Real Estate Investments

12 Months Ended

Dec. 31, 2013

Real Estate Investments [Abstract]

Real Estate Investments

(3) Real Estate Investments

(a) Acquisitions of Real Estate

For the year ended December 31, 2013, the Company purchased six communities consisting of 1,079 units for $349.1 million.

For the year ended December 31, 2012, the Company purchased eleven communities, comprising of 2,052 units for $551.1 million.

(b) Sales of Real Estate investments

During 2013, the Company sold three communities consisting of 363 units for $57.5 million resulting in gains totaling $29.2 million.

During the first quarter of 2013, the Company sold a land parcel held for future development located in Palo Alto, California for $9.1 million, which resulted in a gain of $1.5 million.

During 2012, the Company sold two communities consisting of 264 units for $28.3 million resulting in gains totaling $10.9 million.

(c) Co-investments

The Company has joint venture investments in co-investments which are accounted for under the equity method.  The co-investments’ accounting policies are similar to the Company’s accounting policies.  The joint ventures own, operate, and develop apartment communities.

Wesco I, LLC

Wesco, I LLC (“Wesco I”) is a 50/50 programmatic joint venture with an institutional partner for a total equity commitment of $300.0 million.  Each partner’s equity commitment is $150.0 million. Wesco I will utilize debt targeted at approximately 50% of the cost to acquire and improve real estate.  The Company has contributed $150.0 million to Wesco I, and as of December 31, 2013, Wesco I owned nine apartment communities with 2,713 units with an aggregate carrying value of approximately $670 million.

Wesco III, LLC

During 2012, the Company entered into a 50/50 programmatic joint venture, Wesco III LLC (“Wesco III”), with an institutional partner for a total equity commitment from the parties of $120.0 million. Each partner’s equity commitment is $60.0 million.  Wesco III will utilize debt targeted at approximately 50% of the cost to acquire and improve real estate.  The Company has contributed $39.7 million to Wesco III, and as of December 31, 2013, Wesco III owned three apartment communities with 657 units with an aggregate carrying value of approximately $164 million.

Essex Apartment Value Fund II, L.P.

Essex Apartment Value Fund II, L.P. (“Fund II”), has eight institutional investors with combined partner equity contributions of $265.9 million.  The Company contributed $75.0 million to Fund II, which represents a 28.2% interest as general partner and limited partner.  Fund II utilized debt as leverage equal to approximately 55% upon the initial acquisition of the underlying real estate.  Fund II invested in apartment communities in the Company’s targeted West Coast markets with an emphasis on investment opportunities in the Seattle metropolitan area and the San Francisco Bay Area.  As of October 2006, Fund II was fully invested and closed for any future acquisitions or development.  As of December 31, 2013, Fund II owned two apartment communities.

During the year ended December 31, 2013, Fund II sold five communities for gross proceeds of $320.4 million.  In connection with the 2013 sales, Fund II incurred a prepayment penalty on debt of which the Company’s pro rata share was $0.4 million. The total gain on the sales was $146.8 million, of which the Company’s pro rata share was $38.8 million, net of internal disposition costs. There are two remaining properties in the Fund II portfolio that are expected to be sold in 2014.

During the year ended December 31, 2012, Fund II sold seven communities for gross proceeds of $413.0 million.  In connection with the 2012 sales, Fund II incurred a prepayment penalty on debt of which the Company’s pro rata share was $2.3 million.  The total gain on the sales was $106.0 million, of which the Company’s pro rata share was $29.1 million.

Canada Pension Plan Investment Board – Joint Venture Developments

The Company has entered into six development joint ventures with the Canada Pension Plan Investment Board (“CPPIB”) to develop six apartment communities.  For each joint venture the Company holds a 50% to 55% non-controlling interest in the venture and will earn customary management fees and may earn development, asset, and property management fees.  The Company may also earn a promote interest. These co-investments are not variable interest entities since they have sufficient equity without additional subordinated support, and the Company and CPPIB jointly have the power to direct activities that most significantly impact the co-investments’ economic performance.  Each of the co-investments between the Company and CPPIB has a single general partner, which is a subsidiary consolidated by the Company.  However, the Company, as general partner of the co-investments, does not control the co-investments because the limited partners have substantive participating rights.  Therefore, the presumption of control by the Company as general partner is overcome by the rights held by CPPIB, and the Company records the co-investments with CPPIB on the equity method of accounting.

