An investment in the Liquidation Trust Interests involves various risks. An investor should carefully consider the risks and uncertainties described below and the other information included or
incorporated by reference in this Annual Report before deciding to invest in the Liquidation Trust Interests. Any of the risk factors set forth below could significantly and adversely affect the Company’s business, prospects, financial condition and
results of operations. As a result, the trading price of the Liquidation Trust Interests could decline, and an investor could lose a part or all of his or her investment.
Risks Relating to Pandemics or other Health Crises, such as the Recent Outbreak of the Novel Coronavirus (COVID-19)
The completion of construction of the Company’s development properties may be subject to delays and cost increases, causing delays in
distributions in respect of the Liquidation Trust Interests or reductions in the amounts available for such distributions. The Company’s ability to make such distributions in respect of Liquidation Trust Interest depends, in part, on its
ability to complete the construction of its properties on a timely basis and at the cost reflected in its consolidated financial statements. In light of the COVID-19 pandemic, certain of the Company’s third-party general contractors stopped work for
about three months, which affected several of the Company’s development properties. Other general contractors may also stop work voluntarily to ensure the safety of their workers or as a result of regulatory requirements. Furthermore, the Company’s
active construction sites must comply with new and additional regulations imposed by state and local governments in response to the recent coronavirus outbreak, including COVID-19 safety guidance for construction sites. The implementation of
compliance measures may cause increases in the cost of, or delays, including delays in the delivery of custom cabinets, furnishings and other construction materials and supplies. Such delays may have an impact on the cost and timing of completion of
construction at the affected properties.
The success of the Company’s marketing efforts, the timing of the sales of the Company’s properties and the value realized in such sales could
be adversely affected by any reduction in demand for residential real properties as a result of the COVID-19 pandemic or other crises. The Company’s ability to sell its properties at the values
reflected in its consolidated financial statements depends, in part on demand for such properties and on the global, national, regional and local economic environments. The risk, or public perception of the risk, of a pandemic or media coverage of
infectious diseases may cause persons seeking to purchase residential real properties to suspend or defer their efforts. Reduction in demand for the Company’s properties, which are located in areas affected by the recent COVID-19 outbreak such as Los
Angeles and New York, may cause delays in the sale of such properties or adversely affect the price at which they can be sold. Furthermore, the success of the Company’s marketing efforts depends, in part, on the ability of the Company’s brokers to
meet with and show Company properties to prospective purchasers and their agents. These and other marketing activities may become subject to restrictions on gatherings imposed by state and local governments in response to the recent coronavirus
outbreak.
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The timing of any recoveries relating to the Trust’s prosecution of its Unresolved Causes of Action may be delayed. The timing of
distributions in respect of Liquidation Trust Interests depends, in part, on when net proceeds will be realized from the prosecution of the Trust’s Unresolved Causes of Action. Many of the courts in which the Causes of Action are being prosecuted
have issued orders temporarily suspending previously scheduled hearings and/or deferring or postponing the scheduling of additional hearings. Delays on the prosecution of the Causes of Action may result in delays in the Trust’s realization of net
proceeds from such actions and concomitant delays in distributions to holders of Liquidation Trust Interests relating thereto.
The Company’s operations may be adversely affected, extending the Company’s anticipated liquidation period. Delays in the completion of
the liquidation of the Company and the timing of net recoveries from the Trust’s prosecution of its Unresolved Causes of Action may extend its anticipated liquidation period, increase the overall operating and administrative costs of such liquidation
period, increase the overall operating and administrative costs of such liquidation, and reduce the amounts available for distribution in respect of the Liquidation Trust Interests.
Risks Relating to Limited Purpose and Recent Formation
The Trust has a limited purpose. The Trust cannot conduct any trade or business for profit. The Trust was formed pursuant to a chapter 11
bankruptcy plan. The Trust’s purpose is to prosecute Causes of Action, to litigate and resolve claims filed against the Debtors, to pay allowed administrative and priority claims against the Debtors (including professional fees), to receive cash from
certain sources and, in accordance with the Plan, to make distributions of cash to Interestholders subject to the retention of various reserves and after the payment of Trust expenses and administrative and priority claims.
The Trust does not expect to generate or receive cash other than from limited sources. The Trust does not expect to receive significant cash
other than from remittances to the Trust by the Wind-Down Entity (reflecting the net proceeds of the Wind-Down Group’s liquidation of its portfolio of real estate assets), litigation or settlement by the Trust of its Unresolved Causes of Action, Fair
Fund Recoveries and Forfeited Asset Recoveries.
