Real Estate Owned and Held-For-Sale

9 Months Ended

Sep. 30, 2011

Real Estate Owned and Held-For-Sale

Real Estate Owned and Held-For-Sale

Note 6 — Real Estate Owned and Held-For-Sale

The Company had a $29.8 million loan secured by a portfolio of multifamily assets in various locations of the United States that had a maturity date of June 2010 and a weighted average interest rate of approximately 4.26%.  In prior years, the Company established an $18.4 million provision for loan loss related to this portfolio reducing its carrying value to $11.4 million as of December 31, 2010.  In March 2011, the Company purchased the portfolio of multifamily assets securing this loan out of bankruptcy and assumed a $55.4 million first mortgage loan secured by the portfolio of assets.  As of the date of this transaction, as well as at December 31, 2010, the loan was past due and non-performing.  The Company recorded this transaction as real estate owned in its first quarter 2011 Consolidated Financial Statements at a fair value of $65.3 million and the carrying value of the loan represented the fair value of the underlying collateral at the time of the transfer.  For the first quarter of 2011, the Company did not record any property operating income or expenses from this portfolio because ownership did not pass to the Company until the end of the quarter and the Company believes that any operating activity that occurred was immaterial to the Company’s interim Consolidated Financial Statements.  In the second quarter of 2011, one of the properties in the portfolio was sold to a third party for $1.6 million and the proceeds were used to pay down the first lien mortgage.  No gain or loss was recorded on the transaction as the asset was sold for its historical cost basis.  For the three and nine months ended September 30, 2011, the Company recorded property operating income of $2.5 million and $5.0 million, respectively, property operating expense of $2.4 million and $4.3 million, respectively, and depreciation of $0.8 million and $1.5 million, respectively.  At September 30, 2011, this investment’s balance sheet was comprised of land and building, net of accumulated depreciation, totaling approximately $63.5 million, cash of $0.4 million, restricted cash of $1.9 million due to a first mortgage escrow requirement, other assets of $0.3 million, other liabilities of $1.1 million and a mortgage note payable of $53.8 million.  The Company will finalize the purchase price allocation within one year of the acquisition date.

The Company had an $85.0 million loan secured by a portfolio of six hotel assets in Florida that had a maturity date of July 2014 and a weighted average interest rate of approximately 3.75%.  During 2010, the Company established a $13.4 million provision for loan loss related to this portfolio reducing its carrying value to $71.6 million as of December 31, 2010.  In February 2011, the portfolio of hotel assets securing this loan were transferred to the Company by the owner, a creditor trust.  As of the date of this transaction, as well as at December 31, 2010, the loan was contractually current.  The Company recorded this transaction as real estate owned in its first quarter 2011 Consolidated Financial Statements at a fair value of $67.3 million and the carrying value of the loan represented the fair value of the underlying collateral at the time of the transfer.  For the three and nine months ended September 30, 2011, the Company recorded property operating income of $4.7 million and $14.4 million, respectively, property operating expense of $4.3 million and $11.5 million, respectively, and depreciation of $0.8 million and $2.1 million, respectively.  The operating results of the hotels are seasonal with the majority of revenues earned in the first two quarters of the calendar year.  At September 30, 2011, this investment’s balance sheet was comprised of land and building, net of accumulated depreciation, totaling approximately $65.7 million, cash of $0.2 million, other assets of $2.0 million, receivable from related party of $1.1 million and other liabilities of $1.5 million.  The Company will finalize the purchase price allocation within one year of the acquisition date.

The Company had a $5.6 million junior participating interest in a first mortgage loan secured by an apartment building in Tucson, Arizona that had a maturity date of July 2012 and bore interest at a fixed rate of 10%.  During 2009, the Company established a $5.6 million provision for loan loss related to this property equal to the carrying value of the loan and in the second quarter of 2010, the Company purchased the property securing this loan by deed-in-lieu of foreclosure and assumed the $20.8 million interest in a first mortgage loan.  The Company recorded this transaction as real estate owned in its Consolidated Financial Statements at a fair value of $20.8 million and the carrying value of the loan represented the fair value of the underlying collateral at the time of the transfer.  For the three and nine months ended September 30, 2011, the Company recorded property operating income of $0.6 million and $1.8 million, respectively, property operating expense of $0.6 million and $1.8 million, respectively, and depreciation of $0.2 million and $0.6 million, respectively.  For the three and nine months ended September 30, 2010, the Company recorded property operating income of $0.6 million and $1.2 million, respectively, property operating expense of $0.7 million and $1.4 million, respectively, and depreciation of $0.2 million and $0.4 million, respectively.  At September 30, 2011, this investment’s balance sheet was comprised of land and building, net of accumulated depreciation, totaling approximately $19.6 million, cash of $0.1 million, other assets of $0.7 million, mortgage note payable of $20.8 million and other liabilities of $0.3 million.

