NOTE 5 REAL ESTATE AFFILIATES

In the ordinary course of business, we enter into partnerships or joint ventures primarily for the development and operations of real estate assets. These partnerships or joint ventures are typically characterized by a non-controlling ownership interest with decision making and distribution of expected gains and losses being proportionate to the ownership interest. We account for these partnerships and joint ventures in accordance with ASC 810.

In accordance with ASC 810, as amended, we assess our joint ventures at inception to determine if any meet the qualifications of a variable interest entity ("VIE"). We consider a partnership or joint venture a VIE if: (a) the total equity investment is not sufficient to permit the entity to finance its activities without additional subordinated financial support; (b) characteristics of a controlling financial interest are missing (either the ability to make decisions through voting or other rights, the obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the entity); or (c) the voting rights of the equity holders are not proportional to their obligations to absorb the expected losses of the entity and/or their rights to receive the expected residual returns of the entity, and substantially all of the entity's activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights. Upon the occurrence of certain events outlined in ASC 810, we reassess our initial determination of whether the partnership or joint venture is a VIE. We also perform a qualitative assessment of each VIE to determine if we are the primary beneficiary, as required by ASC 810, as amended.

We account for investments in joint ventures deemed to be variable interest entities for which we are not considered to be the primary beneficiary using the equity method, and investments in joint ventures where we have virtually no influence on the joint venture's operating and financial policies, on the cost method. Generally, the operating agreements with respect to our Real Estate Affiliates provide that assets, liabilities and funding obligations are shared in accordance with our ownership percentages.

The aggregate carrying value of the unconsolidated VIEs was $7.8 million and $3.2 million as of December 31, 2012 and 2011, respectively, and was classified as Investments in Real Estate Affiliates in the Consolidated Balance Sheets. Because these joint ventures are in the predevelopment stage, there were no earnings for the years ended December 31, 2012 and 2011. We did not participate in any VIEs in 2010. Our maximum exposure to loss as a result of these investments is limited to the aggregate carrying value of the investment as we have not provided any guarantees on behalf of these VIEs.

Our recent and more significant VIEs and the related accounting considerations are discussed below.

ONE Ala Moana Condominium Development Joint Venture

On October 11, 2011, we entered into a joint venture with two local developers and formed HHMK Development, LLC to explore the development of a luxury condominium tower at the Ala Moana Center, Honolulu, HI. As we and our partner each own 50% of the venture and unanimous consent of the partners is required for all major decisions, we account for our investment in the venture using the equity method.

On June 14, 2012, we formed another 50/50 joint venture, KR Holdings, LLC ("KR Holdings"), with the same partner. The initial capital contribution which, is due at closing for the construction loan, will include our interest in the condominium declaration and condominium rights for the condominium tower, owned by our wholly owned subsidiary and cash from our partner. We anticipate the construction loan to close in June 2013. We determined that KR Holdings is a VIE, and that we are not the primary beneficiary. Accordingly, we account for our investment in KR Holdings using the equity method. On September 17, 2012, KR Holdings closed on two $20.0 million non-recourse mezzanine loan commitments with List Island Properties, LLC and A & B Properties, Inc. These loans have a blended interest rate of 12%, must be drawn in full at the construction loan closing date and mature on April 30, 2018 with the option to extend for one year. In addition to the mezzanine loans, A & B Properties and List Island Properties, LLC, both have a profit interest in KR Holdings, LLC, which entitles them to receive a share of the profits after we get a return of our capital plus a 13% preferred return on our capital. LIST Co., Ltd., the parent of List Island Properties, LLC, is the exclusive representative for buyers in Japan for the residences. The venture may draw $3.0 million of the $40.0 million provided by the mezzanine lenders to fund the predevelopment costs of the venture. Per the terms of the mezzanine loans, the venture is not required to repay this $3.0 million if the construction loan fails to close or the project fails to go forward. Of the committed predevelopment costs, $2.6 million has been funded as of December 31, 2012, of which $2.0 million is non-interest bearing.

Columbia Parcel D Joint Venture

On October 27, 2011, we entered into a joint venture with a local developer to construct a Class A apartment building with ground floor retail space in downtown Columbia, MD. As we and our partner each own 50% of the venture, and unanimous consent of the partners is required for all major decisions, we account for our investment in this venture using the equity method.

Bridges at Mint Hill Joint Venture

On September 8, 2011, we entered into a joint venture with the owner of land adjacent to our property, located near Charlotte, NC to develop a shopping center on our combined properties. On October 30, 2012, we contributed $4.5 million in cash to the Bridges at Mint Hill joint venture in accordance with the joint venture's operating agreement. The cash was used to repay a mortgage secured by the land contributed by our partner. As a result of our additional contribution, our ownership percentage increased from 79.0% to 90.5%, and we now have the ability to direct the significant economic activities of the entity; therefore, we began consolidating this joint venture in the fourth quarter of 2012. Predevelopment costs incurred through December 31, 2012 total $0.8 million.

