7. Investments in Unconsolidated Entities

Real Estate Joint Ventures and Investments

Joint ventures are common in the real estate industry. We use joint ventures to finance properties, develop new properties, and diversify our risk in a particular property or portfolio of properties. As discussed in Note 2, we held joint venture interests in 78 properties as of December 31, 2016 and 81 properties as of December 31, 2015.

Certain of our joint venture properties are subject to various rights of first refusal, buy‑sell provisions, put and call rights, or other sale or marketing rights for partners which are customary in real estate joint venture agreements and the industry. We and our partners in these joint ventures may initiate these provisions (subject to any applicable lock up or similar restrictions), which may result in either the sale of our interest or the use of available cash, borrowings, or the use of limited partnership interests in the Operating Partnership, to acquire the joint venture interest from our partner.

We may provide financing to joint ventures primarily in the form of interest bearing construction loans. As of December 31, 2016 and 2015, we had construction loans and other advances to related parties totaling $12.3 million and $13.9 million, respectively, which are included in deferred costs and other assets in the accompanying consolidated balance sheets.

Unconsolidated Property Transactions

On September 15, 2016, we and our partners, through two separate joint ventures, acquired certain assets and liabilities of Aéropostale, a retailer of apparel and accessories, out of bankruptcy. Our noncontrolling interest in the retail operations venture and in the licensing venture is 49.05% and 28.45%, respectively. Our aggregate investment in the ventures was $33.1 million, which includes our share of working capital funded into the retail business.

On April 14, 2016, we and a joint venture partner completed the acquisition of The Shops at Crystals, a luxury shopping center on the Las Vegas Strip, for $1.1 billion. The transaction was funded with a combination of cash on hand, cash from our partner, and a $550.0 million 3.74% fixed-rate mortgage financing that will mature on July 1, 2026. We have a 50% noncontrolling interest in this joint venture and will manage the day-to-day operations. Substantially all of our investment has been determined to relate to investment property based on estimated fair values at the acquisition date.

On April 5, 2016, Quaker Bridge Mall, in which we own a 50% noncontrolling interest, completed a $180.0 million mortgage financing with a fixed interest rate of 4.50% that matures on May 1, 2026. Proceeds of approximately $180.0 million from the financing were distributed to the joint venture partners in April 2016.

On July 22, 2015, we closed on our previously announced transaction with Hudson’s Bay Company, or HBC, to which HBC contributed 42 properties in the U.S. and we committed to contribute $100.0 million for improvements to the properties contributed by HBC in exchange for a noncontrolling interest in the newly formed entity, HBS. As of December 31, 2016, we have funded $30.6 million of this commitment. On September 30, 2015, HBC announced it had closed on the acquisition of Galeria Holding, the parent company of Germany’s leading department store, Kaufhof. In conjunction with the closing, HBS acquired 41 Kaufhof properties in Germany from HBC. All of these properties have been leased to affiliates of HBC. We contributed an additional $178.5 million to HBS upon closing of the Galeria Holding transaction. Our noncontrolling equity interest in HBS is approximately 10.2% at December 31, 2016. Our share of net income, net of amortization of our excess investment, was $2.6 million and $15.2 million for the three and twelve months ended December 31, 2016, respectively. Total assets and total liabilities of HBS as of December 31, 2016 were $4.3 billion and $2.8 billion, respectively, and its total revenues, operating income and consolidated net income were approximately $409.8 million, $233.2 million and $128.7 million, respectively, for the twelve months ended December 31, 2016.

On April 13, 2015, we announced a joint venture with Sears Holdings, or Sears, whereby Sears contributed 10 of its properties located at our malls to the joint venture in exchange for a 50% noncontrolling interest in the joint venture. We contributed $114.0 million in cash in exchange for a 50% noncontrolling interest in the joint venture. Sears or its affiliates are leasing back each of the 10 properties from the joint venture. The joint venture has the right to recapture not less than 50% of the space leased to Sears to be used for purposes of redeveloping and releasing the recaptured space. We will provide development, leasing and management services to the joint venture for any recaptured space. On July 7, 2015, we separately invested approximately $33.0 million in exchange for 1,125,760 common shares of Seritage Growth Properties, or Seritage, a public REIT formed by Sears, which we account for as an available-for-sale security. Seritage now holds Sears’ interest in the joint venture.