The Company had a $4.0 million bridge loan secured by a hotel located in St. Louis, Missouri that matured in 2009 and bore interest at a variable rate of LIBOR plus 5.00%.  In April 2009, the borrower delivered a deed-in-lieu of foreclosure to the Company.  As a result, during the second quarter of 2009 the Company recorded this investment on its balance sheet as real estate owned at a fair value of $2.9 million.  The carrying value represented the fair value of the underlying collateral at the time of the transfer.  During the second quarter of 2011, through site visits and discussion with market participants, the Company determined that the asset exhibited indicators of impairment and performed an impairment analysis.  As a result of the impairment analysis based on the indicators of value from the market participants, the Company recorded an impairment loss of $0.8 million in the Consolidated Statement of Operations.  During the third quarter of 2011, the Company entered into negotiations to sell the property to a third party at which time it was determined that the property met the held-for-sale requirements pursuant to the accounting guidance.  The Company will continue to receive cash flows from this property until a sale is completed within one year.  As a result, the Company reclassified this investment from real estate owned to real estate held-for-sale at a value of $1.9 million and reclassified property operating income and expenses and impairment loss for current and prior periods to discontinued operations in the Company’s Consolidated Financial Statements.  For the three and nine months ended September 30, 2011, loss from discontinued operations consisted of property operating income of $0.1 million and $0.3 million, respectively, property operating expense of $0.2 million and $0.9 million, respectively, and depreciation of less than $0.1 million for both periods.  For the three and nine months ended September 30, 2010, loss from discontinued operations consisted of property operating income of $0.2 million and $0.7 million, respectively, property operating expense of $0.4 million and $1.2 million, respectively, and depreciation of less than $0.1 million for both periods.  At September 30, 2011, this investment’s balance sheet was comprised of land and building, net of accumulated depreciation, totaling approximately $1.9 million, other assets of $0.1 million and other liabilities of $0.6 million.

The Company had a $9.9 million bridge loan secured by a motel located in Long Beach, California that matured in 2008 and bore interest at a variable rate of LIBOR plus 4.00%.  During 2008 and 2009, the Company recorded a $4.3 million provision for loan loss related to this property reducing the carrying amount to $5.6 million.  In August 2009, the Company was the winning bidder at a foreclosure sale of the property securing this loan which was recorded as real estate owned.  The carrying value represented the then fair value of the underlying collateral at the time of the sale.  During the third quarter of 2010, the Company agreed to sell the property to a third party at which time it was determined that the property met the held-for-sale requirements pursuant to the accounting guidance.  As a result, the Company reclassified this investment from real estate owned to real estate held-for-sale at a value of $5.5 million and reclassified property operating income and expenses for current and prior periods to discontinued operations in the Company’s Consolidated Financial Statements.  For the three and nine months ended September 30, 2010, loss from discontinued operations consisted of property operating income of $0.2 million and $0.4 million, respectively, property operating expense of $0.1 million and $0.7 million, respectively, and depreciation of less than $0.1 million for both periods.  In addition, discontinued operations have not been segregated in the Company’s Consolidated Statements of Cash Flows.  The Company sold the property to the third party receiving net proceeds of approximately $6.8 million and recording a gain to income from discontinued operations of $1.3 million in October 2010.

The Company had a $5.0 million mezzanine loan secured by an office building located in Indianapolis, Indiana that was scheduled to mature in June 2012 and bore interest at a fixed rate of 10.72%.  During the first quarter of 2008, the Company established a $1.5 million provision for loan loss related to this property reducing the carrying value to $3.5 million at March 31, 2008.  In April 2008, the Company was the winning bidder at a UCC foreclosure sale of the entity which owns the equity interest in the property securing this loan, subject to a $41.4 million first mortgage on the property.  As a result, during the second quarter of 2008, the Company recorded this investment on its Consolidated Balance Sheet as real estate owned at fair value, which included the Company’s $3.5 million carrying value of the mezzanine loan and the $41.4 million first lien mortgage note payable.  During the third quarter of 2009, the Company mutually agreed with the first mortgage lender to appoint a receiver to operate the property and the Company is working to assist in the transfer of title to the first mortgage lender.  As a result, the Company reclassified this investment from real estate owned to real estate held-for-sale at a fair value of $41.4 million, reclassified property operating income and expenses for the current and prior periods to discontinued operations in the Company’s Consolidated Financial Statements, and recorded an impairment loss of $4.9 million in 2009.  The Company had originally planned to transfer the property to the first mortgage lender within one year of the date of its designation as held-for-sale, however, due to circumstances beyond the Company’s control, the transfer has not been completed within the one year time frame.  The Company believes it is reasonable to expect the transfer to be completed in 2011.  Based on the facts and circumstances related to this property, the Company will continue to account for this investment as real estate held-for-sale.  As of September 30, 2011, this real estate held-for-sale investment consisted of land and building, net of accumulated depreciation, of approximately $41.4 million.  At September 30, 2011, the Company also had a mortgage note payable held-for-sale of $41.4 million and other liabilities of $1.2 million.  The Company did not record interest expense related to the note payable, as the interest expense is non-recourse and the Company is in the process of cooperating with the receiver and the first lien holder in order for the first lien holder to take title to the office building.  For the three and nine months ended September 30, 2011 and 2010, the receiver’s issued financial statements reported net income for the office building investment.  The Company believes these amounts are not realizable at this time and, as such, did not record any income or loss on this held-for-sale investment.

As of September 30, 2011, the Company’s six hotel properties and eight multifamily properties classified as real estate owned had weighted average occupancy rates of 54.5% and 81.6%, respectively.