The Trust’s cash may be invested only in investments permissible under applicable Treasury regulations. Cash not available for distribution
and cash pending distribution is expected to be held in demand and time deposits, such as short-term deposits in banks or other savings institutions or other temporary, liquid investments such as Treasury bills. Such investments are likely to bear
only low rates of interest, if any. There can be no assurance that cash will earn interest or dividends at a rate in excess of inflation, or at all. The Liquidation Trustee will not be liable in the event of the insolvency or failure of any
institution in which he or she has invested any funds of the Trust.
The Trust and the Wind-Down Entity are recently formed entities. Each was formed on February 15, 2019, the effective date of the Plan, and
has little operating history. The Wind-Down Group has a limited operating history upon which to forecast its future cash proceeds from real estate asset sales, net and cash used to pay accrued liquidation costs. In assessing its business prospects,
and its ability to make distributions to the Trust, you should consider various risks and difficulties encountered by newly organized companies. These risks include the Wind-Down Group’s ability to implement and execute its business plan and respond
effectively to operational and competitive challenges.
Risks Relating to Uncertainties Relating to Causes of Action
The amount and timing of receipts, if any, from Unresolved Causes of Action is inherently speculative and risky and cannot be predicted with
certainty. The Trust does not expect to receive the proceeds of the Unresolved Causes of Action unless and until it successfully obtains judgments or concludes settlements with respect to such Unresolved Causes of Action and is successful in
recovering on such judgments or settlements. The Trust may not be successful in litigating the Unresolved Causes of Action or, if it is successful, there could be a significant delay before any recovery is obtained and distributed (if ever). The
outcome of litigation is inherently speculative and uncertain, and there can be no assurance that the Trust will obtain a favorable judgment or settlement with respect to any particular Unresolved Cause of Action. In addition, even if there is a
favorable judgment or settlement, there can be no assurance that the Trust will be able to recover some or all of such judgment or settlement. Due to the speculative and risky nature of litigation and settlement efforts, the Company is unable to make
any meaningful determination of the potential outcome or value, in the aggregate, of the Unresolved Causes of Action.
Even if there is a recovery based on the Causes of Action, there can be no assurances that there will be sufficient funds to make any distributions
to Interestholders. Even if the Trust obtains a judgment or settlement based on the Unresolved Causes of Action and successfully recovers funds on account of such judgment or settlement, there can be no assurance that the Interestholders
will receive any proceeds from such judgment or settlement. Before Interestholders receive distributions, the Liquidation Trustee must pay Trust expenses and may set aside funds for future expenses or contingencies.
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Limited information regarding developments in the Trust’s prosecution of Causes of Action and potential outcomes will be available; therefore, it may
be difficult for Interestholders to assess the amount of recovery. The Trust is required to file current and periodic reports with the SEC, as required under the Exchange Act. The Trust also expects to file with the Bankruptcy Court such
quarterly reports as may be required by the Plan and the Liquidation Trust Agreement. The SEC and Bankruptcy Court reports are expected to include certain information regarding pending Causes of Action. However, the Trust’s ability to disclose
details of the Causes of Action may be limited by the inherent nature and rules of judicial proceedings, including, among other things, proceedings and filings that are sealed by a court, matters involving attorney-client and work product privilege
and proceedings that are conducted on a confidential basis by agreement of the parties, such as settlement negotiations. To the extent that information regarding the Causes of Action cannot be provided, it will be difficult for investors in the
Liquidation Trust Interests to make any meaningful determination of the potential outcome or value of the Unresolved Causes of Action.
Risks Relating to Real Estate Assets
The Wind-Down Group may not be able to sell its real estate for its (or “real estate assets”) carrying value. The Wind-Down Group has
estimated the sales price of its real estate assets. There are many factors which are outside of the Wind-Down Group’s control which may impact the actual sales price of its real estate assets. The actual sales price will be determined through
negotiations between the Wind-Down Group and the prospective buyer. The actual sales price of the real estate assets may differ materially from the estimates.
There is limited liquidity in real estate investments, which could limit the Wind-Down Group’s flexibility. Real estate is a relatively
illiquid asset. The Wind-Down Group may not be able to sell its real estate assets at the optimal time to maximize its recovery. The Wind-Down Group is unable to acquire new real estate assets to diversify its portfolio and may lack the flexibility
to adapt in response to changes in economic and other conditions.
The Wind-Down Group’s real estate asset portfolio is not diversified. The vast majority of the estimated value of the Wind-Down Group’s real
estate portfolio is derived from several very exclusive and expensive single-family residential properties in the Beverly Hills and Bel-Air neighborhoods of Los Angeles. This lack of diversification means that the Wind-Down Group is particularly
subject to the risks and fluctuations in the price of high-end residential real property in this market, and any downturn in this market would result in a significant and outsized negative impact on the Wind-Down Group.
