UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
[X]           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

or

[  ]           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from
                                                           to

Commission File Number:
1-13274

 
Mack-Cali Realty Corporation
  
(Exact name of registrant as specified in its charter)

Maryland
  
 22-3305147
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
     

343 Thornall Street, Edison, New Jersey
  
08837-2206
(Address of principal executive offices)
  
(Zip Code)

 
(732) 590-1000
  
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days.  YES X NO ___

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ___ No ___ (the Registrant is not yet required to submit Interactive Data)

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  x                                                                                                           Accelerated filer  ¨
 
Non-accelerated filer  ¨ (Do not check if a smaller reporting company)                                                                                                                                Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES___  NO   X 

As of October 27, 2009, there were 78,648,164 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.
 

 
 
 
 


MACK-CALI REALTY CORPORATION

FORM 10-Q

INDEX

 
Part I
Financial Information
Page
       
 
Item 1.
Financial Statements (unaudited):
  
       
   
Consolidated Balance Sheets as of September 30, 2009
  
   
  and December 31, 2008
4
       
   
Consolidated Statements of Operations for the three and nine month
  
   
   periods ended September 30, 2009 and 2008
5
       
   
Consolidated Statement of Changes in Equity for the nine months
  
   
   ended September 30, 2009
6
       
   
Consolidated Statements of Cash Flows for the nine months ended
  
   
   September 30, 2009 and 2008
7
       
   
Notes to Consolidated Financial Statements
8-39
       
 
Item 2.
Management’s Discussion and Analysis of Financial Condition
  
   
   and Results of Operations
40-59
       
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
59
       
 
Item 4.
Controls and Procedures
59
       
Part II
Other Information
  
       
 
Item 1.
Legal Proceedings
60
       
 
Item 1A.
Risk Factors
60
       
Item 2.
  
Unregistered Sales of Equity Securities and Use of Proceeds
61
       
 
Item 3.
Defaults Upon Senior Securities
61
       
 
Item 4.
Submission of Matters to a Vote of Security Holders
61
       
 
Item 5.
Other Information
62
       
 
Item 6.
Exhibits
62
       
Signatures
    
63
       
Exhibit Index
    
64-80


 
2
 


MACK-CALI REALTY CORPORATION

Part I – Financial Information


Item 1.        Financial Statements

The accompanying unaudited consolidated balance sheets, statements of operations, of changes in equity, and of cash flows and related notes thereto, have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission (“SEC”).  Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements.  The financial statements reflect all adjustments consisting only of normal, recurring adjustments, which are, in the opinion of management, necessary for a fair presentation for the interim periods.

The aforementioned financial statements should be read in conjunction with the notes to the aforementioned financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included in Mack-Cali Realty Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

The results of operations for the three and nine month periods ended September 30, 2009 are not necessarily indicative of the results to be expected for the entire fiscal year or any other period.

 
3
 

MACK-CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) (unaudited)

   
September 30,
    
December 31,
  
ASSETS
  
2009
    
2008
  
Rental property
            
Land and leasehold interests
   $ 774,155     $ 731,086  
Buildings and improvements
     3,954,619       3,792,186  
Tenant improvements
     446,279       431,616  
Furniture, fixtures and equipment
     9,358       8,892  
      5,184,411       4,963,780  
Less – accumulated depreciation and amortization
     (1,113,034 )     (1,040,778 )
Net investment in rental property
     4,071,377       3,923,002  
Cash and cash equivalents
     279,156       21,621  
Investments in unconsolidated joint ventures
     32,969       138,495  
Unbilled rents receivable, net
     117,069       112,524  
Deferred charges and other assets, net
     225,645       212,422  
Restricted cash
     20,720       12,719  
Accounts receivable, net of allowance for doubtful accounts
                
of $2,905 and $2,319
     10,300       23,139  
                 
Total assets
   $ 4,757,236     $ 4,443,922  
                 
LIABILITIES AND EQUITY
                
Senior unsecured notes
   $ 1,582,173     $ 1,533,349  
Revolving credit facility
     --       161,000  
Mortgages, loans payable and other obligations
     755,702       531,126  
Dividends and distributions payable
     42,070       52,249  
Accounts payable, accrued expenses and other liabilities
     119,395       119,451  
Rents received in advance and security deposits
     54,635       54,406  
Accrued interest payable
     22,416       32,978  
Total liabilities
     2,576,391       2,484,559  
Commitments and contingencies
                
                 
Equity:
                
Mack-Cali Realty Corporation stockholders’ equity:
                
Preferred stock, $0.01 par value, 5,000,000 shares authorized, 10,000
                
and 10,000 shares outstanding, at liquidation preference
     25,000       25,000  
Common stock, $0.01 par value, 190,000,000 shares authorized,
                
78,554,827 and 66,419,055 shares outstanding
     785       664  
Additional paid-in capital
     2,265,423       1,905,386  
Dividends in excess of net earnings
     (435,517 )     (386,587 )
Total Mack-Cali Realty Corporation stockholders’ equity
     1,855,691       1,544,463  
                 
Noncontrolling interests in subsidiaries:
                
Operating Partnership
     322,111       414,114  
Consolidated joint ventures
     3,043       786  
Total noncontrolling interests in subsidiaries
     325,154       414,900  
                 
Total equity
     2,180,845       1,959,363  
                 
Total liabilities and equity
   $ 4,757,236     $ 4,443,922  
                 
                 
The accompanying notes are an integral part of these consolidated financial statements.
  

 
4
 

MACK-CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited)

   
Three Months Ended
    
Nine Months Ended
  
   
September 30,
    
September 30,
  
REVENUES
  
2009
    
2008
    
2009
    
2008
  
Base rents
   $ 155,532     $ 147,809     $ 458,943     $ 444,499  
Escalations and recoveries from tenants
     24,995       29,755       77,888       82,065  
Construction services
     7,761       12,268       16,466       36,334  
Real estate services
     1,808       3,347       6,450       10,016  
Other income
     3,521       11,184       9,874       18,955  
Total revenues
     193,617       204,363       569,621       591,869  
                                 
EXPENSES
                                
Real estate taxes
     23,557       23,361       70,522       71,522  
Utilities
     18,122       24,706       55,090       65,794  
Operating services
     24,918       25,955       79,775       79,080  
Direct construction costs
     7,337       11,104       15,347       34,087  
General and administrative
     9,818       10,767       30,551       33,099  
Depreciation and amortization
     51,830       49,242       149,818       144,550  
Total expenses
     135,582       145,135       401,103       428,132  
Operating income
     58,035       59,228       168,518       163,737  
                                 
OTHER (EXPENSE) INCOME
                                
Interest expense
     (36,048 )     (31,163 )     (102,350 )     (94,963 )
Interest and other investment income
     167       257       551       1,115  
Equity in earnings (loss) of unconsolidated joint ventures
     635       (269 )     (6,401 )     (533 )
Gain on reduction of other obligations
     --       --       1,693       --  
Gain on sale of investment in marketable securities
     --       --       --       471  
Total other (expense) income
     (35,246 )     (31,175 )     (106,507 )     (93,910 )
Income from continuing operations
     22,789       28,053       62,011       69,827  
Net income
     22,789       28,053       62,011       69,827  
Noncontrolling interest in consolidated joint ventures
     213       147       980       286  
Noncontrolling interest in Operating Partnership
     (3,415 )     (5,131 )     (9,929 )     (12,751 )
Preferred stock dividends
     (500 )     (500 )     (1,500 )     (1,500 )
Net income available to common shareholders
   $ 19,087     $ 22,569     $ 51,562     $ 55,862  
                                 
Basic earnings per common share:
                                
Income from continuing operations available to
                                
common shareholders
   $ 0.24     $ 0.34     $ 0.71     $ 0.85  
Net income available to common shareholders
   $ 0.24     $ 0.34     $ 0.71     $ 0.85  
                                 
Diluted earnings per common share:
                                
Income from continuing operations available to
                                
common shareholders
   $ 0.24     $ 0.34     $ 0.71     $ 0.85  
Net income available to common shareholders
   $ 0.24     $ 0.34     $ 0.71     $ 0.85  
                                 
Dividends declared per common share
   $ 0.45     $ 0.64     $ 1.35     $ 1.92  
                                 
Basic weighted average shares outstanding
     78,151       65,519       72,889       65,438  
                                 
Diluted weighted average shares outstanding
     92,245       80,617       87,106       80,573  
                                 
                                 
The accompanying notes are an integral part of these consolidated financial statements.
  

 
5
 

MACK-CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (in thousands) (unaudited)



             
     
Additional
Dividends in
Noncontrolling
  
 
Preferred Stock
Common Stock
Paid-In
Excess of
Interests
Total
 
Shares
Amount
Shares
Par Value
Capital
Net Earnings
in Subsidiaries
Equity
Balance at January 1, 2009
10
$25,000
66,419
$664
$1,905,386
$(386,587)
$414,900
$1,959,363
Net income
--
--
--
--
--
53,062
8,949
62,011
Preferred stock dividends
--
--
--
--
--
(1,500)
--
(1,500)
Common stock dividends
--
--
--
--
--
(100,492)
--
(100,492)
Common unit distributions
--
--
--
--
--
--
(19,027)
(19,027)
Common Stock offering
--
--
11,500
115
274,711
--
--
274,826
Increase in noncontrolling
                
  interests
--
--
--
--
--
--
3,237
3,237
Redemption of common units
                
  for common stock
--
--
616
6
16,498
--
(16,504)
--
Shares issued under Dividend
                
  Reinvestment and Stock
                
  Purchase Plan
--
--
7
--
152
--
--
152
Stock Options Exercised
--
--
16
--
421
--
--
421
Directors Deferred comp. plan
--
--
--
--
303
--
--
303
Stock Compensation
--
--
--
--
1,700
--
--
1,700
Cancellation of
                
  Restricted stock
--
--
(3)
--
(149)
--
--
(149)
Rebalancing of ownership
                
  percent between
                
  parent and subsidiary
--
--
--
--
66,401
--
(66,401)
--
Balance at September 30, 2009
10
$25,000
78,555
$785
$2,265,423
$(435,517)
$325,154
$2,180,845
                 

The accompanying notes are an integral part of these consolidated financial statements.





