Correctional Facility. In September 2012, CCA announced that it was awarded a new management contract from the Arizona Department of Corrections to house up to 1,000 medium-security inmates at its 1,596-bed Red Rock Correctional Center in Arizona. The new management contract, which commenced in January 2014, contains an initial term of ten years, with two five-year renewal options upon mutual agreement and provides an occupancy guarantee of 90% of the contracted beds, which is expected to be implemented in two phases. The government partner included the occupancy guarantee in its Request For Proposal (“RFP”) in order to guarantee its access to the beds. Additionally, the contract provides the state of Arizona an option to purchase the Red Rock facility at any time during the term of the contract, including extension options, based on an amortization schedule starting with the fair market value and decreasing evenly to zero over the twenty-year term. In order to prepare the Red Rock facility to house Arizona inmates under this contract, CCA capitalized $20.7 million of facility improvements as of September 30, 2014. The total net book value of the facility is being depreciated over the twenty-year term. In October 2013, CCA entered into a lease for its California City Correctional Center with the California Department of Corrections and Rehabilitation (“CDCR”). The lease agreement includes a three-year base term that commenced December 1, 2013, with unlimited two-year renewal options upon mutual agreement. Annual rent during the three-year base term is fixed at $28.5 million. After the three-year base term, the rent will be increased annually by the lesser of CPI (Consumer Price Index) or 2%. CCA will be responsible for repairs and maintenance, property taxes and property insurance, while all other aspects and costs of facility operations will be the responsibility of the CDCR. CCA also provided $10.0 million of tenant allowances and improvements. In November 2013, CCA announced its decision to re-commence construction of a correctional facility in Trousdale County, Tennessee. CCA suspended construction of this facility in 2009 until it had greater clarity around the timing of a new contract. In October 2013, Trousdale County received notice from the Tennessee Department of Corrections of its intent to partner with the County to develop a new correctional facility to house state of Tennessee inmates. In April 2014, CCA entered into an agreement with Trousdale County whereby CCA agreed to finance, design, build and operate a 2,552-bed facility to meet the responsibilities of a separate inter-governmental service agreement (“IGSA”) between Trousdale County and the state of Tennessee regarding correctional services. In July 2014, CCA received notice that Trousdale County and the state of Tennessee finalized the IGSA. The IGSA with the state of Tennessee includes a minimum monthly payment plus a per diem payment for each inmate housed in the facility in excess of 90% of the design capacity, provided that during a twenty-six week ramp period the minimum payment is based on the greater of the number of inmates actually at the facility or 90% of the beds available pursuant to the ramp schedule. As of September 30, 2014, CCA has invested approximately $38.0 million in the Trousdale Turner Correctional Center and construction is expected to be completed in the fourth quarter of 2015. During the third quarter of 2013, CCA began hiring staff at the Diamondback Correctional Facility in order to reactivate the facility for future operations. CCA’s decision to activate the facility was made as a result of potential need for additional beds by certain state customers. In January 2014, the state of Oklahoma issued a RFP for bed capacity in the state of Oklahoma and anticipated that an award announcement would be made in the second quarter of 2014. While the RFP has not been cancelled, in April 2014, when it became evident the contract would not be awarded and commence in the near-term, CCA made the decision to re-idle the facility. In September 2014, CCA announced that it had agreed under an expansion of an existing IGSA between the City of Eloy, Arizona, and the U.S. Immigration and Customs Enforcement (“ICE”) to house up to 2,400 individuals at the South Texas Family Residential Center, a facility leased by CCA in Dilley, Texas. Certain new services provided under the amended IGSA commenced in the fourth quarter of 2014, have a term of up to four years, and can be extended by bi-lateral modifications. The agreement provides for a fixed monthly payment in accordance with a graduated schedule. Under terms of the amended IGSA, ICE can terminate the agreement for convenience, without penalty, by providing CCA with at least a 90-day notice. In addition, terms allow for ICE to terminate the agreement with CCA at any time, without penalty, due to a non-appropriation of funds. CCA expects ICE to begin housing the first residents at the facility in early December 2014, and the site is expected to be ready for full capacity during the second quarter of 2015. CCA leases the South Texas Family Residential Center and the 50-acre site upon which it is being constructed from a third-party lessor. CCA’s lease agreement with the lessor is over a period co-terminus with the aforementioned amended IGSA with ICE. CCA’s remaining obligation to the third-party lessor totals $306.2 million as of September 30, 2014. However, under terms of the lease agreement, if ICE terminates the amended IGSA for convenience, CCA can terminate the agreement, without penalty, by providing the lessor with a 90-day notice. In the event ICE elects to terminate the amended IGSA due to a non-appropriation of funds, CCA must provide a 60-day notice period to the lessor. If ICE terminates the IGSA due to non-appropriation of funds without notice to CCA, CCA may not be able to provide a timely termination notice to the lessor and could, therefore, be subject to a penalty the equivalent of up to two months of payments due to the lessor, which would currently amount to approximately $13.4 million. Additionally, CCA has contractually committed $66.1 million for various other services related to the South Texas Family Residential Center even though many of these agreements provide CCA with the ability to terminate if ICE terminates the amended IGSA. Although CCA can provide no assurance, CCA does not currently expect ICE to terminate the IGSA, and would expect to receive at least 60 days’ notice of a termination due to non-appropriation of funds. Under the terms of the IGSA, upon execution of the contract, ICE agreed to pay $70.0 million to CCA in two $35.0 million installments during the fourth quarter of 2014. The $70.0 million is reported in accounts receivable and deferred revenue, which is reflected within other liabilities, in the accompanying consolidated balance sheet as of September 30, 2014. Similarly, CCA’s lease agreement with the lessor required CCA to pay $70.0 million in September 2014, which is reported as property and equipment in the accompanying consolidated balance sheet as of September 30, 2014 due to CCA’s deemed ownership of the constructed assets for accounting purposes, in accordance with ASC 840-40-55, formerly Emerging Issues Task Force No. 97-10, “The Effect of Lessee Involvement in Asset Construction.”

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