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REAL ESTATE TRANSACTIONS | 12 Months Ended
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Dec. 31, 2016
REAL ESTATE TRANSACTIONS |
5. | REAL ESTATE TRANSACTIONS
Activations In September 2014, CoreCivic announced that it had agreed under an expansion of an existing IGSA between the city of Eloy, Arizona and ICE to house up to 2,400 individuals at the South Texas Family Residential Center, a facility leased by CoreCivic in Dilley, Texas. Services provided under the original amended IGSA commenced in the fourth quarter of 2014, had an original term of up to four years, and could be extended by bi-lateral modifications. The agreement provided for a fixed monthly payment in accordance with a graduated schedule. In October 2016, CoreCivic entered into an amended IGSA that provides for a new, lower fixed monthly payment commencing in November 2016, and extends the life of the contract through September 2021. The agreement can be further extended by bi-lateral modification. However, ICE can also terminate the agreement for convenience or non-appropriation of funds, without penalty, by providing CoreCivic with at least a 60-day notice. ICE began housing the first residents at the facility in December 2014, and the site was completed during the second quarter of 2015. Under the fixed monthly payment schedule of the original amended IGSA, ICE agreed to pay CoreCivic $70.0 million in two $35.0 million installments during the fourth quarter of 2014 and graduated fixed monthly payments over the remaining months of the contract. As described in Note 2, CoreCivic used the multiple-element arrangement guidance prescribed in ASC 605, “Revenue Recognition” in determining the total revenue to be recognized over the term of the amended IGSA. CoreCivic determined that there were five distinct elements related to the amended IGSA with ICE. The lease revenue element, representing the operating lease of the site and constructed assets, was valued based on the estimated selling price of the land and building improvements provided to ICE and is recognized proportionately based on the number of beds available. The correctional services revenue element, representing the correctional management services provided to ICE, was valued based on the estimated selling price of similar services CoreCivic provides and is recognized based on labor efforts expended over the contract. The food services revenue element was valued based on the TPE of the contracted outsourced service and is recognized proportionately based on the number of beds available. The educational services revenue element, representing the grade-level appropriate juvenile educational program prescribed under the IGSA, was based on the TPE of the contracted outsourced service and is recognized on a straight-line basis over the period educational services are required to be performed. The construction management services revenue element, representing CoreCivic’s site development and construction management services, was valued based on the estimated selling price of similar services CoreCivic provides and was recognized on a straight-line basis during the first seven months of the IGSA representing the period over which the construction activity was ongoing. During the years ended December 31, 2016, 2015, and 2014, CoreCivic recognized $266.8 million, $244.2 million, and $21.0 million, respectively, in revenue associated with the amended IGSA with the unrecognized balance of the fixed monthly payments reported in deferred revenue. The current portion of deferred revenue is reflected within accounts payable and accrued expenses while the long-term portion is reflected in deferred revenue in the accompanying consolidated balance sheets. As of December 31, 2016 and 2015, total deferred revenue associated with this agreement amounted to $67.0 million and $94.6 million, respectively. In June 2015, ICE announced a policy change regarding family unit detention that has shortened the duration of ICE detention for those who are awaiting further process before immigration courts. Public policies and views regarding family detention, as well as proposals pertaining to the most effective means to address families crossing the border illegally, continue to evolve. In addition, numerous lawsuits, to which CoreCivic is not a party, have challenged the government’s policy of detaining migrant families. One such lawsuit in the United States District Court for the Central District of California concerns a settlement agreement between ICE and a plaintiffs’ class consisting of detained minors, whereby the court issued an order on August 21, 2015, enforcing the settlement agreement and requiring compliance by October 23, 2015. The court’s order clarified that the government has the flexibility to hold class members for longer periods of time in unlicensed and secure facilities during influxes of large numbers of undocumented migrant families via the southern U.S. border. After announcing its intention to comply fully with the court’s order, the federal government appealed. In July 2016, the U.S. Court of Appeals for the Ninth Circuit affirmed most aspects of the District Court’s order, but ruled that ICE is not required to release a parent simply because the settlement agreement might require release of that parent’s minor child. The impact of these rulings on family residential programs is not yet known. In December 2016, a Texas state court judge blocked efforts by Texas state officials to license the South Texas Family Residential Center as a child care center, ruling that the state officials lacked authority to license such facilities. The state of Texas has appealed this ruling, and the impact of the judge’s decision on family residential detention programs is not