5. Investments in Unconsolidated Joint Ventures

The investments in unconsolidated joint ventures consist of the following at December 31, 2016 and 2015:



					Carrying Value of Investment (1)
Entity	Properties	Nominal % Ownership			December 31, 2016			December 31, 2015
					(in thousands)
Square 407 Limited Partnership	Market Square North	50.0	%		$	(8,134	)	$	(9,951	)
BP/CRF Metropolitan Square LLC	Metropolitan Square	20.0	%	(2)	2,004			9,179
901 New York LLC	901 New York Avenue	25.0	%	(3)	(10,564		)	(11,958		)
WP Project Developer LLC	Wisconsin Place Land and Infrastructure	33.3	%	(4)	41,605			43,524
Annapolis Junction NFM, LLC	Annapolis Junction	50.0	%	(5)	20,539			29,009
540 Madison Venture LLC	540 Madison Avenue	60.0	%		67,816			68,983
500 North Capitol LLC	500 North Capitol Street, NW	30.0	%		(3,389		)	(3,292		)
501 K Street LLC	1001 6th Street	50.0	%	(6)	42,528			42,584
Podium Developer LLC	The Hub on Causeway - Podium	50.0	%		29,869			18,508
Residential Tower Developer LLC	The Hub on Causeway - Residential	50.0	%		20,803			N/A
Hotel Tower Developer LLC	The Hub on Causeway - Hotel	50.0	%		933			N/A
1265 Main Office JV LLC	1265 Main Street	50.0	%		4,779			11,916
BNY Tower Holdings LLC	Dock 72 at the Brooklyn Navy Yard	50.0	%	(7)	33,699			11,521
CA-Colorado Center Limited Partnership	Colorado Center	49.8	%		510,623			N/A
					$	753,111		$	210,023

_______________


(1)	Investments with deficit balances aggregating approximately $22.1 million and $25.2 million at December 31, 2016 and 2015, respectively, have been reflected within Other Liabilities in the Company’s Consolidated Balance Sheets.


(2)	On October 20, 2016, the Company sold a 31% ownership interest in this joint venture.


(3)	The Company’s economic ownership has increased based on the achievement of certain return thresholds.


(4)	The Company’s wholly-owned entity that owns the office component of the project also owns a 33.3% interest in the entity owning the land, parking garage and infrastructure of the project.


(5)	The joint venture owns four in-service buildings and two undeveloped land parcels.


(6)	Under the joint venture agreement for this land parcel, the partner will be entitled to up to two additional payments from the venture based on increases in total entitled square footage of the project above 520,000 square feet and achieving certain project returns at stabilization.


(7)	This entity is a VIE (See Note 2).

Certain of the Company’s unconsolidated joint venture agreements include provisions whereby, at certain specified times, each partner has the right to initiate a purchase or sale of its interest in the joint ventures. With limited exceptions under these provisions, the Company is not compelled to purchase the interest of its outside joint venture partners. Under certain of the Company's joint ventures agreements, if certain return thresholds are achieved the partners will be entitled to an additional promoted interest or payments.

The combined summarized balance sheets of the Company’s unconsolidated joint ventures are as follows:



	December 31, 2016		December 31, 2015
	(in thousands)
ASSETS
Real estate and development in process, net	$	1,519,217	$	1,072,412
Other assets	297,263		252,285
Total assets	$	1,816,480	$	1,324,697
LIABILITIES AND MEMBERS’/PARTNERS’ EQUITY
Mortgage and notes payable, net	$	865,665	$	830,125
Other liabilities	67,167		44,549
Members’/Partners’ equity	883,648		450,023
Total liabilities and members’/partners’ equity	$	1,816,480	$	1,324,697
Company’s share of equity	$	450,662	$	237,070
Basis differentials (1)	302,449		(27,047		)
Carrying value of the Company’s investments in unconsolidated joint ventures (2)	$	753,111	$	210,023

_______________

(1)

This amount represents the aggregate difference between the Company’s historical cost basis and the basis reflected at the joint venture level, which is typically amortized over the life of the related assets and liabilities. Basis differentials result from impairments of investments, acquisitions through joint ventures with no change in control and upon the transfer of assets that were previously owned by the Company into a joint venture. In addition, certain acquisition, transaction and other costs may not be reflected in the net assets at the joint venture level. At December 31, 2016, there is an aggregate basis differential of approximately $328.8 million between the carrying value of the Company’s investment in the joint venture that owns Colorado Center and the joint venture’s basis in the assets and liabilities, which differential (excluding land) shall be amortized over the remaining lives of the related assets and liabilities.


