Goodwill and Other Intangibles

9 Months Ended

Sep. 30, 2015

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill

In connection with the Company’s acquisition of CapLease and the merger of Cole with and into our wholly owned subsidiary (the “Cole Merger”), the Company recorded goodwill as a result of the merger consideration exceeding the net assets acquired. The goodwill recorded as a result of the Cole Merger was allocated between the Company’s two segments, the REI segment and Cole Capital segment.

The following table summarizes the Company’s goodwill activity by segment from the date of the CapLease acquisition (in thousands):



	REI Segment			Cole Capital Segment			Consolidated
Balance as of January 1, 2013	$	—		$	—		$	—
Acquisition of Caplease	92,789			—			92,789
Balance as of December 31, 2013	92,789			—			92,789
Cole Merger	1,654,085			558,835			2,212,920
Measurement period adjustments	(27,339		)	49,627			22,288
Goodwill allocated to dispositions ⁽¹⁾	(210,139		)	—			(210,139		)
Impairment	—			(223,064		)	(223,064		)
Balance as of December 31, 2014	$	1,509,396		$	385,398		$	1,894,794
Goodwill allocated to dispositions and held for sale assets ⁽¹⁾	(66,789		)	—			(66,789		)
Balance as of September 30, 2015	$	1,442,607		$	385,398		$	1,828,005

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(1) Included in loss on disposition of real estate and held for sale assets, net, in the consolidated statements of operations.

In the event the Company disposes of a property that constitutes a business under U.S. GAAP, the Company will allocate a portion of the REI segment’s goodwill to that property in determining the gain or loss on the disposal of the property. The amount of goodwill allocated to the property will be based on the relative fair value of the property to the fair value of the REI segment. The Company generally estimates the relative fair value by utilizing rental income on a straight line basis as an indication of the relative fair value. Future property acquisitions that constitute a business will be integrated into the REI segment and therefore will also be allocated goodwill upon disposition.

Intangible Assets

The intangible assets as of September 30, 2015 of $150.4 million, net of accumulated amortization of $22.5 million, primarily consist of management and advisory contracts that the Company has with certain Managed REITs, which are subject to an estimated useful life of approximately five years. The Company recorded $7.5 million and $22.5 million of amortization expense for the three and nine months ended September 30, 2015, respectively, related to the management and advisory contracts. As of September 30, 2014, the Company had intangible assets of $385.6 million, net of accumulated amortization of $62.3 million. The Company recorded $24.3 million and $62.3 million of amortization expense for the three and nine months ended September 30, 2014, respectively, related to the management and advisory contracts. The estimated amortization expense for the remainder of the year ending December 31, 2015 is $7.6 million. The estimated amortization expense for each of the years ending December 31, 2016, 2017, 2018 and 2019 is $30.1 million.

Impairments

The Company evaluates goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicate the carrying value, by reporting unit, may not be recoverable. The Company’s annual testing date is during the fourth quarter. The Company tests goodwill for impairment by first comparing the carrying value of net assets to the fair value of each reporting unit. If the fair value is determined to be less than the carrying value or if qualitative factors indicate that it is more likely than not that goodwill is impaired, a second step is performed to compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value. The Company estimates the fair value of the reporting units, which the Company has determined is the same as its reportable segments, using discounted cash flows and relevant competitor multiples. During the nine months ended September 30, 2015 and 2014, management monitored the actual performance of the business segments relative to the fair value assumptions used during our annual goodwill impairment test. During the nine months ended September 30, 2015 and 2014, no triggering events were identified.

The Company evaluates intangible assets for impairment when an event occurs or circumstances change that indicate the carrying value may not be recoverable. The Company tests intangible assets for impairment by first comparing the carrying value of the asset group to the undiscounted future cash flows expected from the use of the assets and their eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying amount, the Company will adjust the intangible assets to their respective fair values and recognize an impairment loss. The Company will estimate the fair value of the intangible assets using a discounted cash flow model specific to the applicable Managed REITs. There were no events or changes in circumstances that indicated that intangible assets were impaired during the nine months ended September 30, 2015 or 2014.

The fair values of the Cole Capital segment goodwill and intangible assets are dependent upon actual results, including, but not limited to, the timing of and aggregate capital raised and deployed on behalf of the Managed REITs, which is influenced by the Company’s ability to reinstate certain selling agreements that were suspended as a result of the Audit Committee Investigation and the resulting restatements. If the Company is unable to reinstate certain selling agreements with broker-dealers timely, the fair values of the Cole Capital segment goodwill and intangible assets may be less than the respective carrying value, resulting in an impairment that could have a material effect on a Company’s financial results. In addition, the actual timing of closing an offering or executing a liquidity event on behalf of a Managed REIT or the commencement of operations of newly formed REITs, which are not yet effective, may differ from the Company’s assumptions used at September 30, 2015.

The evaluation of goodwill and intangible assets for potential impairment requires the Company’s management to exercise significant judgment and to make certain assumptions. While the Company believes its assumptions are reasonable, there are no guarantees as to actual results. Changes in assumptions based on actual results may have a material impact on the Company’s financial results.

Intangible Leases

Intangible lease assets and liabilities of the Company consist of the following as of September 30, 2015 and December 31, 2014 (amounts in thousands, except weighted-average useful life):



	Weighted-Average Useful Life	September 30, 2015		December 31, 2014
Intangible lease assets:
In-place leases, net of accumulated amortization of $361,315 and $236,096, respectively	14.1	$	1,575,024	$	1,816,508
Leasing commissions, net of accumulated amortization of $853 and $505, respectively	7.8	3,779		4,205
Above-market leases, net of accumulated amortization of $41,449 and $22,471, respectively	16.5	330,949		355,269
Total intangible lease assets, net		$	1,909,752	$	2,175,982

Intangible lease liabilities:
Below-market leases, net of accumulated amortization of $33,493 and $19,123, respectively	17.4	$	264,232	$	317,838

The following table provides the projected amortization expense and adjustments to rental income related to the intangible lease assets and liabilities for the remainder of 2015 and the next four calendar years as of September 30, 2015 (amounts in thousands):



	October 1, 2015 - December 31, 2015		2016		2017		2018		2019
In-place leases:
Total to be included in amortization expense	$	46,008	$	179,088	$	163,617	$	149,574	$	137,702
Leasing Commissions
Total to be included in amortization expense	$	141	$	547	$	519	$	409	$	382
Above-market lease assets:
Total to be deducted from rental income	$	6,716	$	26,797	$	26,450	$	25,887	$	23,925
Below-market lease liabilities:
Total to be included in rental income	$	5,368	$	21,364	$	21,222	$	20,895	$	20,153

- Definition

The entire disclosure for the aggregate amount of goodwill and a description of intangible assets, which may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain (loss) on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss.

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