INVESTMENT IN UNCONSOLIDATED VENTURES

As of December 31, 2013, the Company had an aggregate investment of approximately $180.5 million in 17 unconsolidated Real Estate Ventures. The Company formed or acquired interests in these ventures with unaffiliated third parties to develop or manage office properties or to acquire land in anticipation of possible development of office or residential properties. As of December 31, 2013, 11 of the real estate ventures owned 55 office buildings that contain an aggregate of approximately 5.7 million net rentable square feet; two real estate ventures owned 3.8 acres of undeveloped parcels of land; three real estate ventures owned 22.5 acres of land under active development and one real estate venture developed a hotel property that contains 137 rooms in Conshohocken, PA.

The Company accounts for its unconsolidated interests in its Real Estate Ventures using the equity method. The Company’s unconsolidated interests range from 20% to 65%, subject to specified priority allocations of distributable cash in certain of the Real Estate Ventures.

The amounts reflected in the following tables (except for the Company’s share of equity and income) are based on the historical financial information of the individual Real Estate Ventures. The Company does not record operating losses of the Real Estate Ventures in excess of its investment balance unless the Company is liable for the obligations of the Real Estate Venture or is otherwise committed to provide financial support to the Real Estate Venture.

The Company’s investment in Real Estate Ventures as of December 31, 2013 and the Company’s share of the Real Estate Ventures’ income (loss) for the year ended December 31, 2013 was as follows (in thousands):



	Ownership Percentage (a)		Carrying Amount			Company’s Share of 2013 Real Estate Venture Income (Loss)			Real Estate Venture Debt at 100%		Current Interest Rate		Debt Maturity
Broadmoor Austin Associates (f)	50	%	$	65,867		$	(52	)	$	56,616	7.04	%	Apr-23
Brandywine-AI Venture LLC	50	%	46,406			130			134,500		3.92	%	(b)
DRA (G&I) Austin (f)	50	%	17,262			(434		)	230,600		3.39	%	(c)
HSRE-Campus Crest IX, LLC (f)	30	%	13,761			—			966		L+2.20%		Jul-16
4040 Wilson LLC	50	%	13,499			—			—		N/A		N/A
TB-BDN Plymouth Apartments	50	%	12,402			5			—		L+1.70%		Dec-17
Brandywine 1919 Ventures	50	%	6,214			—			—		N/A		N/A
1000 Chesterbrook Blvd.	50	%	2,064			461			24,861		4.75	%	Dec-21
Four Tower Bridge	65	%	1,617			320			10,535		5.20	%	Feb-21
PJP VII	25	%	783			239			6,250		L+2.65%		Dec-19
Residence Inn Tower Bridge	50	%	742			326			13,700		5.63	%	Feb-16
Seven Tower Bridge	20	%	447			—			11,035		4.22	%	(d)
PJP II	30	%	330			(87		)	3,765		6.12	%	Nov-23
PJP V	25	%	175			158			5,437		6.47	%	Aug-19
PJP VI	25	%	112			70			8,404		6.08	%	Apr-23
BDN Beacon Venture LLC (i)	20	%	—			907			—		N/A		N/A
Six Tower Bridge (g)	63	%	—			165			—		N/A		N/A
One Commerce Square (h)	25	%	—			933			—		N/A		N/A
Two Commerce Square (h)	25	%	—			614			—		N/A		N/A
G&I Interchange Office LLC (DRA — N. PA) (e) (f)	20	%	—			(619		)	177,207		5.78	%	Jan-15
Two Tower Bridge (i)	35	%	—			265			—		N/A		N/A
Coppell Associates	50	%	(1,169		)	(78		)	15,984		5.75	%	Feb-16
Eight Tower Bridge (i)			—			3			—
Invesco, L.P. (i)			—			338			—
			$	180,512		$	3,664		$	699,860


(a)	Ownership percentage represents the Company's entitlement to residual distributions after payments of priority returns, where applicable.


(b)	The debt for these properties is comprised of three fixed rate mortgages: (1) $40.0 million with a 4.40% fixed interest rate due January 1, 2019, (2) $28.0 million with a 4.65% fixed interest rate due January 1, 2022, and (3) $66.5 million with a 3.22% fixed interest rate due August 1, 2019, resulting in a time and dollar weighted average rate of 3.92%.


