REAL ESTATE AFFILIATES

9 Months Ended

Sep. 30, 2012

REAL ESTATE AFFILIATES

REAL ESTATE AFFILIATES

NOTE 7REAL 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 which are referred to as real estate affiliates. 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, as amended (“ASC 810”).

In accordance with ASC 810, we assess our partnerships or joint ventures at inception to determine if any meet the qualifications of a variable interest entity (“VIE”). We consider a partnership or joint venture to be 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.

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.

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. 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 air rights for the condominium tower 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 back-end 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, will serve as an exclusive representative for buyers in Japan for the residences. Three million dollars of the $40.0 million provided by the mezzanine lenders may be drawn and used to fund the pre-development 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 pre-development costs, $2.0 million has been funded as of September 30, 2012 and is non-interest bearing.

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 the 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 (81.43%). 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.

On October 30, 2012, we funded $4.5 million in cash to the Bridges at Mint Hill joint venture in accordance with the venture’s operating agreement. The cash was used to repay a mortgage secured by land to be contributed by our partner. As a result, our ownership percentage increased to 90.5% from 79.0%, and we now have the ability to direct the significant economic activities of the entity; therefore, we will begin consolidating this joint venture in the fourth quarter of 2012.

The Bridges at Mint Hill, LLC, HHMK Development, LLC, KR Holdings, LLC, Millennium Woodlands Phase II, LLC and the Parcel D Development, LLC joint venture entities included in the table below are VIEs. The aggregate carrying value of the unconsolidated VIEs was $7.9 million and $3.2 million as of September 30, 2012 and December 31, 2011, respectively, and was classified as Investments in Real Estate Affiliates in the Condensed Consolidated Balance Sheet. Because these joint ventures are in the pre-development stage, there were no earnings for the three and nine months ended September 30, 2012. 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.

Below is a summary of our Investments in Real Estate Affiliates:

	Economic/ Legal Ownership				Carrying Value				Share of Earnings/Dividends
	September 30,		December 31,		September 30,		December 31,		Three Months Ended September 30,					Nine Months Ended September 30,
	2012		2011		2012		2011		2012			2011		2012		2011
	(In percentages)				(In thousands)				(In thousands)
The Woodlands (a)					$	—	$	—	$	—		$	—	$	—	$	3,727
Bridges at Mint Hill, LLC (b)	79.00	%	79.00	%	673		180		—			—		—		—
Circle T	50.00	%	50.00	%	9,004		9,004		—			—		—		—
Forest View Apartments (c) (d)	—		50.00	%	—		5,358		—			1		2		1
HHMK Development, LLC	50.00	%	50.00	%	947		—		—			—		—		—
KR Holdings, LLC	50.00	%	—		—		—		—			—		—		—
Millennium Waterway Apartments (e)	100.00	%	83.55	%	—		21,998		—			14		406		14
Millennium Woodlands Phase II, LLC	81.43	%	—		2,190		—		—			—		—		—
Parcel D Development, LLC	50.00	%	50.00	%	4,084		2,990		—			—		—		—
Stewart Title (c)	50.00	%	50.00	%	3,758		3,643		324			85		640		85
Timbermill Apartments (c) (d)	—		50.00	%	—		3,988		—			1		2		1
Woodlands Sarofim #1 (c)	20.00	%	20.00	%	2,462		2,456		(14		)	30		6		30
Other investments					300		—		—			—		—		—
					23,418		49,617		310			131		1,056		3,858
Cost basis investments (f)					12,744		12,978		—			35		2,376		3,929
Total					$	36,162	$	62,595	$	310		$	166	$	3,432	$	7,787

(a)As of July 1, 2011, The Woodlands is consolidated and no longer a Real Estate Affiliate (Refer to Note 4). Prior to July 1, 2011, we owned 52.5% economic interest in The Woodlands.

(b)Ownership percentage as of October 30, 2012 is 90.50%

(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 September 30, 2012, approximately $9.1 million of indebtedness was secured by the properties owned by our Real Estate Affiliates in which our share was approximately $2.5 million (KR Holdings, LLC - $1.0 million; Millennium Woodlands Phase II - $0.1 million; and Woodlands Sarofim #1 - $1.4 million) based upon our economic ownership. The debt is non-recourse to us.