WEIL, GOTSHAL & MANGES LLP
767 Fifth Avenue
New York, New York 10153
Telephone: (212) 310-8000
Facsimile: (212) 310-8007
April 15, 2005
TRANSMITTED VIA EDGAR:
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Securities and Exchange Commission
Division of Corporation Finance
Office of Mergers and Acquisitions
450 Fifth Street, N.W.
Washington, D.C. 20549-0305
Attention: Steven Jacobs, Branch Chief
Re: HomeFed Corporation
Form 10-K for the year ended December 31, 2004
File No. 001-10153
Ladies and Gentlemen:
We are writing on behalf of our client, HomeFed Corporation
("HomeFed"), to respond to the comments of the Staff set forth in the letter
dated April 8, 2005 with respect to the above-referenced Form 10-K. For your
convenience, the paragraph numbering of the responses below corresponds to the
numbering in the comment letter.
Note 1- Summary of Significant Accounting Policies, pages F-8 to F-10
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Provision for Environmental Remediation, page F-9
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1. In a supplemental response, please tell us whether you tested the
value of Otay Ranch for impairment as a result of this environmental liability
based on the criteria of paragraph 8 of FAS 144 and the application of your
policy discussed in Provision for Losses on Real Estate of this Note 1 to
Financial Statements.
At the time the Company recognized the environmental liability, it
also concluded that the affected parcel met the criteria specified in
paragraph 8b of FAS 144 requiring it to test the $143,000 book value
for recoverability. Based on its evaluation, the Company concluded
that it will receive future cash flows from the eventual sale of the
property that are well in excess of the book value, and that it is,
therefore, not impaired. The Company also believes its application of
FAS 144 is consistent with its stated accounting policy for Provision
for Losses on Real Estate contained in Note 1 to the Financial
Statements.
Note 8- Sales of Real Estate, page F-14
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2. In a supplemental response, please tell us how you applied EITF
01-3 Accounting in a Business Combination for Deferred Revenue of an Acquiree to
recognize $12,830,000 of deferred revenue related to your purchase of CDS in
October, 2002. Additionally, please tell us how you determined and allocated the
FV of real estate from this purchase between raw, in-process and finished land
and whether you recognized earnings from the sale of acquired finished land
subsequent to the acquisition. Finally, tell us how you account for the
difference in bases in recording cost of sales applicable to minority interests
and the Company.
Immediately prior to its purchase by the Company in October 2002, CDS
recognized deferred revenue related to its legal obligations to
builders and the City of San Marcos, principally to complete
construction of common areas related to the San Elijo Hills project,
in which CDS has an effective 68% equity interest. The Company
evaluated these obligations and concluded they met the criteria
specified in paragraph 4 of EITF 01-3 for legal performance
obligations, and accordingly recognized a liability at acquisition
based on its fair value to the extent of the 68% interest acquired.
The fair value was determined based upon the estimated external costs
to complete the construction of the common areas.
At acquisition, the fair values of CDS's individual assets and
liabilities exceeded the acquisition cost (a bargain purchase). This
excess was allocated to reduce the amounts that otherwise would have
been assigned to the acquired non-current assets, principally real
estate. As a result, the total amount ultimately allocated to all of
CDS's real estate at acquisition was $139,000. This amount was not
allocated between raw, in-process and finished land since the Company
concluded that any such allocation would not have a material impact.
However, by way of further information all of the acquired real
estate was either raw land or in-process land. Since no finished land
was acquired, the Company did not recognize any earnings on finished
land subsequent to acquisition.
As a result of the application of purchase accounting to the acquired
real estate discussed above, the Company maintains two accounting
records for its CDS real estate, one for consolidated public
reporting purposes, and one for minority interest accounting that is
based on the historical pre-acquisition real estate book value. The
Company also recorded the historical carrying amount of the minority
interest at the date CDS was acquired for purchase accounting
purposes. As a result, cost of sales for public reporting purposes is
less than cost of sales used to determine the charge for minority
interest in the Company's consolidated statement of operations.
Note 13- Other Related Party Transactions, page F-18
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3. In a supplemental response, please tell us how you applied
paragraph 14 of FAS 141 to your redemption of Leucadia's interest in Otay Land
Company, LLC. In your response, please quantify the carrying amount of the
preferred capital and accrued preferred return at the time of redemption. If
purchase accounting is not applicable, please explain and advise as to whether
Leucadia's interest was classified as debt and why.
When Leucadia's preferred capital interest was extinguished in April
2003, the total amount of preferred capital was $10,000,000 (which
was the only capital ever contributed by Leucadia), and the accrued
preferred return was $2,900,000, resulting in an aggregate carrying
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amount of $12,900,000. During the periods that Leucadia's preferred
capital interest was outstanding, the accrued preferred return was
recognized in the Company's consolidated financial statements by
recording minority interest charges in the Company's consolidated
statements of operations.
The Company does not believe that paragraph 14 of FAS 141 applies to
preferred capital interests. The Company considered Leucadia's
preferred capital interest to be most similar to a non-voting
preferred stock of a subsidiary. The preferred capital interest had
no fixed redemption date; the operating agreement required that any
amounts available for distribution to members first be distributed to
Leucadia until such time as Leucadia received a 12% annual return on
its capital interest and a return of all its contributed capital.
Therefore the Company accounted for Leucadia's investment as a
minority interest in a subsidiary's preference shares. Upon
redemption, the amount paid to Leucadia to extinguish its preferred
capital interest equaled the amount accrued as minority interest.
If the Staff has any additional questions or comments, kindly contact
the undersigned at (212) 310-8528.
Very truly yours,
/s/ Andrea A. Bernstein
cc: Erin H. Ruhe
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