(c)	The debt for these properties is comprised of three mortgages: (1) $34.0 million with a 3.52% interest rate due November 1, 2018, (2) $56.0 million with a 3.19% interest rate due October 15, 2018, and (3) $140.6 million with a rate of 3.44% fixed interest rate due November 1, 2018, resulting in a time and dollar weighted average rate of 3.39%.

(d)

Comprised of two fixed rate mortgages totaling $8.0 million that mature on February 8, 2015 and accrue interest at a current rate of 6% (increasing by 1% annually through maturity), a $1.0 million 3% fixed rate loan with interest only through its September 1, 2025 maturity, and a $2.0 million 4% fixed rate loan with interest only through its February 7, 2016 maturity, resulting in a time and dollar weighted average rate of 4.22%.


(e)	Proceeds received by the Company from the sale of an 80% ownership stake in the properties exceeded the historical cost of those properties. No investment in the real estate venture was reflected on the balance sheet at formation.


(f)	The basis differences associated with these ventures are allocated between cost and the underlying equity in the net assets of the investee and is accounted for as if the entity were consolidated (i.e., allocated to the Company’s relative share of assets and liabilities with an adjustment to recognize equity in earnings for the appropriate depreciation/amortization).


(g)	On June 19, 2013, we acquired ownership of Six Tower Bridge. Real estate venture income reflects our previous partnership interest for the year to date period through June 18, 2013.


(h)	On December 19, 2013, we increased our ownership interest in One and Two Commerce Square. The real estate venture income reflects our previous partnership interest for the year to date period through December 18, 2013.


(i)	The ownership interest in these properties was disposed of prior to December 31, 2013. For further information on BDN Beacon LLC, see the section entitled BDN Beacon Venture below. For further information on Two Tower Bridge, see the section entitled Two and Six Tower Bridge Exchange Transaction below.

The following is a summary of the financial position of the Real Estate Ventures as of December 31, 2013 and December 31, 2012 (in thousands):



	December 31, 2013		December 31, 2012
Net property	$	965,475	$	923,536
Other assets	164,152		174,677
Other liabilities	49,442		53,645
Debt	699,860		724,780
Equity	380,325		319,788
Company’s share of equity (Company’s basis)	180,512		193,555

The following is a summary of results of operations of the Real Estate Ventures in which the Company had interests as of December 31, 2013, 2012 and 2011 (in thousands):



	Years ended December 31,
	2013		2012		2011
Revenue	$	102,919	$	164,013	$	145,867
Operating expenses	40,436		70,775		63,715
Interest expense, net	26,529		41,633		42,032
Depreciation and amortization	35,138		50,241		39,172
Net income	816		1,364		948
Company’s share of income (Company’s basis)	3,664		2,741		3,775

As of December 31, 2013, the aggregate principal payments of recourse and non-recourse debt payable to third-parties are as follows (in thousands):



2014	$	11,940
2015	191,304
2016	42,180
2017	13,937
2018	229,780
Thereafter	210,719
	$	699,860

Austin Venture

On October 16, 2013, the Company contributed a portfolio of seven office properties containing an aggregate of 1,398,826 square feet located in Austin, Texas (the "Austin Properties") to a newly-formed joint venture (the "Austin Venture") with G&I VII Austin Office LLC (“DRA”). The Austin Properties and related assets represent the Company's entire remaining property portfolio within the Austin, Texas region, with the exception of the acquisition of Four Points Centre disclosed in Note 3. DRA and the Company, based on arm's-length negotiation, agreed to an aggregate gross sales price of $330.0 million subject to an obligation on the Company's part to fund the first $5.2 million of post-closing capital expenditures, of which $0.8 million had been funded by us through December 31, 2013.

DRA owns a 50% interest in the Austin Venture and the Company owns a 50% interest in the Austin Venture, subject to the Company's right to receive up to an additional 10% of distributions.

At the closing the Austin Venture obtained third party debt financing of approximately $230.6 million secured by mortgages on the Austin Properties and used proceeds of this financing together with $49.7 million of cash contributions by DRA (less $1.9 million of closing costs and $6.9 million of closing prorations and lender holdbacks) to fund a $271.5 million distribution to the Company. The Company has agreed to fund the first $5.2 million of post-closing capital expenditures on behalf of the Austin Venture, resulting in net proceeds of $266.3 million after funding the Company's capital expenditure obligation. As part of the transaction, the Company's subsidiary management company executed an agreement with the Austin Venture to provide property management and leasing services to the Austin Venture in exchange for a market-based fee.

