COMMITMENTS AND CONTINGENCIES

We are sometimes involved in lawsuits, warranty claims, and environmental matters arising in the ordinary course of business. Management makes assumptions and estimates concerning the likelihood and amount of any potential loss relating to these matters.

We are currently a party to various legal proceedings. We accrue a liability for litigation if an unfavorable outcome is probable and the amount of loss can be reasonably estimated. If an unfavorable outcome is probable and a reasonable estimate of the loss is a range, we accrue the best estimate within the range; however, if no amount within the range is a better estimate than any other amount, the minimum within the range is accrued. Legal fees related to litigation are expensed as incurred. Other than as described below, we do not believe that the ultimate outcome of these matters, either individually or in the aggregate, could have a material adverse effect on our financial position or overall trends in results of operations; however, litigation is subject to inherent uncertainties. Also under our leases, tenants are typically obligated to indemnify us from and against all liabilities, costs and expenses imposed upon or asserted against us (1) as owner of the properties due to certain matters relating to the operation of the properties by the tenant, and (2) where appropriate, due to certain matters relating to the ownership of the properties prior to their acquisition by us.

In November 2016, we were included as a defendant in a class action lawsuit related to predatory towing by a third party company we had retained to provide towing services at several of our properties in Montgomery County, Maryland. We were not named as a defendant in the litigation prior to the certification of the defendant class. In December 2015, the towing company defendant reached a settlement with the plaintiff class that resulted in a $22 million judgment being entered against them. After the judgment was entered, the Circuit Court for Montgomery County, Maryland certified a defendant class of approximately 600 property owners, including us. We believe this is the first time a Maryland court has certified a defendant class that has resulted in a complete denial of due process to the members of that class and together with others in the defendant class, filed a Writ of Mandamus challenging the certification of the defendant class. The hearing of the Writ by the Court of Appeals is discretionary. Because of the specific facts and circumstances of our contractual relationship with the towing company, we do not believe we should have been included in the defendant class nor do we believe we should have any liability in this matter. We are currently pursuing all available legal remedies and intend to vigorously defend ourselves in the matter, including defenses based on the total lack of due process afforded to us to present our unique facts and circumstances. We believe our potential loss in this matter ranges from $0 to an undetermined share of the $22 million judgment. The judgment does not provide any guidance for how the judgment amount is to be shared amongst the defendant class.

We are self-insured for general liability costs up to predetermined retained amounts per claim, and we believe that we maintain adequate accruals to cover our retained liability. We currently do not maintain third party stop-loss insurance policies to cover liability costs in excess of predetermined retained amounts. Our accrual for self-insurance liability is determined by management and is based on claims filed and an estimate of claims incurred but not yet reported. Management considers a number of factors, including third-party actuarial analysis, previous experience in our portfolio, and future increases in costs of claims, when making these determinations. If our liability costs exceed these accruals, it will reduce our net income.

We reserve for estimated losses, if any, associated with warranties given to a buyer at the time real estate is sold or other potential liabilities relating to that sale, taking any insurance policies into account. These warranties may extend up to ten years and require significant judgment. If changes in facts and circumstances indicate that warranty reserves are understated, we will accrue additional reserves at such time a liability has been incurred and the costs can be reasonably estimated. Warranty reserves are released once the legal liability period has expired or all related work has been substantially completed. During 2016, the legal liability period relating to our latent defect warranty on condominiums sold at Santana Row expired. Upon expiration, we released the remaining $4.9 million warranty reserve which is included in "gain on sale of real estate and change in control of interests" in the consolidated statement of comprehensive income for the year ended December 31, 2016.

At December 31, 2016 and 2015, our reserves for warranties and general liability costs were $2.8 million and $7.7 million, respectively, and are included in “accounts payable and accrued expenses” in our consolidated balance sheets. Any potential losses which exceed our estimates would result in a decrease in our net income. During 2016 and 2015, we made payments from these reserves of $2.0 million and $1.8 million, respectively. Although we consider the reserve to be adequate, there can be no assurance that the reserve will prove to be adequate over-time to cover losses due to the difference between the assumptions used to estimate the reserve and actual losses.

At December 31, 2016, we had letters of credit outstanding of approximately $1.3 million.

As of December 31, 2016 in connection with capital improvement, development, and redevelopment projects, the Trust has contractual obligations of approximately $445.3 million.

We are obligated under ground lease agreements on several shopping centers requiring minimum annual payments as follows, as of December 31, 2016:




	(In thousands)
Year ending December 31,
2017	$	2,070
2018	3,021
2019	3,174
2020	3,187
2021	3,195
Thereafter	170,698
	$	185,345

A master lease for Mercer Mall includes a fixed purchase price option for $55 million in 2023. If we fail to exercise our purchase option, the owner of Mercer Mall has a put option which would require us to purchase Mercer Mall for $60 million in 2025.

Under the terms of the Congressional Plaza partnership agreement, a minority partner has the right to require us and the other minority partner to purchase its 29.47% interest in Congressional Plaza at the interest’s then-current fair market value. If the other minority partner defaults in their obligation, we must purchase the full interest. Based on management’s current estimate of fair market value as of December 31, 2016, our estimated maximum liability upon exercise of the put option would range from approximately $89 million to $93 million.

A master lease for Melville Mall includes a fixed purchase price option in 2021 for $5 million. If we fail to exercise our purchase option, the owner of Melville Mall has a put option which would require us to purchase Melville Mall in 2023 for $5 million.

The other member in Montrose Crossing has the right to require us to purchase all of its 10.1% interest in Montrose Crossing at the interest's then-current fair market value. If the other member fails to exercise its put option, we have the right to purchase its interest on or after December 27, 2021 at fair market value. Based on management’s current estimate of fair market value as of December 31, 2016, our estimated maximum liability upon exercise of the put option would range from approximately $9 million to $10 million.

Two of the members in Plaza El Segundo have the right to require us to purchase their 10.0% and 11.8% ownership interests at the interests' then-current fair market value. If the members fail to exercise their put options, we have the right to purchase each of their interests on or after December 30, 2026 at fair market value. Based on management’s current estimate of fair market value as of December 31, 2016, our estimated maximum liability upon exercise of the put option would range from approximately $21 million to $24 million. Also, we exercised our option to acquire the preferred interest of a member in our Plaza El Segundo partnership for $4.9 million. The transaction is expected to close in 2018.

Effective January 1, 2017, the other member in The Grove at Shrewsbury and Brook 35 has the right to require us to purchase all of its approximately 4.8% interest in The Grove at Shrewsbury and approximately 8.8% interest in Brook 35 at the interests' then-current fair market value. Based on management's current estimate of fair market value as of December 31, 2016, our estimated maximum liability upon exercise of the put option would range from $10 million to $11 million.

Under the terms of certain partnership agreements, the partners have the right to exchange their operating partnership units for cash or the same number of our common shares, at our option. A total of 763,797 downREIT operating partnership units are outstanding which have a total fair value of $108.5 million, based on our closing stock price on December 31, 2016.

On February 12, 2016, we acquired the 10% noncontrolling interest of a partnership which owns a project in southern California for $13.0 million, bringing our ownership interest to 100%.