THE INTERGROUP CORPORATION
820 Moraga Drive
Los Angeles, CA 90049
Telephone: (310) 889-2500
Facsimile: (310) 889-2525
Via EDGAR
March 16, 2009
Kevin Woody
Branch Chief
Robert Telewicz
Staff Accountant
Securities and Exchange Commission
Division of Corporation Finance, Mail Stop 4561
Washington, D.C. 20549
Re: The InterGroup Corporation; File No. 1-10324
Response to Comment Letter Dated February 12, 2009
Dear Mr. Woody and Mr. Telewicz:
This letter is in response to your comment letter dated February 12, 2009
regarding the Form 10-KSB for the Fiscal Year Ended June 30, 2008 of The
InterGroup Corporation ("InterGroup" or the "Company"). Our responses below
correspond to each of the comments set forth in your letter. For convenience,
we have set forth the comment or question asked prior to each of our
responses.
Form 10-KSB for the fiscal year ended June 30, 2008
- ---------------------------------------------------
Financial Statements
- --------------------
Consolidated Statements of Operations, page 34
- ----------------------------------------------
1. We note that you separately present your operations of your Hotel,
Real Estate and Investment segments on the face of your income statement.
Explain to us how your presentation complies with Rule 5-03 of Regulation
S-X.
RESPONSE:
The Company's operations are fairly unique in that a majority of its revenues
and expenses are attributable to the Justice Investors limited partnership, in
which the Company has a 50% limited partnership interest and serves as one of
the two general partners of Justice. In accordance with the guidance set
forth in FSP SOP 78-9-1 and EITF 04-05, "Determining Whether a General
Partner, or the General Partners as a Group, Controls a Limited Partnership or
Similar Entity When the Limited Partners Have Certain Rights", Portsmouth has
consolidated the financial statements of Justice with those of the Company
effective as of July 1, 2006. Management believes that by presenting "Hotel
operations" as a separate business segment on the face of its Consolidated
Statements of Operations, it provides the reader with a better understanding
and transparency of the hotel operations related to the Partnership, minority
interest and the Company's overall business. While this presentation might not
be in total alignment with Rule 5-03 of Regulation S-X, management believes
that the greater detail provided by this format results in a fuller
presentation of the Company's financial picture.
Notes to Consolidated Financial Statements
- ------------------------------------------
Note 1 - Business and Significant Accounting Policies and Practices
- -------------------------------------------------------------------
Minority Interest, page 40
- --------------------------
2. Explain to us how you determined it would be appropriate to record an
asset related to the minority interest in Justice Investors. In your
response, tell us whether the minority investors are required to fund any
portion of the accumulated net losses of the partnership. Cite any
relevant accounting literature in your response.
RESPONSE:
Under FASB's General Standards-Consolidation (Sec. C51.116) and/or FASB ARB No
51,para 15-Consolidated Financial Statements-Minority Interests, "in the
unusual case in which losses applicable to the minority interest in a
subsidiary exceed the minority interest in the equity capital of the
subsidiary, such excess and any further losses applicable to the minority
interest shall be charged against the majority interest, as there is no
obligation of the minority interest to make good on such losses. However, if
future earnings do materialize, the majority shall be credited to the extent
of such losses previously absorbed."
Following FASB's general accounting concept above, Portsmouth ordinarily
should have absorbed 100% of the accumulated deficit and should have not
recorded a minority interest asset of since the subsidiary was consolidated.
Rather Portsmouth should have reported all of the net loss and accumulated
deficit (deficiency) of Justice Investors as if they were Portsmouth's net
loss.
We read other accounting guidance through the Accounting Research Manager
(i.e., Accounting Standards/Consolidation- Minority Interest) and noted the
following context:
"When cumulative losses applicable to minority interests exceed the
minority's interests in the subsidiary's capital, the excess should be
charged against the majority interest and should not be reflected as an
asset, except in rare cases when the minority shareholders have a binding
obligation to make good on such losses. Subsequent profits earned by a
subsidiary under such circumstances that are applicable to the minority
interests should be allocated to the majority interest to the extent
minority losses have been previously absorbed."
