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, 2013
 
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 X   No ___
 
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 21, 2013, there were 88,023,335 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, 2013 
 
   
  and December 31, 2012
4
       
   
Consolidated Statements of Operations for the three and nine months 
 
   
  ended September 30, 2013 and 2012
5
       
   
Consolidated Statement of Changes in Equity for the nine months 
 
   
  ended September 30, 2013
       
   
Consolidated Statements of Cash Flows for the nine months 
 
   
  ended September 30, 2013 and 2012
       
   
Notes to Consolidated Financial Statements
8-51 
       
 
Item 2.
Management’s Discussion and Analysis of Financial Condition 
 
   
  and Results of Operations
52-74 
       
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
74 
       
 
Item 4.
Controls and Procedures
75 
       
Part II
Other Information
   
       
 
Item 1.
Legal Proceedings
76 
       
 
Item 1A.
Risk Factors
76 
       
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
76 
       
 
Item 3.
Defaults Upon Senior Securities
76 
       
 
Item 4.
Mine Safety Disclosures
76 
       
 
Item 5.
Other Information
76 
       
 
Item 6.
 Exhibits
76
       
Signatures
   
77 
       
Exhibit Index
   
78-98 

 
 

 
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, 2012. 
 
The results of operations for the three and nine month periods ended September 30, 2013 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
 
2013
   
2012
Rental property
         
Land and leasehold interests
$
755,643
 
$
 782,315
Buildings and improvements
 
3,908,139
   
 4,104,472
Tenant improvements
 
445,623
   
 489,608
Furniture, fixtures and equipment
 
4,535
   
 3,041
   
5,113,940
   
 5,379,436
Less – accumulated depreciation and amortization
 
(1,392,064)
   
 (1,478,214)
   
3,721,876
   
 3,901,222
Rental property held for sale, net
 
 -
   
 60,863
Net investment in rental property
 
3,721,876
   
 3,962,085
Cash and cash equivalents
 
308,043
   
 58,245
Investments in unconsolidated joint ventures
 
131,859
   
 132,339
Unbilled rents receivable, net
 
134,695
   
 139,984
Deferred charges, goodwill and other assets
 
 284,399
   
 204,874
Restricted cash
 
19,213
   
 19,339
Accounts receivable, net of allowance for doubtful accounts
         
of $3,122 and $2,614
 
9,178
   
 9,179
           
Total assets
$
4,609,263
 
$
 4,526,045
           
LIABILITIES AND EQUITY
         
Senior unsecured notes
$
1,616,337
 
$
 1,446,894
Mortgages, loans payable and other obligations
 
752,344
   
 757,495
Dividends and distributions payable
 
30,003
   
 44,855
Accounts payable, accrued expenses and other liabilities
 
130,588
   
 124,822
Rents received in advance and security deposits
 
45,857
   
 55,917
Accrued interest payable
 
23,472
   
 27,555
Total liabilities
 
2,598,601
   
 2,457,538
Commitments and contingencies
         
           
Equity:
         
Mack-Cali Realty Corporation stockholders’ equity:
         
Common stock, $0.01 par value, 190,000,000 shares authorized,
         
88,021,807 and 87,536,292 shares outstanding
 
880
   
 875
Additional paid-in capital
 
2,536,837
   
 2,530,621
Dividends in excess of net earnings
 
(817,387)
   
 (764,522)
Total Mack-Cali Realty Corporation stockholders’ equity
 
1,720,330
   
 1,766,974
           
Noncontrolling interests in subsidiaries:
         