 
6
 

MACK-CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)

   
Nine Months Ended
  
   
September 30,
  
CASH FLOWS FROM OPERATING ACTIVITIES
  
2009
    
2008
  
Net income
   $ 62,011     $ 69,827  
Adjustments to reconcile net income to net cash provided by
                
operating activities:
                
Depreciation and amortization, including related intangibles
     146,177       140,154  
Amortization of stock compensation
     1,700       2,165  
Amortization of deferred financing costs and debt discount
     2,024       2,124  
Equity in (earnings) loss of unconsolidated joint ventures
     6,401       533  
Gain on reduction of other obligations
     (1,693 )     --  
Gain on sale of investment in marketable securities
     --       (471 )
Distribution of cumulative earnings from unconsolidated joint ventures
     2,637       3,841  
Changes in operating assets and liabilities:
                
Increase in unbilled rents receivable, net
     (4,487 )     (1,912 )
Increase in deferred charges and other assets, net
     (256 )     (17,339 )
Decrease in accounts receivable, net
     12,670       16,975  
Increase (decrease) in accounts payable, accrued expenses and other liabilities
     2,219       (12,988 )
(Decrease) increase in rents received in advance and security deposits
     (1,628 )     1,397  
Decrease in accrued interest payable
     (11,209 )     (15,615 )
                 
Net cash provided by operating activities
   $ 216,566     $ 188,691  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
                
Additions to rental property and related intangibles
     (57,308 )     (68,420 )
Repayments of notes receivable
     11,441       125  
Investment in unconsolidated joint ventures
     (4,465 )     (6,584 )
Proceeds from the sale of available for sale securities
     --       5,355  
Distribution in excess of cumulative earnings from unconsolidated joint ventures
     518       3,274  
(Increase) decrease in restricted cash
     (8,001 )     1,424  
                 
Net cash used in investing activities
   $ (57,815 )   $ (64,826 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
                
Borrowings from revolving credit facility
     337,000       630,100  
Repayment of revolving credit facility
     (498,000 )     (587,100 )
Proceeds from mortgages
     81,500       --  
Borrowings from Money Market Loans
     --       352,000  
Repayments of Money Market Loans
     --       (352,000 )
Repayment of mortgages, loans payable and other obligations
     (9,619 )     (24,570 )
Proceeds from senior unsecured notes
     246,238       --  
Repayments of senior unsecured notes
     (199,724 )     --  
Payment of financing costs
     (2,660 )     (79 )
Repurchase of common stock
     --       (5,198 )
Proceeds from offering of Common Stock
     274,826       --  
Proceeds from stock options exercised
     421       2,311  
Payment of dividends and distributions
     (131,198 )     (156,365 )
                 
Net cash provided by (used) in financing activities
   $ 98,784     $ (140,901 )
                 
Net increase (decrease) in cash and cash equivalents
   $ 257,535     $ (17,036 )
Cash and cash equivalents, beginning of period
   $ 21,621     $ 24,716  
                 
Cash and cash equivalents, end of period
   $ 279,156     $ 7,680  
                 
                 
The accompanying notes are an integral part of these consolidated financial statements.
                

 
7
 

MACK-CALI REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1.  
ORGANIZATION AND BASIS OF PRESENTATION

ORGANIZATION
Mack-Cali Realty Corporation, a Maryland corporation, together with its subsidiaries (collectively, the “Company”), is a fully-integrated, self-administered, self-managed real estate investment trust (“REIT”) providing leasing, management, acquisition, development, construction and tenant-related services for its properties and third-parties.  As of September 30, 2009, the Company owned or had interests in 288 properties plus developable land (collectively, the “Properties”).  The Properties aggregate approximately 33.1 million square feet, which are comprised of 276 buildings, primarily office and office/flex buildings, totaling approximately 32.7 million square feet (which include 19 buildings, primarily office buildings, aggregating approximately 2.1 million square feet owned by unconsolidated joint ventures in which the Company has investment interests), six industrial/warehouse buildings totaling approximately 387,400 square feet, two retail properties totaling approximately 17,300 square feet, a hotel (which is owned by an unconsolidated joint venture in which the Company has an investment interest) and three parcels of land leased to others.  The Properties are located in five states in the Northeast, plus the District of Columbia.

BASIS OF PRESENTATION
The accompanying consolidated financial statements include all accounts of the Company, its majority-owned and/or controlled subsidiaries, which consist principally of Mack-Cali Realty, L.P. (the “Operating Partnership”), and variable interest entities for which the Company has determined itself to be the primary beneficiary, if any.  See Note 2: Significant Accounting Policies – Investments in Unconsolidated Joint Ventures for the Company’s treatment of unconsolidated joint venture interests.  Intercompany accounts and transactions have been eliminated.

The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  The Company evaluated subsequent events through October 27, 2009, the date these financial statements were available to be issued.  Certain reclassifications have been made to prior period amounts in order to conform with current period presentation.

On July 1, 2009, the Financial Accounting Standards Board (“FASB”) issued the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, also known as FASB Accounting Standards Codification (“ASC”) 105-10, General Accepted Accounting Principles, (“ASC 105-10”).  ASC 105-10 establishes the FASB Accounting Standards Codification (“Codification”) as the single source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  The Codification supersedes all existing non-SEC accounting and reporting standards.  All other nongrandfathered, non-SEC accounting literature not included in the Codification will become nonauthoritative.  Following the Codification, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts.  Instead, it will issue Accounting Standards Updates, which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification.  GAAP was not intended to be changed as a result of the FASB’s Codification project, but it will change the way the guidance is organized and presented.  As a result, these changes will have a significant impact on how companies reference GAAP in their financial statements and in their accounting policies for financial statements issued for interim and annual periods ending after September 15, 2009.  The Company has implemented the Codification in this quarterly report by providing references to the Codification topics, as appropriate.


 
8
 


2.  
SIGNIFICANT ACCOUNTING POLICIES

Rental
Property
Rental properties are stated at cost less accumulated depreciation and amortization.  Costs directly related to the acquisition, development and construction of rental properties are capitalized.  Pursuant to the Company’s adoption of the authoritative guidance on business combinations, effective January 1, 2009, acquisition-related costs are expensed as incurred. Capitalized development and construction costs include pre-construction costs essential to the development of the property, development and construction costs, interest, property taxes, insurance, salaries and other project costs incurred during the period of development.  Included in total rental property is construction, tenant improvement and development in-progress of $105,134,000 and $143,010,000 (including land of $72,649,000 and $70,709,000) as of September 30, 2009 and December 31, 2008, respectively.  Ordinary repairs and maintenance are expensed as incurred; major replacements and betterments, which improve or extend the life of the asset, are capitalized and depreciated over their estimated useful lives.  Fully-depreciated assets are removed from the accounts.

The Company considers a construction project as substantially completed and held available for occupancy upon the completion of tenant improvements, but no later than one year from cessation of major construction activity (as distinguished from activities such as routine maintenance and cleanup).  If portions of a rental project are substantially completed and occupied by tenants, or held available for occupancy, and other portions have not yet reached that stage, the substantially completed portions are accounted for as a separate project.  The Company allocates costs incurred between the portions under construction and the portions substantially completed and held available for occupancy, and capitalizes only those costs associated with the portion under construction.

Properties are depreciated using the straight-line method over the estimated useful lives of the assets.  The estimated useful lives are as follows:

Leasehold interests
Remaining lease term
Buildings and improvements
5 to 40 years
Tenant improvements
The shorter of the term of the
 
related lease or useful life
Furniture, fixtures and equipment
5 to 10 years

Upon acquisition of rental property, the Company estimates the fair value of acquired tangible assets, consisting of land, building and improvements, and identified intangible assets and liabilities assumed, generally consisting of the fair value of (i) above and below market leases, (ii) in-place leases and (iii) tenant relationships.  The Company allocates the purchase price to the assets acquired and liabilities assumed based on their fair values.  The Company records goodwill or a gain on bargain purchase (if any) if the net assets acquired/liabilities assumed exceed the purchase consideration of a transaction.  In estimating the fair value of the tangible and intangible assets acquired, the Company considers information obtained about each property as a result of its due diligence and marketing and leasing activities, and utilizes various valuation methods, such as estimated cash flow projections utilizing appropriate discount and capitalization rates, estimates of replacement costs net of depreciation, and available market information.  The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant.

Above-market and below-market lease values for acquired properties are recorded based on the present value, (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases. The capitalized above-market lease values are amortized as a reduction of base rental revenue over the remaining term of the respective leases, and the capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any below-market fixed rate renewal options of the respective leases.
 
 
9
 

 
Other intangible assets acquired include amounts for in-place lease values and tenant relationship values, which are based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with the respective tenant.  Factors to be considered by management in its analysis of in-place lease values include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases.  In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions.  In estimating costs to execute similar leases, management considers leasing commissions, legal and other related expenses.  Characteristics considered by management in valuing tenant relationships include the nature and extent of the Company’s existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals.  The value of in-place leases are amortized to expense over the remaining initial terms of the respective leases.  The value of tenant relationship intangibles are amortized to expense over the anticipated life of the relationships.

On a periodic basis, management assesses whether there are any indicators that the value of the Company’s real estate properties held for use may be impaired.  A property’s value is impaired only if management’s estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property is less than the carrying value of the property.  To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the property over the fair value of the property.  The Company’s estimates of aggregate future cash flows expected to be generated by each property are based on a number of assumptions that are subject to economic and market uncertainties including, among others, demand for space, competition for tenants, changes in market rental rates, and costs to operate each property.  As these factors are difficult to predict and are subject to future events that may alter management’s assumptions, the future cash flows estimated by management in its impairment analyses may not be achieved.

Rental Property
 
Held for Sale and
 
Discontinued
 
Operations
When assets are identified by management as held for sale, the Company discontinues depreciating the assets and estimates the sales price, net of selling costs, of such assets.  If, in management’s opinion, the estimated net sales price of the assets which have been identified as held for sale is less than the net book value of the assets, a valuation allowance is established.  Properties identified as held for sale and/or sold are presented in discontinued operations for all periods presented.

If circumstances arise that previously were considered unlikely and, as a result, the Company decides not to sell a property previously classified as held for sale, the property is reclassified as held and used.  A property that is reclassified is measured and recorded individually at the lower of (a) its carrying amount before the property was classified as held for sale, adjusted for any depreciation (amortization) expense that would have been recognized had the property been continuously classified as held and used, or (b) the fair value at the date of the subsequent decision not to sell.

Investments in
Unconsolidated
Joint Ventures
The Company accounts for its investments in unconsolidated joint ventures under the equity method of accounting.  The Company applies the equity method by initially recording these investments at cost, as Investments in Unconsolidated Joint Ventures, subsequently adjusted for equity in earnings and cash contributions and distributions.
 