On January 30, 2014, as discussed in Note 4, we acquired the remaining 50% interest in Arizona Mills from our joint venture partner. The consolidation of this previously unconsolidated property resulted in a remeasurement of our previously held interest to fair value and a corresponding non-cash gain of $2.7 million in the first quarter of 2014. As a result of this acquisition, we now own 100% of this property.

International Investments

We conduct our international operations through joint venture arrangements and account for all of our international joint venture investments using the equity method of accounting.

European Investments. At December 31, 2016, we owned 63,924,148 shares, or approximately 20.3%, of Klépierre, which had a quoted market price of $39.50 per share. On July 29, 2014, Klépierre announced that it had entered into a conditional agreement to acquire Corio pursuant to which Corio shareholders received 1.14 Klépierre ordinary shares for each Corio ordinary share. On January 15, 2015, the tender offer transaction closed and the merger was completed on March 31, 2015, reducing our ownership from 28.9% at December 31, 2014 to 18.3%, resulting in a non-cash gain of $206.9 million that was required to be recognized in the first quarter of 2015 as if we had sold a proportionate share of our investment. On May 11, 2015, we purchased 6,290,000 additional shares of Klépierre for $279.4 million bringing our ownership to 20.3%. All of the excess investment related to this additional purchase has been determined to relate to investment property. Our share of net income, net of amortization of our excess investment, was $41.5 million, $6.7 million and $131.5 million for the year ended December 31, 2016, 2015 and 2014, respectively. Based on applicable Euro:USD exchange rates and after our conversion of Klépierre’s results to GAAP, Klépierre’s total assets, total liabilities, and noncontrolling interests were $19.8 billion, $11.8 billion, and $1.4 billion, respectively, as of December 31, 2016 and $20.8 billion, $12.4 billion, and $1.4 billion, respectively, as of December 31, 2015. Klépierre’s total revenues, operating income and consolidated net income were approximately $1.5 billion, $449.9 million and $310.9 million, respectively, for the year ended December 31, 2016, $1.5 billion, $414.8 million and $181.2 million, respectively, for the year ended December 31, 2015, and $1.2 billion, $432.1 million and $1.3 billion, respectively, for the year ended December 31, 2014.

During the fourth quarter of 2016, Klépierre completed the disposal of certain Scandinavian properties. In connection with these transactions, we recorded a gain of $8.1 million, which is included in gain upon acquisition of controlling interests and sale or disposal of assets and interests in unconsolidated entities, net in the accompanying consolidated statements of operations and comprehensive income.

On April 16, 2014, Klépierre completed the disposal of a portfolio of 126 retail galleries located in France, Spain and Italy. Total gross consideration for the transaction, including transfer duties, was €1.98 billion (€1.65 billion Klépierre’s group share). The net cash proceeds were used by Klépierre to reduce its overall indebtedness. In connection with this transaction, we recorded a gain of $133.9 million, net of the write-off of a portion of our excess investment, which is included in gain upon acquisition of controlling interests and sale or disposal of assets and interest in unconsolidated entities, net in the accompanying consolidated statements of operations and comprehensive income.

We had an interest in a European investee that had interests in six Designer Outlet properties, as of December 31, 2015. On January 1, 2016, we gained control of the entity through terms of the underlying venture agreement requiring a remeasurement of our previously held equity interest to fair value and a corresponding non-cash gain of $12.1 million in earnings during the first quarter of 2016, which includes amounts reclassified from accumulated other comprehensive income (loss) related to the currency translation adjustment previously recorded on our investment. The gain is included in gain upon acquisition of controlling interests and sale or disposal of assets and interests in unconsolidated entities, net in the accompanying consolidated statements of operations and comprehensive income. As a result of the change in control, we consolidated two of the six outlet properties on January 1, 2016. The consolidation required us to recognize the entity's identifiable assets and liabilities at fair value in our consolidated financial statements along with the related redeemable noncontrolling interest representing our partners' share. The fair value of the consolidated assets and liabilities relates primarily to investment property, investments in unconsolidated entities and assumed mortgage debt. Due to certain redemption rights held by our venture partner, the noncontrolling interest is presented (i) in the accompanying Simon consolidated balance sheet outside of equity in limited partners’ preferred interest in the Operating Partnership and noncontrolling redeemable interests in properties and (ii) in the accompanying Operating Partnership consolidated balance sheet within preferred units, various series, at liquidation value, and noncontrolling redeemable interests in properties. As of December 31, 2016, our legal percentage ownership interests in these entities ranged from 45% to 90%.