Operating Partnership
 
234,282
   
 245,091
Consolidated joint ventures
 
56,050
   
 56,442
Total noncontrolling interests in subsidiaries
 
 290,332
   
 301,533
           
Total equity
 
2,010,662
   
 2,068,507
           
Total liabilities and equity
$
4,609,263
 
$
 4,526,045

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
   
2013
   
2012
   
2013
   
2012
Base rents
 
$
134,882
 
$
 132,388 
 
$
403,943
 
$
 401,920 
Escalations and recoveries from tenants
   
17,173
   
 19,717 
   
54,117
   
 56,540 
Construction services
   
678
   
 1,169 
   
15,650
   
 9,235 
Real estate services
   
7,003
   
 1,247 
   
20,088
   
 3,519 
Parking income
   
1,642
   
 1,427 
   
4,631
   
 4,553 
Other income
   
1,127
   
 849 
   
3,335
   
 10,524 
Total revenues
   
162,505
   
 156,797 
   
501,764
   
 486,291 
                         
EXPENSES
                       
Real estate taxes
   
20,572
   
 20,472 
   
62,055
   
 64,587 
Utilities
   
18,043
   
 16,647 
   
48,070
   
 44,645 
Operating services
   
25,852
   
 24,261 
   
76,487
   
 71,859 
Direct construction costs
   
609
   
 979 
   
14,945
   
 8,594 
Real estate services expenses
   
5,552
   
 536 
   
15,809
   
 1,542 
General and administrative
   
12,151
   
 12,580 
   
37,235
   
 35,150 
Depreciation and amortization
   
46,094
   
 43,492 
   
135,122
   
 130,720 
Impairments
   
 48,700 
   
 -
   
 48,700 
   
 -
Total expenses
   
177,573
   
 118,967 
   
438,423
   
 357,097 
Operating income
   
(15,068)
   
 37,830 
   
63,341
   
 129,194 
                         
OTHER (EXPENSE) INCOME
                       
Interest expense
   
(30,936)
   
 (30,428)
   
(92,075)
   
 (92,539)
Interest and other investment income
   
187
   
 7 
   
1,287
   
 27 
Equity in earnings (loss) of unconsolidated joint ventures
   
(229)
   
 2,418 
   
(2,059)
   
 4,751 
Loss from early extinguishment of debt
   
 -
   
 -
   
 -
   
 (4,415)
Total other (expense) income
   
 (30,978)
   
 (28,003)
   
(92,847)
   
 (92,176)
Income (loss) from continuing operations
   
 (46,046)
   
 9,827 
   
(29,506)
   
 37,018 
Discontinued operations:
                       
Income from discontinued operations
   
 2,164 
   
 6,337 
   
11,842
   
 17,446 
Loss from early extinguishment of debt
   
 -
   
 -
   
(703)
   
 -
Realized gains (losses) and unrealized losses
                       
on disposition of rental property and impairments, net
   
47,321
   
 12 
   
61,079
   
 2,390 
Total discontinued operations, net
   
49,485
   
 6,349 
   
72,218
   
 19,836 
Net income
   
3,439
   
 16,176 
   
42,712
   
 56,854 
Noncontrolling interest in consolidated joint ventures
   
1,838
   
 85 
   
1,962
   
 256 
Noncontrolling interest in Operating Partnership
   
5,314
   
 (1,207)
   
3,295
   
 (4,543)
Noncontrolling interest in discontinued operations
   
(5,948)
   
 (773)
   
(8,699)
   
 (2,418)
Net income available to common shareholders
 
$
4,643
 
$
 14,281 
 
$
39,270
 
$
 50,149 
                         
Basic earnings per common share:
                       
Income (loss) from continuing operations
 
$
(0.44)
 
$
 0.10 
 
$
(0.28)
 
$
 0.37 
Discontinued operations
   
0.49
   
 0.06 
   
0.73
   
 0.20 
Net income available to common shareholders
 
$
0.05
 
$
 0.16 
 
$
0.45
 
$
 0.57 
                         
Diluted earnings per common share:
                       
Income (loss) from continuing operations
 
$
(0.44)
 
$
 0.10 
 
$
(0.28)
 
$
 0.37 
Discontinued operations
   
0.49
   
 0.06 
   
0.73
   
 0.20 
Net income available to common shareholders
 
$
0.05
 
$
 0.16 
 
$
0.45
 
$
 0.57 
                         
Basic weighted average shares outstanding
   
87,793
   
 87,826 
   
87,724
   
 87,814 
                         
Diluted weighted average shares outstanding
   
99,787
   
 100,075 
   
99,778
   
 100,071 

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
     
   
Common Stock
   
Paid-In
   
Excess of
   
Interests
   
Total
   
   Shares
   
Par Value
   
Capital
   
Net Earnings
   
in Subsidiaries
   
Equity
Balance at January 1, 2013
 
 87,536 
 
$
 875 
 
$
 2,530,621 
 
$
 (764,522)
 
