Bf Enterprises, Inc. (BFET) - Description of business

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Item 1. Business .

General

     BF Enterprises, Inc. and its subsidiaries (collectively, the “Company”) currently are engaged primarily in the real estate business, including the last stages of the development of approximately 1,724 acres of land known as Meadow Pointe, in suburban Tampa, Florida, and, as owner and landlord, leasing of a 220,000 square foot building on 16 acres in Tempe, Arizona.

     At December 31, 2004, the Company’s assets also included approximately $15.7 million of cash, cash equivalents and marketable securities, which the Company intends to use for general corporate purposes.

Real Estate

     The Company’s principal real estate assets consist of the following:

     Meadow Pointe. As of February 28, 2005, the Company owned approximately 53 developable acres in a master planned unit development, encompassing approximately 1,724 acres, known as Meadow Pointe, in Pasco County, Florida. The Company commenced development of Meadow Pointe in 1992. Since 1992, the Company has sold 3,441 residential lots, consisting of approximately 714 acres; a 40-acre commercial tract; and 834 acres to the two community development districts described below. In addition, the Company sold a one-acre tract to a local utility, a two acre tract to a church and a one acre parcel to a day care operator. The Company also donated 79 acres to Pasco County, primarily for a park, school site and EMS site. Meadow Pointe is located approximately 20 miles northeast of downtown Tampa on County Road 581.

     Infrastructure construction at Meadow Pointe began in late February 1992, and the initial sales of residential lots to homebuilders closed in June 1992. The Company sold its remaining inventory of 128 lots in 2004, 120 lots in 2003, 195 lots in 2002, 447 lots in 2001, 353 lots in 2000, 457 lots in 1999, 314 lots in 1998, 297 lots in 1997, 269 lots in 1996, 211 lots in 1995, 284 lots in 1994, 267 lots in 1993 and 99 lots during the last seven months of 1992. Prices of the residential lots ranged from approximately $15,000 to $50,000. As of February 28, 2005, there remained to be sold approximately 29 developable acres currently planned for townhome and condominium residential units and approximately 24 developable commercial acres.

     The Meadow Pointe project is subject to, and is being developed in accordance with, a Development of Regional Impact Development Order (the “DO”) approved by the Tampa Bay Regional Planning Council (the “TBRPC”) and Florida Department of Community Affairs (the “FDCA”) and issued by the Pasco County Board of County Commissioners (“Pasco County”). The DO included a requirement that the development build-out be completed by December 31, 2003, notwithstanding a DO expiration date of December 31, 2008. During the quarter ended September 30, 2004, the Company was notified by Pasco County that, in light of the expiration of the build-out date, it would no longer approve site plans and issue construction permits covering the Meadow Pointe project (“Pasco County Approvals”). As a result on September 27, 2004, the Company filed a Notice of Proposed Change with Pasco County, TBRPC, and FDCA extending the build-out date for the DO until November 30, 2008 (“Build-out Extension”). On November 8, 2004 the TBRPC, on behalf of itself as reviewer and on behalf of the FDCA, approved the Build-out Extension. In apparent disagreement with the TBRPC, Pasco County notified the Company by letter, dated October 27, 2004, that it deemed the proposed Build-out Extension as a substantial deviation pursuant to Section 380.06 (19) (c), Florida Statutes, and it would, therefore, not approve the Build-out Extension until a public hearing was held on the matter.

     The Company entered into negotiations with Pasco County to resolve the impasse with respect to the DO. On March 8, 2005, Pasco County approved the Build-Out Extension contained in the Notice of Proposed Change pursuant to the Settlement Agreement, by and between the Company and Pasco County, dated March 8, 2005 (the “Settlement Agreement”). The Settlement Agreement, among other obligations, requires the Company i) to construct a park