The Company and DRA, utilizing additional equity funding of up to $100.0 million per partner and to-be-determined third-party debt financing, intend to jointly pursue additional office opportunities in targeted Austin sub-markets and plan to co-invest in acquisitions that meet certain investment criteria.

Based upon the facts and circumstances at formation of the Austin Venture, the Company determined that the Austin Venture is not a VIE in accordance with the accounting standard for the consolidation of VIEs. As a result, the Company used the voting interest model under the accounting standard for consolidation in order to determine whether to consolidate the Austin Venture. Based upon each member's substantive participating rights over the activities of the Austin Venture under the operating and related agreements of the Austin Venture, it is not consolidated by the Company, and is accounted for under the equity method of accounting. As a result, the Company measured its equity interest at fair value based on the fair value of the Austin Properties and the distribution provisions of the real estate venture agreement. Since the Company retains a non-controlling interest in the Austin Properties and there are no other facts and circumstances that preclude the consummation of a sale, the contribution qualifies as a partial sale of real estate under the relevant guidance for sales of real estate. Accordingly, during the fourth quarter of 2013, the Company recorded a gain of approximately $25.9 million, which is reflected in "Net gain (loss) on real estate venture transactions" on the accompanying statement of operations.

The Company's continuing involvement with the properties through its interest in the Venture and its management and leasing activities represents a significant continuing involvement in the properties. Accordingly, under the accounting standard for reporting discontinued operations, the Company has determined that the gain on partial sale and the operations of the properties should not be included as part of discontinued operations in its consolidated statements of operations.

4040 Wilson Venture

On July 31, 2013, the Company formed 4040 Wilson LLC Venture ("4040 Wilson"), a joint venture between the Company and Ashton Park Associates LLC (“Ashton Park”), an unaffiliated third party. Each of the Company and Ashton Park owns a 50% interest in 4040 Wilson. 4040 Wilson expects to construct a 426,900 square foot office representing the final phase of the eight building, mixed-use, Liberty Center complex developed by the parent company of Ashton Park in the Ballston submarket of Arlington, Virginia. 4040 Wilson expects to develop the office building on a 1.3-acre land parcel contributed by Ashton Park to 4040 Wilson at an agreed upon value of $36.0 million. The total estimated project costs are $194.1 million, which the Company expects will be financed through approximately $72.0 million of partner capital contributions (consisting of land with a value of $36.0 million from Ashton Park and $36.0 million in cash from the Company, of which $13.5 million has been funded to date) and approximately $125.1 million of debt financing through a construction lender that has not yet been determined. As part of the 4040 Wilson venture, the Company has agreed to guarantee 100% of any lender mandated recourse. As of December 31, 2013, the Company had not provided any guarantees in respect of 4040 Wilson.

Based upon the facts and circumstances at formation of 4040 Wilson, the Company determined that 4040 Wilson is a VIE in accordance with the accounting standard for the consolidation of VIEs. As a result, the Company used the variable interest model under the accounting standard for consolidation in order to determine whether to consolidate 4040 Wilson. Based upon each member's shared power over the activities of 4040 Wilson under the operating and related agreements of 4040 Wilson, and the Company's lack of control over the development and construction phases of the project, 4040 Wilson is not consolidated by the Company, and is accounted for under the equity method of accounting.

Two and Six Tower Bridge Exchange Transaction

On June 19, 2013, the Company acquired, from an unaffiliated third party, the third party's ownership interest in the Six Tower Bridge real estate venture through a nonmonetary exchange for the Company's ownership interest in the Two Tower Bridge real estate venture. The Six Tower Bridge real estate venture owns an unencumbered office property in Conshohocken, PA. The Company previously accounted for its noncontrolling interest in Six Tower Bridge using the equity method. As a result of the exchange transaction, the Company obtained control of the Six Tower Bridge property and the Company's existing equity interest was remeasured at fair value based on the fair value of the underlying property and the distribution provisions of the real estate venture agreement. Accordingly, during 2013, the Company recorded a gain of approximately $7.8 million, which is reflected in "Net gain from remeasurement of investments in a real estate ventures" on the accompanying statement of operations. Following the acquisition, the Class A office property in Conshohocken, PA is wholly owned by the Company with an unencumbered fair value of $24.5 million. The Company accounted for this transaction as a business combination and allocated the fair value as follows: $14.8 million to building, $6.9 million to land, $3.3 million to intangible assets and $0.5 million to below market lease liabilities assumed.