$
 301,533 
 
$
 2,068,507 
Net income
 
 -
   
 -
   
 -
   
 39,270 
   
 3,442 
   
 42,712 
Common stock dividends
 
 -
   
 -
   
 -
   
 (92,135)
   
 -
   
 (92,135)
Common unit distributions
 
 -
   
 -
   
 -
   
 -
   
 (12,634)
   
 (12,634)
Increase in noncontrolling interests
 
 -
   
 -
   
 -
   
 -
   
 1,570 
   
 1,570 
Redemption of common units
                                 
  for common stock
 
 155 
   
 2 
   
 3,084 
   
 -
   
 (3,086)
   
 -
Shares issued under Dividend
                                 
  Reinvestment and Stock Purchase Plan
 
 7 
   
 -
   
 191 
   
 -
   
 -
   
 191 
Stock compensation
 
 324 
   
 3 
   
 2,448 
   
 -
   
 -
   
 2,451 
Rebalancing of ownership percentage
                                 
  between parent and subsidiaries
 
 -
   
 -
   
 493 
   
 -
   
 (493)
   
 -
Balance at September 30, 2013
 
 88,022 
 
$
 880 
 
$
 2,536,837 
 
$
 (817,387)
 
$
 290,332 
 
$
 2,010,662 

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
   
2013
   
2012
Net income
 
$
42,712
 
$
 56,854 
Adjustments to reconcile net income to net cash provided by
           
Operating activities:
           
Depreciation and amortization, including related intangible assets
   
135,148
   
 130,683 
Depreciation and amortization on discontinued operations
   
8,196
   
 13,363 
Amortization of stock compensation
   
2,451
   
 2,338 
Amortization of deferred financing costs and debt discount
   
2,379
   
 1,945 
Write off of unamortized discount on senior unsecured notes
   
 156 
   
 370 
Equity in loss (earnings) of unconsolidated joint venture, net
   
2,059
   
 (4,751)
Distributions of cumulative earnings from unconsolidated joint ventures
   
6,468
   
 2,680 
Realized (gains) and unrealized losses on disposition
           
   of rental property and impairments, net
   
(61,079)
   
 (2,390)
Impairments
   
48,700
   
 -
Changes in operating assets and liabilities:
           
Increase in unbilled rents receivable, net
   
(8,504)
   
 (2,438)
Increase in deferred charges, goodwill and other assets
   
(27,584)
   
 (22,521)
Increase (decrease) in accounts receivable, net
   
1
   
 (909)
Increase in accounts payable, accrued expenses and other liabilities
   
5,967
   
 8,056 
Decrease in rents received in advance and security deposits
   
(10,059)
   
 (2,472)
Decrease in accrued interest payable
   
(4,083)
   
 (7,733)
             
Net cash provided by operating activities
 
$
142,928
 
$
 173,075 
             
CASH FLOWS FROM INVESTING ACTIVITIES
           
Rental property acquisitions and related intangibles
 
$
(149,200)
   
 -
Rental property additions and improvements
   
(67,172)
 
$
 (59,105)
Development of rental property
   
(12,954)
   
 (16,301)
Proceeds from the sale of rental property
   
332,540
   
 4,023 
Issuance of notes and mortgage receivable
   
(16,425)
   
 -
Repayment of notes receivable
   
208
   
 -
Investment in unconsolidated joint ventures
   
(32,235)
   
 (32,477)
Distributions in excess of cumulative earnings from
           
   unconsolidated joint ventures
   
20,671
   
 1,028 
Payment of contingent consideration
   
(2,755)
   
 -
Decrease in restricted cash
   
126
   
 906 
             
Net cash provided by (used in) investing activities
 
$
72,804
 
$
 (101,926)
             
