Investments in Unconsolidated Joint Ventures

9 Months Ended

Sep. 30, 2019

Investments In Unconsolidated Joint Ventures [Abstract]

Investments In Unconsolidated Joint Ventures

5. Investments in Unconsolidated Joint Ventures

The investments in unconsolidated joint ventures consist of the following at September 30, 2019 and December 31, 2018:

		Nominal % Ownership			Carrying Value of Investment (1)
Entity	Properties				September 30, 2019			December 31, 2018
					(in thousands)
Square 407 Limited Partnership	Market Square North	50.0	%		$	(5,114	)	$	(6,424	)
BP/CRF Metropolitan Square, LLC	Metropolitan Square	20.0	%		5,726			2,644
901 New York, LLC	901 New York Avenue	25.0	%	(2)	(12,385		)	(13,640		)
WP Project Developer LLC	Wisconsin Place Land and Infrastructure	33.3	%	(3)	37,179			38,214
Annapolis Junction NFM LLC	Annapolis Junction	50.0	%	(4)	25,314			25,268
540 Madison Venture LLC	540 Madison Avenue	60.0	%	(5)	3,075			66,391
500 North Capitol Venture LLC	500 North Capitol Street, NW	30.0	%		(5,661		)	(5,026		)
501 K Street LLC	1001 6th Street	50.0	%	(6)	42,555			42,557
Podium Developer LLC	The Hub on Causeway - Podium	50.0	%		41,434			69,302
Residential Tower Developer LLC	The Hub on Causeway - Residential	50.0	%		48,491			47,505
Hotel Tower Developer LLC	The Hub on Causeway - Hotel Air Rights	50.0	%		3,917			3,022
Office Tower Developer LLC	100 Causeway Street	50.0	%		74,083			23,804
1265 Main Office JV LLC	1265 Main Street	50.0	%		3,932			3,918
BNY Tower Holdings LLC	Dock 72	50.0	%		94,700			82,520
CA-Colorado Center Limited Partnership	Colorado Center	50.0	%		250,213			253,495
7750 Wisconsin Avenue LLC	7750 Wisconsin Avenue	50.0	%		55,662			69,724
BP-M 3HB Venture LLC	3 Hudson Boulevard	25.0	%		54,037			46,993
SMBP Venture LP	Santa Monica Business Park	55.0	%		163,809			180,952
Platform 16 Holdings LP	Platform 16	55.0	%	(7)	29,128			—
					$	910,095		$	931,219

_______________

(1) Investments with deficit balances aggregating approximately $23.2 million and $25.1 million at September 30, 2019 and December 31, 2018, respectively, have been reflected 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) The property was sold on June 27, 2019. As of September 30, 2019, the investment is comprised of undistributed cash. See note below for additional details.

(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 provide that, 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 or the Company will be entitled to an additional promoted interest or payments.

The Company classifies distributions received from equity method investees within its consolidated statements of cash flows using the nature of the distribution approach, which classifies the distributions received on the basis of the nature of the activity or activities of the investee that generated the distribution as either a return on investment (classified as cash inflows from operating activities) or a return of investment (classified as cash inflows from investing activities).

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

	September 30, 2019		December 31, 2018
	(in thousands)
ASSETS
Real estate and development in process, net (1)	$	3,782,279	$	3,545,906
Other assets	498,040		543,512
Total assets	$	4,280,319	$	4,089,418
LIABILITIES AND MEMBERS’/PARTNERS’ EQUITY
Mortgage and notes payable, net	$	2,107,805	$	2,017,609
Other liabilities (2)	773,033		582,006
Members’/Partners’ equity	1,399,481		1,489,803
Total liabilities and members’/partners’ equity	$	4,280,319	$	4,089,418
Company’s share of equity	$	569,704	$	622,498
Basis differentials (3)	340,391		308,721
Carrying value of the Company’s investments in unconsolidated joint ventures (4)	$	910,095	$	931,219

 _______________

(1) At September 30, 2019, this amount includes right of use assets - finance leases and right of use assets - operating leases totaling approximately $383.9 million and $12.3 million, respectively.

(2) At September 30, 2019, this amount includes lease liabilities - finance leases and lease liabilities - operating leases totaling approximately $511.7 million and $17.3 million, respectively.

(3) 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 September 30, 2019 and December 31, 2018, there was an aggregate basis differential of approximately $312.3 million and $316.7 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.

(4) Investments with deficit balances aggregating approximately $23.2 million and $25.1 million at September 30, 2019 and December 31, 2018, 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:

	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018
	(in thousands)
Total revenue (1)	$	75,940		$	76,177		$	239,099		$	189,759
Expenses
Operating	28,839			29,522			89,472			75,239
Depreciation and amortization	23,477			44,993			76,941			74,245
Total expenses	52,316			74,515			166,413			149,484
Other income (expense)
Interest expense	(20,483		)	(19,861		)	(62,043		)	(48,993		)
Gain on sale of real estate (2)	(812		)	—			33,760			—
Net income (loss)	$	2,329		$	(18,199	)	$	44,403		$	(8,718	)
Company’s share of net income (loss)	$	392		$	(2,858	)	$	24,352		$	1,073
Basis differential (2) (3)	(1,041		)	(1,455		)	23,176			(4,156		)
Income (loss) from unconsolidated joint ventures	$	(649	)	$	(4,313	)	$	47,528		$	(3,083	)

 _______________ 

(1) Includes straight-line rent adjustments of approximately $5.3 million and $4.8 million for the three months ended September 30, 2019 and 2018, respectively, and $18.7 million and $9.8 million for the nine months ended September 30, 2019 and 2018, respectively.