yet known. Any court decision or government action that impacts CoreCivic’s existing contract for the South Texas Family Residential Center could materially affect the Company’s cash flows, financial condition, and results of operations. In December 2015, CoreCivic announced it was awarded a new contract from the Arizona Department of Corrections to house up to an additional 1,000 medium-security inmates at its 1,596-bed Red Rock Correctional Center in Arizona, bringing the contracted bed capacity to 2,000 inmates. In connection with the new contract, CoreCivic expanded its Red Rock facility to a design capacity of 2,024 beds and added additional space for inmate reentry programming. Total cost of the expansion was approximately $37.0 million. Construction was substantially completed at December 31, 2016, although CoreCivic began receiving inmates under the new contract during the third quarter of 2016. As of December 31, 2016, CoreCivic housed approximately 1,700 inmates at the Red Rock Correctional Center. Pursuant to an agreement with Trousdale County, Tennessee, CoreCivic agreed to finance, design, construct, and operate a 2,552-bed facility to meet the responsibilities of a separate IGSA between Trousdale County and the state of Tennessee regarding correctional services. CoreCivic invested approximately $144.0 million in the Trousdale Turner Correctional Center and construction was completed in the fourth quarter of 2015. In order to guarantee access to the beds at the facility, 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 following completion of the ramp, which occurred in the third quarter of 2016. CoreCivic began housing state of Tennessee inmates at the newly activated facility in January 2016. As of December 31, 2016, CoreCivic housed approximately 2,300 inmates at the Trousdale Turner Correctional Center. In April 2016, CoreCivic was awarded a contract to continue providing residential reentry services for the BOP, which was a rebid of existing contracts at both of CoreCivic’s CAI facilities, CAI-Boston Avenue and CAI-Ocean View. During the contract rebid process, CoreCivic identified an opportunity to consolidate BOP resident populations at both facilities into the 483-bed CAI-Ocean View facility in order to make available the CAI-Boston Avenue facility for other potential partners and more efficiently utilize available capacity. On July 18, 2016, CoreCivic announced that it received an award from the CDCR to house up to 120 residents as part of The Male Community Reentry Program (“MCRP”) at CoreCivic’s 120-bed CAI-Boston Avenue residential reentry facility in San Diego, California. The MCRP was designed by the CDCR to provide a range of community-based, rehabilitative services to help participants successfully reenter the community and reduce recidivism. The new contract commenced on August 1, 2016 and contains an initial term extending to June 30, 2018, with three one-year renewal options. Leasing Transactions In May 2016, CoreCivic entered into a lease with the Oklahoma Department of Corrections (“ODOC”) for its previously idled 2,400-bed North Fork Correctional Facility. The lease agreement commenced on July 1, 2016, and includes a five-year base term with unlimited two-year renewal options. However, the lease agreement permitted the ODOC to utilize the facility for certain activation activities and, therefore, revenue recognition began upon execution of the lease. The average annual rent to be recognized during the base term is $7.3 million, including annual rent in the fifth year of $12.0 million. After the five-year base term, the annual rent will be equal to the rent due during the prior lease year, adjusted for increases in the Consumer Price Index (“CPI”). CoreCivic is responsible for repairs and maintenance, property taxes and property insurance, while all other aspects and costs of facility operations are the responsibility of the ODOC. Acquisitions On August 27, 2015, CoreCivic acquired four community corrections facilities from a privately held owner of community corrections facilities and other government leased assets. The four acquired community corrections facilities have a capacity of approximately 600 beds and are leased to Community Education Centers, Inc. (“CEC”) under triple net lease agreements that extend through July 2019 and include multiple five-year lease extension options. CEC separately contracts with the Pennsylvania Department of Corrections and the Philadelphia Prison System to provide rehabilitative and reentry services to residents and inmates at the leased facilities. CoreCivic acquired the four facilities in the real estate-only transaction as a strategic investment that expands the Company’s investment in the residential reentry market. The consideration paid for the asset portfolio consisted of approximately $13.8 million in cash, excluding transaction related expenses. In allocating the purchase price, CoreCivic recorded $13.4 million of net tangible assets and $0.4 million of identifiable intangible assets. On June 10, 2016, CoreCivic acquired a residential reentry facility in Long Beach, California from a privately held owner for approximately $7.7 million in cash, excluding transaction-related expenses. In allocating the purchase price, CoreCivic recorded $7.4 million of net tangible assets and $0.3 million of identifiable intangible assets. The 112-bed facility is leased to CEC under a triple net lease agreement that extends through June 2020 and includes one five-year lease extension option. CEC separately contracts with the CDCR to provide rehabilitative and reentry services to residents at the leased facility. CoreCivic acquired the facility in the real estate–only transaction as a strategic investment that expands the Company’s investment in the residential reentry