Many of the residential real properties are positioned within the high-end of the markets in which they are located and are subject to the costs and
risks associated with construction of such properties. High-end residential real properties are defined as homes priced in excess of $10 million. These homes tend to be larger, custom “estate” properties constructed with costly, high-quality
or designer materials. They tend also to be situated in highly attractive, affluent hillside neighborhoods featuring panoramic views and special amenities. The high-end market is characterized by relatively high and unpredictable construction costs
due to their unique designs, the cost of quality materials, installations by craftsman subcontractors and construction costs on hillside locations. Due to their design, engineering and construction complexities, hillside properties are frequently
subject to protracted construction periods. Additionally, projected completion schedules may be subject to further delays caused by material and craftsman subcontractor shortages.
High-end residential properties are subject to the costs and risks of marketing such properties. High-end residential properties commonly
require longer average DOM (days on the market) than conventional residential properties. During an extended marketing period, significant costs may be incurred to furnish, maintain and own the completed homes. The Wind-Down Group may be required to
refresh properties after completion of construction to accommodate prospective purchasers’ requests, which may result in additional costs to complete a sale.
The Wind-Down Group is dependent on the timely and consistent performance of services by third party service providers. To complete the
construction of its properties, the Wind-Down Group relies on general contractors, development managers, architects, maintenance personnel and other service providers who are not under the control of the Wind-Down Group. Inadequate or failed
performance of services by such third-party providers may subject the Wind-Down Group to delays in completing its properties that may increase the costs of construction.
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The Los Angeles market, in which many of the properties owned by the Wind-Down Group are located, may experience a significant slackening of demand.
Slowing of demand in the Los Angeles market may further lengthen the number of days the properties remain on the market and negatively affect sales prices. In addition, periods of economic slowdown or recession in the United States and in other
countries, rising interest rates or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in property values, which would adversely affect the financial position, net assets
in liquidation and cash flow of the Wind-Down Group. This would, in turn, adversely affect the Company’s ability to make distributions to its Interestholders.
If the Wind-Down Group is unable to sell properties within a reasonable period of time, it may need to consider bulk marketing and disposition.
The Wind-Down Group’s homes are highly customized and unique. The pool of potential buyers for these homes is very limited and, depending on market conditions, price reductions and/or bulk sales may be necessary. One or more bulk sales of the
Wind-Down Group’s properties is unlikely to yield as high an aggregate value as individual property sales, and a bulk sale may possibly depress prices in that market, negatively affecting the Wind-Down Group’s ability to recover the highest value for
its remaining properties located in the same area.
The Wind-Down Group’s working capital may not be sufficient to complete construction and may be restricted in its ability to access capital to complete construction.
As of August 31, 2020, and June 30, 2020, the Wind-Down Group has existing unrestricted cash and cash equivalents of approximately $78.02 million and $86.07 million, respectively. The Wind-Down Group may need to access its $25.00 million revolving
line of credit to complete construction of the properties currently under construction. Additional borrowings may be needed. Such borrowings, which would require approval of the Liquidation Trust, may not be available or may be very costly to
acquire. The revolving line of credit has a June 19, 2022 maturity date and can be extended for one additional year thereafter.
The Wind-Down Entity’s failure to meet repayment requirements under the revolving line of credit could harm its financial condition. The
repayment of the line of credit would be primarily from the sale of properties. The Wind-Down Entity does not have any other material source of revenue. Any failure of the Wind-Down Entity to have sufficient liquidity to (i) repay principal
payments when due or (ii) pay the outstanding balance at the expiration of the credit facility on June 19, 2022 could materially adversely affect the Wind-Down Entity’s financial condition and performance.
Risks related to building code and zoning compliance may adversely affect the financial condition and changes in net assets in liquidation of the
Wind-Down Group. The Wind-Down Group intends to complete the construction of numerous high-value properties, and, in connection therewith, must comply with zoning and building code requirements and pass frequent building inspections and
obtain other approvals to attain marketable homes. Delays or difficulties in connection with any of the foregoing may result in additional costs and delays, which depending on market conditions may adversely affect the financial position, net assets
in liquidation and cash flow of the Wind-Down Group. This would, in turn, adversely affect the Trust’s ability to make distributions to its Interestholders.
Risks related to competition from other developers of residential real properties in the markets in which the properties are located may adversely
affect the financial condition and changes in net assets in liquidation of the Wind-Down Group. The addition of new homes by the Wind-Down Group’s competitors may increase the available supply of similar properties, creating downward
pressure on home prices and protracted sales periods. In addition, one or more of the Wind-Down Group’s competitors may have superior financial resources that would allow them to continue in business for a longer term than the Wind-Down Group.
