REAL ESTATE

Leasing as a lessor

Revenue Recognition

We lease multifamily properties under operating leases with terms of generally one year or less. We lease commercial properties (our office and retail segments) under operating leases with an average term of seven years. Substantially all commercial leases contain fixed escalations or, in some instances, changes based on the Consumer Price Index, which occur at specified times during the term of the lease. In certain commercial leases, variable lease income, such as percentage rent, is recognized when rents are earned. We recognize rental income and rental abatements from our multifamily and commercial leases when earned on a straight-line basis over the lease term. Recognition of rental income commences when control of the leased space has been transferred to the tenant.

We recognize cost reimbursement income from pass-through expenses on an accrual basis over the periods in which the expenses were incurred. Pass-through expenses are comprised of real estate taxes, operating expenses and common area maintenance costs which are reimbursed by tenants in accordance with specific allowable costs per tenant lease agreements.

Parking revenues are derived from leases, monthly parking agreements and transient parking. We recognize parking revenues from leases on a straight-line basis over the lease term and other parking revenues as earned. We recognize transient parking revenue when our performance obligation is met.

Upon adoption of ASU 2016-02, we elected not to bifurcate lease contracts into lease and non-lease components, since the timing and pattern of revenue is not materially different and the non-lease components is not the primary component of the lease. Accordingly, both lease and non-lease components are presented in “Real estate rental revenue” in our consolidated financial statements. The adoption of ASU 2016-02 did not result in a material change to our recognition of real estate rental revenue.

Accounts Receivable

Lease related receivables, which include contractual amounts accrued and unpaid from tenants and accrued straight-line rents receivable, are reduced for credit losses. Such amounts are recognized as a reduction to real estate rental revenues. We evaluate the collectability of lease receivables monthly using several factors including a lessee’s creditworthiness. We recognize the credit loss on lease related receivables when, in the opinion of management, collection of substantially all lease payments is not probable. While collectability is determined not probable, any lease income subsequent to recognizing the credit loss is limited to the lesser of the lease income reflected on a straight-line basis or cash collected. The adoption of ASU 2016-02 resulted in an adjustment to our opening distributions in excess of net income balance of $0.9 million, associated with lease related receivables where collection of substantially all operating lease payments is not probable as of January 1, 2019.

Future Minimum Rental Income

As of March 31, 2019, non-cancelable commercial operating leases provide for future minimum rental income as follows (in thousands). Apartment leases are not included as the terms are generally for one year or less.



2019	$	192,841
2020	181,544
2021	159,607
2022	139,518
2023	114,521
Thereafter	343,439
	$	1,131,470

As of December 31, 2018, non-cancelable commercial operating leases provide for future minimum rental income as follows (in thousands):



2019	$	191,252
2020	175,925
2021	153,395
2022	133,359
2023	108,564
Thereafter	304,876
	$	1,067,371

Leasing as a Lessee

2000 M Street, an office property in Washington, DC, is subject to an operating ground lease with a remaining term of 52 years. Rental payments under this lease are subject to percentage rent variable payments, which are not included as part of our measurement of straight-line rental expense. We recognized variable rental payments of $0.2 million during each of the 2019 and 2018 Quarters.

Upon adoption of ASU 2016-02, we recognized a right of use asset (included in Income producing property) and lease liability (included in Accounts payable and other liabilities) of $4.2 million. We used a discount rate of approximately 5.9%, which was derived from our assessment of securitized rates for similar assets and credit quality. We recognized $0.1 million of right-of-use and lease liability amortization during the 2019 Quarter. In addition, as of January 1, 2019 we reclassified the associated below-market ground lease intangible asset of $10.0 million, net of accumulated amortization of $2.1 million, from Prepaid expenses and other assets to Income producing property on our consolidated balance sheets.

The following table sets forth the undiscounted cash flows of our schedule obligations for future minimum payments on our operating ground lease at March 31, 2019 and a reconciliation of those cash flows to the operating lease liability at March 31, 2019 (in thousands):



2019	$	195
2020	260
2021	260
2022	260
2023	260
2024	260
Thereafter	11,895
	13,390
Imputed interest	(9,233		)
Lease liability	$	4,157

Acquisitions

We did not execute any acquisitions during the 2019 Quarter. Properties and land for development acquired during the year ended December 31, 2018 were as follows:

Acquisition Date

Property

Type

# of units (unaudited)

Rentable

Square Feet

(unaudited)

Contract

Purchase Price

(in thousands)

January 18, 2018

Arlington Tower

Office

N/A

391,000

250,000

The results of operations from acquired operating properties are included in the consolidated statements of operations as of their acquisition dates.