(2)	Investments with deficit balances aggregating approximately $22.1 million and $25.2 million at December 31, 2016 and 2015, respectively, have been reflected within Other Liabilities in the Company’s Consolidated Balance Sheets.

The combined summarized statements of operations of the Company’s unconsolidated joint ventures are as follows:



	For the year ended December 31,
	2016			2015			2014
	(in thousands)
Total revenue (1)	$	177,182		$	155,642		$	158,161
Expenses
Operating	76,741			65,093			62,974
Depreciation and amortization	44,989			36,057			37,041
Total expenses	121,730			101,150			100,015
Operating income	55,452			54,492			58,146
Other income (expense)
Interest expense	(34,016		)	(32,176		)	(31,896		)
Net income	$	21,436		$	22,316		$	26,250

Company’s share of net income (2)	$	9,873		$	22,031		$	11,913
Basis differential (3)	(1,799		)	739			856
Income from unconsolidated joint ventures	$	8,074		$	22,770		$	12,769

Gain on sale of investment in unconsolidated joint venture	$	59,370		$	—		$	—

_______________


(1)	Includes straight-line rent adjustments of approximately $18.1 million, $3.9 million and $3.0 million for the years ended December 31, 2016, 2015 and 2014, respectively.

(2)

During the year ended December 31, 2015, the Company received a distribution of approximately $24.5 million, which was generated from the excess loan proceeds from the refinancing of 901 New York Avenue’s mortgage loan to a new 10-year mortgage loan totaling $225.0 million. The Company’s allocation of income and distributions for the year ended December 31, 2015 was not proportionate to its nominal ownership interest as a result of the achievement of specified investment return thresholds, as provided for in the joint venture agreement.


(3)	Includes the Company’s share of straight-line rent adjustments of approximately $1.4 million and net below-market rent adjustments of approximately $0.9 million for the year ended December 31, 2016.

On April 11, 2016, a joint venture in which the Company has a 50% interest received a notice of event of default from the lender for the loan collateralized by its Annapolis Junction Building One property. The event of default relates to the loan to value ratio not being in compliance with the loan agreement. The loan has an outstanding balance of approximately $39.6 million, is non-recourse to the Company, bears interest at a variable rate equal to LIBOR plus 1.75% per annum and has a stated maturity date of March 31, 2018, with one, three-year extension option, subject to certain conditions including that the loan is not in default. On October 17, 2016, the lender notified the joint venture that it has elected to charge the default interest rate on the loan equal to LIBOR plus 5.75% per annum. The joint venture is currently in discussions with the lender regarding the event of default, although there can be no assurance as to the outcome of those discussions. The estimated fair value of the Company’s investment in the unconsolidated joint venture exceeds its carrying value. Annapolis Junction Building One is a Class A office property with approximately 118,000 net rentable square feet located in Annapolis, Maryland.

On July 1, 2016, the Company entered the Los Angeles market through its acquisition of a 49.8% interest in an existing joint venture that owns and operates Colorado Center located in Santa Monica, California for a gross purchase price of approximately $511.1 million, or approximately $503.6 million in cash net of credits for free rent, unfunded leasing costs and other adjustments. Colorado Center is a six-building office complex that sits on a 15-acre site and contains an aggregate of approximately 1,184,000 net rentable square feet with an underground parking garage for 3,100 vehicles. The following table summarizes the allocation of the Company’s aggregate purchase price for its 49.8% interest in Colorado Center at the date of acquisition (in thousands).



Land and improvements	$	189,597
Site improvements	9,050
Building and improvements	259,592
Tenant improvements	17,234
In-place lease intangibles	43,157
Above-market lease intangible	819
Below-market lease intangible	(16,461		)
Net assets	$	502,988

On October 1, 2016, a joint venture in which the Company has a 50% interest completed and fully placed in-service 1265 Main Street, a Class A office project with approximately 115,000 net rentable square feet located in Waltham, Massachusetts. On December 8, 2016, the joint venture obtained mortgage financing totaling $40.4 million collateralized by the property. The mortgage loan bears interest at a fixed rate of 3.77% per annum and matures on January 1, 2032.

