WEIL, GOTSHAL & MANGES LLP
767 Fifth Avenue
New York, New York 10153
Telephone: (212) 310-8000
Facsimile: (212) 310-8007
May 11, 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 May 3, 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.
Form 10-K for the year ended December 31, 2004
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Financial Statements and Notes
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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 light of your disclosure on page F-9 that you allocate costs
based on relative fair value rather than specific identification under paragraph
11 of SFAS 67, please tell us how the cash outflows of each parcel are largely
independent in reaching your determination each parcel is the lowest level at
which to evaluate impairment. In your response, please tell us at what level the
environment liability is assigned for evaluating impairment and why.
By way of further background, the approximate 30 acre parcel that the
Company expects to remediate is part of a single contiguous parcel
totaling approximately 265 acres ("Parcel A"). The land in Parcel A
is currently entitled for 175 acres of non-developable open space
mitigation land and 90 acres of developable land, and has an
aggregate book value of approximately $1,426,000 (including the 30
acre affected parcel). The Company may pursue further entitlements
for the Parcel A land; however, the Company does not currently plan
to further improve the land through construction activities.
Substantially all of the costs expected to be incurred in Parcel A
are either specifically identifiable to sub-parcels within Parcel A,
or are considered allocated costs that are allocated principally
based on acreage (for example, property taxes, legal fees and
consulting fees). There are minimal common or shared costs expected
that would be allocated within Parcel A based upon relative fair
value. All of the acreage in Parcel A is separate from and does not
border any of the other approximately 2,600 acres of land the Company
owns in Otay. Costs incurred related to Parcel A are separate from
and are not allocated to other Otay land; nor are costs incurred from
other Otay land allocated to Parcel A.
The Company assigned the environmental liability to the 30 acre
affected sub-parcel, and concluded that the carrying amount of that
sub-parcel was recoverable. The Company believes that the net cash
flow that can be generated from the sale of this sub-parcel is
separately identifiable and largely independent from the net cash
flow that can be generated from the sales of other sub-parcels within
Parcel A. For the reasons described above, the Company does not
believe the nature of the costs it expects to incur would result in a
conclusion that it should use the next higher level for impairment
evaluation, since these costs are substantially separately
identifiable or allocated. However, if the Company were to assign the
environmental liability to the next highest level and analyze all of
Parcel A as an asset group for impairment evaluation, because the
Company's estimate of the future net cash flow from all of Parcel A
is greater than the net carrying amount of Parcel A, the Company
would reach the same conclusion that the carrying amount of the asset
group is recoverable.
The disclosure in footnote 1 on page F-9 that describes how land
costs are allocated to individual lots prior to development
principally refers to the allocation of original acquisition costs.
Subsequent to acquisition, as described above, costs are principally
allocated to parcels or lots primarily based on specific
identification or relative acreage.
2. Your response to our comment states you estimate future net cash
flows of Otay land to be over $150 million, which would exceed the carrying
value of all Otay land and the environmental liability. Please relate and
explain the estimate to historical sales per acre of developable and mitigation
Otay land. We note your historical sales per acre appear to be significantly
less than what you estimate in your impairment test.
The two most recent sales of Otay land have been sales of
non-developable mitigation land (average price of approximately
$15,000 per acre) which is far less valuable than developable land.
Land that is entitled for development is valued at a much greater
price per acre than mitigation land, even if sold as unimproved
developable land. If the Company chooses to improve its developable
land, it can earn the additional profit that comes from that
development activity. In the case of developable land that is
entitled for residential development, land values and prices are
strongly influenced by the number of dwelling units permitted. The
Company considers all of these and other factors, including current
market prices, to develop its cash flow projections for Otay. The
Company's historical selling prices of non-developable mitigation
land are just one of the factors the Company considers in its cash
flow projections, and such prices are not by themselves indicative of
the future net cash flows that can be generated from the Company's
investment in Otay.
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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 N. Ruhe
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