market. Real Estate Closures and Idle Facilities On July 29, 2016, the BOP elected not to renew its contract at CoreCivic’s owned and managed 1,129-bed Cibola County Corrections Center located in New Mexico. CoreCivic prepared to idle the facility upon expiration of the contract on October 30, 2016. CoreCivic performed an impairment analysis of the Cibola County Corrections Center, which had a net carrying value of $29.4 million as of December 31, 2016, and concluded that this asset has a recoverable value in excess of the carrying value. On October 31, 2016, CoreCivic announced a new contract award to house up to 1,116 ICE detainees at the Cibola facility and began receiving detainees in December 2016 under the new contract. The contract contains an initial term of five years, with renewal options upon mutual agreement. Based on a decline in offender populations within the state of Colorado and available capacity at other facilities CoreCivic owns in Colorado, CoreCivic idled its 1,488-bed Kit Carson Correctional Center during the third quarter of 2016. Inmate populations from the Kit Carson Correctional Center were transferred to the remaining two company-owned facilities that CoreCivic continues to operate for the Colorado Department of Corrections, the Bent County Correctional Facility and the Crowley County Correctional Facility. CoreCivic idled the Kit Carson Correctional Center following the transfer of the inmate population, and is continuing to market the facility to other customers. CoreCivic performed an impairment analysis of the Kit Carson Correctional Center, which had a net carrying value of $58.8 million as of December 31, 2016, and concluded that this asset has a recoverable value in excess of the carrying value. CoreCivic also has six additional idled facilities that are currently available and being actively marketed to potential 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 CoreCivic owns without significant cost (dollars in thousands):
|  | Design |  |  | Date |  |  | Net Carrying Values at December 31, |
Facility |  | Capacity |  |  | Idled |  |  | 2016 |  |  | 2015 |
Prairie Correctional Facility |  |  | 1,600 |  |  |  | 2010 |  |  | $ | 17,071 |  |  | $ | 17,961 |
Huerfano County Correctional Center |  |  | 752 |  |  |  | 2010 |  |  |  | 17,542 |  |  |  | 18,276 |
Diamondback Correctional Facility |  |  | 2,160 |  |  |  | 2010 |  |  |  | 41,539 |  |  |  | 43,030 |
Southeast Kentucky Correctional Facility (1) |  |  | 656 |  |  |  | 2012 |  |  |  | 22,618 |  |  |  | 23,270 |
Marion Adjustment Center |  |  | 826 |  |  |  | 2013 |  |  |  | 12,135 |  |  |  | 12,536 |
Lee Adjustment Center |  |  | 816 |  |  |  | 2015 |  |  |  | 10,342 |  |  |  | 10,840 |
Kit Carson Correctional Center |  |  | 1,488 |  |  |  | 2016 |  |  |  | 58,819 |  |  |  | 60,039 |
|  |  | 8,298 |  |  |  |  |  |  | $ | 180,066 |  |  | $ | 185,952 |
(1) | Formerly known as the Otter Creek Correctional Center.
From the date each of the aforementioned seven facilities became idle, CoreCivic incurred approximately $8.5 million, $7.3 million, and $6.5 million in operating expenses for the years ended December 31, 2016, 2015, and 2014, respectively. The operating expenses incurred in 2014 exclude the incremental 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, when anticipated opportunities to activate the facility were deferred. CoreCivic considers the cancellation of a contract as an indicator of 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. CoreCivic 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 CoreCivic to reconsider its most recent assumptions. As a result of CoreCivic’s analyses, CoreCivic determined each of the idled facilities to have recoverable values in excess of the corresponding carrying values. In the fourth quarter of 2014, CoreCivic made the decision to actively pursue the sale of the Queensgate Correctional Facility, idle since 2009, and the Mineral Wells Pre-Parole Transfer Facility, idle since 2013. CoreCivic reviewed comparable sales data and concluded that either the exit value in the principle market or comparable sales prices for similar properties in the respective geographical areas represented the fair value of these assets. CoreCivic determined the principle market for these assets will be buyers who intend to use the assets for purposes other than as correctional facilities. The aggregate net book value of these facilities prior to the evaluation for impairment was $28.8 million and, as a result of the impairment indicator resulting from the potential sale of the facilities, CoreCivic recorded non-cash impairments totaling $27.8 million during the fourth quarter of 2014 to write down the book values of the Queensgate and Mineral Wells facilities to the estimated fair values using Level 2 inputs for quoted prices of similar assets and assuming asset sales for uses other than correctional facilities. Sales In the third quarter of 2014, CoreCivic entered into a purchase and sale agreement with a third party to sell its idled Houston Educational Facility in Houston, Texas for $4.5 million. The Houston Educational Facility was an asset that was previously leased to a charter school operator. CoreCivic closed 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, CoreCivic recorded a non-cash 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 using Level 2 inputs. The ultimate sale price was used as a proxy for the fair value of the facility.

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- Definition The entire disclosure for real estate transactions including acquisitions, real estate closures and idle facilities, sales, construction of new facilities, activations, and other leasing transactions. + References No definition available. + Details
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