5. Investments in Unconsolidated Joint Ventures

The investments in unconsolidated joint ventures consist of the following at December 31, 2018 and 2017:



					Carrying Value of Investment (1)
Entity	Properties	Nominal % Ownership			December 31, 2018			December 31, 2017
					(in thousands)
Square 407 Limited Partnership	Market Square North	50.0	%		$	(6,424	)	$	(8,258	)
The Metropolitan Square Associates LLC	Metropolitan Square	20.0	%		2,644			3,339
BP/CRF 901 New York Avenue LLC	901 New York Avenue	25.0	%	(2)	(13,640		)	(13,811		)
WP Project Developer LLC	Wisconsin Place Land and Infrastructure	33.3	%	(3)	38,214			39,710
Annapolis Junction NFM LLC	Annapolis Junction	50.0	%	(4)	25,268			18,381
540 Madison Venture LLC	540 Madison Avenue	60.0	%		66,391			66,179
500 North Capitol Venture LLC	500 North Capitol Street, NW	30.0	%		(5,026		)	(3,876		)
501 K Street LLC	1001 6th Street	50.0	%	(5)	42,557			42,657
Podium Developer LLC	The Hub on Causeway - Podium	50.0	%		69,302			67,120
Residential Tower Developer LLC	The Hub on Causeway - Residential	50.0	%		47,505			28,212
Hotel Tower Developer LLC	The Hub on Causeway - Hotel Air Rights	50.0	%		3,022			1,690
Office Tower Developer LLC	100 Causeway Street	50.0	%	(6)	23,804			—
1265 Main Office JV LLC	1265 Main Street	50.0	%		3,918			4,641
BNY Tower Holdings LLC	Dock 72	50.0	%		82,520			72,104
CA-Colorado Center Limited Partnership	Colorado Center	50.0	%		253,495			254,440
7750 Wisconsin Avenue LLC	7750 Wisconsin Avenue	50.0	%	(6)	69,724			21,452
BP-M 3HB Venture LLC	3 Hudson Boulevard	25.0	%		46,993			—
SMBP Venture LP	Santa Monica Business Park	55.0	%		180,952			—
					$	931,219		$	593,980

_______________


(1)	Investments with deficit balances aggregating approximately $25.1 million and $25.9 million at December 31, 2018 and 2017, respectively, are included within Other Liabilities in the Company’s Consolidated Balance Sheets.


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


(3)	The Company’s wholly-owned subsidiary that owns Wisconsin Place Office also owns a 33.3% interest in the joint venture entity that owns the land, parking garage and infrastructure of the project.


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


(5)	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.


(6)	This entity is a VIE (See Note 1).

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 venture 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, 2018		December 31, 2017
	(in thousands)
ASSETS
Real estate and development in process, net	$	3,545,906	$	1,768,996
Other assets	543,512		367,743
Total assets	$	4,089,418	$	2,136,739
LIABILITIES AND MEMBERS’/PARTNERS’ EQUITY
Mortgage and notes payable, net	$	2,017,609	$	1,437,440
Other liabilities	582,006		99,215
Members’/Partners’ equity	1,489,803		600,084
Total liabilities and members’/partners’ equity	$	4,089,418	$	2,136,739
Company’s share of equity	$	622,498	$	286,495
Basis differentials (1)	308,721		307,485
Carrying value of the Company’s investments in unconsolidated joint ventures (2)	$	931,219	$	593,980

_______________

(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, 2018 and 2017, there was an aggregate basis differential of approximately $316.7 million and $322.5 million, respectively, 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 $25.1 million and $25.9 million at December 31, 2018 and 2017, 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,
	2018			2017			2016
	(in thousands)
Total revenue (1)	$	271,951		$	222,517		$	177,182
Expenses
Operating	106,610			90,542			76,741
Depreciation and amortization (2)	103,079			57,079			44,989
Total expenses	209,689			147,621			121,730
Other income (expense)
Interest expense	(71,308		)	(46,371		)	(34,016		)
Gain on sale of real estate	16,951			—			—
Net income	$	7,905		$	28,525		$	21,436

Company’s share of net income	$	8,084		$	18,439		$	9,873
Basis differential (3)	(5,862		)	(7,207		)	(1,799		)
Income from unconsolidated joint ventures	$	2,222		$	11,232		$	8,074

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

_______________


(1)	Includes straight-line rent adjustments of approximately $15.9 million, $21.7 million and $18.1 million for the years ended December 31, 2018, 2017 and 2016, respectively.


(2)	During the year ended December 31, 2018, the joint venture that owns Metropolitan Square in Washington, DC, commenced a renovation project and recorded accelerated depreciation expense of approximately $22.4 million related to the remaining book value of the assets to be replaced. The Company's share of the accelerated depreciation expense totaled approximately $4.5 million.


(3)	Includes straight-line rent adjustments of approximately $2.4 million, $1.9 million and $1.4 million for the years ended December 31, 2018, 2017 and 2016, respectively. Also includes net above-/below-market rent adjustments of approximately $1.6 million, $2.9 million and $0.9 million for the years ended December 31, 2018, 2017 and 2016, respectively.

On April 19, 2018, a joint venture in which the Company has a 50% interest obtained construction financing with a total commitment of $180.0 million collateralized by its Hub on Causeway - Residential development project. The construction financing bears interest at a variable rate equal to LIBOR plus 2.00% per annum and matures on April 19, 2022, with two, one-year extension options, subject to certain conditions. As of December 31, 2018, approximately $40.5 million had been drawn under the loan. The Hub on Causeway - Residential is an approximately 320,000 square foot project comprised of 440 residential units located in Boston, Massachusetts.

