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Investments in unconsolidated real estate joint ventures (Notes)
12 Months Ended
Dec. 31, 2016
Equity Method Investments and Joint Ventures [Abstract]  
Investments in Unconsolidated Real Estate Joint Ventures
Investment in unconsolidated real estate joint venture

1455 and 1515 Third Street

As of January 1, 2016, we had an unconsolidated real estate joint venture with an affiliate of Uber Technologies, Inc. (“Uber”), for the development of two new Class A buildings aggregating 422,980 RSF at 1455 and 1515 Third Street in our Mission Bay/SoMa submarket of San Francisco. We had a 51% interest, and Uber had a 49% interest. The unconsolidated real estate joint venture owned land parcels, initial building improvements and a parking garage structure. The project was 100% leased to Uber for a 15-year term. We accounted for our 51% interest in the unconsolidated real estate joint venture under the equity method.

On November 10, 2016 (the “acquisition date”), we acquired the remaining 49% interest in our unconsolidated real estate joint venture with Uber for $90.1 million, which consisted of $64.6 million cash and $25.5 million of building improvements. We paid $7.8 million of total cash consideration on the acquisition date. The remaining $56.8 million will be paid in 2017. As a result of this acquisition, we now own a 100% fee simple interest in both land parcels and the parking garage and are no longer obligated to fund the development of the two Class A properties.

We evaluated this transaction under the new framework for determining whether an integrated set of assets and activities meets the definition of a business and needs to be accounted for as a business combination. When either of the following criteria is met, the acquisition does not qualify as a business and is accounted for as an asset acquisition:

1)
An integrated set of assets and activities acquired do not qualify as a business if substantially all of the fair value of the gross assets acquired is concentrated in either a single identifiable asset or a group of similar identifiable assets; or

2)
The set of assets acquired is lacking, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs.

Based on the criteria above, we did not acquire a substantive process, such as an organized workforce (no employees were acquired in connection with this this transaction, nor were we provided access to employees though an acquired contract) or another process that cannot be replaced without significant cost, effort, or delay or that is considered unique or scarce. Accordingly, the acquired assets did not meet the definition of a business and the transaction was accounted for as an asset acquisition. As an asset acquisition, the $90.1 million purchase price, including acquisition costs, was allocated to the assets acquired based upon their relative fair values.

Upon completion of the acquisition, we leased the land parcels and the parking garage to Uber for 75 years. Due to the length of the lease term (greater than 75% of the estimated useful life of the parking garage), the parking garage lease was classified as a direct financing lease with an estimated net investment at inception of $37.0 million.

The net investment in the direct financing lease represents the sum of minimum lease payments receivable pursuant to our parking lease of 75 years and the estimated residual value of the parking garage, less the unearned income. Inputs to this valuation include market comparables for the land parcels and parking garage, residual value, incremental borrowing rates, and constant periodic rate of return on investment. We classified the net investment in the direct financing lease in other assets in our consolidated balance sheets. Refer to Note 7 – “Other Assets” to our consolidated financial statements for additional information.

360 Longwood Avenue

We have a 27.5% ownership interest in one unconsolidated real estate joint venture that owns a building aggregating 413,799 RSF in our Longwood Medical Area submarket of Greater Boston. As of December 31, 2016, 100% of the project was in service with occupancy of 76%. Our equity investment in this real estate joint venture was $50.2 million as of December 31, 2016. Our tenant at the property exercised their option to purchase a condo interest representing 203,090 RSF, or 49%, of the entire property, pursuant to a fixed-price purchase option in the lease agreement. The sale of the property will be completed in mid-2017. Our share of the sale price is $65.7 million, excluding any customary and ordinary closing costs. As of December 31, 2016, our share of the net book value of the portion of the property expected to be sold is $52.4 million.

The real estate joint venture has a non-recourse, secured construction loan (“Longwood Construction Loan”) that includes the following key terms (dollars in thousands):
Tranche
 
Maturity Date
 
Stated Rate
 
Outstanding Balance
 
Remaining Commitments
 
Total
Fixed rate
 
April 1, 2017
(1 
) 
 
5.25
%
 
 
$
173,226

 
$
2,015

 
$
175,241

Floating rate (2)
 
April 1, 2017
(1 
) 
 
L+3.75
%
 
 
12,557

 
25,402

 
37,959

 
 
 
 
 
 
 
 
185,783

 
$
27,417

 
$
213,200

Unamortized deferred financing costs
 
 
 
 
 
 
 
(117
)
 
 
 
 
 
 
 
 
 
 
 
 
$
185,666

 
 
 
 


(1)
We have two, one-year options to extend the stated maturity date to April 1, 2019, subject to certain conditions. In connection with the anticipated sale of a condo interest in 203,090 RSF of 360 Longwood Avenue in mid-2017, the real estate joint venture expects to refinance the existing secured construction loan.
(2)
Borrowings under the floating rate tranche have an interest rate floor equal to 5.25%, and are subject to an interest rate cap on LIBOR of 3.50%.

As described in Note 2 – “Basis of Presentation and Summary of Significant Accounting Policies” to our consolidated financial statements, we evaluate our unconsolidated real estate joint venture, which is a limited liability company, using the consolidation guidance under the VIE model first, and then under the voting model if the entity is not a VIE. On October 1, 2015, upon our adoption of the consolidation guidance ASU issued in February 2015, we re-evaluated our 360 Longwood Avenue joint venture (27.5% interest held by the Company). We first evaluated the partially-owned legal entity under the variable interest model, based upon the following characteristics of a VIE:

1)
The entity does not have sufficient equity to finance its activities without additional subordinated financial support.
This entity has significant equity and non-recourse financing in place to fund the remainder of the development.

2)
The entity is established with non-substantive voting rights.
Our 27.5% ownership interest in 360 Longwood Avenue consists of an interest in a joint venture with a development partner. The joint venture with our development partner holds an interest in the property with an institutional investor. Our development partner was responsible for the day-to-day management of construction and development activities, and we are responsible for the day-to-day administrative operations of components of the property following development completion. At the property level, all major decisions (including the development plan, annual budget, leasing plan, and financing plan) require approval of all three investors. Although voting rights within the structure are disproportionate to the members’ economic interests, the activities of the ventures are conducted on behalf of all members, and therefore, 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.
The other members have significant participating rights, including in the day-to-day management of development activities and the participation in decisions related to the operations of the property.

Since the joint venture does not meet the VIE criteria, we determined that our 360 Longwood Avenue joint venture does not qualify for evaluation under the VIE model. Therefore, we evaluate the joint venture under the voting model. Under the voting model, we consolidate the entity if we determine that we, directly or indirectly, have greater than 50% of the voting shares and that noncontrolling equity holders do not have substantive participating rights. Our interest is limited to 27.5%, and we do not have other contractual rights; therefore we account for this joint venture under the equity method of accounting.