 
 
10

 
 
The authoritative guidance on consolidation provides guidance on the identification of entities for which control is achieved through means other than voting rights (“variable interest entities” or “VIEs”) and the determination of which business enterprise, if any, should consolidate the VIE (the “primary beneficiary”).  Generally, the consideration of whether an entity is a VIE applies when either (1) the equity investors (if any) lack one or more of the essential characteristics of a controlling financial interest, (2) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support or (3) the equity investors have voting rights that are not proportionate to their economic interests and the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest.

On a periodic basis, management assesses whether there are any indicators that the value of the Company’s investments in unconsolidated joint ventures may be impaired.  An investment is impaired only if management’s estimate of the value of the investment is less than the carrying value of the investment, and such decline in value is deemed to be other than temporary.  To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the investment over the value of the investment.  The Company’s estimates of value for each investment (particularly in commercial real estate joint ventures) are based on a number of assumptions that are subject to economic and market uncertainties including, among others, demand for space, competition for tenants, changes in market rental rates, and operating costs.  As these factors are difficult to predict and are subject to future events that may alter management’s assumptions, the values estimated by management in its impairment analyses may not be realized.  See Note 4: Investments in Unconsolidated Joint Ventures.

Cash and Cash
 
Equivalents
All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents.

Marketable
 
Securities
The Company classifies its marketable securities (if any) among three categories: held-to-maturity, trading and available-for-sale.  Unrealized holding gains and losses relating to available-for-sale securities are excluded from earnings and reported as other comprehensive income (loss) in equity until realized.  A decline in the market value of any marketable security below cost that is deemed to be other than temporary results in a reduction in the carrying amount to fair value.  Any impairment would be charged to earnings and a new cost basis for the security established.

The fair value of the marketable securities was determined using level I inputs under the authoritative guidance for fair value measurements.  Level I inputs represent quoted prices available in an active market for identical investments as of the reporting date.

The Company received approximately $65,000 in dividend income from its holdings in marketable securities during the nine months ended September 30, 2008.  The Company disposed of its marketable securities in April 2008 for aggregate net proceeds of approximately $5.4 million and realized a gain of $471,000.

Deferred
Financing Costs
Costs incurred in obtaining financing are capitalized and amortized on a straight-line basis, which approximates the effective interest method, over the term of the related indebtedness.  Amortization of such costs is included in interest expense and was $681,000 and $708,000 for the three months ended September 30, 2009 and 2008, respectively, and $2,024,000 and $2,124,000 for the nine months ended Sept 30, 2009 and 2008, respectively.

 
11
 

Deferred
 
Leasing Costs
Costs incurred in connection with leases are capitalized and amortized on a straight-line basis over the terms of the related leases and included in depreciation and amortization.  Unamortized deferred leasing costs are charged to amortization expense upon early termination of the lease.  Certain employees of the Company are compensated for providing leasing services to the Properties.  The portion of such compensation, which is capitalized and amortized, approximated $939,000 and $895,000 for the three months ended September 30, 2009 and 2008, respectively, and $2,739,000 and $2,549,000 for the nine months ended September 30, 2009 and 2008, respectively.

Derivative
Instruments
The Company measures derivative instruments (if any), including certain derivative instruments embedded in other contracts, at fair value and records them as an asset or liability, depending on the Company’s rights or obligations under the applicable derivative contract.  For derivatives designated and qualifying as fair value hedges, the changes in the fair value of both the derivative instrument and the hedged item are recorded in earnings.  For derivatives designated as cash flow hedges, the effective portions of the derivative are reported in other comprehensive income (“OCI”) and are subsequently reclassified into earnings when the hedged item affects earnings.  Changes in fair value of derivative instruments not designated as hedging and ineffective portions of hedges are recognized in earnings in the affected period.

Revenue
Recognition
Base rental revenue is recognized on a straight-line basis over the terms of the respective leases.  Unbilled rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with the lease agreements.  Above-market and below-market lease values for acquired properties are recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed-rate renewal options for below-market leases.  The capitalized above-market lease values for acquired properties are amortized as a reduction of base rental revenue over the remaining term of the respective leases, and the capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any below-market fixed-rate renewal options of the respective leases.  Escalations and recoveries from tenants are received from tenants for certain costs as provided in the lease agreements.  These costs generally include real estate taxes, utilities, insurance, common area maintenance and other recoverable costs.  See Note 11: Tenant Leases.  Construction services revenue includes fees earned and reimbursements received by the Company for providing construction management and general contractor services to clients.  Construction services revenue is recognized on the percentage of completion method.  Using this method, profits are recorded on the basis of estimates of the overall profit and percentage of completion of individual contracts.  A portion of the estimated profits is accrued based upon estimates of the percentage of completion of the construction contract.  This revenue recognition method involves inherent risks relating to profit and cost estimates.  Real estate services revenue includes property management, facilities management, leasing commission fees and other services, and payroll and related costs reimbursed from clients.  Other income includes income from parking spaces leased to tenants, income from tenants for additional services arranged for by the Company and income from tenants for early lease terminations.

Allowance for
Doubtful Accounts
Management periodically performs a detailed review of amounts due from tenants and clients to determine if accounts receivable balances are impaired based on factors affecting the collectibility of those balances.  Management’s estimate of the allowance for doubtful accounts requires management to exercise significant judgment about the timing, frequency and severity of collection losses, which affects the allowance and net income.
 
 
12
 

 
Income and
Other Taxes
The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”).  As a REIT, the Company generally will not be subject to corporate federal income tax (including alternative minimum tax) on net income that it currently distributes to its shareholders, provided that the Company satisfies certain organizational and operational requirements including the requirement to distribute at least 90 percent of its REIT taxable income to its shareholders.  The Company has elected to treat certain of its corporate subsidiaries as taxable REIT subsidiaries (each a “TRS”).  In general, a TRS of the Company may perform additional services for tenants of the Company and generally may engage in any real estate or non-real estate related business (except for the operation or management of health care facilities or lodging facilities or the providing to any person, under a franchise, license or otherwise, rights to any brand name under which any lodging facility or health care facility is operated).  A TRS is subject to corporate federal income tax.  If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate tax rates.  The Company is subject to certain state and local taxes.

The Company adopted the amended provisions of the authoritative guidance on income taxes on January 1, 2007.  As a result of the implementation of the guidance, the Company recognized no material adjustments regarding its tax accounting treatment.  The Company expects to recognize interest and penalties related to uncertain tax positions, if any, as income tax expense, which is included in general and administrative expense.

Earnings
 
Per Share
The Company presents both basic and diluted earnings per share (“EPS”).  Basic EPS excludes dilution and is computed by dividing net income available to common shareholders by the weighted average number of shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, where such exercise or conversion would result in a lower EPS amount.

Dividends and
 
Distributions
Payable
The dividends and distributions payable at September 30, 2009 represents dividends payable to preferred shareholders (10,000 shares) and common shareholders (78,555,358 shares), and distributions payable to noncontrolling interest common unitholders of the Operating Partnership (13,821,755 common units) for all such holders of record as of October 5, 2009 with respect to the third quarter 2009.  The third quarter 2009 preferred stock dividends of $50.00 per share, common stock dividends and common unit distributions of $0.45 per common share and unit were approved by the Board of Directors on September 16, 2009.  The common stock dividends and common unit distributions payable were paid on October 9, 2009.  The preferred stock dividends payable were paid on October 15, 2009.

The dividends and distributions payable at December 31, 2008 represents dividends payable to preferred shareholders (10,000 shares) and common shareholders (66,419,764 shares), and distributions payable to noncontrolling interest common unitholders of the Operating Partnership (14,437,731 common units) for all such holders of record as of January 6, 2009 with respect to the fourth quarter 2008.  The fourth quarter 2008 preferred stock dividends of $50.00 per share, common stock dividends and common unit distributions of $0.64 per common share and unit were approved by the Board of Directors on December 9, 2008.  The common stock dividends and common unit distributions payable were paid on January 12, 2009.  The preferred stock dividends payable were paid on January 15, 2009.

 
13
 

Costs Incurred For
Stock Issuances
Costs incurred in connection with the Company’s stock issuances are reflected as a reduction of additional paid-in capital.

Stock
 
Compensation
The Company accounts for stock options and restricted stock awards granted prior to 2002 using the intrinsic value method prescribed in the previously existing accounting guidance on accounting for stock issued to employees.  Under this guidance, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company’s stock at the date of grant over the exercise price of the option granted.  Compensation cost for stock options is recognized ratably over the vesting period.  The Company’s policy is to grant options with an exercise price equal to the quoted closing market price of the Company’s stock on the business day preceding the grant date.  Accordingly, no compensation cost has been recognized under the Company’s stock option plans for the granting of stock options made prior to 2002.  Restricted stock awards granted prior to 2002 are valued at the vesting dates of such awards with compensation cost for such awards recognized ratably over the vesting period.

In 2002, the Company adopted the provisions of the authoritative guidance on compensation-stock compensation.  In 2006, the Company adopted the amended authoritative guidance, which did not have a material effect on the Company’s financial position and results of operations.  These provisions require that the estimated fair value of restricted stock (“Restricted Stock Awards”) and stock options at the grant date be amortized ratably into expense over the appropriate vesting period.  The Company recorded stock expense of $517,000 and $715,000 for the three months ended September 30, 2009 and 2008, respectively, and $1,551,000 and $2,135,000 for the nine months ended September 30, 2009 and 2008, respectively.

Other
 
Comprehensive
 
Income
Other comprehensive income (loss) includes items that are recorded in equity, such as unrealized holding gains or losses on marketable securities available for sale.


  3.
REAL ESTATE TRANSACTIONS

On March 1, 2009, the Company placed in service a 249,409 square-foot, class A office building, which is fully leased for 15 years.  The building is located in the Mack-Cali Business Campus in Parsippany, New Jersey.

On April 29, 2009, the Company acquired SL Green’s interests in the Mack-Green-Gale LLC (“Mack-Green”) and 55 Corporate Partners, LLC (“55 Corporate”) joint ventures (the “SL Green Transactions”) for $5 million.  As a result, the Company owns 100 percent of Mack-Green and 55 Corporate. Concurrent with the SL Green Transactions, the loan agreement with an affiliate of Gramercy Capital Corporation (“Gramercy”) on six office properties indirectly owned by Mack-Green was restructured providing Gramercy with the power to control the activities that are most important to the properties’ economic performance.  At the time of the restructuring, the estimated fair value of the six properties was less than the aggregate carrying amount of the non-recourse mortgage loans.