On April 27, 2018, a joint venture in which the Company has a 60% interest refinanced the mortgage loan collateralized by its 540 Madison Avenue property located in New York City totaling $120.0 million. The mortgage loan bears interest at a variable rate equal to LIBOR plus 1.10% per annum and matures on June 5, 2023. The previous mortgage loan bore interest at a variable rate equal to LIBOR plus 1.50% per annum and was scheduled to mature on June 5, 2018. 540 Madison Avenue is an approximately 284,000 net rentable square foot Class A office property.

On July 13, 2018, the Company entered into a joint venture with a third party to acquire a development site at 3 Hudson Boulevard that, upon the future acquisition of additional available development rights, can accommodate a Class A office tower with up to 2.0 million net rentable square feet located on the entire square block between 11th Avenue and Hudson Boulevard Park from West 34th Street to West 35th Street in New York City. The Company owns a 25% interest in, and is the managing member of, the joint venture. The acquisition includes improvements consisting of excavation work and foundation elements that are currently being constructed on the site. The Company contributed cash totaling approximately $45.6 million at closing and will contribute approximately $62.2 million in the future for its initial capital contribution, a portion of which will fund the remaining costs to complete the foundation elements to grade for the future office building. In addition, the Company provided $80.0 million of mortgage financing to the joint venture that bears interest at a variable rate equal to LIBOR plus 3.50% per annum and matures on July 13, 2023, with extension options, subject to certain conditions. The loan has been reflected as a Related Party Note Receivable on the Company’s Consolidated Balance Sheets. The Company's policy is to record notes receivable at their unamortized cost, net of any unamortized deferred fees or costs, premiums or discounts and an allowance for loan losses. Loan fees and direct costs associated with loans originated by the Company are deferred and amortized over the term of the note as interest income.

On July 19, 2018, the Company entered into a joint venture with Canada Pension Plan Investment Board (“CPPIB”) to acquire Santa Monica Business Park in the Ocean Park neighborhood of Santa Monica, California for a net purchase price of approximately $626.7 million, including $11.5 million of seller funded leasing costs after the effective date of the purchase and sale agreement. Santa Monica Business Park is a 47-acre office park consisting of 21 buildings totaling approximately 1.2 million net rentable square feet. Approximately 70% of the rentable square footage is subject to a ground lease with 80 years remaining, including renewal periods. The ground lease provides the joint venture with the right to purchase the land underlying the properties in 2028 with subsequent purchase rights every 15 years. CPPIB invested approximately $147.0 million for a 45% ownership interest in the joint venture. The Company is providing customary operating, property management and leasing services to, and invested approximately $179.7 million in, the joint venture. The acquisition was completed with $300.0 million of financing. The mortgage financing bears interest at a variable rate equal to LIBOR plus 1.28% per annum and matures on July 19, 2025. At closing, the borrower under the loan, which is a subsidiary of the joint venture, entered into interest rate swap contracts with notional amounts aggregating $300.0 million through April 1, 2025, resulting in a fixed rate of approximately 4.063% per annum through the expiration of the interest rate swap contracts. At December 31, 2018, the unconsolidated joint venture has recorded the changes in fair value of the interest rate swap contracts aggregating approximately $5.6 million as a liability and accumulated other comprehensive loss on its balance sheet. At December 31, 2018, the Company has recognized its share of the fair value totaling approximately $3.1 million as a decrease to its Investments in Unconsolidated Joint Ventures and Accumulated Other Comprehensive Loss on the Company's Consolidated Balance Sheets.

The following table summarizes the allocation of the joint venture's aggregate purchase price for Santa Monica Business Park at the date of acquisition (in thousands).



Land and improvements	$	100,453
Leasehold interest in land	248,944
Site improvements	13,379
Building and improvements	593,669
Tenant improvements	31,329
In-place lease intangibles	47,955
Above-market lease intangible	4,495
Below-market lease intangible	(17,503		)
Capital lease obligation	(396,008		)
Net assets acquired	$	626,713

On July 27, 2018, the Company entered into a joint venture with its partner at The Hub on Causeway mixed-use development in Boston, Massachusetts to acquire the air rights for the development of an approximately 627,000 net rentable square foot Class A office tower at the site to be known as 100 Causeway Street. In addition, the joint venture entered into a lease agreement with an affiliate of Verizon Communications, Inc., under which Verizon will lease approximately 70% of the office tower for a term of 20 years. With the execution of the lease, the joint venture commenced development of the project. The Company serves as the co-development manager for the project. The joint venture partner contributed an air rights parcel and improvements, with a fair value of approximately $41.3 million, for its initial 50% interest in the joint venture. The Company contributed improvements totaling approximately $3.9 million and will contribute cash totaling approximately $37.4 million for its initial 50% interest.

On November 16, 2018, 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 outstanding balance of the loan totaled approximately $13.1 million and was scheduled to mature on November 17, 2018. The extended loan has a total commitment amount of approximately $14.3 million, bears interest at a variable rate equal to LIBOR plus 2.00% per annum and matures on November 17, 2019, with one, one-year extension option, subject to certain conditions. Annapolis Junction Building Six is a Class A office property with approximately 119,000 net rentable square feet located in Annapolis, Maryland (See Note 19).

On December 31, 2018, the Company entered into a distribution agreement with its partner in the joint venture in which the Company has a 50% interest and that owns Annapolis Junction. Under the agreement, the joint venture distributed its Annapolis Junction Building One property to the partner and the partner assumed the mortgage indebtedness collateralized by the property. The Company recognized a gain on sale of real estate totaling approximately $8.3 million, which is included within Income from Unconsolidated Joint Ventures in the Company's Consolidated Statements of Operations. Annapolis Junction Building One is an approximately 118,000 net rentable square foot Class A office property.