As of December 31, 2013, the Company and CPPIB have six active developments projects comprised of 1,507 units for total estimated costs of $695.2 million.  At December 31, 2013, the total remaining estimated costs to be incurred on these projects was $216.2 million of which the Company’s portion of the remaining costs were $118.9 million.

Epic – Phase I, a 280 unit community in San Jose, California, a development joint venture with CPPIB, stabilized its operations in the fourth quarter of 2013.  Epic – Phase II and Phase III are currently still under development.

The Huxley and The Dylan – Joint Venture Developments

During the third quarter 2011, the Company entered into a development joint venture with a regional developer for the construction of The Huxley, a 187 unit community with approximately 18,200 square feet of retail located in West Hollywood, California.  The regional developer contributed the land and the Company contributed approximately $9.0 million in cash for a 50% interest in the venture.  The joint venture obtained bond financing for the project in the amount of $54.5 million with a maturity date of October 2046 and entered into an interest rate swap transaction with respect to the bonds that terminates in September 2016 that effectively converts the interest rate to the Securities Industry and Financial Market Association Municipal Swap Index (“SIFMA Municipal Swap Index”) plus 150 basis points through December 2016.

In the fourth quarter 2011, the Company entered into another development joint venture with the same regional developer for the construction of The Dylan, a 184 unit apartment community with approximately 12,750 square feet of retail located in West Hollywood, California.  The 50/50 joint venture was created with the contribution of $5.8 million by the Company and the contribution of entitled land by the regional developer.  The joint venture secured bond financing in the amount of $59.9 million, maturing in December 2046.  The joint venture entered into a total return swap agreement that effectively converts the interest rate to SIFMA Municipal Swap Index plus 150 basis points through December 2016.

The bond financing for these two development projects have joint and several liability for the joint venture partners.  Additionally, if either partner fails to make capital contributions to one of these joint ventures in certain instances, then the ownership interest of the defaulting partner in the other joint venture may be reduced.

One South Market

During May 2013, the Company entered into a development joint venture to develop a 312 unit community in San Jose, California.  The Company holds a 55% non-controlling interest in the venture and will earn customary management fees and may earn development, asset, and property management fees.  The Company may also earn a promote interest. The co-investment is not a variable interest entity since it has sufficient equity without additional subordinated support, and the Company and the partner jointly have the power to direct activities that most significantly impact the co-investment economic performance.  The co-investment has a single general partner, which is a subsidiary consolidated by the Company.  However, the Company, as general partner of the co-investment, does not control the co-investments because the limited partners have substantive participating rights.  Therefore, the presumption of control by the Company as general partner is overcome by the rights held by the partner, and the Company records the co-investments on the equity method of accounting.

As of December 31, 2013, the project’s total estimated costs were $145.1 million.  At December 31, 2013, the total remaining estimated costs to be incurred on this project was $114.2 million of which the Company’s portion of the remaining costs were $62.8 million.

Preferred Equity Investments

During the first quarter of 2013, the Company made an $8.6 million preferred equity interest investment in an apartment development located in Redwood City, California to a related party entity.  The investment has a preferred return of 12% and matures in January 2016.

In March 2013, the Company received the redemption of $9.7 million of preferred equity related to two properties located in downtown Los Angeles, California.  The Company recorded $0.4 million of income from redemption penalties due to the early redemption of these preferred equity investments.

During the second quarter of 2013, the Company received the redemption of $13.1 million of preferred equity related to a property located in downtown Los Angeles, California.  The Company recorded $0.5 million of income from redemption penalties due to the early redemption of these preferred equity investments.