As a result of the SL Green Transactions and the agreement with Gramercy, as of April 29, 2009, the Company began consolidating 11 office properties, aggregating approximately 1.5 million square feet, owned and controlled by Mack-Green, and a pre-leased 205,000 square foot office development project owned and controlled by 55 Corporate.  The Company also has retained a non-controlling interest in entities that own 100 percent of six office properties, aggregating 786,198 square feet, which were previously indirectly owned by Mack-Green. The consolidated properties’ aggregate acquisition amounts were allocated as follows:  $43.0 million to land and leasehold interests, $150.1 million to buildings and improvements, $14.3 million to tenant improvements, $43.7 million to deferred lease costs and other lease intangibles, net, $13.1 million to other assets acquired (including cash and accounts receivable) and $156.8 million to liabilities (including mortgage debt with a fair market value of approximately $151.1 million), as well as an allocation to noncontrolling interests in consolidated joint ventures of $3.2 million.  There was no contingent consideration associated with the acquisition.   See “Mack-Green-Gale LLC” and “55 Corporate Partners, LLC” under Note 4: Investments in Unconsolidated Joint Ventures for further discussion on the transactions.
 
 
 
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The Company has not yet obtained all of the information necessary to finalize its estimates to complete the purchase price allocations related to the SL Green Transactions. The purchase price allocations will be finalized once the information identified by the Company has been received, which should not be longer than one year from the closing date.


4.  
INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES

The debt of the Company’s unconsolidated joint ventures generally is non-recourse to the Company, except for customary exceptions pertaining to such matters as intentional misuse of funds, environmental conditions and material misrepresentations, and except as otherwise indicated below.

PLAZA VIII AND IX ASSOCIATES, L.L.C.
Plaza VIII and IX Associates, L.L.C. is a joint venture between the Company and Columbia Development Company, L.L.C. (“Columbia”).  The venture was formed to acquire land for future development, located on the Hudson River waterfront in Jersey City, New Jersey, adjacent to the Company’s Harborside Financial Center office complex.  The Company and Columbia each hold a 50 percent interest in the venture.  Among other things, the partnership agreement provides for a preferred return on the Company’s invested capital in the venture, in addition to the Company’s proportionate share of the venture’s profit, as defined in the agreement.  The venture owns undeveloped land currently used as a parking facility.

RAMLAND REALTY ASSOCIATES L.L.C. (One Ramland Road)
On August 20, 1998, the Company entered into a 50/50 joint venture with S.B. New York Realty Corp. to form Ramland Realty Associates L.L.C.  The venture was formed to own, manage and operate One Ramland Road, a 232,000 square foot office/flex building and adjacent developable land, located in Orangeburg, New York.  In August 1999, the joint venture completed redevelopment of the property and placed the office/flex building in service.  The venture recorded an impairment loss of approximately $4.3 million on its rental property as of December 31, 2007.  On December 31, 2008, the venture transferred the deed to the lender in satisfaction of its obligations, including its mortgage with a balance of $14.7 million.  The venture recorded a gain on the disposal of its office property of $7.5 million.

The Company performed management, leasing and other services for the property when owned by the joint venture and recognized $10,000 in fees for such services for the three months ended September 30, 2008 and $42,000 for the nine months ended September 30, 2008.

SOUTH PIER AT HARBORSIDE – HOTEL DEVELOPMENT
On November 17, 1999, the Company entered into a joint venture with Hyatt Corporation (“Hyatt”) to develop a 350-room hotel on the South Pier at Harborside Financial Center, Jersey City, New Jersey, which was completed and commenced initial operations in July 2002.  The Company owns a 50 percent interest in the venture.

The venture has a mortgage loan with a balance as of September 30, 2009 of $67.5 million collateralized by the hotel property.  The loan carries an interest rate of 6.15 percent and matures in November 2016.  The venture has a loan with a balance as of September 30, 2009 of $6.3 million with the City of Jersey City, provided by the U.S. Department of Housing and Urban Development.  The loan currently bears interest at fixed rates ranging from 6.09 percent to 6.62 percent and matures in August 2020.  The Company has posted a $6.3 million letter of credit in support of this loan, $3.2 million of which is indemnified by Hyatt.

RED BANK CORPORATE PLAZA L.L.C./RED BANK CORPORATE PLAZA II, L.L.C.
On March 23, 2006, the Company entered into a joint venture with The PRC Group (“PRC”) to form Red Bank Corporate Plaza L.L.C.  The venture was formed to develop Red Bank Corporate Plaza, a 92,878 square foot office building located in Red Bank, New Jersey.  The property is fully leased to Hovnanian Enterprises, Inc. through September 30, 2017.  The Company holds a 50 percent interest in the venture.  PRC contributed the vacant land for the development of the office building as its initial capital in the venture.  The Company funded the costs of development up to the value of the land contributed by PRC of $3.5 million as its initial capital.
 
 
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On October 20, 2006, the venture entered into a $22.0 million construction loan with a commercial bank collateralized by the land and development project.  The loan (with a balance as of September 30, 2009 of $20.8 million), carried an interest rate of LIBOR plus 130 basis points through March 2008.  In April 2008, the interest rate was reduced to LIBOR plus 125 basis points and the maturity was extended to April 2010.  The loan currently has a one-year extension option subject to certain conditions, which requires payment of a fee.

In September 2007, the joint venture completed development of the property and placed the office building in service.  The Company performs management, leasing and other services for the property owned by the joint venture and recognized $25,100 and $30,500 in fees for such services during the three months ended September 30, 2009 and 2008, respectively and $73,000 and $82,000 for the nine months ended September 30, 2009 and 2008, respectively.

On July 20, 2006, the Company entered into a second joint venture agreement with PRC to form Red Bank Corporate Plaza II L.L.C.  The venture was formed to hold land able to accommodate an 18,561 square foot office building located in Red Bank, New Jersey.  The Company holds a 50 percent interest in the venture.  The terms of the venture are similar to Red Bank Corporate Plaza L.L.C.  PRC contributed the vacant land as its initial capital in the venture.

MACK-GREEN-GALE LLC/GRAMERCY AGREEMENT
On May 9, 2006, the Company entered into a joint venture, Mack-Green-Gale LLC (“Mack-Green”), with SL Green, pursuant to which Mack-Green held an approximate 96 percent interest in and acted as general partner of Gale SLG NJ Operating Partnership, L.P. (the “OPLP”).  The Company’s acquisition cost for its interest in Mack-Green was approximately $125 million, which was funded primarily through borrowing under the Company’s revolving credit facility.  At the time, the OPLP owned 100 percent of entities (“Property Entities”) which owned 25 office properties (the “OPLP Properties”) which aggregated 3.5 million square feet (consisting of 17 office properties aggregating 2.3 million square feet located in New Jersey and eight properties aggregating 1.2 million square feet located in Troy, Michigan).  In December 2007, the OPLP sold its eight properties located in Troy, Michigan for $83.5 million.  The venture recognized a loss of approximately $22.3 million from the sale.

As defined in the Mack-Green operating agreement, the Company shared decision-making equally with SL Green regarding:  (i) all major decisions involving the operations of Mack-Green; and (ii) overall general partner responsibilities in operating the OPLP.

The Mack-Green operating agreement generally provided for profits and losses to be allocated as follows:

 
(i)
99 percent of Mack-Green’s share of the profits and losses from 10 specific OPLP Properties allocable to the Company and one percent allocable to SL Green;
 
(ii)
one percent of Mack-Green’s share of the profits and losses from eight specific OPLP Properties and its minor interest in four office properties allocable to the Company and 99 percent allocable to SL Green; and
 
(iii)
50 percent of all other profits and losses allocable to the Company and 50 percent allocable to SL Green.

Substantially all of the OPLP Properties were encumbered by mortgage loans with an aggregate outstanding principal balance of $275.3 million at March 31, 2009.  $185.0 million of the mortgage loans bore interest at a weighted average fixed interest rate of 6.26 percent per annum and matured at various times through May 2016.

Six of the OPLP Properties (the “Portfolio Properties”) were encumbered by $90.3 million of mortgage loans which bore interest at a floating rate of LIBOR plus 275 basis points per annum and were scheduled to mature in May 2009. The floating rate mortgage loans were provided to the six entities which owned the Portfolio Properties (collectively, the “Portfolio Entities”) by Gramercy, which was a related party of SL Green.  Based on the venture’s anticipated holding period pertaining to the Portfolio Properties, the venture believed that the carrying amounts of these properties may not have been recoverable at December 31, 2008.  Accordingly, as the venture determined that its carrying value of these properties exceeded the estimated fair value, it recorded an impairment charge of approximately $32.3 million as of December 31, 2008. 
 
 
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On April 29, 2009, the Company acquired the remaining interests in Mack-Green from SL Green.  As a result, the Company owns 100 percent of Mack-Green.  Additionally, on April 29, the mortgage loans with Gramercy on the Portfolio Properties (the “Gramercy Agreement”) were modified to provide for, among other things, interest to accrue at the current rate of LIBOR plus 275 basis point per annum, with the interest pay rate capped at 3.15 percent per annum.  Under the Gramercy Agreement, the payment of debt service is subordinate to the payment of operating expenses.  Interest at the pay rate is payable only out of funds generated by the Portfolio Properties and only to the extent that the Portfolio Properties’ operating expenses have been paid, with any accrued unpaid interest above the pay rate serving to increase the balance of the amounts due at the termination of the agreement.  Any excess funds after payment of debt service generally will be escrowed and available for future capital and leasing costs, as well as to cover future cash flow shortfalls, as appropriate.  The Gramercy Agreement has a term of two years and terminates on May 9, 2011.  Approximately six months in advance of the end of the term of the Gramercy Agreement, the Portfolio Entities are to provide estimates of each property’s fair market value (“FMV”).  Gramercy has the right to accept or reject the FMV.  If Gramercy rejects the FMV, Gramercy must market the property for sale in cooperation with the Portfolio Entities and must approve the ultimate sale.  However, Gramercy has no obligation to market a Portfolio Property if the FMV is less than the allocated amount due, including accrued, unpaid interest. If any Portfolio Property is not sold, the Portfolio Entities have agreed to give a deed in lieu of foreclosure, unless the FMV was equal to or greater than the allocated amount due for such Portfolio Property, in which case they can elect to have that Portfolio Property released by paying the FMV.  If Gramercy accepts the FMV, the Portfolio Property will be released from the Gramercy Agreement upon payment of the FMV.

The Company continues to perform management, leasing, and construction services for the Portfolio Properties at market terms.  The Portfolio Entities have a participation interest which provides for sharing 50 percent of any amount realized in excess of the allocated amounts due for each Portfolio Property.

