18.

Variable Interest Entities

Consolidated Variable Interest Entities

Consolidated variable interest entities are those where the Trust is the primary beneficiary of a variable interest entity. The primary beneficiary is the party that has a controlling financial interest in the VIE, which is defined by the entity having both of the following characteristics: 1) the power to direct the activities that, when taken together, most significantly impact the VIE’s performance, and 2) the obligation to absorb losses and right to receive the returns from the VIE that could be significant to the VIE. The Trust has identified two consolidated variable interest entities.

Although the Trust holds 100% of the equity interests in the Cerritos office property, the B-Note collateralized by the property enables the senior lender to participate in the entity’s expected residual returns, the Trust will need to fund expected losses and infuse additional capital to lease and stabilize property operations. Through its equity interests in the property, the Trust has both the right to the returns of the entity and power to direct the activities of Cerritos. Accordingly, the Trust is the primary beneficiary and has consolidated Cerritos since its acquisition on October 5, 2012.

At September 30, 2013 the carrying value of the Cerritos assets and liabilities included: land and building of $22,079,000 net of accumulated depreciation of $830,000; lease intangibles of $3,435,000 net of accumulated amortization of $627,000; mortgage debt comprised of an A Note totaling $23,153,000 and participating B Note totaling $864,000. The outstanding mortgage debt collateralized by the property is non-recourse to the Trust.

In connection with the loan modification of 1515 Market Street, the Trust acquired a 49% equity interest in the entity that holds the property. This equity interest includes the general partner interest. The Trust determined that the 1515 Market Street entity was a variable interest entity due to the lender’s right to participate in the entity’s expected residual returns. Through its equity interest, the Trust has both the right to the returns of the entity and power to direct the activities of 1515 Market Street. Accordingly, the Trust is the primary beneficiary and has consolidated the property effective February 1, 2013.

At September 30, 2013 the carrying value of the 1515 Market Street assets and liabilities include land and building of $42,950,000 net of accumulated depreciation of $590,000 and lease intangibles of $16,624,000 net of accumulated amortization of $1,566,000 and a first mortgage note of $42,683,000. A second mortgage note of $35,040,000 is eliminated in consolidation. The outstanding mortgage debt collateralized by the property is non-recourse to the Trust.

The fair value of the assets and liabilities of the consolidated property was calculated by an independent third party valuation firm and reviewed by management. The following table summarizes the allocation of the aggregate purchase price of 1515 Market Street as of February 1, 2013 (in thousands):


	1515 Market Street
Land	$	18,627
Building		23,159
Other improvements		73
Tenant improvements		1,407
Lease intangibles		14,943
Above market lease intangibles		2,867
Net working capital acquired		1,132
Below market lease intangibles		(620	)
Other liabilities		(1,299	)
Long term liabilities assumed		(60,279	) (1)

Net assets acquired	$	10

(1)	Long term liabilities assumed as part of this transaction remain legally outstanding but are eliminated in consolidation with the Trust’s loan asset purchased on December 12, 2012.

Intangible assets acquired and intangible liabilities assumed for 1515 Market Street at February 1, 2013 consisted of the following (in thousands):


	Carrying Value			Weighted Average Amortization Period (years)
Intangible assets:
In place lease intangibles	$	6,542			6.2
Above market lease intangibles		2,867			5.8
Tenant relationship value		7,388			13.3
Lease commissions, legal and marketing fees		1,013			5.4


Total	$	17,810			9.0

Intangible liabilities:
Below market lease intangibles	$	(620	)		4.2

For the three and nine months ended September 30, 2013, 1515 Market Street contributed revenue of approximately $2,449,000 and $6,942,000, respectively, and contributed net income of approximately $514,000 and $1,586,000, respectively.

The accompanying unaudited pro forma information for the three and nine months ended September 30, 2013 and 2012 is presented as if the consolidation of 1515 Market Street on February 1, 2013 had occurred on January 1, 2012. This unaudited pro forma information is based upon historical consolidated financial information and should be read in conjunction with the consolidated financial statements and notes thereto. This unaudited pro forma information does not purport to represent what the actual results of operations of the Trust would have been had the above occurred, nor do they purport to predict the results of operations of future periods.


Pro forma	For the Three Months Ended				For the Nine Months Ended
(In thousands, except for per share data)	September 30,				September 30,
	2013		2012		2013		2012

Total revenue	$	18,842	$	18,151	$	59,502	$	57,913
Consolidated net income	$	10,133	$	16,010	$	30,797	$	26,591
Net income attributable to Winthrop Realty Trust	$	11,128	$	15,660	$	33,489	$	28,207
Per common share data - basic		0.25		0.39		0.76		0.66
Per common share data - diluted		0.25		0.39		0.76		0.66

Variable Interest Entities Not Consolidated

Equity Method and Preferred Equity Investments – The Trust has reviewed its various equity method and preferred equity investments and identified 11 investments for which the Trust holds a variable interest in a VIE. Of these 11 interests there are seven investments for which the underlying entities do not have sufficient equity at risk to permit them to finance their activities without additional subordinated financial support. There are four additional entities for which the VIE assessment was primarily based on the fact that the voting rights of the equity holders are not proportional to their obligations to absorb expected losses and rights to receive residual returns of the legal entities. These 11 unconsolidated joint ventures are those where the Trust is not the primary beneficiary of a VIE.

Loans Receivable and Loan Securities – The Trust has reviewed its loans receivable and loan securities and four of these assets have been identified as variable interests in a VIE because the equity investment at risk at the borrowing entity level is not considered sufficient for the entity to finance its activities without additional subordinated financial support. There is one investment where the equity holders lack the right to receive returns due to the lender’s participation interest in the debt.

Certain loans receivable and loan securities which have been determined to be VIEs are performing assets, meeting their debt service requirements. In these cases the borrower holds legal title to the real estate collateral and has the power to direct the activities that most significantly impact the economic performance of the VIE, including management and leasing activities. In the event of default under these loans, the Trust only has protective rights and its obligation to absorb losses is limited to the extent of its loan investment. The borrower has been determined to be the primary beneficiary for these performing assets.

The Trust has determined that it does not currently have the power to direct the activities of the properties collateralizing any of its loans receivable and loan securities. For this reason, management believes that it does not control, nor is it the primary beneficiary of these properties. Accordingly, the Trust accounts for these investments under the guidance for loans receivable and real estate debt investments.