As mentioned above, the Company exchanged its non-controlling interest in Two Tower Bridge real estate venture in a nonmonetary transaction with an unaffiliated third party for the third party's interest in the Six Tower Bridge real estate venture. The investment in Two Tower Bridge had a fair value of $3.6 million on the date of the exchange transaction based on the fair value of the venture's equity and the distribution provisions of the real estate venture agreement. Based on this fair value and the carrying value for the Company's investment of $(0.1) million, during 2013 the Company recognized a gain on exchange of interests in real estate ventures of $3.7 million, which is reflected in "Net gain (loss) on real estate venture transactions" on the accompanying statement of operations.

evo at Cira Centre South Venture (formerly the Grove Venture)

On January 25, 2013, the Company formed HSRE-Campus Crest IX Real Estate Venture ("evo at Cira"), a joint venture among the Company and two unaffiliated third parties: Campus Crest Properties, LLC ("Campus Crest") and HSRE-Campus Crest IXA, LLC ("HSRE"). evo at Cira has commenced construction of a 33-story, 850-bed student housing tower located in the University City submarket of Philadelphia, Pennsylvania. Each of the Company and Campus Crest owns a 30% interest in evo at Cira and HSRE owns a 40% interest. evo at Cira is developing the project on a one-acre land parcel held under a long-term ground lease with a third party lessor. The Company contributed to evo at Cira its tenancy rights under a long-term ground lease, together with associated development rights, at an agreed-upon value of $8.5 million. The total estimated project costs are $158.5 million, which will be financed through partner capital contributions totaling $60.7 million, with the remaining $97.8 million being financed through construction facilities provided by PNC Bank, Capital One and First Niagara Bank. As of December 31, 2013, we have funded 100% of our share of the equity contributions. Construction has already commenced, with a targeted project completion in 2014.

In connection with the development of evo at Cira, each of the Company and Campus Crest provided, in addition to customary non-recourse carve-out guarantees, a completion and cost overrun guaranty, as well as a payment guaranty, on the construction financing (with the Company's share of the payment guaranty being approximately $24.7 million).

The Company's historical cost basis in the development rights that it contributed to the evo at Cira was $4.0 million, thus creating a $4.5 million basis difference at December 31, 2013 between the Company's initial outside investment basis and its $8.5 million initial equity basis. As this basis difference is not related to a physical land parcel, but rather to development rights to construct evo at Cira, the Company will accrete the basis difference as a reduction of depreciation expense over the life of evo at Cira's assets.

Based upon the facts and circumstances at evo at Cira formation, the Company determined that evo at Cira is a VIE in accordance with the accounting standard for the consolidation of VIEs. As a result, the Company used the variable interest model under the accounting standard for consolidation in order to determine whether to consolidate the evo at Cira. Based upon each member's shared power over the activities of evo at Cira under the operating and related agreements of evo at Cira, and the Company's lack of exclusive control over the development and construction phases of the project, evo at Cira is not consolidated by the Company, and is accounted for under the equity method of accounting. Accordingly, the land parcel and associated development rights contributed by the Company to evo at Cira were deconsolidated by the Company upon formation of evo at Cira.

BDN Beacon Venture

On March 26, 2013, the Company sold its entire 20% ownership interest in an unconsolidated real estate venture known as BDN Beacon Venture LLC (the "Beacon Venture"). The carrying amount of the Company's investment in the Beacon Venture amounted to $17.0 million at the sale date, with the Company's proceeds effectively matching the carrying amount.

Guarantees

As of December 31, 2013, the Company has provided guarantees on behalf of certain real estate ventures, consisting of (i) a $24.7 million payment guaranty on the construction loan for the project being undertaken by evo at Cira; (ii) a $3.2 million payment guarantee on the construction loan for a project being undertaken by TB-BDN Plymouth Apartments; and (iii) a $0.5 million payment guarantee on a loan provided to PJP VII. In addition, during construction undertaken by real estate ventures the Company provided and expects to continue to provide cost overrun and completion guarantees, with rights of contribution among partners in the venture, as well as customary environmental indemnities and guarantees of customary exceptions to nonrecourse provisions in loan agreements.