access road within Meadow Pointe (“Park Access Road”); ii) to purchase from Pasco County approximately 1.1 acres of land for mitigation use (required as a result of the location of the Park Access Road) at a purchase price of approximately $38,500 (“Mitigation Area”); provided, however, if construction of the Park Access Road and Mitigation Area are not completed by January 8, 2006, the Company will pay approximately $165,000 for the Mitigation Area; iii) to secure its obligations and performance under the Settlement Agreement by providing to Pasco County a letter of credit in the amount of $465,000 to secure the construction of the Park Access Road and purchase of the Mitigation Area (the “LOC”), and iv) to dismiss, with prejudice, litigation pending in the Circuit Court of Pasco County involving the denial by the Board of County Commissioners of Pasco County of the Company’s special exception use application relating to certain commercial property located in Meadow Pointe. The Company is not yet in the initial phase of construction of the Park Access Road and, accordingly, cannot estimate the total cost with certainty. The Company and Pasco County are currently negotiating the terms of an easement, which is required to be obtained prior to construction of the Park Access Road.

     Without the DO in effect during the six-month period ended December 31, 2004, it was difficult to market the Company’s remaining three (3) commercial parcels and one (1) multi-family parcel to prospective purchasers who want to obtain certain Pasco County Approvals prior to the purchase of any of the parcels. As a result, expected revenues from real estate sales at Meadow Pointe were delayed and the Company incurred additional costs, such as community development district assessments and property taxes.

     Two community development districts, both local units of Florida special purpose government, were formed in conjunction with the development of Meadow Pointe. These districts, whose jurisdiction is limited to the Meadow Pointe project, together encompass all of the 1,724 acres within the project. During the period February 1992 through May 2000, the two community development districts issued an aggregate $79.6 million of capital improvement revenue bonds. All of these bonds were issued to finance the acquisition of property, and the construction of roads, utilities, recreation facilities and other infrastructure systems. In April 2004, one of the districts, the Meadow Pointe II Community Development District (“District”), issued $10,050,000 of revenue refunding bonds. The bonds were issued i) to redeem the $9,325,000 outstanding principal amount of the capital improvement revenue bonds issued by the District in 1995, ii) to pay for the construction of certain recreational facilities within the District; iii) to pay bond issuance costs; and iv) to reduce annual assessments on properties within the District in view of the improved creditworthiness of the District and the favorable interest rate climate.

     Commercial Building in Tempe. The Company owns a 220,000 square foot commercial building, with approximately 1,100 parking spaces, on 16 acres in the Hohokam Industrial Park in Tempe, Arizona, which is currently subject to a triple net lease to Morgan Bank. The lease became effective March 1, 1995, and provided for the tenant’s phased occupancy of space during 1995. Base rents due under the lease were: $1,452,000 in 1996; $1,628,000 in 1997; $1,707,200 in 1998; $1,826,000 in 1999; $1,848,000 in 2000; $1,936,000 in 2001; $1,953,600 in 2002; $1,975,600 in 2003; $1,980,000 in 2004; and $330,000 for the two months ending February 28, 2005, when the original lease term ends. On November 5, 2004, Morgan Bank signed a lease extension for the building which terminates on August 31, 2005 at a monthly triple net rental of $209,000 (“Lease Extension”). The tenant has no option to extend

the lease beyond the August 31, 2005 expiration date unless the parties agree in writing. It is unlikely that Morgan Bank will agree to a further extension. Based on current market conditions, the Company cannot provide any assurance that the entire property will be re-leased at rental rates equal to or above the current rental rates and, most likely, the building will have to be sub-divided into smaller spaces to accommodate multiple users. The Company has engaged a real estate brokerage firm on a commission basis to assist with the re-leasing of the building.

     On January 1, 1996, as required by accounting principles generally accepted in the United States (“GAAP”), the Company began amortizing on a straight-line basis (1) income from the lease with Morgan Bank, resulting in annual real estate leasing income of $1,815,000 ($151,000 monthly) through February 28, 2005, and (2) a related $423,000 lease advisory fee (for services rendered by a real estate brokerage firm in connection with the Morgan Bank lease), with annual amortization expense of $46,000 over the same period. Straight-line amortization of income from the lease was adjusted, as required by GAAP, with the execution of the lease extension by Morgan Bank on November 5, 2004. This adjustment increased the recognition of income from the lease for the period November 1, 2004 through August 31, 2005 from $151,000 to $186,000 monthly.