(2) Represents the total gain on sale of 540 Madison Avenue recognized by the joint venture, as described below. During 2008, the Company recognized an other-than-temporary impairment loss on its investment in the unconsolidated joint venture resulting in a basis differential between the carrying value of the Company’s investment in the joint venture and the joint venture’s basis in the assets and liabilities of the property. As a result of the historical basis difference, the Company recognized a gain on sale of real estate totaling approximately $47.3 million for the nine months ended September 30, 2019, which consists of its share of the gain on sale reported by the joint venture as well as an adjustment for the basis differential. The Company recognized a reduction to the gain on sale of real estate totaling approximately $0.5 million for the three months ended September 30, 2019. The gain on sale is included in Income (Loss) from Unconsolidated Joint Ventures in the Company’s Consolidated Statements of Operations.

(3) Includes straight-line rent adjustments of approximately $0.5 million and $0.5 million for the three months ended September 30, 2019 and 2018, respectively, and $1.6 million and $1.9 million for the nine months ended September 30, 2019 and 2018, respectively. Also includes net above-/below-market rent adjustments of approximately $0.4 million and $0.4 million for the three months ended September 30, 2019 and 2018, respectively, and $1.3 million and $1.2 million for the nine months ended September 30, 2019 and 2018, respectively.

On January 24, 2019, 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 $13.0 million and was scheduled to mature on November 17, 2019, with a one-year extension option, subject to certain conditions. 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, 2020. Annapolis Junction Building Six is a Class A office property with approximately 119,000 net rentable square feet located in Annapolis, Maryland.

On April 26, 2019, a joint venture in which the Company has a 50% interest obtained construction financing with a total commitment of $255.0 million collateralized by its 7750 Wisconsin Avenue development project located in Bethesda, Maryland. The construction financing bears interest at a variable rate equal to LIBOR plus 1.25% per annum and matures on April 26, 2023, with two, one-year extension options, subject to certain conditions. As of September 30, 2019, approximately $39.6 million has been drawn under the loan. 7750 Wisconsin Avenue is a 734,000 net rentable square foot build-to-suit Class A office project and below-grade parking garage.

On May 28, 2019, joint ventures in which the Company has a 50% interest and that own The Hub on Causeway - Podium and 100 Causeway Street development projects entered into an infrastructure development assistance agreement (the “IDAA”) with the Commonwealth of Massachusetts and the City of Boston. Per the IDAA, The Hub on Causeway - Podium development project would be reimbursed for certain costs of public infrastructure improvements using the proceeds of up to $30.0 million in aggregate principal amount of municipal bonds issued by the Commonwealth of Massachusetts. On September 16, 2019, the joint venture received the full reimbursement of costs for the public infrastructure improvements totaling approximately $28.8 million, which has been reflected as a reduction to the carrying value of the real estate of The Hub on Causeway - Podium property. The construction loan agreement for The Hub on Causeway - Podium was modified to require the joint venture to pay down the construction loan principal balance using the proceeds received from the reimbursement of costs of the public infrastructure improvements and on September 16, 2019, the joint venture that owns The Hub on Causeway - Podium development project paid down the construction loan principal balance in the amount of approximately $28.8 million. On June 15, 2019, the joint venture that owns The Hub on Causeway - Podium development project partially placed in-service The Hub on Causeway - Podium development project, an approximately 375,000 net rentable square foot project containing retail and office space located in Boston, Massachusetts.

On June 27, 2019, a joint venture in which the Company has a 60% interest completed the sale of 540 Madison Avenue in New York City for a gross sale price of approximately $310.3 million, including the assumption by the buyer of the mortgage loan collateralized by the property totaling $120.0 million. The mortgage loan bore interest at a variable rate equal to LIBOR plus 1.10% per annum and was scheduled to mature on June 5, 2023. Net cash proceeds totaled approximately $178.7 million, of which the Company’s share was approximately $107.1 million, after the payment of transaction costs. During 2008, the Company recognized an other-than-temporary impairment loss on its investment in the unconsolidated joint venture. As a result, the Company recognized a gain on sale of real estate totaling approximately $47.3 million, which is included in Income (Loss) from Unconsolidated Joint Ventures in the accompanying Consolidated Statements of Operations. 540 Madison Avenue is an approximately 284,000 net rentable square foot Class A office property.

On September 5, 2019, a joint venture in which the Company has a 50% interest obtained construction financing with a total commitment of $400.0 million collateralized by its 100 Causeway Street development project located in Boston, Massachusetts. The construction financing bears interest at a variable rate equal to LIBOR plus 1.50% per annum (LIBOR plus 1.375% per annum upon stabilization, as defined in the loan agreement) and matures on September 5, 2023, with two, one-year extension options, subject to certain conditions. As of September 30, 2019, approximately $47.7 million has been drawn under the loan. 100 Causeway Street is an approximately 632,000 net rentable square foot Class A office project.

On September 20, 2019, the Company entered into a joint venture with CPPIB to develop Platform 16 located in San Jose, California. Platform 16 consists of a 65-year ground lease for land totaling approximately 5.6 acres that will support the development of approximately 1.1 million square feet of commercial office space. The Company contributed the ground lease interest and improvements totaling approximately $28.2 million for its initial 55% interest in the joint venture (See Note 3). CPPIB contributed cash totaling approximately $23.1 million for its initial 45% interest in the joint venture. The Company will provide customary development, property management and leasing services to the joint venture.