FAIR VALUE OF FINANCIAL INSTRUMENTS

6 Months Ended

Jun. 30, 2012

FAIR VALUE OF FINANCIAL INSTRUMENTS

FAIR VALUE OF FINANCIAL INSTRUMENTS

NOTE 6FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents, for each of the fair value hierarchy levels required under Accounting Standards Codification (“ASC”) 820, “Fair Value Measurement,” our assets and liabilities that are measured at fair value on a recurring basis.

June 30, 2012

December 31, 2011

Fair Value Measurements Using

Fair Value Measurements Using

Significant

Significant

Quoted Prices in

Other

Significant

Quoted Prices in

Other

Significant

Active Markets for

Observable

Unobservable

Active Markets

Observable

Unobservable

Identical Assets

Inputs

Inputs

for Identical

Inputs

Inputs

Total

(Level 1)

(Level 2)

(Level 3)

Total

Assets (Level 1)

(Level 2)

(Level 3)

(In thousands)

(In thousands)

Liabilities

Warrants

$

226,185

$

—

$

—

$

226,185

$

127,764

$

—

$

—

$

127,764

Interest rate swaps

6,697

—

6,697

—

4,367

—

4,367

—

The valuation of warrants is based on an option pricing valuation model. The inputs to the model include the fair value of the stock related to the warrants, exercise price of the warrants, term, expected volatility, risk-free interest rate and dividend yield.

The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts and includes consideration of counterparty credit risk. The variable cash receipts are based on an expectation of future interest rates derived from observable market interest rate curves.

The following table presents a reconciliation of the beginning and ending balances of the fair value measurements using significant unobservable inputs (Level 3):

	2012		2011
	(In thousands)
Balance as of December 31,	$	127,764	$	227,348
Warrant liability loss	98,421		69,135
Purchases	—		2,000
Balance as of June 30,	$	226,185	$	298,483

The significant unobservable input used in the fair value measurement of our warrants designated as Level 3 is as follows:

			Valuation	Unobservable	Range/
	Fair Value		Technique	Input	Average
	(In thousands)
			Option Pricing	Expected	27%-33%
Warrants	$	226,185	Valuation Model	Volatility (a)	(29.6%)

(a) Based on the asset volatility of comparable companies.

The expected volatility in the table above is a significant unobservable input used to estimate the fair value of our warrant liabilities. An increase in expected volatility would increase the fair value of the liability, while a decrease in expected volatility would decrease the fair value of the liability.

The following table summarizes our assets and liabilities that were measured at fair value on a non-recurring basis as a result of the acquisition of our partner’s interest in the Millennium Waterway Apartments.

Quoted Prices in

Significant

Total Loss (Gain)

Total Fair

Active Markets for

Other

Significant

Three and Six

Value

Identical Assets

Observable

Unobservable Inputs

Months Ended

Measurement

(Level 1)

Inputs (Level 2)

(Level 3)

June 30, 2012

(In thousands)

Investment in Real Estate Affiliates

$

22,405

$

22,405

(a)

$

—

$

—

$

—

(a)We measured our equity interest in Millennium Waterway Apartments based on our purchase of our partners 23.5% economic interest in Millennium Waterway Apartments.  We used Level 1 inputs for the cash payment.

The estimated fair values of the Company’s financial instruments that are not measured at fair value on a recurring basis are as follows:

	June 30, 2012				December 31, 2011
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
	(In thousands)
Fixed-rate debt	$	142,624	$	144,098	$	83,164	$	85,047
Variable-rate debt (a)	465,046		465,046		468,100		468,100
SID bonds (b)	51,727		51,727		55,213		55,213
Total	$	659,397	$	660,871	$	606,477	$	608,360

(a) As more fully described below, $172.0 million of variable-rate debt has been swapped to a fixed rate for the term of the related debt.

(b) Due to the uncertain repayment terms of the Special Improvement District (“SID”) bonds, the carrying value approximates fair value.

The fair value of debt in the table above was estimated based on level 2 inputs which includes risk premiums for loans of comparable quality, the current London Interbank Offered Rate (“LIBOR”), a widely quoted market interest rate which is frequently the index used to determine the rate at which we borrow funds, U.S. Treasury obligation interest rates and on the discounted estimated future cash payments to be made on such debt. The discount rates reflect our judgment as to what the approximate current lending rates for loans or groups of loans with similar maturities and credit quality would be if credit markets were operating efficiently and assuming that the debt is outstanding through maturity.

The carrying amounts of cash and cash equivalents and accounts receivable approximate fair value because of the short-term maturity of these instruments.

Notes receivable are carried at net realizable value which approximates fair value. Factors considered by us in determining the net realizable value include current interest rates, maturity date, credit worthiness of the borrower and any collateral pledged as security.