Derivative and Hedging Activities

Risk Management Objective and Strategies for Using Derivatives

The Company uses derivative instruments, such as interest rate swaps and interest rate caps, primarily to manage exposure to interest rate risks inherent in variable rate debt and refinancings. The Company may also enter into forward starting swaps or treasury lock agreements to set the effective interest rate on a planned fixed-rate financing. The Company’s interest rate swaps involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. In a forward starting swap or treasury lock agreement that the Company cash settles in anticipation of a fixed rate financing or refinancing, the Company will receive or pay an amount equal to the present value of future cash flow payments based on the difference between the contract rate and market rate on the settlement date.

The Company does not use derivatives for trading or speculative purposes and, with the exception of the MacArthur Center swap, currently does not have any derivatives that are not designated as hedging instruments under the accounting requirements for derivatives and hedging.

As of June 30, 2014, the Company had the following outstanding interest rate derivatives that were designated and are expected to be effective as cash flow hedges of the interest payments on the associated debt.



Instrument Type	Ownership		Notional Amount		Swap Rate		Credit Spread on Loan			Total Swapped Rate on Loan			Maturity Date
Consolidated Subsidiaries:
Receive variable (LIBOR) /pay-fixed swap ⁽¹⁾	100	%	$	200,000	1.64	%	1.35	%	⁽¹⁾	2.99	%	⁽¹⁾	February 2019
Receive variable (LIBOR) /pay-fixed swap ⁽¹⁾	100	%	175,000		1.65	%	1.35	%	⁽¹⁾	3.00	%	⁽¹⁾	February 2019
Receive variable (LIBOR) /pay-fixed swap ⁽¹⁾	100	%	100,000		1.64	%	1.35	%	⁽¹⁾	2.99	%	⁽¹⁾	February 2019
Unconsolidated Joint Ventures:
Receive variable (LIBOR) /pay-fixed swap⁽²⁾	50	%	137,500		2.40	%	1.70	%		4.10	%		April 2018
Receive variable (LIBOR) /pay-fixed swap⁽²⁾	50	%	137,500		2.40	%	1.70	%		4.10	%		April 2018

(1)

The hedged forecasted transaction for each of these swaps is the first previously unhedged one-month LIBOR-indexed interest payments accrued and made each month on a debt principal amount equal to the swap notional, regardless of the specific debt agreement from which they may flow. The Company is currently using these swaps to manage interest rate risk on the $475 million TRG Term Loan. The credit spread on this loan can also vary within a range of 1.35% to 1.90%, depending on the Company's leverage ratio at the measurement date.


(2)	The notional amount on each of these swaps is equal to 50% of the outstanding principal balance of the loan on Fair Oaks, which begins amortizing in August 2014.

Non-designated Derivatives

Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings.

In June 2014, in connection with entering into the Starwood Purchase and Sale Agreement (Note 2), the Company discontinued hedge accounting on the MacArthur Center swap and accelerated the reclassification of amounts in AOCI to earnings as a result of it becoming probable that the center's debt would be early extinguished and the hedged interest payments would not occur. The accelerated amount was a loss of $4.9 million recorded as a component of Nonoperating Expense on the Consolidated Statement of Operations and Comprehensive Income. The Company also recorded a loss of $0.8 million to Nonoperating Expense for the three and six months ended June 30, 2014 for changes in the fair value of this swap subsequent to the June 2014 discontinuation of hedge accounting. As of June 30, 2014, this interest rate swap is classified in Liabilities of Centers Held for Sale on the Consolidated Balance Sheet.

As of June 30, 2014, the Company had the following outstanding interest rate derivative not designated for hedge accounting.



Instrument Type	Ownership		Notional Amount	Swap Rate		Credit Spread on Loan		Total Swapped Rate on Loan		Maturity Date
Consolidated Subsidiaries:
Receive variable (LIBOR) /pay-fixed swap ⁽¹⁾	95	%	128,487	2.64	%	2.35	%	4.99	%	September 2020


(1)	The notional amount on this swap is equal to the outstanding principal balance of the loan on MacArthur Center.

Cash Flow Hedges of Interest Rate Risk

For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the unrealized gain or loss on the derivative is reported as a component of Other Comprehensive Income (OCI). The ineffective portion of the change in fair value, if any, is recognized directly in earnings. Net realized gains or losses resulting from derivatives that were settled in conjunction with planned fixed-rate financings or refinancings continue to be included in Accumulated Other Comprehensive Income (Loss) (AOCI) during the term of the hedged debt transaction.

Amounts reported in AOCI related to currently outstanding derivatives are recognized as an adjustment to income as interest payments are made on the Company’s variable-rate debt. Realized gains or losses on settled derivative instruments included in AOCI are recognized as an adjustment to income over the term of the hedged debt transaction.

The Company expects that approximately $10.4 million of the AOCI of Taubman Centers, Inc. and the noncontrolling interests will be reclassified from AOCI and recognized as a reduction of income in the following 12 months.

The following tables present the effect of derivative instruments on the Company’s Consolidated Statement of Operations and Comprehensive Income for the three and six months ended June 30, 2014 and June 30, 2013. The tables include the amount of gains or losses on outstanding derivative instruments recognized in OCI in cash flow hedging relationships and the location and amount of gains or losses reclassified from AOCI into income resulting from outstanding derivative instruments and settled derivative instruments associated with hedged debt.