CASH FLOW FROM FINANCING ACTIVITIES
           
Borrowings from revolving credit facility
 
$
289,000
 
$
 420,026 
Repayment of revolving credit facility
   
(289,000)
   
 (408,526)
Proceeds from senior unsecured notes
   
268,928
   
 299,403 
Repayment of senior unsecured notes
   
(100,000)
   
 (221,019)
Proceeds from mortgages and loans payable
   
2,343
   
 -
Repayment of mortgages, loans payable and other obligations
   
(12,185)
   
 (22,424)
Payment of financing costs
   
(5,459)
   
 (2,635)
Payment of dividends and distributions
   
(119,561)
   
 (134,927)
             
Net cash provided by (used in) financing activities
 
$
34,066
 
$
 (70,102)
             
Net increase in cash and cash equivalents
 
$
249,798
 
$
 1,047 
Cash and cash equivalents, beginning of period
   
58,245
   
 20,496 
             
Cash and cash equivalents, end of period
 
$
308,043
 
$
 21,543 

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, 2013, the Company owned or had interests in 275 properties plus developable land (collectively, the “Properties”).  The Properties aggregate approximately 30.7 million square feet, which are comprised of 251 buildings, primarily office and office/flex buildings totaling approximately 30.2 million square feet (which include 21 buildings, primarily office buildings aggregating approximately 2.6 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, nine multi-family properties totaling 3,319 apartments (which include seven properties aggregating 2,597 apartments owned by unconsolidated joint ventures in which the Company has investment interests), five parking/retail properties totaling approximately 115,600 square feet (which include two buildings aggregating 81,500 square feet  owned by unconsolidated joint ventures in which the Company has investment interests), one 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 seven states, primarily 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.

Accounting Standards Codification (“ASC”) 810, 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 VIEs. 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.  The Company consolidates VIEs in which it is considered to be the primary beneficiary.  The primary beneficiary is defined by the entity having both of the following characteristics: (1) the power to direct the activities that, when taken together, most significantly impact the variable interest entity’s performance: and (2) the obligation to absorb losses and right to receive the returns from the VIE that would be significant to the VIE.

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.  Certain reclassifications have been made to prior period amounts in order to conform with current period presentation.


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.  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.  Capitalized development and construction salaries and related costs approximated $1.9 million and $0.8 million for the three months ended September 30, 2013 and 2012, respectively, and $3.7 million and $2.2 million for the nine months ended September 30, 2013 and 2012, respectively.  Included in total rental property is construction, tenant improvement and development in-progress of $44.9 million and $107.6 million (which included costs related to two properties placed in service during the nine months ended September 30, 2013) as of September 30, 2013 and December 31, 2012, 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.
 
 
 
8

 
 

 
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, primarily based on a percentage of the relative square footage of each portion, 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 initially 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 remaining 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 terms 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 rental properties held for use may be impaired.  In addition to identifying any specific circumstances which may affect a property or properties, management considers other criteria for determining which properties may require assessment for potential impairment.  The criteria considered by management include reviewing low leased percentages, significant near-term lease expirations, recently acquired properties, current and historical operating and/or cash flow losses, near-term mortgage debt maturities or other factors that might impact the Company’s intent and ability to hold the property.  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.  These assumptions are generally based on management’s experience in its local real estate markets and the effects of current market conditions.  The assumptions 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, and actual losses or impairments may be realized in the future.

As of September 30, 2013 and December 31, 2012, the Company’s consolidated real estate joint ventures in which the Company is deemed to be the primary beneficiary have total real estate assets of $210.6 million and $198.3 million, respectively, mortgages of $79.4 million and $77.1 million, respectively, and other liabilities of $16.6 million and $16.5 million, respectively.

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 disposed of are presented in discontinued operations for all periods presented.  See Note 7: Discontinued Operations. 
 
