Investments in real estate (Notes)

12 Months Ended

Dec. 31, 2015

Investments in real estate

Our consolidated investments in real estate consisted of the following as of December 31, 2015 and 2014 (in thousands):



	December 31, 2015			December 31, 2014
Land (related to rental properties)	$	678,752		$	624,681
Buildings and building improvements	6,790,612			6,171,504
Other improvements	274,430			192,128
Rental properties	7,743,794			6,988,313

Development and redevelopment projects (under construction or pre-construction)	917,706			986,819
Future value-creation projects	283,761			253,723

Value-creation pipeline	1,201,467			1,240,542

Gross investments in real estate	8,945,261			8,228,855
Less: accumulated depreciation	(1,315,339		)	(1,120,245		)
Investments in real estate	$	7,629,922		$	7,108,610

Acquisitions

During the year ended December 31, 2015, we acquired real estate and real estate-related assets with an aggregate purchase price of $438.1 million, including the assumption of debt, consisting of one operating property, one development project, two redevelopment projects, and one land parcel, as well as the outstanding noncontrolling interest related to seven operating properties.

Acquired below-market leases

The balances of acquired below-market leases, and related accumulated amortization, classified in accounts payable, accrued expenses, and tenant security deposits in the accompanying consolidated balance sheets as of December 31, 2015 and 2014, were as follows (in thousands):



	December 31, 2015			December 31, 2014
Acquired below-market leases	$	79,744		$	55,955
Accumulated amortization	(53,726		)	(47,145		)
	$	26,018		$	8,810

For the years ended December 31, 2015, 2014, and 2013, we recognized an increase in rental income of approximately $6.3 million, $2.8 million, and $3.3 million, respectively, related to the amortization of acquired below-market leases. The weighted average amortization period of the value of acquired below-market leases was approximately 5.6 years as of December 31, 2015. The estimated annual amortization of the value of acquired below-market leases is as follows (in thousands):



Year	Amount
2016	$	4,101
2017	3,888
2018	2,343
2019	1,846
2020	1,834
Thereafter	12,006
Total	$	26,018

Acquired in-place leases

The balances of acquired in-place leases, and related accumulated amortization, are classified in other assets in the accompanying consolidated balance sheets. As of December 31, 2015 and 2014, these amounts were as follows (in thousands):



	December 31, 2015			December 31, 2014
Acquired in-place leases	$	65,397		$	51,395
Accumulated amortization	(37,400		)	(32,123		)
	$	27,997		$	19,272

Amortization for these intangible assets, classified in depreciation and amortization expense in the accompanying consolidated statements of income, was approximately $5.5 million, $3.5 million, and $2.4 million for the years ended December 31, 2015, 2014, and 2013, respectively. The weighted average amortization period of the value of acquired in-place leases was approximately 7.8 years as of December 31, 2015. The estimated annual amortization of the value of acquired in-place leases is as follows (in thousands):



Year	Amount
2016	$	4,414
2017	3,959
2018	3,834
2019	3,544
2020	3,332
Thereafter	8,914
Total	$	27,997

Minimum lease payments

Minimum lease payments to be received under the terms of the operating lease agreements, excluding expense reimbursements, in effect as of December 31, 2015, are outlined in the table below (in thousands):



Year	Amount
2016	$	525,944
2017	558,299
2018	584,777
2019	549,771
2020	502,810
Thereafter	3,072,185
Total	$	5,793,786

the variable interest model, to determine whether these entities met any of the three characteristics of a VIE:


1)	The entity does not have sufficient equity to finance its activities without additional subordinated financial support.


•	Each joint venture has significant equity at-risk to fund its activities, as each venture is primarily capitalized by contributions from the members and could obtain, if necessary, non-recourse commercial financing arrangements on customary terms.


2)	The entity is established with non-substantive voting rights.


•	The voting rights of the joint ventures require both members to approve major decisions, which results in voting rights that are disproportionate to the members’ economic interest. However, the activities of the joint ventures are conducted on behalf of both investors so the voting rights, while disproportionate, are substantive.


3)	The equity holders, as a group, lack the characteristics of a controlling financial interest, as evidenced by lack of substantive kick-out rights or substantive participating rights.


•	In each of the joint ventures, the institutional investor lacks substantive kick-out rights as it may not remove us as the managing member without cause.


•	In each of the joint ventures, the institutional investor also lacks substantive participating rights, as day-to-day control is vested in us as the managing member and the major decisions that require unanimous consent are primarily protective in nature.

Based on the analysis above, the institutional investor, as the non-managing member of these joint ventures, lacks the characteristics of a controlling financial interest in each of the joint ventures, including 225 Binney Street, because it does not have substantive kick-out rights or substantive participating rights. Accordingly, we concluded that the joint ventures met the criteria to be considered VIEs and, therefore, should be evaluated for consolidation under the VIE model.

After determining these joint ventures were VIEs, we concluded that we were the primary beneficiary of each joint venture, as, in our capacity as managing member, we have the power to make decisions that most significantly impact operations and economic performance of the joint ventures. In addition, through our investment in each joint venture, we have the right to receive benefits and participate in losses that can be significant to the VIEs. Since we are the primary beneficiary of each joint venture, we concluded that we should continue to consolidate each entity.

Since we retained a controlling interest in each of the joint ventures following the sale and did not deconsolidate these entities, we accounted for the proceeds received from the partial sales as equity financing transactions. This resulted in the allocation of the net sales proceeds of approximately $443.4 million between noncontrolling interests aggregating $301.6 million (representing the institutional investor’s pro rata share of our historical cost basis), and additional paid-in capital aggregating $141.9 million (representing the excess of sales proceeds over the institutional investor’s pro rata share of our historical cost basis, less selling costs). These transactions did not qualify as sales of real estate and did not result in purchase accounting adjustments to the carrying value. Accordingly, the carrying amounts of our partner’s share of assets and liabilities are reported at historical cost.