In August 2013, the Company made an $8.5 million preferred equity investment in a multifamily development project located in San Jose, California.  The investment has a preferred return of 12% and matures in 3 years.

During the third quarter of 2013, the Company restructured the terms of a preferred equity investment with a related party entity on a property located in Anaheim, California, reducing the rate from 13% to 9%, while extending the maximum term by one year.  The Company recorded a $0.4 million restructuring fee related to the restructured investment.

During the second quarter 2012, the Company made a $14 million preferred equity investment in an apartment community located in Cupertino, California to a related party entity.  The investment has a preferred return of 9.5% and matures in May 2016.  The preferred equity agreement provides for up to $4 million of additional funding for renovation costs.

The carrying values of the Company’s co-investments, all accounted for under the equity method of accounting as of December 31, 2013 and 2012 are as follows ($ in thousands):

	2013		2012
Membership interest in Wesco I	$	142,025	$	143,874
Membership interest in Wesco III		39,073		9,941
Partnership interest in Fund II		4,166		53,601
Membership interest in a limited liability company that owns Expo		12,041		18,752
Total operating co-investments		197,305		226,168
Membership interests in limited liability companies with CPPIB that own and are developing Epic, Connolly Station, Mosso I & II, Park 20 (fka Elkhorn) and The Village		301,538		186,362
Membership interests in limited liability companies that own and are developing The Huxley and The Dylan		18,545		16,552
Membership interest in a limited liability company that owns and is developing One South Market		17,115		-
Total development co-investments		337,198		202,914
Membership interest in Wesco II that owns a preferred equity interest in Parkmerced with a preferred return of 10.1%		94,711		91,843
Preferred interest in related party limited liability company that owns Sage at Cupertino with a preferred return of  9.5%		15,775		14,438
Preferred interest in a related party limited liability company that owns Madison Park at Anaheim with a preferred return of 9%		13,824		13,175
Preferred interest in related party limited liability company that owns an apartment development in Redwood City with a preferred return of 12%		9,455		-
Preferred interest in a limited liability company that owns an apartment development in San Jose with a preferred return of 12%		8,865		-
Preferred interests in limited liability companies that own apartment communities in downtown Los Angeles with preferred returns of 9% and 10% repaid in 2013		-		22,807
Total preferred interest investments		142,630		142,263
Total co-investments	$	677,133	$	571,345

The combined summarized financial information of co-investments, which are accounted for under the equity method, is as follows ($ in thousands):

	December 31,
	2013		2012
Balance sheets:
Rental properties and real estate under development	$	1,953,328	$	1,745,147
Other assets		61,578		168,061
Total assets	$	2,014,906	$	1,913,208
Debt	$	667,641	$	820,895
Other liabilities		125,479		91,922
Equity		1,221,786		1,000,391
Total liabilities and partners' equity	$	2,014,906	$	1,913,208
Company's share of equity	$	677,133	$	571,345

	Years ended
	December 31,
	2013			2012			2011
Statements of operations:
Property revenues	$	100,402		$	130,128		$	106,386
Property operating expenses		(37,518	)		(55,990	)		(43,066	)
Net operating income		62,884			74,138			63,320
Gain on sale of real estate		146,758			106,016			-
Interest expense		(24,155	)		(34,959	)		(27,843	)
General and administrative		(5,344	)		(3,697	)		(1,748	)
Depreciation and amortization		(36,831	)		(47,917	)		(44,412	)
Net income (loss)	$	143,312		$	93,581		$	(10,683	)
Company's share of net income (loss)	$	55,865		$	41,745		$	(467	)

(d) Real Estate for Development

The Company defines development activities as new properties that are being constructed, or are newly constructed and, in the case of development communities, are in a phase of lease-up and have not yet reached stabilized operations.  As of December 31, 2013, the Company had two consolidated development projects, and eight unconsolidated joint venture development projects aggregating 2,501 units for an estimated total cost of $1.1 billion, of which $407.0 million remains to be expended.   The Company’s portion of the remaining costs was $249.2 million.

As of December 31, 2013, the Company had one consolidated predevelopment project consisting of 200 units.