Development/Redevelopment

We have properties under development/redevelopment and held for current or future development as of March 31, 2019.

In the multifamily segment, we have The Trove, a multifamily development adjacent to The Wellington, and own land held for future multifamily development adjacent to Riverside Apartments. As of March 31, 2019, we had invested $71.3 million and $23.3 million, including the costs of acquiring the land, in The Trove and the development adjacent to Riverside Apartments, respectively.

In the retail segment, we had a redevelopment project to add rentable space at Spring Valley Village. As of March 31, 2019, we had invested $6.6 million in the redevelopment. We substantially completed major construction activities on this project during the fourth quarter of 2018 and placed into service assets totaling $4.3 million.

Properties Sold and Held for Sale

We intend to hold our properties for investment with a view to long-term appreciation, to engage in the business of acquiring, developing and owning our properties, and to make occasional sales of the properties that no longer meet our long-term strategy or return objectives and where market conditions for sale are favorable. The proceeds from the sales may be reinvested into other properties, used to fund development operations or to support other corporate needs, or distributed to our shareholders. We had no properties classified as held for sale requiring discontinuation of depreciation during the 2019 Quarter. Operating revenues, other operating expenses and interest continue to be recognized until the date of sale.

We did not sell or classify as held for sale any properties during the 2019 Quarter. We sold our interests in the following properties in 2018:



Disposition Date	Property Name	Segment	Rentable Square Feet/ Number of Units	Contract Sales Price (in thousands)		Gain on Sale (in thousands)
January 19, 2018	Braddock Metro Center	Office	356,000	$	93,000	$	—
June 28, 2018	2445 M Street	Office	292,000	101,600		2,495
		Total 2018	648,000	$	194,600	$	2,495

We have fully transferred control of the assets associated with these disposed properties.

During the first quarter of 2018, we executed a purchase and sale agreement to sell 2445 M Street, a 292,000 square foot office property in Washington, DC, for a contract sales price of $100.0 million, with settlement originally scheduled for the third quarter of 2018. During 2017, we evaluated 2445 M Street for impairment and recognized a $24.1 million impairment charge in order to reduce the carrying value of the property to its estimated fair value. Upon execution of the purchase and sale agreement, the property met the criteria for classification as held for sale. Due to the property’s classification as held for sale, we recorded an additional impairment charge of $1.9 million in the first quarter of 2018 in order to reduce the carrying value of the property to its estimated fair value, less estimated selling costs. We based this fair value on the expected sales price from a potential sale. There are few observable market transactions for similar properties. This fair valuation falls into Level 2 of the fair value hierarchy due to its reliance on a quoted price in a market that is not active. During the second quarter of 2018, we executed an amendment to the purchase and sale agreement which increased the contract sales price to $101.6 million and advanced the settlement date. On June 28, 2018, we sold 2445 M Street, recognizing a gain on sale of real estate of $2.5 million.

During the first quarter of 2019, we executed a letter of intent for the sale of Quantico Corporate Center, an office property in Stafford, Virginia, consisting of two office buildings totaling 272,000 square feet. The property did not meet the criteria for classification as held for sale as of March 31, 2019. Due to the negotiations to sell the property, we evaluated Quantico Corporate Center for impairment and recognized a $8.4 million impairment charge during the 2019 Quarter in order to reduce the carrying value of the property to its estimated fair value. We based this fair valuation on the expected sale price from a potential sale. There are few observable market transactions for similar properties. This fair valuation falls into Level 2 of the fair value hierarchy due to its reliance on a quoted price in a market that is not active.

On April 22, 2019, we executed a purchase and sale agreement to sell Quantico Corporate Center for a contract sale price of $33.0 million. We anticipate settlement in the second quarter of 2019. However, there can be no assurances that this proposed sale will be consummated. Upon execution of the purchase and sale agreement and receipt of a non-refundable deposit, we determined that the property met the criteria for classification as held for sale as of that date.