-2-
Portsmouth has a 50% limited partnership interest in Justice Investors, a
California limited partnership ("Justice" or the "Partnership") and serves as
one of its two general partners. Evon Corporation ("Evon") serves as the other
general partner. Under California law, limited partners are generally not
responsible for the debts of a limited partnership beyond the assets of the
partnership and their own capital contributions. However, the general partners
of the limited partnership can be held jointly liable for the debts of the
partnership if partnership assets are not sufficient to cover those
obligations. There are no provisions in the Limited Partnership Agreement that
would negate that liability of Evon and Portsmouth as the general partners
under California law.
The Limited Partnership Agreement further provides that, upon the liquidation
of the partnership real property if, after allocation of all gain or loss to
the partner's accounts, there shall be a deficit in the account of Justice
Enterprises (the predecessor of Evon), or the successor in interest to the 10%
interest held by Justice Enterprises, then it (Evon) shall contribute the
amount of its deficit to the Partnership which shall distribute such sum among
the limited partners in the proportion their profit and loss percentages bear
to each other. Thus, Evon has a legal obligation to make good on any losses of
the Partnership as a general partner of Justice as well as a contractual
obligation to contribute 10% of any deficit
As a practical matter, the above scenario is very hypothetical given the fact
that the Hotel asset has been very conservatively appraised at $111,600,000
and management believes that the actual market value is much higher.
Furthermore, that appraisal was based on a valuation of the Hotel prior to the
termination of the parking garage lease and the return of that asset to
Justice. As such there is substantial equity in the Hotel far in excess of the
Partnership's debt. Even in the unlikely scenario of a forced liquidation and
sale of the Hotel, there should be in excess of $50,000,000 available for
distribution to the limited partners after the payment of all obligations.
Based on those factors, management believes that the minority interest asset
recorded in the consolidated financial statements of Portsmouth as of June 30,
2008 is appropriate because they will be recoverable in the future. Management
also considered whether the minority interest asset is temporary and will
begin to reverse itself in the next five years based on the profitability of
the Hotel. Management's analysis of the future profitability of the Hotel is
discussed below in its response to the staff's comments on the Company's
deferred tax assets.
It should be noted that, while management has concluded, as of June 30, 2008
and September 30, 2008, that there has been no impairment of the minority
interest asset and that it will be recoverable, it has also considered whether
it is appropriate for Portsmouth to continue to add to its minority interest
asset as a result of any future losses incurred by Justice. Economic
circumstances have significantly changed since the quarter ended September 30,
2008 for the lodging sector. Facing a very uncertain economy and the prospect
of a significant recession, management believed that it would be most
appropriate for the Company not to add to the minority interest asset balance
beginning the quarterly period ended December 31, 2008. Management does not
view that conclusion as being inconsistent with its conclusion regarding the
realization of its deferred tax asset as the Company's net operating loss
-3-
carryforwards do not begin to expire until 2025 for federal tax purposes and
2015 for state tax purposes, which should be well after the economic recovery.
Management will continue to assess the existing minority interest asset for
impairment and recoverability on an ongoing basis.
Note 7 - Other Investments, Net, page 46
- ----------------------------------------
3. Please tell us the security-type that underlies your private equity hedge
fund investment (i.e., unlisted securities). Please cite the accounting
literature relied upon to account for this investment, as well as the
remaining components of Other Investments, net as of the balance sheet
date.
RESPONSE:
The Company has an investment in a private equity hedge fund called the
Longview Fund, L.P. ("Longview"). The security-types held by Longview, as
reported on the its December 31, 2007 audited financial statements, include
securities of public companies, restricted securities of public companies,
investments private companies, investments in unlisted securities and
investments in partnerships. The Company holds less than 3% of Longview.
In accounting for other investments, the Company first looked at FAS 115,
Accounting for Certain Investments in Debt and Equity Securities which
addresses the accounting and reporting for investments that have readily and
determinable fair values and for all securities in debt securities. The
Company's investment in Longview and other investments (debt instruments) did
not have readily determinable fair values as defined by paragraph 3 of FAS
115. AS the result, the Company turned to APB Opinion No. 18, The Equity
Method of Accounting for Investments in Common stock, EITF D-46, Accounting
for Limited Partnership Investments and AICPA SOP 78-9, Accounting for
Investment in Real Estate Ventures, for further guidance.