As the Company acquired SL Green’s interests in Mack-Green, the Company owns 100 percent of Mack-Green and is consolidating Mack-Green as of the closing date.  Mack-Green, in turn, has been and will continue consolidating the OPLP as Mack-Green’s approximate 96 percent, general partner ownership interest in the OPLP remained unchanged as of the closing date.  Additionally, as of the closing date, the OPLP continues to consolidate its Property Entities which own 11 office properties aggregating 1.5 million square feet as its 100-percent ownership and rights regarding these entities were unchanged in the transaction.  The OPLP will not be consolidating the Portfolio Entities that own six office properties, aggregating 786,198 square feet, as the Gramercy Agreement is considered a reconsideration event under the provisions of the authoritative guidance on consolidation and accordingly, the Portfolio Entities were deemed to be variable interest entities for which the OPLP was not considered the primary beneficiary based on the Gramercy Agreement as described above.  As a result of the SLG Transactions, the Company has an unconsolidated joint venture interest in the Portfolio Properties.

In connection with these transactions, at the closing date, the Company also acquired the remaining 50 percent interest in 55 Corporate Partners L.L.C. from an affiliate of SL Green (see “55 Corporate Partners, LLC” below).

The Company performs management, leasing, and construction services for properties owned by the unconsolidated joint ventures and recognized $299,000 and $863,000 in income (net of $0 and $209,000 in direct costs) for such services in the three months ended September 30, 2009 and 2008, respectively, and $1.9 million and $2.8 million in income (net of $1.1 million and $1.5 million in direct costs) for the nine months ended September 30, 2009 and 2008, respectively.

GE/GALE FUNDING LLC (PFV)
The Gale agreement signed as part of the Gale/Green transactions in May 2006 provides for the Company to acquire certain ownership interests in real estate projects (the “Non-Portfolio Properties”), subject to obtaining certain third party consents and the satisfaction of various project-related and/or other conditions.  Each of the Company’s acquired interests in the Non-Portfolio Properties provide for the initial distributions of net cash flow solely to the Company, and thereafter an affiliate of Mr. Gale (“Gale Affiliate”) has participation rights (“Gale Participation Rights”) in 50 percent of the excess net cash flow remaining after the distribution to the Company of the aggregate amount equal to the sum of: (a) the Company’s capital contributions, plus (b) an internal rate of return (“IRR”) of 10 percent per annum, accruing on the date or dates of the Company’s investments.
 
 
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On May 9, 2006, as part of the Gale/Green transactions, the Company acquired from a Gale Affiliate for $1.8 million a 50 percent controlling interest in GMW Village Associates, LLC (“GMW Village”).  GMW Village holds a 20 percent interest in GE/Gale Funding LLC (“GE Gale”).  GE Gale owns a 100 percent interest in the entity owning Princeton Forrestal Village, a mixed-use, office/retail complex aggregating 527,015 square feet and located in Plainsboro, New Jersey (“Princeton Forrestal Village” or “PFV”).

In addition to the cash consideration paid to acquire the interest, the Company provided a Gale affiliate with the Gale Participation Rights.

The operating agreement of GE Gale, which is owned 80 percent by GEBAM, Inc., provides for, among other things, distributions of net cash flow, initially, in proportion to each member’s interest and subject to adjustment upon achievement of certain financial goals, as defined in the operating agreement.

GE Gale has a mortgage loan with a balance of $51.6 million at September 30, 2009.  The loan bears interest at a rate of LIBOR plus 275 basis points and matures on January 9, 2010, with an extension option, subject to certain conditions, through January 9, 2011.

The Company performs management, leasing, and other services for PFV and recognized $236,000 and $217,300 in income (net of $0 and $31,700 in direct costs) for such services in the three months ended September 30, 2009 and 2008, respectively and $758,000 and $655,000 in income (net of $0 and $288,000 in direct costs) for the nine months ended September 30, 2009 and 2008, respectively.

ROUTE 93 MASTER LLC (“Route 93 Participant”)/ROUTE 93 BEDFORD MASTER LLC (with the Route 93 Participant, collectively, the “Route 93 Venture”)
On June 1, 2006, the Route 93 Venture was formed between the Route 93 Participant, a majority-owned subsidiary of the Company, having a 30 percent interest and the Commingled Pension Trust Fund (Special Situation Property) of JPMorgan Chase Bank having a 70 percent interest, for the purpose of acquiring seven office buildings, aggregating 666,697 square feet, located in the towns of Andover, Bedford and Billerica, Massachusetts.  Profits and losses are shared by the partners in proportion to their respective interests until the investment yields an 11 percent IRR, then sharing will shift to 40/60, and when the IRR reaches 15 percent, then sharing will shift to 50/50.

The Route 93 Participant is a joint venture between the Company and a Gale affiliate.  Profits and losses are shared by the partners under this venture in proportion to their respective interests (83.3/16.7) until the investment yields an 11 percent IRR, then sharing will shift to 50/50.

On March 31, 2009, on account of the recent deterioration in the commercial real estate markets in the Boston area, the Company wrote off its investment in the venture and recorded an impairment charge in equity in earnings (loss) of $4.0 million (of which $0.6 million was attributable to noncontrolling interest in consolidated joint ventures) during the period.

The Route 93 Ventures had a mortgage loan with a $44.2 million balance at September 1, 2009 collateralized by its office properties.  The loan bore interest at a rate of LIBOR plus 220 basis points and was scheduled to mature on July 11, 2009.  On September 2, 2009, the venture transferred the deeds to the lender in satisfaction of its obligations.

Through September 30, 2008, the Company had performed services for Route 93 Master LLC and Route 93 Bedford Master LLC and recognized $12,500 in fees for such services for the three months ended September 30, 2008 and $45,000 for the nine months ended September 30, 2008.

GALE KIMBALL, L.L.C.
On June 15, 2006, the Company entered into a joint venture with a Gale Affiliate to form M-C Kimball, LLC (“M-C Kimball”).  M-C Kimball was formed for the sole purpose of acquiring a Gale Affiliate’s 33.33 percent membership interest in Gale Kimball, L.L.C. (“Gale Kimball”), an entity holding a 25 percent interest in 100 Kimball Drive LLC (“100 Kimball”), which developed and placed in service a 175,000 square foot office property that is leased to a single tenant, located at 100 Kimball Drive, Parsippany, New Jersey (the “Kimball Property”).

 
18
 

The operating agreement of M-C Kimball provides, among other things, for the Gale Participation Rights (of which Mark Yeager, an Executive Vice President of the Company, has a direct 26 percent interest).

Gale Kimball is owned 33.33 percent by M-C Kimball and 66.67 percent by the Hampshire Generational Fund, L.L.C. (“Hampshire”).  The operating agreement of Gale Kimball provides, among other things, for the distribution of net cash flow, initially, in accordance with its members’ respective membership interests and, upon achievement of certain financial conditions, 50 percent to each of the Company and Hampshire.

100 Kimball is owned 25 percent by Gale Kimball and 75 percent by 100 Kimball Drive Realty Member LLC, an affiliate of JPMorgan (“JPM”). The operating agreement of 100 Kimball provides, among other things, for the distributions to be made in the following order:

(i)  
first, to JPM, such that JPM is provided with an annual 12 percent compound preferred return on Preferred Equity Capital Contributions (as such term is defined in the operating agreement of 100 Kimball and largely comprised of development and construction costs);
(ii)  
second, to JPM, as return of Preferred Equity Capital Contributions until complete repayment of such Preferred Equity Capital Contributions;
(iii)  
third, to each of JPM and Gale Kimball in proportion to their respective membership interests until each member is provided, as a result of such distributions, with an annual twelve percent compound return on the Member’s Capital Contributions (as defined in the operating agreement of 100 Kimball, and excluding Preferred Equity Capital Contributions, if any); and
(iv)  
fourth, 50 percent to each of JPM and Gale Kimball.

On September 21, 2007, 100 Kimball obtained a $47 million mortgage loan which bears interest at a rate of 5.95 percent and matures in September 2012.

The Company performs management, leasing, and other services for the property owned by 100 Kimball for which it recognized $59,000 and $193,000 in income for the three months ended September 30, 2009 and 2008, respectively, and $181,000 and $316,800 in income (net of $0 and $1.0 million in direct costs) for the nine months ended September 30, 2009 and 2008, respectively.

55 CORPORATE PARTNERS, LLC
On June 9, 2006, the Company entered into a joint venture with a Gale Affiliate to form 55 Corporate Partners L.L.C. (“55 Corporate”).  55 Corporate was formed for the sole purpose of acquiring from a Gale Affiliate a 50 percent interest in SLG 55 Corporate Drive II LLC (“SLG 55”), an entity presently holding a 100 percent indirect condominium interest in a vacant land parcel located in Bridgewater, New Jersey, which can accommodate development of an approximately 205,000 square foot office building (the “55 Corporate Property”).  The remaining 50 percent in SLG 55 was owned by SLG Gale 55 Corporate LLC, an affiliate of SL Green Realty Corp. (“SLG Gale 55”).

In November 2007, Sanofi-Aventis U.S. Inc. (“Sanofi”), which occupied neighboring buildings, exercised its option to cause the venture to construct a building on the Property and has signed a lease thereof.  The lease has a term of fifteen years, subject to three five-year extension options.  The construction of the building, estimated to cost approximately $36 million, commenced in 2009 and is expected to be delivered to the tenant in July 2011.

The operating agreement of 55 Corporate provides, among other things, for the Gale Participation Rights (of which Mr. Yeager has a direct 26 percent interest).  If Mr. Gale receives any commission payments with respect to a Sanofi lease on the development property, Mr. Gale has agreed to pay to Mr. Yeager 26 percent of such payments.

The operating agreement of SLG 55 provided, among other things, for the distribution of the available net cash flow to each of 55 Corporate and SLG Gale 55 in proportion to their respective membership interests in SLG 55 (50 percent each).

On April 29, 2009, the Company acquired the remaining 50 percent interest in 55 Corporate from SLG Gale 55 Corporate LLC, an affiliate of SL Green.  As of the closing date, the Company owns 100 percent of and is consolidating the venture, 50 percent of which remains subject to the Gale Participation Rights.  In connection with this transaction, the Company also acquired the remaining interest in Mack-Green from an affiliate of SLG Gale 55 Corporate LLC.
 
 
19
 

 
12 VREELAND ASSOCIATES, L.L.C.
On September 8, 2006, the Company entered into a joint venture with a Gale Affiliate to form M-C Vreeland, LLC (“M-C Vreeland”).  M-C Vreeland was formed for the sole purpose of acquiring a Gale Affiliate’s 50 percent membership interest in 12 Vreeland Associates, L.L.C., an entity owning an office property located at 12 Vreeland Road, Florham Park, New Jersey.

The operating agreement of M-C Vreeland provides, among other things, for the Gale Participation Rights (of which Mr. Yeager has a direct 15 percent interest).