Risks related to commodity shortages, delivery interruptions, or price increases may delay the Wind-Down Group’s construction schedule and/or
increase costs. The Wind-Down Group is dependent on commodities such as lumber, steel, copper, gypsum and others that are commonly used in real property construction. These commodities are prone to market fluctuations and unpredictable
shortages due to demand, tariffs, and other factors. In addition, delivery of commodities is subject to interruptions due to the COVID-19 pandemic, labor strikes, civil unrest, and natural disasters. These and other factors beyond the Wind-Down
Group’s control may adversely affect the Wind-Down Group’s ability to timely complete construction and could increase overall costs.
Risk related to labor shortages and wage increases may prevent the Wind-Down Group from completing construction at its projected cost. The
Wind-Down Group is dependent on skilled contractors and craftsmen at its properties. Labor shortages, wage increases, and other factors beyond the Wind-Down Group’s control may affect the availability and cost of construction labor, and may
consequently adversely affect the Wind-Down Group’s ability to timely complete construction of its properties at its projected cost. This would, in turn, adversely affect the Trust’s ability to make distributions to its Interestholders.
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The Wind-Down Group may remain subject to potential liabilities for construction defects for an extended period of time following the sale of its properties.
In connection with its sales of developed real properties and pursuant to applicable law, the Wind-Down Group may face potential claims for construction defects and property damage for up to 10 years following the completion of construction. There
can be no assurance that contractor’s guaranties and warranties will be adequate to indemnify the Wind-Down Group against all such claims. In the ordinary course of business, the Wind-Down Group seeks to obtain liability insurance in appropriate
amounts in order to address its potential liability for construction defects and property damage. However, the Company’s ability to continue to do so is subject to factors beyond its control, including the availability and cost of appropriate
insurance products. Furthermore, subject to applicable law and policy limitations, coverage may or may not be available for property damage or certain other liabilities resulting from construction defects. If contractor’s guaranties and insurance
policies were to prove insufficient, the Wind-Down Group may become exposed to further costs, including potentially expensive litigation and significant adverse judgments. Any significant liabilities resulting from such post-sale obligations may
adversely affect the Wind-Down Group’s financial position, net assets in liquidation and cash flow which would, in turn adversely affect the Trust’s ability to make distributions to its Interestholders. Furthermore, the amount of cash available for
distribution to the Trust upon completion of the Wind-Down Group’s activities may be affected by reserves that the Wind-Down Group may be required to set aside in order to make reasonable provision for future or unknown construction defect claims.
The Wind-Down Group’s success depends on the continuing contributions of its key personnel. The Wind-Down Group has a skilled management team
to oversee the development, marketing and sale of the properties. However, it does not have agreements with any key personnel that hinders such individuals’ ability to quit at will and, thus, any executive officer or key employee may terminate his or
her relationship with the Wind-Down Group at any time upon relatively short notice.
Adverse weather conditions and natural disasters could adversely affect the Wind-Down Group’s operations and results. Additionally, the Wind-Down
Group may not be able to obtain insurance at reasonable rates for natural disasters and other events which are beyond its control. Adverse weather conditions can delay and increase the costs of construction and may impact buyer demand for
properties. In more severe cases, such as wildfires, earthquakes and other natural disasters, weather conditions may damage the Wind-Down Group’s properties, perhaps for prolonged periods, which would negatively affect the value of those properties
and the ability to sell them. Southern California, where the bulk of the properties are located, is a seismically active area. Additionally, wildfires are prevalent in this region.
Additionally, although the Wind-Down Group insures its properties against earthquakes (for some properties subject to coverage limitations of insurance), wildfires, and other disasters, it may not be
able to obtain insurance for these types of events for all of its properties at reasonable rates. In particular, because many of the Wind-Down Group’s properties are located in areas subject to seismic activity and/or wildfires, the Wind-Down Group
may not be able to obtain insurance or sufficient insurance coverage against those types of disasters. A devastating natural disaster or other event in the vicinity of one of the properties could result in substantial losses. This would, in turn,
adversely affect the Trust’s ability to make distributions to its Interestholders.
The Wind-Down Group may suffer environmental liabilities which could result in substantial costs. Under various environmental laws, the
current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances, including asbestos-containing materials that are located on or under the property. These laws often impose
liability whether the owner or operator knew of, or was responsible for, the presence of those substances. In connection with the Wind-Down Group’s ownership and operation of properties, it may be liable for these costs, which could be substantial.
In addition, the Wind-Down Group may become subject to claims by third parties based on damages and costs resulting from environmental contamination at or emanating from the properties.