     Mortgage Loans Receivable. Mortgage loans receivable consists of (1) a promissory note in the principal amount of $1,000,000 received from Hobson Park, LLC, a Georgia limited liability company (“Hobson”), as part of the proceeds from the sale of the Company’s 21 acres of raw land in Nashville, Tennessee (the “Nashville Property”) on October 13, 2004 (the “Hobson Note”); and (2) participation in certain mortgage loans with Graham Mortgage Corporation, a Texas corporation engaged in real estate loans and investments based in Dallas, Texas (“Graham Mortgage”).

Hobson Note

     The Hobson Note is secured by a First Deed of Trust on the Nashville Property with variable interest payable semi-annually at the initial rate of 3.32% (subject to semi-annual adjustment based upon the Treasury Note Rate as published in the Wall Street Journal), with all outstanding principal and interest due and payable on October 13, 2009 (the “Maturity Date”); provided, however, that in the event any portion of the Nashville Property is sold prior to the Maturity Date, Hobson shall apply 50% of the net sale proceeds to repay amounts outstanding under the Hobson Note.

Graham Mortgage Loans

     In March 2002, the Company’s Board of Directors authorized and approved the participation of the Company in certain mortgage loans (“Loans”), with Graham Mortgage. Pursuant to a Master Participation Agreement, by and between the Company and Graham Mortgage, dated as of March 14, 2002, the Company’s six participating interests (collectively, the “Participating Interests”) at December 31, 2004, were: $150,000 in each of four Loans, and two other Loans of $250,000 and $500,000, respectively. The Loans are for terms of 30 to 84 months with yields to the Company, net of a one-half percent administrative fee, ranging from 8.50% to 13.50% per annum, and are secured by First Deeds of Trust in real property located in Texas. The aggregate principal balance of the Participating Interests at December 31, 2004 was $1,199,000. In early

January 2005, two of the loans, with principal balances of $437,500 and $150,000 at December 31, 2004, were repaid in full.

Employees

     Currently, the Company has nine employees.

Competition

     The Company competes with many other firms and individuals who develop real estate or hold undeveloped or developed property for lease or sale, many of whom have significantly greater resources than the Company. While competitive conditions vary substantially, depending upon the geographical area and the type of real estate asset, within a particular market the most significant competitive factors generally are location, price and zoning.

     Completion of the Meadow Pointe project may take several more years and is dependent upon, among other things, the strength of the general economy and employment growth in the Tampa area, mortgage interest rates, competitive commercial and residential developments serving the same group of commercial developers and residential buyers and other factors related to the local Tampa real estate market. There are several other commercial and residential projects in the same market area as Meadow Pointe, along or near County Road 581. Competition from these projects may have an adverse impact on the rate of sales at Meadow Pointe.

Other Information

     The Company’s current business constitutes a single business segment, real estate, consisting of primarily two properties, Meadow Pointe and the commercial building in Tempe, Arizona.

     Revenues from the Company’s lease agreement with Morgan Bank covering the 220,000 square foot Tempe commercial building represent 45% of the Company’s 2004 revenues. Except for the foregoing, the Company’s business is not dependent upon a single customer or a limited number of customers, and is not seasonal. The Company does not utilize stores of raw materials, has no order backlog, and no material portion of its business is subject to government contracts. The Company has no trademarks, service marks or trade names other than Meadow Pointe. The Company does not engage in or make any expenditures with respect to research and development activities. Generally the Company’s business is not materially affected by compliance with federal, state or local provisions regulating the discharge of materials into the environment. However, the protection of the environment typically is of increasing concern to governmental authorities, homeowners, and civic groups whose actions may impact the Company’s real estate management and development business.

Certain Factors Affecting the Business

     In evaluating the Company and its business, the following factors, in addition to the information mentioned elsewhere in this Form 10-KSB, should be given careful consideration.