The office property at 12 Vreeland is a 139,750 square foot office building that is fully leased to a single tenant through June 15, 2012.  The property is subject to a mortgage loan, which matures on July 1, 2012, and bears interest at 6.9 percent per annum.  As of September 30, 2009 the outstanding balance on the mortgage note was $5.6 million.

Under the operating agreement of 12 Vreeland Associates, L.L.C., M-C Vreeland has a 50 percent interest, with S/K Florham Park Associates, L.L.C. (the managing member) and its affiliate holding the other 50 percent.

BOSTON-DOWNTOWN CROSSING
On October 20, 2006, the Company formed a joint venture (the “MC/Gale JV LLC”) with Gale International/426 Washington St. LLC (“Gale/426”), which, in turn, entered into a joint venture (the “Vornado JV LLC”) with VNO 426 Washington Street JV LLC (“Vornado”), an affiliate of Vornado Realty LP, which was formed to acquire and redevelop the Filenes property located in the Downtown Crossing district of Boston, Massachusetts (the “Filenes Property”).

On January 25, 2007, (i) each of M-C/Gale JV LLC, Gale and Washington Street Realty Member LLC (“JPM”) formed a joint venture (“JPM JV LLC”), (ii) M-C/Gale JV LLC assigned its entire 50 percent ownership interest in the Vornado JV LLC to JPM JV LLC, (iii) the Limited Liability Company Agreement of Vornado JV LLC was amended to reflect, among other things, the change in the ownership structure described in subsection (ii) above, and (iv) the Limited Liability Company Agreement of MC/Gale JV LLC was amended and restated to reflect, among other things, the change in the ownership structure described in subsection (ii) above.  The Vornado JV LLC acquired the Filenes Property on January 29, 2007, for approximately $100 million.

On or about September 16, 2008, Vornado JV LLC was reorganized in contemplation of developing and converting the Filenes property into a condominium consisting of a retail unit, an office unit, a parking unit, a hotel unit and a residential unit.  Pursuant to this reorganization, (i) the Company and Gale/426 formed a new joint venture (“M-C/Gale JV II LLC”) and (ii) M-C/Gale JV II LLC and Washington Street Realty Member II LLC (“JPM II”) formed a new joint venture (“JPM JV II LLC”) to invest in a new joint venture (“Vornado JV II LLC”) with Vornado RTR DC LLC, an affiliate of Vornado Realty, LP (“Vornado II”).  Following this reorganization, Vornado JV LLC owns the interests in the retail unit and the office unit (the “Filenes Office/Retail Component”) and Vornado JV II LLC owns the interests in the parking unit, the hotel unit and the residential unit (“the “Filenes Hotel/Residential/Parking Component”).   In connection with the foregoing, (a) the Limited Liability Company Agreement of Vornado JV LLC, as amended, was amended and restated to reflect, among other things, the change in the ownership structure described above, (b) the Limited Liability Company Agreement of JPM JV LLC was amended and restated to reflect, among other things, the change in the ownership structure described above and (c) the Limited Liability Company Agreement of M-C/Gale JV LLC was amended and restated to reflect, among other things, the change in the ownership structure described above.

As a result of the foregoing transactions, (A) (i) the Filenes Office/Retail Component is owned by Vornado JV LLC, (ii) Vornado JV LLC is owned 50 percent by each of Vornado and JPM JV LLC, (iii) JPM JV LLC is owned 30 percent by M-C/Gale JV LLC, 70 percent by JPM and managed by Gale/426, which has no ownership interest in JPM JV LLC, and (iv) M-C/Gale JV LLC is owned 99.99 percent by the Company and 0.01 percent by Gale/426 and (B) (i) the Filenes Hotel/Residential/Parking Component is owned by Vornado JV II LLC, (ii) Vornado JV II LLC is owned 50 percent by each of Vornado II and JPM JV II LLC, (iii) JPM JV II LLC is owned 30 percent by M-C/Gale JV II LLC, 70 percent by JPM II and managed by Gale/426, which has no ownership interest in JPM JV II LLC, and (iv) M-C/Gale JV II LLC is owned 99.99 percent by the Company and 0.01 percent by Gale/426.  Thus, the Company holds approximately a 15 percent indirect ownership interest in each of Vornado JV LLC and Vornado JV II LLC and the Filenes Property.
 
 
 
20

 
Distributions are made (i) by Vornado JV LLC in proportion to its members’ respective ownership interests, (ii) by JPM JV LLC (a) initially, in proportion to its members’ respective ownership interests until JPM’s investment yields an 11 percent IRR, (b) thereafter, 60/40 to JPM and MC/Gale JV LLC, respectively, until JPM’s investment yields a 15 percent IRR and (c) thereafter, 50/50 to JPM and MC/Gale JV LLC, respectively, and (iii) by MC/Gale JV LLC (w) initially, in proportion to its members’ respective ownership interests until each member has received a 10 percent IRR on its investment, (x) thereafter, 65/35 to the Company and Gale/426, respectively, until the Company’s investment yields a 15 percent IRR, (y) if by the time the Company receives a 15 percent IRR on its investment, Gale/426 has not done so, 100 percent to Gale/426 until Gale/426’s investment yields a 15 percent IRR, and (z) thereafter,  50/50 to each of the Company and Gale/426.

Distributions are made (i) by Vornado JV II LLC in proportion to its members’ respective ownership interests, (ii) by JPM JV II LLC (a) initially, in proportion to its members’ respective ownership interests until JPM II’s investment yields an 11 percent IRR, (b) thereafter, 60/40 to JPM II and M-C/Gale JV II LLC, respectively, until JPM II’s investment yields a 15 percent IRR and (c) thereafter, 50/50 to JPM II and M-C/Gale JV II LLC, respectively, and (iii) by M-C/Gale JV II LLC (w) initially, in proportion to its members’ respective ownership interests until each member has received a 10 percent IRR on its investment, (x) thereafter, 65/35 to the Company and Gale/426, respectively, until the Company’s investment yields a 15 percent IRR, (y) if by the time the Company receives a 15 percent IRR on its investment, Gale/426 has not done so, 100 percent to Gale/426 until Gale/426’s investment yields a 15 percent IRR, and (z) thereafter, 50/50 to each of the Company and Gale/426.

The joint venture has suspended its plans for the development of the Filenes Property which was to include approximately 1.2 million square feet consisting of office, retail, condominium apartments, hotel and a parking garage.  The project is subject to governmental approvals.  The venture recorded an impairment charge of approximately $69.5 million on its development project as of December 31, 2008.

GALE JEFFERSON, L.L.C.
On August 22, 2007, the Company entered into a joint venture with a Gale Affiliate to form M-C Jefferson, L.L.C. (“M-C Jefferson”).  M-C Jefferson was formed for the sole purpose of acquiring a Gale Affiliate’s 33.33 percent membership interest in Gale Jefferson, L.L.C. (“Gale Jefferson”), an entity holding a 25 percent interest in One Jefferson Road LLC (‘One Jefferson”), which is developing a 100,000 square foot office property at One Jefferson Road, Parsippany, New Jersey, (“the Jefferson Property”).  The property has been fully leased to a single tenant through August 2025.

The operating agreement of M-C Jefferson provides, among other things, for the Gale Participation Rights (of which Mark Yeager, an Executive Vice President of the Company, has a direct 26 percent interest).  Gale Jefferson is owned 33.33 percent by M-C Jefferson and 66.67 percent by the Hampshire Generational Fund, L.L.C. (“Hampshire”).  The operating agreements of Gale Jefferson provides, among other things, for the distribution of net cash flow, first, in accordance with its member’s respective interests until each member is provided, as a result of such distributions, with an annual 12 percent compound return on the Member’s Capital Contributions, as defined in the operating agreement and secondly, 50 percent to each of the Company and Hampshire.

One Jefferson is owned 25 percent by Gale Jefferson and 75 percent by One Jefferson Road Realty Member LLC, an affiliate of JPMorgan (“JPM”).  The operating agreement of One Jefferson provides, among other things, for the distribution of net cash flow, first, in accordance with its members’ respective interests until each member is provided, as a result of such distributions, with an annual 12 percent compound return on the Member’s Capital Contributions, as defined in the operating agreement and secondly, 50 percent to JPM and Gale Jefferson.  One Jefferson has a construction loan in an amount not to exceed $21 million (with a balance of $13.5 million at September 30, 2009), bearing interest at a rate of LIBOR plus 160 basis points and maturing on October 24, 2010 with a one-year extension option.

The Company performs management, leasing and other services for Gale Jefferson and recognized $0 and $76,000 in income (net of $123,000 and $2.6 million in direct costs) for such services for the three months ended September 30, 2009 and 2008, respectively and $188,000 and $250,000 in income (net of $587,000 and $8.3 million in direct costs) for the nine months ended September 30, 2009 and 2008, respectively.

 
21
 

SUMMARIES OF UNCONSOLIDATED JOINT VENTURES
The following is a summary of the financial position of the unconsolidated joint ventures in which the Company had investment interests as of September 30, 2009 and December 31, 2008.  (dollars in thousands)


 
September 30, 2009
  
 
Plaza
    
Red Bank
M-G-G/
Princeton
        
Boston-
    
 
VIII & IX
Ramland
Harborside
Corporate
Gramercy
Forrestal
Route 93
Gale
55
12
Downtown
Gale
Combined
 
Associates
Realty
South Pier
Plaza I & II
Agreement
Village
Portfolio
Kimball
Corporate
Vreeland
Crossing
Jefferson
Total
Assets:
                          
Rental property, net
$   9,713
--
$ 60,339
$ 24,953
$ 72,912
$ 39,085
--
--
--
$ 14,632
--
--
$ 221,634
Other assets
857
--
14,801
4,626
9,823
21,426
--
--
--
754
$ 46,591
$ 1,838
100,716
Total assets
$ 10,570
--
$ 75,140
$ 29,579
$ 82,735
$ 60,511
--
--
--
$ 15,386
$ 46,591
$ 1,838
$ 322,350
Liabilities and
                          
 partners’/members’
                          
 capital (deficit):
                          
Mortgages, loans
                          
  payable and other
                          
  obligations
--
--
$ 73,796
$ 20,849
$ 90,288
$ 51,627
--
--
--
$  5,643
--
--
$ 242,203
Other liabilities
$      530
--
3,713
69
2,772
3,424
--
--
--
--
--
--
10,508
Partners’/members’
                          
  capital (deficit)
10,040
--
(2,369)
8,661
(10,325)
5,460
--
--
--
9,743
$ 46,591
$ 1,838
69,639
Total liabilities and
                          
  partners’/members’
                          
  capital (deficit)
$ 10,570
--
$ 75,140
$ 29,579
$ 82,735
$ 60,511
--
--
--
$ 15,386
$ 46,591
$ 1,838
$ 322,350
Company’s
                          
  investment
                          
  in unconsolidated
                          
  joint ventures, net
$   4,942
--
$        11
$   4,126
--
$  1,183
--
--
--
$  8,808
$ 13,109
$    790
$   32,969