In February 2016, we and our partner, through this European investee, acquired a noncontrolling 75.0% ownership interest in an outlet center in Ochtrup, Germany for cash consideration of approximately $38.3 million.

On July 25, 2016, this European investee also acquired the remaining 33% interest in two Italian outlet centers in Naples and Venice, as well as the remaining interests in related expansion projects and working capital for cash consideration of €145.5 million. This resulted in the consolidation of these two properties on the acquisition date, requiring a remeasurement of our previously held equity interest to fair value and the recognition of a non-cash gain of $29.3 million in earnings during the third quarter of 2016. The gain is included in gain upon acquisition of controlling interests and sale or disposal of assets and interests in unconsolidated entities, net in the accompanying consolidated statements of operations and comprehensive income. The determination of fair value of the consolidated assets and liabilities consists primarily of investment property and lease related intangibles.

In addition, we have a noncontrolling interest in a European property management and development company that provides services to the Designer Outlet properties.

We also have minority interests in Value Retail PLC and affiliated entities, which own or have interests in and operate nine luxury outlets located throughout Europe and we have a direct minority ownership in three of those outlets. Our investment in these entities is accounted for under the cost method. The carrying value of these non-marketable investments was $140.8 million and $115.4 million at December 31, 2016 and December 31, 2015, respectively, and is included in deferred costs and other assets.

On March 19, 2015, we disposed of our interest in a joint venture which had held interests in rights to pre-development projects in Europe, for total proceeds of $19.0 million. We recognized a gain on the sale of $8.3 million, which is included in other income in the accompanying consolidated statements of operations and comprehensive income.

Asian Joint Ventures. We conduct our international Premium Outlet operations in Japan through a joint venture with Mitsubishi Estate Co., Ltd. We have a 40% noncontrolling ownership interest in this joint venture. The carrying amount of our investment in this joint venture was $227.5 million and $224.6 million as of December 31, 2016 and 2015, respectively, including all related components of accumulated other comprehensive income (loss). We conduct our international Premium Outlet operations in South Korea through a joint venture with Shinsegae International Co. We have a 50% noncontrolling ownership interest in this joint venture. The carrying amount of our investment in this joint venture was $130.9 million and $117.0 million as of December 31, 2016 and 2015, respectively, including all related components of accumulated other comprehensive income (loss).

Summary Financial Information

A summary of our equity method investments and share of income from such investments, excluding Klépierre, our investment in Aéropostale, and HBS, follows. During 2016, we disposed of four retail properties and our investments in two multi-family residential assets. During 2015, we disposed of three retail properties. As discussed in Note 3, on May 28, 2014, we completed the spin-off of Washington Prime, which included ten unconsolidated properties. The net income of these ten properties is included in income from operations of discontinued joint venture interests in the accompanying summary financial information.

BALANCE SHEETS


	December 31,		December 31,
	2016		2015
Assets:
Investment properties, at cost	$	17,549,078	$	17,186,884
Less - accumulated depreciation		5,892,960		5,780,261
		11,656,118		11,406,623
Cash and cash equivalents		778,455		818,805
Tenant receivables and accrued revenue, net		348,139		354,133
Deferred costs and other assets		351,098		482,024
Total assets	$	13,133,810	$	13,061,585
Liabilities and Partners’ Deficit:
Mortgages	$	14,237,576	$	13,827,215
Accounts payable, accrued expenses, intangibles, and deferred revenue		867,003		985,159
Other liabilities		325,078		468,005
Total liabilities		15,429,657		15,280,379
Preferred units		67,450		67,450
Partners’ deficit		(2,363,297)		(2,286,244)
Total liabilities and partners’ deficit	$	13,133,810	$	13,061,585
Our Share of:
Partners’ deficit	$	(1,018,755)	$	(854,562)
Add: Excess Investment		1,791,691		1,788,749
Our net Investment in unconsolidated entities, at equity	$	772,936	$	934,187

