Commitments and Contingencies

Legal Proceedings

The Company is from time to time involved in various disputes, lawsuits, warranty claims, environmental and other matters arising in the ordinary course of its business. Management makes assumptions and estimates concerning the likelihood and amount of any potential loss relating to these matters.

The Company currently is a party to various legal proceedings, none of which management expects will have a material adverse effect on the Company’s financial position, results of operations, or liquidity. Management accrues a liability for litigation if an unfavorable outcome is determined to be probable and the amount of loss can be reasonably estimated. If an unfavorable outcome is determined by management to be probable and a range of loss can be reasonably estimated, management accrues the best estimate within the range; however, if no amount within the range is a better estimate than any other, the minimum amount within the range is accrued. Legal fees related to litigation are expensed as incurred. Management does not believe that the ultimate outcome of these matters, either individually or in the aggregate, could have a material adverse effect on the Company’s financial position or results of operations; however, litigation is subject to inherent uncertainties.

Under the Company’s leases, tenants are typically obligated to indemnify the Company from and against all liabilities, costs, and expenses imposed upon or asserted against it as owner of the properties due to certain matters relating to the operation of the properties by the tenant.

Guarantees

In connection with the Company's mezzanine lending activities, the Company has made guarantees to pay portions of certain senior loans of third parties associated with the development projects. The following table summarizes the guarantees made by the Company as of December 31, 2018 (in thousands):



Development project	Payment guarantee amount
1405 Point	$	25,000
The Residences at Annapolis Junction	8,300
Delray Plaza	4,750		(a)
Nexton Square	—		(b)
Interlock Commercial	—		(c)
Solis Apartments at Interlock	—		(d)
City Center	18,457		(e)
Total	$	56,507

________________________________________

(a) On January 8, 2019, the mezzanine loan and senior construction loan were modified, and the payment guarantee amount increased to $5.2 million.

(b) As of December 31, 2018, this payment guarantee was not yet effective because the senior construction loan had not yet been executed. On February 8, 2019, the senior construction loan was executed and the $12.6 million payment guarantee became effective. The Company has also guaranteed completion of the development project to the senior construction lender.

(c) As of December 31, 2018, this $30.7 million payment guarantee was not yet effective because the senior construction loan had not yet been executed. Once the senior construction loan is executed, the Company will also guarantee completion of the development project to the senior lender. The Company has also guaranteed completion of the development project to Georgia Tech, the ground lessor.

(d) There is no payment guarantee for the senior construction loan on this project. The Company has guaranteed completion of the development project to the senior lender.

(e) Durham City Center is accounted for as an equity method investment.

Commitments

The Company has a bonding line of credit for its general contracting construction business and is contingently liable under performance and payment bonds, bonds for cancellation of mechanics liens, and defect bonds. Such bonds collectively totaled $34.8 million and $44.9 million as of December 31, 2018 and 2017, respectively.

The Operating Partnership has entered into standby letters of credit using the available capacity under the credit facility. The letters of credit relate to the guarantee of future performance on certain of the Company’s construction contracts. Letters of credit generally are available for draw down in the event the Company does not perform. As of December 31, 2018 and 2017, the Operating Partnership had total outstanding letters of credit of $2.1 million and $2.1 million, respectively. The amounts outstanding at December 31, 2018 and 2017 include a $2.1 million letter of credit related to the guarantee on the Point Street Apartments senior construction loan.

The Company has six ground leases on five properties with initial terms that range from 20 to 65 years and options to extend up to an additional 70 years in certain cases. The Company also leases automobiles and equipment.

Future minimum rental payments for all operating leases during each of the next five years and thereafter are as follows (in thousands):



2019	$	2,127
2020	2,291
2021	2,368
2022	2,364
2023	2,403
Thereafter	105,961
Total	$	117,514

Ground rent expense for the years ended December 31, 2018, 2017, and 2016 was $2.4 million, $2.5 million and $2.0 million, respectively.

Concentrations of Credit Risk

The majority of the Company’s properties are located in Hampton Roads, Virginia. For the years ended December 31, 2018, 2017, and 2016, rental revenues from Hampton Roads properties represented 53%, 53% and 58%, respectively, of the Company’s rental revenues. Many of the Company’s Hampton Roads properties are located in the Town Center of Virginia Beach. For the years ended December 31, 2018, 2017, and 2016, rental revenues from Town Center properties represented 42%, 38% and 41%, respectively, of the Company’s rental revenues.

A group of three construction customers comprised 55%, 41%, and 22% of the Company’s general contracting and real estate services revenues for the years ended December 31, 2018, 2017, and 2016, respectively. The same customers represented 28%, 20%, and 19% of the Company’s general contracting and real estate services segment gross profit for the years ended December 31, 2018, 2017, and 2016, respectively.