After reviewing APB Opinion No. 18, EITF D-46 and AICPA SOP 78-9, the Company
utilized the guidance in the AICPA SOP 78-9 and accounted for its in
investment in Longview under the cost method. The AICPA SOP 78-9 guidance
stated the following:
"The division believes that the accounting recommendations for use of the
equity method of accounting of accounting for investments in general
partnerships are generally appropriate for accounting by limited partners for
their investments in limited partnerships. A limited partner's interest may
be so minor that the limited partner may have virtually no influence over
partnership operating and financial policies. Such limited partner is, in
substance, in the same position with respect to the investment as an investor
that owns a minor common stock interest in a corporation, and, accordingly,
accounting for the investment using the cost method may be appropriate.
Under the cost method, income recognized by the investor is limited to
distributions received, except that distributions that exceed the investor's
share of earnings after the date of investment are applied to reduce the
carrying value of the investment."
The Company also utilized the cost method for accounting for the other
components of other investments.
-4-
4. We note that you recorded impairment losses on Other Investments in
accordance with EITF 03-1. Please note that FSP FAS 115-1 nullified EITF
03-1 and was applicable for you as of July 1, 2006. Please tell us whether
you considered FSP FAS 115-1 in your determination of whether the
identified impairment was other than temporary in nature. Additionally,
please tell us the reasons why the valuation of these securities resulted
in an additional impairment of $595,000 during the three month period
ended September 30, 2008.
RESPONSE:
In recording impairment losses on Other Investments, the Company did consider
FSP FAS 115-1 and applied the proper guidance. However, the reference in our
footnote disclosure was not updated. We will make sure the reference is
properly updated and disclosed as FSP FAS 115-1 in our future filings.
The Company recorded total impairment losses of $595,000 during the three
months ended September 30, 2008 related to Other Investments. Of this total,
$417,000 was related to the impairment of an investment in corporate debt
instruments of public company and remaining $178,000 was related to the
impairment of the Company's investment in a private equity hedge fund.
As of September 30, 2008, the following were the reasons management recorded
the $417,000 impairment loss related to the Company's investment in the
corporate debt instruments:
* The public company is a North American precious metals mining company
* The public company received a qualified audit report as a going concern
* The public company had limited resources and inability to obtain
additional financing could negatively effect its success
* The public company has invested in high-risk mineral projects where it
has not conducted sufficient exploration and engineering studies
* The corporate officers of this public company lacked sufficient technical
training and mining experience
* The mining company does not have proven reserves and there is no
assurance that the quantities of precious metals it produces will be
sufficient to recover its investment and operating costs
As of September 30, 2008, the following were the reasons management recorded
the $178,000 impairment loss related to the Company's investment in the
private equity hedge fund:
* The hedge fund had begun to incur losses starting in April 2008
* The losses from the hedge fund continued through 2008
* The losses resulted in the Company's net capital balance being less than
its cost basis
* The current financial crisis and the continual decline in the stock
market
-5-
Note 15 - Income Taxes, page 52
- -------------------------------
5. Please provide us with a schedule detailing the adjustments that make up
the 11.9% "other adjustments" line item in your reconciliation of the
federal statutory income tax rate to the effective tax rate.
RESPONSE:
The 11.9% "other adjustments" in the reconciliation of the federal statutory
income tax rate to the effective tax rate is comprised of the following:
Deferred tax asset adjustments $132,000 7.6%
Permanent book to tax adjustment 67,000 3.9%
Return to provision true-up 7,000 0.4%
------- -----
Total $206,000 11.9%
======= =====
The deferred tax asset adjustments are primarily related to unrealized gains
on investments, depreciation, other investment impairment loss reserve and net
operating loss. This net adjustment was considered immaterial to the
Company's financial statements, therefore, it was recorded in the June 30,
2008 tax provision.
The permanent book to tax adjustment is related to the amortization of the
step up in the asset values allocable to the depreciable assets of its
investment in Justice Investors. This amount has no impact on taxable income.
6. We note that you have recorded a valuation allowance of approximately $1.2
million for the year ended June 30, 2008. Please tell us why the Company
concluded a valuation allowance was required for the current year.