The following table summarizes the financial position of our consolidated VIEs as of December 31, 2015 (in thousands):



	As of December 31, 2015
	Consolidated Real Estate Joint Ventures at 100%
	225 Binney Street		1500 Owens Street		409/499 Illinois Street
Investments in real estate	$	163,359	$	82,712	$	362,403
Cash and cash equivalents	1,247		16		797
Other assets	6,877		6,382		24,374
Total assets	$	171,483	$	89,110	$	387,574

Secured notes payable	$	—	$	—	$	—
Other liabilities	2,752		9,704		26,210
Total liabilities	2,752		9,704		26,210
Redeemable noncontrolling interests	—		—		—
Company’s share	50,619		39,783		216,818
Noncontrolling interest’s share	118,112		39,623		144,546
Total liabilities and equity	$	171,483	$	89,110	$	387,574

There are no creditors or other partners of our consolidated VIEs who have recourse to our general credit. Our maximum exposure to all our VIEs is limited to our variable interests in each VIE.

Sales of real estate assets

In addition to the sales of partial interests in Class A properties in three separate transactions discussed in the previous section titled “Investments in Consolidated Real Estate Joint Ventures” in Note 3 – “Investments in Real Estate,” we sold the following real estate assets during the year ended December 31, 2015.

We sold a property located at 75/125 Shoreway Road in our Palo Alto/Stanford Research Park submarket of San Francisco for $38.5 million. We recognized a gain of $12.4 million in connection with this sale.

We completed the sale of 270 Third Street, a residential development project with 91 units at our Alexandria Center^® at Kendall Square in our Cambridge submarket in Greater Boston, for a sales price of $43.0 million. The net proceeds of $25.5 million reflect the assumption by the buyer of the cost to complete the construction of $17.5 million. The net proceeds from the sale approximated the carrying amount; therefore, no gain or loss was recognized in connection with this transaction.

In December 2014, our land and land improvements at 661 University Avenue in Toronto, Canada, met the criteria for classification as “held for sale” and accordingly, we recognized an impairment charge of $16.6 million to lower the carrying costs of this property to its estimated fair value less cost to sell, including an estimated $5.0 million foreign currency exchange translation loss. In 2015 we completed the sale for $54.1 million and no gain or loss was recognized.

We completed a probability-weighted cash flow analysis for a 175,000 RSF life science property in Hyderabad, India, inclusive of the estimated costs to complete, and determined that the estimated undiscounted cash flows exceeded the carrying amount of the property as of December 31, 2014. During the three months ended March 31, 2015, we determined that this property met the criteria for classification as “held for sale,” including, among others, the following: (i) management committed to sell the real estate and executed a purchase and sale agreement on March 23, 2015, and (ii) management determined that the sale was probable within one year. Upon classification as “held for sale,” we recognized an impairment charge of $14.5 million to reduce the carrying amount of the property to its estimated fair value less cost to sell, including an estimated $4.2 million foreign currency exchange translation loss. On March 26, 2015, we completed the sale of the property to an Indian multispecialty healthcare provider for $12.4 million and no gain or loss was recognized.

As a result of our sales in Canada and India discussed above, our consolidated statement of comprehensive income reflects an aggregate $9.2 million of losses that we realized during the year ended December 31, 2015, related to foreign currency exchange translation losses, noted above, that were previously classified in accumulated other comprehensive income (loss) on our accompanying consolidated balance sheets.

In December 2015, we determined that a 71,000 RSF, R&D/warehouse property, located at 16020 Industrial Drive in Maryland, met the criteria for classification as “held for sale.” Accordingly, in December 2015 we recognized an $8.7 million impairment charge to lower the carrying costs of the property to its estimated fair value less cost to sell. We expect to complete the sale of the property in 2016 for approximately $6.4 million.

Development and redevelopment projects under construction

A key component of our business model is our development and redevelopment projects under construction. These projects are focused on providing high-quality, generic, and reusable space. We also have certain significant value-creation projects undergoing important and substantial predevelopment activities to bring these assets to their intended use. These critical activities add significant value and are required for the construction of buildings. Upon completion, each value-creation project is expected to generate significant revenues and cash flows. Our development and redevelopment projects are generally in locations that are highly desirable to high-quality science and technology entities, which we believe results in higher occupancy levels, longer lease terms, and higher rental income and returns. Development projects consist of the ground-up development of generic and reusable facilities. We generally will not commence new development projects for aboveground construction of Class A space without first securing pre-leasing for such space, except when there is solid market demand for high-quality Class A facilities. Redevelopment projects consist of the permanent change in use of office, warehouse, and shell space into high-quality and innovative space.

As of December 31, 2015, we had 11 ground-up development projects, including two unconsolidated real estate joint venture development projects and four redevelopment projects under construction in North America. The projects at completion will aggregate 4.1 million RSF, of which 717,058 RSF has been completed and placed into service as of December 31, 2015.

Future value-creation projects

Future value-creation projects represent land held for future development or land undergoing predevelopment activities. If land is undergoing predevelopment activities prior to commencement of construction of aboveground building improvements, we capitalize project costs, including interest, property taxes, insurance, and other costs directly related and essential to the development or construction of a project during periods when activities necessary to prepare an asset for its intended use are in progress. For all other land (that we plan to develop in the future, but for which, as of each period presented, no construction or predevelopment activities were ongoing) interest, property taxes, insurance, and other costs are expensed as incurred. As of December 31, 2015, we had $283.8 million of future value-creation projects supporting an aggregate of 12.0 million square feet of ground-up development.