“Excess Investment” represents the unamortized difference of our investment over our share of the equity in the underlying net assets of the joint ventures or other investments acquired and has been determined to relate to the fair value of the investment property, lease related intangibles, and debt premiums and discounts. We amortize excess investment over the life of the related depreciable components of investment property, typically no greater than 40 years, the terms of the applicable leases and the applicable debt maturity, respectively. The amortization is included in the reported amount of income from unconsolidated entities.

As of December 31, 2016, scheduled principal repayments on joint venture properties’ mortgage indebtedness are as follows:


2017	$	552,579
2018		418,221
2019		704,496
2020		3,180,236
2021		1,832,371
Thereafter		7,607,451
Total principal maturities		14,295,354
Net unamortized debt premium		3,337
Debt issuance costs		(61,115)
Total mortgages and unsecured indebtedness	$	14,237,576

This debt becomes due in installments over various terms extending through 2035 with interest rates ranging from 0.26% to 9.35% and a weighted average interest rate of 3.97% at December 31, 2016.

STATEMENTS OF OPERATIONS



	For the Year Ended
	December 31,
	2016		2015		2014
REVENUE:
Minimum rent	$	1,823,674	$	1,801,023	$	1,746,549
Overage rent		200,638		191,249		183,478
Tenant reimbursements		862,155		799,420		786,351
Other income		237,782		236,726		293,419
Total revenue		3,124,249		3,028,418		3,009,797
OPERATING EXPENSES:
Property operating		538,002		530,798		574,706
Depreciation and amortization		588,666		594,973		604,199
Real estate taxes		239,917		231,154		221,745
Repairs and maintenance		76,380		73,286		71,203
Advertising and promotion		88,956		75,773		72,496
Provision for credit losses		7,603		4,153		6,527
Other		183,435		169,504		187,729
Total operating expenses		1,722,959		1,679,641		1,738,605
Operating Income		1,401,290		1,348,777		1,271,192
Interest expense		(585,958)		(593,187)		(598,900)
Income from Continuing Operations		815,332		755,590		672,292
Income from operations of discontinued joint venture interests		—		—		5,079
Gain on sale or disposal of assets and interests in unconsolidated entities, net		101,051		67,176		—
Net Income	$	916,383	$	822,766	$	677,371
Third-Party Investors’ Share of Net Income	$	452,844	$	405,456	$	348,127
Our Share of Net Income		463,539		417,310		329,244
Amortization of Excess Investment		(94,213)		(94,828)		(99,463)
Our Share of Gain on Sale or Disposal of Assets and Interests in Unconsolidated Entities, net		(22,636)		(43,589)		—
Our Share of Gain on Sale or Disposal of Assets and Interests Included in Other Income in the Consolidated Financial Statements		(36,153)		—		—
Our Share of Loss from Unconsolidated Discontinued Operations		—		—		(652)
Income from Unconsolidated Entities	$	310,537	$	278,893	$	229,129

Our share of income from unconsolidated entities in the above table, aggregated with our share of results of Klépierre, our investment in Aéropostale, and HBS, is presented in income from unconsolidated entities in the accompanying consolidated statements of operations and comprehensive income. Unless otherwise noted, our share of the gain on sale or disposal of assets and interests in unconsolidated entities, net is reflected within gain upon acquisition of controlling interests, sale or disposal of assets and interests in unconsolidated entities, net in the accompanying consolidated statements of operations and comprehensive income.

2016 Dispositions

In 2016, we disposed of our interest in four retail properties and two multi-family residential investments. Our share of the net gain on disposition was $22.6 million and $36.2 million, respectively.

2015 Dispositions

In 2015, we disposed of our interests in three retail properties. Our share of the net gain on disposition was $43.6 million.