Additionally, explain to us how you determined that a greater valuation
allowance was not required in light of the significance of the hotel
operations to your business, net losses recorded in the past two fiscal
years as well as your expectations from your Form 10-Q for the period
ended September 30, 2008 that you expect Hotel operating revenues to
decline in the current fiscal year as a result of the dramatic downturn in
the domestic and international economies and markets. Finally, expand your
disclosure in your MD&A to more fully address the reasons for recording a
valuation allowance in the current period.
RESPONSE:
The InterGroup Corporation is the parent Company of Santa Fe Financial
Corporation. Santa Fe's revenue is primarily generated through the management
of its 68.8% owned Portsmouth Square, Inc. Each entity, InterGroup, Santa Fe
and Portsmouth are separate tax paying entities and are viewed as such for tax
purposes.
InterGroup, on a standalone basis, had net taxable income of approximately
$4.1 million for the year ended June 30, 2008. In addition to the taxable
income, Intergroup also has a significant deferred tax liability related
several tax deferred 1031 exchanges of its real estate properties. As the
result of these two factors, no tax valuation allowance was recorded at
InterGroup standalone.
-6-
Santa Fe, on a standalone basis and from a tax perspective, generates taxable
income from its two unit apartment complex and from its investment portfolio.
During the year ended June 30, 2008, Santa Fe had taxable income of
approximately $308,000. As of June 30, 2008, Santa Fe had an accumulated
deferred tax asset of approximately $1.5 million, $308,000 of this tax asset
was applied against the taxable income of $308,000 during the year ended June
30, 2008. An valuation allowance of $1.2 million was recorded for the
remaining unused deferred tax asset during the year ended June 30, 2008.
Management determined that the balance of the $1.2 million deferred tax asset
was impaired for the following reasons:
* Santa Fe had a history of losses and inconsistent performance
* Santa Fe's standalone business operations which consist of a two unit
apartment complex and an investment portfolio of $1.4 million were sufficient
enough cover expenses but may not generate sufficient enough income to fully
utilize the deferred tax asset
* Santa Fe had a significant decline in its investment portfolio along
with the decline in the stock market during the year ended June 30, 2008.
* As the result of the financial crisis, the stock market continued to
decline, thus, continuing to negatively impact Santa Fe's investment
portfolio.
As of June 30, 2008, Portsmouth had recorded a deferred tax asset in the
amount of $3,517,000. That deferred tax asset is primarily the result of net
operating losses incurred by Justice beginning in the fiscal year ended June
30, 2005 as a result of the Partnership's upgrading and repositioning its
Hotel asset from a Holiday Inn to a full service Hilton Hotel. As of June 30,
2008, Portsmouth had $10,301,000 in federal, and $10,026,000 in state, net
operating loss carryforwards. Significant to note is that these loss
carryfowards do not begin to expire until 2025 for federal tax purposes and
until 2015 for state tax purposes.
Management has conducted regular quarterly and annual reviews and assessments
of the ability of Portsmouth to realize its deferred tax assets. Since the
operations of the Hotel are the primary source of the Company's revenues and
income, management's assessments have concentrated on the operations of the
Hotel and the ability of Justice to generate taxable income. As part of its
assessments, management also considered the historical factors that resulted
in most of the operating losses and the significant depreciation and
amortization expenses resulting from the upgrading and repositioning of the
Hotel.
As part of its assessments, management consulted with the Hotel's third party
management company, Prism Hotels, the Hotel's executive management team,
reviewed the historical and current operating results of the Hotel, budgets
and forecasts prepared by Prism and Hotel executive management, future
bookings, industry trends, and other information related to the operations of
the Hotel and Justice. Management also reviewed and considered appraisal
reports, forecasts and projections prepared by independent third party experts
-7-
regarding the Hotel and the San Francisco hotel market. Based on its
assessments, management concluded that Portsmouth will be able to realize all
of its deferred tax assets before their expiration and no valuation allowance
was required.