On October 20, 2016, the Company and its partner in the unconsolidated joint venture that owns Metropolitan Square located in Washington, DC, completed the sale of an 80% interest in the joint venture for a gross sale price of approximately $282.4 million, including the assumption by the buyer of its pro rata share of the mortgage loan collateralized by the property totaling approximately $133.4 million. In addition, the buyer agreed to assume certain unfunded leasing costs totaling approximately $14.2 million. Net proceeds to the Company totaled approximately $58.2 million, resulting in a gain on sale of investment totaling approximately $59.4 million. Prior to the sale, the Company owned a 51% interest and its partner owned a 49% interest in the joint venture. Following the sale, the Company continues to own a 20% interest in the joint venture with the buyer owning the remaining 80%. Metropolitan Square is an approximately 607,000 net rentable square foot Class A office property.

On November 15, 2016, a joint venture in which the Company has a 50% interest extended the loan collateralized by its Annapolis Junction Building Six property. At the time of the extension, the loan had an outstanding balance of approximately $12.9 million and was scheduled to mature on November 17, 2016. The extended loan has a total commitment amount of approximately $15.4 million, bears interest at a variable rate equal to LIBOR plus 2.25% per annum and matures on November 17, 2018. Annapolis Junction Building Six is a Class A office property with approximately 119,000 net rentable square feet located in Annapolis, Maryland.

On November 28, 2016, the Company entered into a joint venture with the partner at its North Station development to acquire the air rights for the future development of a hotel property at the site. The joint venture partner contributed an air rights parcel and improvements, with a fair value of approximately $7.4 million, for its initial 50% interest in the joint venture. The Company contributed improvements totaling approximately $0.7 million and will contribute cash totaling approximately $6.7 million for its initial 50% interest. On November 28, 2016, the joint venture entered into a 99-year air rights lease with a third-party hotel developer/operator. In addition, on November 28, 2016, the Company and its partner entered into a joint venture to acquire the air rights for the future development of a residential tower at the site, consisting of an approximately 40-story residential tower totaling approximately 320,000 rentable square feet comprised of 440 apartment units. The joint venture partner contributed an air rights parcel, with a fair value of approximately $24.2 million, for its initial 50% interest in the joint venture. The Company contributed cash and improvements totaling approximately $17.7 million and will contribute cash totaling approximately $6.5 million for its initial 50% interest.

On December 7, 2016, two joint ventures, in which the Company has a 50% interest in each, combined and extended mortgage loans totaling approximately $21.6 million and $15.1 million collateralized by Annapolis Junction Building Seven and Building Eight, respectively. On April 4, 2016, the mortgage loan collateralized by Annapolis Junction Building Seven had been extended from April 4, 2016 to April 4, 2017, with one, one-year extension option, subject to certain conditions, and bore interest at a variable rate equal to LIBOR plus 1.65% per annum. The mortgage loan collateralized by Annapolis Junction Building Eight bore interest at a variable rate equal to LIBOR plus 1.50% per annum and was scheduled to mature on June 23, 2017, with two, one-year extension options, subject to certain conditions. The new mortgage loan has a total commitment amount of approximately $42.0 million, with an initial balance totaling approximately $36.7 million, bears interest at a variable rate equal to LIBOR plus 2.35% per annum and matures on December 7, 2019, with three, one-year extension options, subject to certain conditions. Annapolis Junction Building Seven and Building Eight are Class A office properties with approximately 127,000 and 126,000 net rentable square feet, respectively, located in Annapolis, Maryland.

On December 19, 2016, a joint venture in which the Company has a 50% interest obtained construction financing with a total commitment of $250.0 million collateralized by its Dock 72 development project. The construction financing bears interest at a variable rate equal to LIBOR plus 2.25% per annum and matures on December 18, 2020, with two, one-year extension options, subject to certain conditions. As of December 31, 2016, there have been no amounts drawn under the loan. Dock 72 is a Class A office project with approximately 670,000 net rentable square feet located in Brooklyn, New York.