     All of the Company’s rental revenues are derived from one property located in Tempe, Arizona. Events and conditions applicable to owners and operators of real property that are beyond our control may decrease the value of our property. These events include, among other things: local oversupply or reduction in demand for office, industrial or other commercial space; inability to collect rent from tenants; vacancies or inability to rent spaces on favorable terms; inability to finance property development on favorable terms; increased operating costs, including insurance premiums, utilities, and real estate taxes; costs of complying with changes in governmental regulations, including zoning, construction, land use and environmental regulations; the relative illiquidity of real estate investments; changing sub-market demographics; and property damage resulting from seismic activity and other natural disasters. The geographical concentration of the Company’s rental property in a single market may expose us to greater economic risks than if we owned properties in several geographic regions. Any adverse economic or real estate developments in the Tempe, Arizona area could adversely impact our financial condition, results from operations, cash flows and quoted per share trading price of our common stock. Morgan Bank’s decision in September 2003 not to renew the lease agreement relating to our property in Tempe, Arizona and subsequent decision to vacate the facility by August 31, 2005, will adversely impact our revenues and, in turn, the value of our most significant asset. Morgan Bank’s decision could also require the Company (i) to maintain and operate the vacant building, incurring, among other costs and expenses, property management fees and property taxes, and (ii) to advance or expend substantial funds to make tenant improvements in connection with a re-leasing of the building.

     A downturn in economic conditions would adversely affect the Company’s business. Moreover, the Company’s ability to generate sales revenues is directly related to the real estate market, primarily in Florida and to the economy in general. Considerable economic and political uncertainties currently exist. These uncertainties could have adverse effects on consumer buying habits, construction costs, availability of labor and materials and other factors affecting us and the real estate industry in general.

     The Company’s real estate development activities entail risks that include, among others, the following factors: construction delays or cost overruns, which may increase project development costs; rising interest rates; an inability to obtain required governmental permits and authorizations; an inability of prospective purchasers to secure tenants or anchor tenants necessary to support the project; failure to achieve anticipated occupancy levels or rents; and an inability to sell its inventory of commercial parcels.

     The Company maintains workers compensation, commercial general liability, fire, extended coverage, rental loss, and directors’ and officers’ insurance. Management believes the policy specifications and insured limits are appropriate for the relative risk of loss, the cost of the coverage and industry practice. The Company does not carry earthquake coverage, nor does the Company carry insurance for losses such as pollution, contamination, asbestos, seepage or terrorism. Some of the Company’s policies are subject to limitations involving large deductibles or co-payments and policy limits. If the Company experiences a loss, which is uninsured or which exceeds policy limits, the Company could lose the capital invested in the damaged property as well as the anticipated future cash flows from any such property.

     These forward-looking statements are subject to factors beyond the Company’s control (such as weather, market and economic forces) and, with respect to the future development

of the Company’s land, the availability of financing and the ability to obtain various governmental entitlements, including, but not limited to, Pasco County. No assurance can be given that the actual future results will not differ materially from the forward-looking statements.

Selected Financial Data

     Following is a table of selected financial data of the Company for the last five years:

						Year ended December 31,
		(in thousands, except per share amounts)
		2004			2003			2002			2001			2000
Income statement data:
Revenues		$	4,188			$	3,004			$	3,680			$	8,983			$	4,363
Income before income taxes			375				462				1,485				3,197				1,722
Net income			219				271				906				1,839				1,722
Net income per share:
Basic			.06				.08				.25				.52				.50
Diluted			.06				.07				.24				.48				.46
Weighted Average shares used in computing basic net income per share			3,489				3,506				3,559				3,520				3,445
Weighted Average shares and share equivalents used in computing diluted net income per share			3,553				3,677				3,771				3,813				3,776
Balance sheet data (at end of period):
Total assets		$	30,047			$	28,788			$	28,893			$	29,128			$	26,636
Stockholders’ equity		$	27,672			$	27,516			$	27,321			$	27,683			$	25,956
Stockholders’ equity per share (diluted)(1)		$	7.82			$	7.73			$	7.44			$	7.35			$	7.03

(1)

Calculation of diluted stockholders’ equity per share assumes exercise at the end of each year of all dilutive options outstanding at that time.