Real Estate Owned via Equity Investment

6 Months Ended

Jun. 30, 2011

Real Estate Owned via Equity Investment [Abstract]

Real Estate Owned via Equity Investment

Note 17.             Real Estate Owned via Equity Investment

The Company, together with third party real estate development companies, formed variable interest entities (“VIEs”) to construct various real estate development projects.  These VIEs account for acquisition, development and construction costs of the real estate development projects in accordance with FASB ASC Topic 970, “Real Estate-General”, and account for capitalized interest on those projects in accordance with FASB ASC Topic 835, “Interest”.  Due to economic conditions, management decided to curtail new equity investments.

In accordance with ASC Topic 976, the full accrual method is used to recognize profit on real estate sales.  Profits on the sales of this real estate are recorded when cash in excess of the amount of the original investment is received, and calculation of same is made in accordance with the terms of the partnership agreement, the Company is no longer obligated to perform significant activities after the sale to earn profits, there is no continuing involvement with the property and, finally, the usual risks and rewards of ownership in the transaction have passed to the acquirer.

At June 30, 2011, the Company had one VIE which is consolidated into the Company's financial statements.  This VIE met the requirements for consolidation under FASB ASC Topic 810, “Consolidation” (“ASC Topic 810”) based on Royal Investments America being the primary financial beneficiary.  Consolidation of this VIE was determined based on the amount invested by Royal Investments America compared to the Company's partners. In September 2005, the Company, together with a real estate development company, formed a limited partnership.  Royal Investments America is a limited partner in the partnership (the “Partnership”).  The Partnership was formed to convert an apartment complex into condominiums.  The development company is the general partner of the Partnership. The Company invested 66% of the initial capital contribution, or $2.5 million, with the development company investing the remaining equity of $1.3 million.  The Company is entitled to earn a preferred return on the $2.5 million capital contribution.  In addition, the Company made two mezzanine loans totaling $9.2 million at market terms and interest rates.  The Partnership no longer has senior debt with another bank as it was paid off in June 2010.  Upon the repayment of the mezzanine loan interest and principal and the initial capital contributions and preferred return, the Company and the development company will both receive 50% of the remaining distribution, if any.

On August 13, 2009, the Company received a Senior Loan Default Notice from the Senior Lender as a result of the Partnership not making the required repayment by July 9, 2009.  The Company signed a forbearance agreement and an inter-creditor agreement between the Company and the Senior Lender on October 23, 2009 which extended the loan until December 9, 2010.  On October 25, 2009, the Senior Lender filed for bankruptcy protection, which did not impact the relationship between the Partnership and the Senior Lender.  As part of the agreement to extend the loan for 14 months, the Senior Lender required the Partnership to provide additional funds to cover current and potential future cash requirements for capital improvements, operating expenses and marketing costs. As mentioned above the Senior Lender has been repaid in full.  Through June 30, 2011, Royal Bank had loaned $2.6 million to the Partnership and may be required to fund additional costs associated with capital improvements, operating and marketing expenses. The loan balance was paid down to $0 during the second quarter of 2011 as a result of the sales proceeds received from an auction that was held in April of 2011.

In accordance with ASC Topic 360, the Partnership assesses the recoverability of fixed assets based on estimated future operating cash flows.  The Company had recognized $12.6 million in impairment charges related to this asset through December 31, 2010.  The measurement and recognition of the impairment was based on estimated future discounted operating cash flows.  No further impairment of this asset occurred during the first six months of 2011.

As noted above, the Partnership held an auction during the second quarter of 2011, which was successful in reducing the number of units that remain at the project.  The auction company continued to sell units for the Partnership through the second quarter of 2011.  As of June 30, 2011 the remaining proceeds from the sales of the units are being utilized to reduce the balance of the $9.2 million of mezzanine loans that the Company made to the Partnership.  At June 30, 2011, the Partnership had total assets of $4.9 million of which $3.4 million is real estate as reflected on the consolidated balance sheet and total borrowings of $4.8 million, all of which relates to the Company's loans discussed above.  The Company has made an investment of $14.3 million in this Partnership ($2.5 million capital contribution and $11.8 million of loans).  The impairments mentioned above along with the repayment of advances that started in June 2010 have contributed to an overall reduction in the Company's investment. At June 30, 2011, the remaining amount of the investment in and receivables due from the Partnership totaled $2.0 million.