FAIR VALUE OF FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 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.

	September 30, 2012								December 31, 2011
	Fair Value Measurements Using								Fair Value Measurements Using
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs  (Level 3)		Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)								(In thousands)
Liabilities
Warrants	$	290,488	$	—	$	—	$	290,488	$	127,764	$	—	$	—	$	127,764
Interest rate swaps	7,724		—		7,724		—		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 (gain) loss	162,724		(100,762		)
Purchases	—		2,000
Balance as of September 30,	$	290,488	$	128,586

The significant unobservable input used in the fair value measurement of our warrants designated as Level 3 as of September 30, 2012 is as follows:

	Fair Value		Valuation Technique	Unobservable Input	Range/ Average
	(In thousands)
Warrants	$	290,488	Option Pricing Valuation Model	Expected Volatility (a)	27%-28% (28%)

(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 tables summarize our assets and liabilities that were measured at fair value on a non-recurring basis:

	Total Fair Value Measurement		Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Loss (Gain) Three and Nine Months Ended September 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 partner’s 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:

	September 30, 2012				December 31, 2011
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(In thousands)
Assets:
Notes receivable, net	$	28,677	$	28,677	$	35,354	$	35,354
Tax indemnity receivable, including interest	326,150		(c)		331,771		(c)
Liabilities:
Fixed-rate debt	$	159,098	$	160,689	$	83,164	$	85,047
Variable-rate debt (a)	473,778		473,778		468,100		468,100
SID bonds (b)	50,928		50,928		55,213		55,213
Total mortgages, notes and loans payable	683,804		685,395		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.

(c) It is not practicable to estimate the fair value of the tax indemnity receivable, including interest, as the timing and ultimate amount received under contract is highly dependent on numerous future events that cannot be reliably predicted.

Notes receivables are carried at net realizable value which approximates fair value. The estimated fair values of these notes receivable are categorized as Level 3 due to certain factors, such as current interest rates, terms of the note and credit worthiness of the borrower.

The fair value of debt in the table above was estimated based on a discounted future cash payment model using Level 2 inputs which includes risk premiums for loans of comparable quality and a risk free rate derived from the current London Interbank Offered Rate (“LIBOR) or U.S. Treasury obligation interest rates. 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.