 
December 31, 2008
  
 
Plaza
    
Red Bank
M-G-G/
Princeton
        
Boston-
    
 
VIII & IX
Ramland
Harborside
Corporate
Gramercy
Forrestal
Route 93
Gale
55
12
Downtown
Gale
Combined
 
Associates
Realty
South Pier
Plaza I & II
Agreement
Village
Portfolio
Kimball
Corporate
Vreeland
Crossing
Jefferson
Total
Assets:
                          
Rental property, net
$ 10,173
--
$ 62,469
$ 24,583
$ 326,912
 $ 41,058
$ 56,771
--
--
$ 14,598
--
  
$ 536,564
Other assets
1,008
$ 20
34,654
4,301
 45,391
21,680
 495
--
$ 17,896
789
$ 46,743
$ 1,838
174,815
Total assets
$ 11,181
$ 20
$ 97,123
$ 28,884
$ 372,303
 $ 62,738
$ 57,266
--
$ 17,896
$ 15,387
$ 46,743
$ 1,838
$ 711,379
Liabilities and
                          
 partners’/members’
                          
 capital (deficit):
                          
Mortgages, loans
                          
  payable and other
                          
  obligations
--
--
$ 74,852
$ 20,416
 $ 276,752
 $ 52,800
$ 43,541
--
--
$   7,170
--
--
$ 475,531
Other liabilities
$      531
--
21,652
 87
23,805
 4,156
985
--
--
--
--
--
51,216
Partners’/members’
                          
  capital (deficit)
10,650
$ 20
619
8,381
71,746
5,782
12,740
--
$ 17,896
8,217
$ 46,743
$ 1,838
184,632
Total liabilities and
                          
  partners’/members’
                          
  capital (deficit)
$ 11,181
$ 20
$ 97,123
$ 28,884
$ 372,303
 $ 62,738
$ 57,266
--
$ 17,896
$ 15,387
$ 46,743
$ 1,838
$ 711,379
Company’s
                          
  investment
                          
  in unconsolidated
                          
  joint ventures, net
$   5,248
--
$      254
$   3,929
$   92,110
$   1,342
$   4,024
--
$   9,068
$   8,300
$ 13,464
$    756
$ 138,495



 
22
 


The following is a summary of the results of operations of the unconsolidated joint ventures for the period in which the Company had investment interests during the three months ended September 30, 2009 and 2008:  (dollars in thousands)


 
Three Months Ended September 30, 2009
 
Plaza
    
Red Bank
M-G-G/
Princeton
        
Boston-
    
 
VIII & IX
Ramland
Harborside
Corporate
Gramercy
Forrestal
Route 93
Gale
55
12
Downtown
Gale
Combined
 
Associates
Realty
South Pier
Plaza I & II
Agreement
Village
Portfolio
Kimball
Corporate
Vreeland
Crossing
Jefferson
Total
Total revenues
$  232
--
$ 9,334
$  808
$ 3,213
$ 2,856
$  466
$   3
--
$ 594
--
--
$ 17,506
Operating and
                          
  other expenses
(52)
--
(6,112)
(230)
(1,924)
(1,976)
(516)
--
--
(12)
$ (706)
--
(11,528)
Depreciation and
                          
  amortization
(153)
--
(1,045)
(153)
(1,211)
(842)
(297)
--
--
(128)
--
--
(3,829)
Interest expense
--
--
(1,154)
(85)
(781)
(436)
(38)
--
--
(106)
--
--
(2,600)
                           
Net income
$    27
--
$ 1,023
$  340
$  (703)
$  (398)
$ (385)
$   3
--
$ 348
$ (706)
--
$    (451)
Company’s equity
                          
  in earnings (loss)
                          
  of unconsolidated
                          
  joint ventures
$    13
--
$     511
$  170
--
$    (87)
--
$ 66
--
$ 174
$ (212)
--
$     635





 
Three Months Ended September 30, 2008
 
Plaza
    
Red Bank
M-G-G/
Princeton
        
Boston-
    
 
VIII & IX
Ramland
Harborside
Corporate
Gramercy
Forrestal
Route 93
Gale
55
12
Downtown
Gale
Combined
 
Associates
Realty
South Pier
Plaza I & II
Agreement
Village
Portfolio
Kimball
Corporate
Vreeland
Crossing
Jefferson
Total
Total revenues
$ 307
$ 395
$ 11,232
$  793
$ 12,457
$ 2,719
$     773
$  409
--
$ 597
$ 1
--
$ 29,683
Operating and
                          
  other expenses
(40)
(284)
(6,670)
(210)
(5,155)
(1,889)
(852)
(146)
--
(16)
--
--
(15,262)
Depreciation and
                          
  amortization
(153)
(118)
(991)
(148)
(5,075)
(929)
(497)
(86)
--
(128)
--
--
(8,125)
Interest expense
--
(179)
(1,165)
(187)
(4,227)
(801)
(548)
(184)
--
(136)
--
--
(7,427)
                           
Net income
$ 114
$ (186)
$   2,406
$  248
$ (2,000)
$  (900)
$ (1,124)
$    (7)
--
$ 317
$ 1
--
$ (1,131)
Company’s equity
                          
  in earnings (loss)
                          
  of unconsolidated
                          
  joint ventures
$   57
--
$   1,203
$  124
$ (1,326)
$  (187)
$    (337)
$    38
--
$ 159
--
--
$    (269)


 
23
 

The following is a summary of the results of operations of the unconsolidated joint ventures for the period in which the Company had investment interests during the nine months ended September 30, 2009 and 2008:  (dollars in thousands)


 
Nine Months Ended September 30, 2009
 
Plaza
    
Red Bank
M-G-G/
Princeton
        
Boston-
    
 
VIII & IX
Ramland
Harborside
Corporate
Gramercy
Forrestal
Route 93
Gale
55
12
Downtown
Gale
Combined
 
Associates
Realty
South Pier
Plaza I & II
Agreement
Village
Portfolio
Kimball
Corporate
Vreeland
Crossing
Jefferson
Total
Total revenues
$ 619
--
$ 25,002
$ 2,421
$ 22,851
$ 9,262
$   2,153
$   38
--
$ 1,786
--
--
$  64,132
Operating and
                          
  other expenses
(146)
--
(16,921)
(688)
(10,052)
(5,149)
(2,487)
--
--
(47)
$ (9,564)
--
(45,054)
Depreciation and
                          
  amortization
(459)
--
(3,130)
(450)
(8,466)
(3,074)
(1,206)
--
--
(383)
--
--
(17,168)
Interest expense
  
--
(3,459)
(257)
(6,057)
(1,361)
(649)
--
--
(340)
--
--
(12,123)
                           
Net income
$  14
--
$  1,492
$ 1,026
$ (1,724)
$  (322)
$ (2,189)
$   38
--
$ 1,016
$ (9,564)
--
$ (10,213)
Company’s equity
                          
  in earnings (loss)
                          
  of unconsolidated
                          
  joint ventures
$    7
--
$  2,008
$    513
$    (916)
$  (159)
$ (4,354)
$ 107
--
$    508
$ (4,115)
--
$   (6,401)





 
Nine Months Ended September 30, 2008
 
Plaza
    
Red Bank
M-G-G/
Princeton
        
Boston-
    
 
VIII & IX
Ramland
Harborside
Corporate
Gramercy
Forrestal
Route 93
Gale
55
12
Downtown
Gale
Combined
 
Associates
Realty
South Pier
Plaza I & II
Agreement
Village
Portfolio
Kimball
Corporate
Vreeland
Crossing
Jefferson
Total
Total revenues
$ 843
$ 1,339
$ 32,579
$ 2,396
$ 37,285
$  8,862
$  2,100
$ 1,214
--
$1,589
$ 51
$ 1
$  88,259
Operating and
                          
  other expenses
(137)
(881)
(19,115)
(596)
(15,427)
(4,881)
(2,551)
(388)
--
(58)
--
(1)
(44,035)
Depreciation and
                          
  amortization
(461)
(363)
(3,919)
(445)
(14,529)
(2,683)
(1,288)
(253)
--
(383)
--
--
(24,324)
Interest expense
--
(590)
(3,525)
(602)
(13,162)
(2,604)
(1,899)
(518)
--
(380)
--
--
(23,280)
                           
Net income
$ 245
$ (495)
$   6,020
$    753
$ (5,833)
$ (1,306)
$ (3,638)
$     55
--
$ 768
$ 51
--
$  (3,380)
Company’s equity
                          
  in earnings (loss)
                          
  of unconsolidated
                          
  joint ventures
$ 123
--
$   3,046
$    376
$ (3,938)
$    (267)
$    (701)
$   426
--
$ 384
$ 18
--
$     (533)




 
24
 

5.  
DEFERRED CHARGES AND OTHER ASSETS

 
September 30,
December 31,
(dollars in thousands)
2009
2008
Deferred leasing costs
$ 222,534
$ 214,887
Deferred financing costs
26,802
23,723
 
249,336
238,610
Accumulated amortization
(114,545)
(104,652)
Deferred charges, net
134,791
133,958
Notes receivable
--
11,443
In-place lease values, related intangible and other assets, net
58,794
33,256
Prepaid expenses and other assets, net
32,060
33,765
     
Total deferred charges and other assets, net
$ 225,645
$ 212,422


6.  
SENIOR UNSECURED NOTES

A summary of the Company’s senior unsecured notes as of September 30, 2009 and December 31, 2008 is as follows (dollars in thousands):

 
September 30,
December 31,
Effective
 
2009
2008
Rate (1)
7.250% Senior Unsecured Notes, due March 15, 2009
--
$   199,689
7.486%
5.050% Senior Unsecured Notes, due April 15, 2010
$   149,970
149,929
5.265%
7.835% Senior Unsecured Notes, due December 15, 2010
15,000
15,000
7.950%
7.750% Senior Unsecured Notes, due February 15, 2011
299,771
299,641
7.930%
5.250% Senior Unsecured Notes, due January 15, 2012
99,550
99,404
5.457%
6.150% Senior Unsecured Notes, due December 15, 2012
93,332
92,963
6.894%
5.820% Senior Unsecured Notes, due March 15, 2013
25,723
25,641
6.448%
4.600% Senior Unsecured Notes, due June 15, 2013
99,894
99,872
4.742%
5.125% Senior Unsecured Notes, due February 15, 2014
201,049
201,229
5.110%
5.125% Senior Unsecured Notes, due January 15, 2015
149,510
149,441
5.297%
5.800% Senior Unsecured Notes, due January 15, 2016
200,483
200,540
5.806%
7.750% Senior Unsecured Notes, due August 15, 2019
247,891
--
8.020%
       
Total Senior Unsecured Notes
$1,582,173
$1,533,349
  
       
(1)  Includes the cost of terminated treasury lock agreements (if any), offering and other transaction costs and the discount/premium on the notes, as applicable.