Millennium Woodlands Phase II, LLC

On May 14, 2012, we entered into a joint venture, Millennium Woodlands Phase II, LLC ("Millennium Phase II"), with the same partner from Millennium Waterway Apartments as discussed in Note 4 for the construction of a 314-unit Class A multi-family complex in The Woodlands Town Center. Our partner is the managing member of Millennium Phase II. As the managing member, our partner controls, directs, manages and administers the affairs of Millennium Phase II. Millennium Phase II is a variable interest entity, and although we have an 81.4% majority ownership interest in the joint venture, we determined that we are not the primary beneficiary because our partner has the power to direct activities that most significantly impact the economic performance of the joint venture and therefore we report our interest on the equity method. On July 5, 2012, Millennium Phase II was capitalized by our contribution of 4.8 acres of land valued at $15.5 million to the joint venture, our partner's contribution of $3.0 million in cash and by a construction loan in the amount of $37.7 million which is guaranteed by our partner. The development of Millennium Phase II further expands our multi-family portfolio in The Woodlands Town Center.

Other

Our interest in Westlake Retail Associates, Ltd. ("Circle T Ranch") and 170 Retail Associates ("Circle T Power Center"), and together with Circle T Ranch, ("Circle T"), located in the Dallas/Fort Worth, Texas area is held through joint venture entities in which we own non-controlling interests and are unconsolidated and accounted for on the equity method. Woodlands Sarofim #1 Ltd. ("Woodlands Sarofim") industrial buildings and Stewart Title of Montgomery County, Inc. ("Stewart Title"), both are located in The Woodlands, are reflected in our financial statements as non-consolidated joint ventures and are accounted for on the equity method.

	Economic/Legal Ownership						Carrying Value				Share of Earnings/Dividends

	December 31,						December 31,				December 31,
	2012			2011			2012		2011		2012			2011			2010
	(In percentages)						(In thousands)				(In thousands)
Equity Method Investments
The Woodlands (a)							$	—	$	—	$	—		$	3,731		$	9,417
Bridges at Mint Hill, LLC (b)		90.50	%		79.00	%		—		180		—			—			—
Circle T		50.00	%		50.00	%		9,004		9,004		—			(1	)		(4	)
Forest View Apartments (c) (d)		—			50.00	%		—		5,358		2			5			—
HHMK Development, LLC		50.00	%		50.00	%		1,257		—		—			—			—
KR Holdings, LLC		50.00	%		—			—		—		—			—			—
Millennium Waterway Apartments (e)		100.00	%		83.55	%		—		21,998		407			682			—
Millennium Woodlands Phase II, LLC		81.43	%		—			2,190		—		—			—			—
Parcel D Development, LLC		50.00	%		50.00	%		4,330		2,990		—			—			—
Stewart Title (c)		50.00	%		50.00	%		3,871		3,643		902			204			—
Timbermill Apartments (c) (d)		—			50.00	%		—		3,988		2			—			—
Woodlands Sarofim #1 (c)		20.00	%		20.00	%		2,450		2,456		(6	)		64			—
Other Investments								300		—		—			—			—

								23,402		49,617		1,307			4,685			9,413
Cost basis investments (f)								8,777		9,173		2,376			3,893			—

Investment in Real Estate Affiliates							$	32,179	$	58,790	$	3,683		$	8,578		$	9,413

(a): As of July 1, 2011, The Woodlands is consolidated and no longer a Real Estate Affiliate (please refer to Note 4 – Acquisitions and Dispositions). Prior to July 1, 2011, we owned a 52.5% economic interest in The Woodlands.
(b): On October 30, 2012, we contributed $4.5 million to repay a mortgage secured by the land contributed by our partner. As a result, our ownership percentage increased from 79.0% to 90.5% and we now have the ability to direct the significant economic activities of the entity. We began consolidating this joint venture in the fourth quarter of 2012.
(c): Equity investment consolidated into our financial statements as part of the acquisition of our partner's economic interest in The Woodlands on July 1, 2011.
(d): On April 19, 2012, the joint ventures owning the Forest View and Timbermill Apartments completed their sale to a third party. Our share of the distributable cash, after repayment of debt and transaction expenses, was $8.6 million.
(e): On May 31, 2012, we acquired our partner's interest for $6.9 million and consolidated this property.
(f): Includes dividends received from Summerlin Hospital Medical Center.

As of December 31, 2012, approximately $9.9 million of indebtedness was secured by the properties owned by our Real Estate Affiliates of which our share was approximately $3.9 million based upon our economic ownership. All of this debt is without recourse to us.