Consolidated-Tomoka—A Real Estate Holding Company

Abstract

A real estate holding company with a diverse array of real estate operations serves to introduce a number of accounting and finance topics. The company owns over 11,000 acres of raw land purchased many years past, thus the use of historical cost accounting has left significant asset value off the books. The company is debt free, but a shift in corporate strategy and the use of tax-free 1231 like-kind exchanges has created an ever growing deferred tax liability. The basics of valuation, particularly income capitalization and a sum-of-the parts methodology are relevant. Finally, pressure from an outsider shareholder has put the company's corporate strategy in flux. Management must assess its current strategy of liquidating raw land and reinvesting in income properties, or devise a new longer-term land-development strategy.

Excerpt

UVA-C-2315

Rev. Jan. 25, 2011

Consolidated-Tomoka: A Real estate Holding COMPANY

The Consolidated-Tomoka Land Co. (CTO) was a real estate holding company with primary operations in Central Florida. Throughout its long history, the company had evolved into one engaged in a diverse array of real estate operations. These included the more conventional (land purchases and sales, development, and rental operations) but also the less conventional (agricultural farming, mineral extraction, and golf course management). CTO's properties were spread throughout the Southeast, with a heavy concentration in and around Volusia County, Florida.

The three-year period spanning 2007 through 2009 was unlike any other experienced in the real estate industry. Most real estate companies, particularly real estate investment trusts (REITs) and homebuilders, experienced an unprecedented drop in business. In mid-2007, operating fundamentals for these companies began to deteriorate at a rapid pace. The U.S. financial crisis driving these declines was itself fueled by a national real estate bubble. Virtually all property owners witnessed sharp equity erosion, and those who were highly levered quickly found themselves with loan-to-value ratios greater than one. The declines in Florida real estate were particularly severe, with year-over-year drops in appraised values exceeding 30% (Exhibit 1). Although CTO was one of the few real estate companies that managed an operating profit in each quarter during 2007–09, it was not completely immune to the downturn's effects (Exhibits 2 through 4 provide the three-year balance sheets, income statements, and statements of cash flow, and Exhibit 5 lists a summary of key accounting policies related to those statements).

Corporate Evolution and Current Strategy

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Keywords: Financial statements, historical cost, deferred tax, valuation, real estate, value investing