Repositioning of Hotel
- ----------------------
Effective June 30, 2004, Justice terminated its lease of the Hotel to Felcor
and assumed the role of an owner/operator on July 1, 2005. To run the day-to-
day operations of the Hotel, Justice engaged the services of a third party
management company, and entered into a short term franchise agreement to
operate the Hotel as a Holiday Inn, while the partnership sought out a new
franchise agreement to reposition the Hotel up-market. In December 2004,
Justice entered into a franchise license agreement with Hilton Hotels
Corporation to operate the Hotel as a full service Hilton brand hotel. In
order to operate the Hotel as a Hilton, the Partnership was required to
undertake a complete renovation of all of the Hotel's guestrooms, meeting
rooms, common areas, restaurant and bar at a cost of approximately $37
million. To complete that renovation project on an expedited basis, the
Partnership shut down the operations of the Hotel on May 31, 2005 and all
assets disposed of during the renovation of the Hotel were written off at that
time contributing greatly to the net loss of Justice Investors for 2005.
The Hotel remained closed for a period of more than seven months when it
opened with a limited number of rooms available in January 2006 and did not
transition into full operations until February 2006. As typical in the
industry for hotels that shut down operations for major renovations, it took
several months for the Hotel to ramp up operations and to start generating
operating income. Together with the significant start up costs to resume
operations, the Partnership sustained significant losses in fiscal 2006.
Hotel began to reach a stabilized level in fiscal 2007 as it was able to
generate operating income, before interest, depreciation and amortization, of
approximately $2,501,000. However, due to the significant amount of
depreciation and amortization expense resulting from the improvements made to
the Hotel, as well as certain nonrecurring legal and consulting expenses, the
Company recorded an overall loss from hotel operations of $4,590,000 for
fiscal year ended June 30, 2007.
Fiscal Year Ended June 30, 2008 Compared To Fiscal Year Ended June 30, 2007.
- ---------------------------------------------------------------------------
For the fiscal year ended June 30, 2008, Portsmouth had a net loss from hotel
operations of $1,413,000 which included $4,463,000 in depreciation and
amortization. Excluding the depreciation and amortization expense, Portsmouth
would have realized operating income from hotel operations of $3,050,000 for
fiscal 2008. For the fiscal year ended June 30, 2007, Portsmouth had a net
loss from hotel operations of $4,590,000 which included $4,172,000 in
depreciation and amortization. Excluding the depreciation and amortization
expense, the loss from hotel operations would have only been $418,000 for
fiscal 2007.
-8-
With respect to the year-over-year increase in the net loss to $1,921,000 for
the year ended June 30, 2008 from $1,495,000 for the year ended June 30, 2007,
that increase was attributable to two factors. The first was a loss from
investment transactions of $1,959,000 for the fiscal year ended June 30, 2008,
compared to income from investment transaction of $303,000 for the fiscal year
ended June 30, 2007. That loss was primarily due to a loss on marketable
securities of $1,358,000 resulting from the overall decline in financial
markets in fiscal 2008. The second factor was the decrease in the minority
interest related to Justice Investors to $802,000 from $2,423,000 due to the
decrease in the loss from hotel operations to $1,413,000 for the year ended
June 30, 2008 from $4,590,000 for the year ended June 30, 2007.
Management does not view that year-over-year increase in net loss to be a
significant factor in its assessment of whether the Company will be able to
realize its deferred tax asset and in reaching its conclusion not to record a
valuation allowance respecting that asset. Historically, the Company has been
able to produce net gains on marketable securities and overall income from
investment transactions. Despite the loss of $1,358,000 on marketable
securities incurred in fiscal 2008, the Company has been able to generate net
gains on marketable securities of $2,710,000 for the five year period of
fiscal years 2004 through 2008. The decrease in the minority interest related
to Justice Investors was viewed by management as a positive indicator since it
was attributable to a significant decrease in the loss from hotel operations.
Management's Analysis and Projections
- -------------------------------------
Fiscal Year Ended June 30, 2008
- -------------------------------
Average daily room rates, occupancy, revenue per available room ("RevPar") and
total hotel revenues have continued to improve since the reopening of the
Hotel in January 2006 through fiscal year ended June 30, 2008. The following
table sets forth the total revenues, average daily room rate, occupancy
percentage and RevPar for the Hotel for the years ended June 30, 2008 and 2007
and for the five an one-half months of operations for the year ended June 30,
2006.