During the three months ended June 30, 2014, the Company had an immaterial amount of hedge ineffectiveness related to the swap on MacArthur Center (prior to discontinuation of hedge accounting), which was classified as Nonoperating Expense on the Consolidated Statement of Operations and Comprehensive Income. For the three months ended June 30, 2013, the Company did not have any hedge ineffectiveness or amounts that were excluded from the assessment of hedge effectiveness recorded in earnings.



	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)					Location of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)
	Three Months Ended June 30						Three Months Ended June 30
	2014			2013			2014			2013
Derivatives in cash flow hedging relationships:
Interest rate contracts – consolidated subsidiaries ⁽¹⁾						Nonoperating Expense ⁽¹⁾	$	(4,880	)
Interest rate contracts – consolidated subsidiaries ⁽¹⁾	$	(5,284	)	$	5,161	Interest Expense ⁽¹⁾	(2,507		)	$	(801	)
Interest rate contracts – UJVs	(501		)	3,716		Equity in Income of UJVs	(783		)	(766		)
Total derivatives in cash flow hedging relationships	$	(5,785	)	$	8,877		$	(8,170	)	$	(1,567	)

Realized losses on settled cash flow hedges:
Interest rate contract – consolidated subsidiaries						Interest Expense				$	(151	)
Interest rate contract – UJVs						Equity in Income of UJVs
Total realized losses on settled cash flow hedges							$	—		$	(151	)


(1)	Includes MacArthur Center swap for the period that it was effective as a hedge until June 2014, when hedge accounting was discontinued.

During the six months ended June 30, 2014, the Company had an immaterial amount of hedge ineffectiveness related to the swap on MacArthur Center (prior to discontinuation of hedge accounting), which was classified as Nonoperating Income on the Consolidated Statement of Operations and Comprehensive Income. For the six months ended June 30, 2013, the Company did not have any hedge ineffectiveness or amounts that were excluded from the assessment of hedge effectiveness recorded in earnings.



	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)					Location of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)
	Six Months Ended June 30						Six Months Ended June 30
	2014			2013			2014			2013
Derivatives in cash flow hedging relationships:
Interest rate contracts – consolidated subsidiaries ⁽¹⁾						Nonoperating Expense ⁽¹⁾	$	(4,880	)
Interest rate contracts – consolidated subsidiaries ⁽¹⁾	$	(7,735	)	$	6,442	Interest Expense ⁽¹⁾	(5,043		)	$	(1,594	)
Interest rate contracts – UJVs	(258		)	4,368		Equity in Income of UJVs	(1,551		)	(1,520		)
Total derivatives in cash flow hedging relationships	$	(7,993	)	$	10,810		$	(11,474	)	$	(3,114	)

Realized losses on settled cash flow hedges:
Interest rate contract – consolidated subsidiaries						Interest Expense				$	(303	)
Interest rate contract – UJVs						Equity in Income of UJVs
Total realized losses on settled cash flow hedges							$	—		$	(303	)


(1)	Includes MacArthur Center swap for the period that it was effective as a hedge until June 2014, when hedge accounting was discontinued.

The Company records all derivative instruments at fair value in the Consolidated Balance Sheet. The following table presents the location and fair value of the Company’s derivative financial instruments as reported in the Consolidated Balance Sheet as of June 30, 2014 and December 31, 2013. The Company does not have any derivatives not designated as hedging instruments in an asset position as of June 30, 2014 and December 31, 2013.



		Fair Value
	Consolidated Balance Sheet Location	June 30 2014			December 31 2013
Derivatives designated as hedging instruments:
Asset derivatives:
Interest rate contracts – consolidated subsidiaries	Deferred Charges and Other Assets				$	1,543
Liability derivatives:
Interest rate contract – consolidated subsidiaries	Accounts Payable and Accrued Liabilities	$	(4,417	)	$	(3,418	)
Interest rate contracts – UJVs	Investment in UJVs	(6,196		)	(5,938		)
Total liabilities designated as hedging instruments		$	(10,613	)	$	(9,356	)
Derivatives not designated as hedging instruments:
Interest rate contract – held for sale	Liabilities of Centers Held for Sale	(5,859		)
Total liability derivatives		$	(16,472	)	$	(9,356	)

Contingent Features

Three of the Company's outstanding derivatives contain provisions that state if the hedged entity defaults on any of its indebtedness in excess of $1 million, then the derivative obligation could also be declared in default. Three of the Company’s outstanding derivatives contain provisions that state if the Operating Partnership defaults on any of its recourse indebtedness in excess of $50 million, then the derivative obligation could also be declared in default. As of June 30, 2014, the Company is not in default on any indebtedness that would trigger a credit risk related default on its current outstanding derivatives.

As of June 30, 2014 and December 31, 2013, the fair value of derivative instruments with credit-risk-related contingent features that were in a liability position was $16.5 million and $9.4 million, respectively. As of June 30, 2014 and December 31, 2013, the Company was not required to post any collateral related to these agreements. If the Company breached any of these provisions it would be required to settle its obligations under the agreements at their fair value. See Note 12 for fair value information on derivatives.