On August 14, 2009, the Operating Partnership completed the sale of $250 million face amount of 7.750 percent senior unsecured notes due August 15, 2019 with interest payable semi-annually in arrears.  The net proceeds from the issuance of approximately $246.2 million, after underwriting discount, were used for general corporate purposes.


7.  
UNSECURED REVOLVING CREDIT FACILITY

The Company has a $775 million unsecured credit facility (expandable to $800 million) with a group of 23 Lenders.  The facility matures in June 2011, with an extension option of one year, which would require a payment of 15 basis points of the then borrowing capacity of the facility upon exercise.  The interest rate on outstanding borrowings (not electing the Company’s competitive bid feature) is LIBOR plus 55 basis points at the BBB/Baa2 pricing level.

The facility has a competitive bid feature, which allows the Company to solicit bids from lenders under the facility to borrow up to $300 million at interest rates less than the current LIBOR plus 55 basis point spread.  The Company may also elect an interest rate representing the higher of the lender’s prime rate or the Federal Funds rate plus 50 basis points.  The unsecured facility also requires a 15 basis point facility fee on the current borrowing capacity payable quarterly in arrears.
 
 
25
 

 
The interest rate and the facility fee are subject to adjustment, on a sliding scale, based upon the Operating Partnership’s unsecured debt ratings.  In the event of a change in the Operating Partnership’s unsecured debt rating, the interest and facility fee rates will be adjusted in accordance with the following table:

Operating Partnership’s
Interest Rate –
  
Unsecured Debt Ratings:
Applicable Basis Points
Facility Fee
S&P Moody’s/Fitch (a)
Above LIBOR
Basis Points
No ratings or less than BBB-/Baa3/BBB-
100.0
25.0
BBB-/Baa3/BBB-
75.0
20.0
BBB/Baa2/BBB (current)
55.0
15.0
BBB+/Baa1/BBB+
42.5
15.0
A-/A3/A- or higher
37.5
12.5
     
(a)   If the Operating Partnership has debt ratings from two rating agencies, one of which is Standard & Poor’s Rating Services (“S&P”) or Moody’s Investors Service (“Moody’s”), the rates per the above table shall be based on the lower of such ratings.  If the Operating Partnership has debt ratings from three rating agencies, one of which is S&P or Moody’s, the rates per the above table shall be based on the lower of the two highest ratings.  If the Operating Partnership has debt ratings from only one agency, it will be considered to have no rating or less than BBB-/Baa3/BBB- per the above table.

The terms of the unsecured facility include certain restrictions and covenants which limit, among other things, the payment of dividends (as discussed below), the incurrence of additional indebtedness, the incurrence of liens and the disposition of real estate properties (to the extent that: (i) such property dispositions cause the Company to default on any of the financial ratios of the facility described below, or (ii) the property dispositions are completed while the Company is under an event of default under the facility, unless, under certain circumstances, such disposition is being carried out to cure such default), and which require compliance with financial ratios relating to the maximum leverage ratio, the maximum amount of secured indebtedness, the minimum amount of tangible net worth, the minimum amount of fixed charge coverage, the maximum amount of unsecured indebtedness, the minimum amount of unencumbered property interest coverage and certain investment limitations.  The dividend restriction referred to above provides that, if an event of default has occurred and is continuing, the Company will not make any excess distributions with respect to common stock or other common equity interests except to enable the Company to continue to qualify as a REIT under the Code.

The lending group for the credit facility consists of: JPMorgan Chase Bank, N.A., as administrative agent (the “Agent”); Bank of America, N.A., as syndication agent; Scotiabanc, Inc., Wachovia Bank, National Association; and Wells Fargo Bank, National Association, as documentation agents; SunTrust Bank, as senior managing agent; US Bank National Association, Citicorp North America, Inc.; and PNC Bank National Association, as managing agents; and Bank of China, New York Branch; The Bank of New York; Chevy Chase Bank, F.S.B.; The Royal Bank of Scotland PLC; Mizuho Corporate Bank, Ltd.; The Bank of Tokyo-Mitsubishi UFJ, Ltd. (Successor by merger to UFJ Bank Limited); North Fork Bank; Bank Hapoalim B.M.; Comerica Bank; Chang Hwa Commercial Bank, Ltd., New York Branch; First Commercial Bank, New York Agency; Mega International Commercial Bank Co. Ltd., New York Branch; Deutsche Bank Trust Company Americas and Hua Nan Commercial Bank, New York Agency, as participants.

As of September 30, 2009 and December 31, 2008, the Company had outstanding borrowings of zero and $161 million, respectively, under its unsecured revolving credit facility.

MONEY MARKET LOAN
The Company has an agreement with JPMorgan Chase Bank to participate in a noncommitted money market loan program (“Money Market Loan”).  The Money Market Loan is an unsecured borrowing of up to $75 million arranged by JPMorgan Chase Bank with maturities of 30 days or less.  The rate of interest on the Money Market Loan borrowing is set at the time of each borrowing.  The Company had no outstanding borrowings under the Money Market Loan as of September 30, 2009 and December 31, 2008.

 
26
 


8.  
MORTGAGES, LOANS PAYABLE AND OTHER OBLIGATIONS

The Company has mortgages, loans payable and other obligations which primarily consist of various loans collateralized by certain of the Company’s rental properties.  As of September 30, 2009, 32 of the Company’s properties with a total book value of approximately $1,044,392,000 are encumbered by the Company’s mortgages and loans payable.  Payments on mortgages, loans payable and other obligations are generally due in monthly installments of principal and interest, or interest only.

On January 27, 2009, the Company obtained $64.5 million in mortgage financing from Guardian Life Insurance Company of America.  The two mortgage loans, which are collateralized by one and three office properties located in Clark and Red Bank, New Jersey, respectively, both carry an effective rate of 7.31 percent per annum and carry a 10-year term.

On April 29, 2009, in connection with the SL Green Transactions, the Company consolidated 11 office properties, which are encumbered by mortgage loans with Wachovia CMBS as lender which were recorded at an aggregate amount of approximately $151.1 million at the closing date.  The mortgage loans carry an average effective interest rate of 10.66 percent per annum and mature through May 2016.

On June 30, 2009, the Company obtained $17.0 million in mortgage financing from Valley National Bank.  The mortgage loan, which is collateralized by the Company’s office property in Woodbridge, New Jersey, is for a 25-year term and bears interest at a net effective rate of 6.94 percent per annum through the end of the 10th year.  The coupon interest rate will be reset at the end of year 10 and year 20 at 225 basis points over the 10-year treasury yield 45 days prior to the reset dates, with a minimum rate of 6.875 percent.

As a result of the recent expirations of the remainder of the Company’s acquired lease obligations incurred as part of the consideration for certain properties acquired in 2004 (“Assumed Obligations”) included in mortgages, loans payable and other obligations, the Company recorded a gain on retirement of other obligations of approximately $1.7 million during the three months ended June 30, 2009 on account of the remaining unused balance of the obligations at expiration.


 
27
 

A summary of the Company’s mortgages, loans payable and other obligations as of September 30, 2009 and December 31, 2008 is as follows (dollars in thousands):

   
Effective
    
   
Interest
September 30,
December 31,
  
Property Name
Lender
Rate (a)
2009
2008
    Maturity
Assumed obligations
Various
4.96%
--
$   5,090
n/a
Various (b)
Prudential Insurance
4.84%
$150,000
150,000
01/15/10
105 Challenger Road
Archon Financial CMBS
6.24%
19,353
19,188
06/06/10
2200 Renaissance Boulevard
Wachovia CMBS
5.89%
16,728
17,043
12/01/12
Soundview Plaza
Morgan Stanley Mortgage Capital
6.02%
16,741
17,109
01/01/13
9200 Edmonston Road
Principal Commercial Funding L.L.C.
5.53%
4,843
4,955
05/01/13
6305 Ivy Lane
John Hancock Life Insurance Co.
5.53%
6,746
6,901
01/01/14
395 West Passaic
State Farm Life Insurance Co.
6.00%
11,847
12,176
05/01/14
6301 Ivy Lane
John Hancock Life Insurance Co.
5.52%
6,343
6,480
07/01/14
35 Waterview Boulevard
Wachovia CMBS
6.35%
19,679
19,868
08/11/14
6 Becker, 85 Livingston,
  75 Livingston &
  20 Waterview
Wachovia CMBS
10.22%
60,218
--
08/11/14
4 Sylvan
Wachovia CMBS
10.19%
14,348
--
08/11/14
10 Independence
Wachovia CMBS
12.44%
15,277
--
08/11/14
4 Becker
Wachovia CMBS
9.55%
36,090
--
05/11/16
5 Becker
Wachovia CMBS
12.83%
10,999
--
05/11/16
210 Clay
Wachovia CMBS
13.42%
11,062
--
05/11/16
51 Imclone
Wachovia CMBS
8.39%
3,900
--
05/11/16
23 Main Street
JPMorgan CMBS
5.59%
32,166
32,521
09/01/18
Harborside Plaza 5
The Northwestern Mutual Life Insurance Co. & New York Life Insurance Co.
6.84%
237,901
239,795
11/01/18
100 Walnut Avenue
Guardian Life Insurance Co.
7.31%
19,600
--
02/01/19
One River Center
Guardian Life Insurance Co.
7.31% (c)
44,900
--
02/01/19
581 Main Street
Valley National Bank
6.94% (d)
16,961
--
07/01/34
           
Total mortgages, loans payable and other obligations
  
$755,702
$531,126
  

(a)  Reflects effective rate of debt, including deferred financing costs, comprised of the cost of terminated treasury lock agreements (if any), debt initiation costs, mark-to-market adjustment of acquired debt and other transaction costs, as applicable.
(b)  Mortgage is collateralized by seven properties.
(c)  Mortgage is collateralized by the three properties compromising One River Center.
(d)  The coupon interest rate will be reset at the end of year 10 and year 20 at 225 basis points over the 10-year treasury yield 45 days prior to the reset dates with a minimum rate of 6.875 percent.