Year Ended Total Hotel Average Average
June 30, Revenues Daily Rate Occupancy% RevPar
---------- ----------- ---------- ---------- ------
2008 $37,778,000 $175 84.1% $148
2007 $31,715,000 $160 75.8% $122
2006 $ 9,999,000 $147 50.2% $ 74
These positive trends lend support to management's conclusions that the Hotel
operations will be profitable in the future. In support of its assessment for
fiscal year ended June 30, 2008, management also considered five-year net
operating income projections for Justice Investors based on Hotel operating
forecasts provided by Prism and the Hotel executive management, as well as
hotel industry reports. Since Justice is a limited partnership and files
income tax returns on a calendar year, the projections were also made on a
calendar basis. The following table sets forth the projected net operating
income for Justice Investors for the calendar years 2008 through 2012 which
-9-
was considered by management in making its assessment. Since depreciation and
amortization expense is a very important component of those projections, we
have also set forth the projected tax depreciation and amortization expenses
for those years.
2008 2009 2010 2011 2012
---------- ---------- ---------- ---------- ----------
Justice NOI $ 476,000 $3,486,106 $4,397,084 $6,550,853 $8,048,738
Depreciation and $4,050,226 $2,957,773 $3,152,184 $2,527,030 $1,773,957
Amortization
Significant to note, is that annual depreciation and amortization expenses are
projected to decrease by more than $2,275,000 by 2012 and will continue to
decrease thereafter, unless new major improvements are made to the Hotel.
Since the Hotel was just recently fully renovated, no major improvements to
the hotel are anticipated in the foreseeable future. The above projections
also do not take into account the early termination of the garage lease,
effective October 1, 2008, which is expected to produce an additional $300,000
in annual net operating income to the Partnership for 2009 and 2010.
Based on the above information and analysis, management concluded that no
valuation allowance for the Company's deferred tax asset recorded as of June
30, 2008 was required.
Three Months Ended September 30, 2008 Compared
to the Three Months Ended September 30, 2007
- ----------------------------------------------
Despite a slowing economy, the Company was able to record income from hotel
operations of $241,000 (after depreciation and amortization of $1,097,000) for
the three months ended September 30, 2008, compared to a loss from hotel
operations of $508,000 (after depreciation and amortization of $1,080,000) for
the three months ended September 30, 2007. Even though hotel operating
revenues were off $487,000 from the comparable three month period of 2007, the
Company was able to achieve these positive results due to a significant
decrease in operating expenses of $1,270,000. While much of that decrease was
attributable to certain nonrecurring legal and consultant fees incurred in the
prior period, management has also been proactive in reducing hotel operating
expenses in response to difficult economic conditions.
Management estimates that, through labor reductions and other cost saving
initiatives, such as moving lunch and dinner service from the restaurant to
the lounge and bringing the Hotel's laundry service in house, the Hotel can
effectuate annual savings in operating expenses of more than $3 million
without compromising the guest experience. Management expects that those
savings will mitigate the impact of lower hotel operating revenues in fiscal
2009 and help preserve net operating income. That proved to be the case in the
three months ended September 30, 2008 as the Company generated net operating
income despite lower revenues. Those results provided further support for
management conclusion that no valuation allowance for the Company's deferred
tax asset was required as of September 30, 2008.
-10-
Three and Six Months Ended December 31, 2008 Compared
to Three and Six Months Ended December 31, 2007
- -----------------------------------------------------
Since the receipt of the staff's comment letter, the Company filed its
Form 10-Q for the period ended December 31, 2008. While the staff did not
request that the Company address the operating results of the Hotel for the
three and six month periods ending December 31, 2008, we have provided such
information for a full discussion of management's continuing review and
assessment of its deferred tax assets.
For the three months ended December 31, 2008 the Company recorded a loss from
hotel operations of $1,161,000 (after depreciation and amortization of
$1,120,000), compared to a loss from hotel operations of $555,000 (after
depreciation and amortization of $1,118,000) for the three months ended
December 31, 2008. However, a majority of the loss for the current period was
attributable to a $684,000 loss on the termination of the garage lease which
was a one-time nonrecurring expense item. Without that nonrecurring item, the
loss from hotel operations for the three months ended December 31, 2008 would
have been $477,000 and a $78,000 improvement over the comparative period. The
Company was able to achieve those results despite a $975,000 decrease in total
hotel revenues due to the significant downturn in the economy that started to
have a serious impact on the San Francisco hotel market beginning in September
2008. It should also be noted that the termination of the garage lease is
expected to generate an additional $300,000 in annual net operating income to
the Partnership and promote greater efficiencies with the garage operations
now integrated into those of the Hotel.
For the six months ended December 31, 2008 the Company recorded a loss from
hotel operations of $920,000 (after depreciation and amortization of
$2,217,000), compared to a loss from hotel operations of $1,063,000 (after
depreciation and amortization of $2,201,000) for the six months ended December
30, 2008. However, a majority of the loss for the six months ended December
31, 2008 was attributable to the $684,000 loss on the termination of the
garage lease. Without that nonrecurring item, the loss from hotel operations
for the six months ended December 31, 2008 would have been only $236,000 and
an $827,000 improvement over the comparative six month period. The Company was
able to achieve those results despite a $1,562,000 decrease in total hotel
revenues due to the significant downturn in the economy that started to have a
serious impact on the San Francisco hotel market beginning in September 2008.
Management also performed an assessment of its deferred tax asset recorded as
of December 31, 2008 and concluded that no valuation allowance was required
based on, among others, the following factors:
* The Company's net operating loss carryforwards do not begin to expire
until 2025 for federal tax purposes and until 2015 for state tax purposes.
* Although there is no meaningful way to predict how long the current
economic conditions will last, management views them as cyclical and not
permanent. Some hotel industry experts have predicted the start of the
recovery as early as the latter part of 2009, while others believe that no
significant recovery will occur until 2010. Whether the recovery starts in
2009 or sometime later, the Company should able to utilize all of its net
operating loss carryforwards before their expiration.
-11-
* The operations of the Hotel have continued to improve since it reopened
in January 2006. Despite the decrease in operating revenues beginning in
September 30, 2008, the loss from hotel operations has continued to decrease
due to management's ability to significantly reduce expenses as a percentage
of operating revenues.
* The greatest non-operating expense related to hotel operations is
depreciation and amortization. Annual depreciation and amortization expenses
are projected to decrease by approximately $2,275,000 from 2009 to 2012. Those
expenses are expected to continue to decrease on an annual basis thereafter,
unless new major improvements are made to the Hotel. However, since the Hotel
was just recently fully renovated, no major improvements to the hotel are
anticipated in the foreseeable future. The decrease in depreciation and
amortization expenses will flow directly to the bottom line and result in an
increase in net operating income.
* Since the hotel was recently fully renovated, and has a relatively low
debt ratio, management believes that the Hotel is better positioned than most
of its competition to meet the challenges of a troubled economy. As of
December 31, 2008, the Hotel was one of the leaders in its competitive set in
the San Francisco market in terms of RevPar and has become the leader in its
competitive set since then.
* Although Justice has revised its net operating income forecast for the
calendar year 2009 down from the $3,486,000 in NOI projected as of fiscal year
ended June 30, 2008 to approximately $1,700,000, every indication that
management has is that the Hotel will be profitable in the future.
* The termination of the garage lease, effective October 1, 2008, will
generate approximately $300,000 in additional annual operating income through
November 30, 2010 (the term of the installment sale agreement) and
approximately $600,000 per year thereafter.
Based on the above information and analysis, management concluded that a
valuation allowance for the Company's deferred tax asset was not required as
of December 31, 2008. Management will continue to assess its deferred tax
asset for impairment and recoverability on an ongoing basis.
In future filings, at the Intergroup and Santa Fe level, management will
expand the disclosure in the MD&A to include the reasons for recording a tax
valuation allowance.
In connection with responding to your comments, the Company acknowledges that:
* the Company is responsible for the adequacy and accuracy of the
disclosure in the filings;
* staff comments or changes to disclosure in response to staff comments do
not foreclose the Commission from taking any action with respect to the
filings; and
* the Company may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
-12-
If you require further information or have further comments, please feel free
to call me at my direct number at (310) 889-2511 or you can reach me at my
direct facsimile number (310) 496-1606.
Sincerely,
/s/ David T. Nguyen
David T. Nguyen
Treasurer and Controller
Principal Financial Officer
cc: John V. Winfield
Michael G. Zybala
Burr, Pilger & Mayer LLP
Audit Committee
-13-