 
 
10

 
 
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.  The outside basis portion of the Company’s joint ventures is amortized over the anticipated useful lives of the underlying ventures’ tangible and intangible assets acquired and liabilities assumed.  Generally, the Company would discontinue applying the equity method when the investment (and any advances) is reduced to zero and would not provide for additional losses unless the Company has guaranteed obligations of the venture or is otherwise committed to providing further financial support for the investee.    If the venture subsequently generates income, the Company only recognizes its share of such income to the extend it exceeds its share of previously unrecognized losses.

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, and actual losses or impairment may be realized in the future.  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.
 
 
Deferred
Financing Costs
Costs incurred in obtaining financing are capitalized and amortized over the term of the related indebtedness. Amortization of such costs is included in interest expense and was $954,000 and $673,000 for the three months ended September 30, 2013 and 2012, respectively, and $2,379,000 and $1,945,000 for the nine months ended September 30, 2013 and 2012, respectively.  If a financing obligation is extinguished early, any unamortized deferred financing costs are written off and included in gains (loss) on early extinguishment of debt.  Such unamortized costs which were written off amounted to $156,000 and zero for the three months ended September 30, 2013 and 2012, respectively, and $156,000 and $370,000 for the nine months ended September 30, 2013 and 2012, respectively.

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 $962,000 and $1,156,000 for the three months ended September 30, 2013 and 2012, respectively, and $3,168,000 and $3,312,000 for the nine months ended September 30, 2013 and 2012, respectively.
 
 
 
11

 
 

Goodwill
Goodwill represents the excess of the purchase price over the fair value of net tangible and intangible assets acquired in a business combination.  Management performs an annual impairment test for goodwill during the fourth quarter.  Additionally, management evaluates the recoverability of goodwill whenever events or changes in circumstances indicate that the carrying amounts of goodwill may not be fully recoverable.
 
 
Derivative
Instruments
The Company measures derivative instruments, 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 cumulative 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 initially 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 remaining 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 terms 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 14: 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 our 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, development and leasing commission fees and other services, and payroll and related costs reimbursed from clients.  Fee income derived from the Company’s unconsolidated joint ventures (which are capitalized by such ventures) are recognized to the extent attributable to the unaffiliated ownership interests.  Other income includes income from tenants for additional services arranged for by the Company and income from tenants for early lease terminations. 
 
 
 
 
 
12

 
 
Allowance for
Doubtful Accounts
Management periodically performs a detailed review of amounts due from tenants to determine if accounts receivable balances are impaired based on factors affecting the collectability 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. 
 
 
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.

Pursuant to the amended provisions related to uncertain tax provisions of ASC 740, Income Taxes, 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.

In the normal course of business, the Company or one of its subsidiaries is subject to examination by federal, state and local jurisdictions in which it operates, where applicable.  As of September 30, 2013, the tax years that remain subject to examination by the major tax jurisdictions under the statute of limitations are generally from the year 2008 forward.
 
 
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.  Shares whose issuance is contingent upon the satisfaction of certain conditions shall be considered outstanding and included in the computation of diluted EPS as follows (i) if all necessary conditions have been satisfied by the end of the period (the events have occurred), those shares shall be included as of the beginning of the period in which the conditions were satisfied (or as of the date of the grant, if later) or (ii) if all necessary conditions have not been satisfied by the end of the period, the number of contingently issuable shares included in diluted EPS shall be based on the number of shares, if any, that would be issuable if the end of the reporting period were the end of the contingency period (for example, the number of shares that would be issuable based on current period earnings or period-end market price) and if the result would be dilutive. Those contingently issuable shares shall be included in the denominator of diluted EPS as of the beginning of the period (or as of the date of the grant, if later).
 
 

 
13

 


Dividends and
 
Distributions
Payable
The dividends and distributions payable at September 30, 2013 represents dividends payable to common shareholders (87,766,758 shares) and distributions payable to noncontrolling interest common unitholders of the Operating Partnership (11,987,175 common units) for all such holders of record as of October 3, 2013 with respect to the third quarter 2013.  The third quarter 2013 common stock dividends and common unit distributions of $0.30 per common share and unit were approved by the Board of Directors on September 12, 2013.  The common stock dividends and common unit distributions payable were paid on October 11, 2013.

The dividends and distributions payable at December 31, 2012 represents dividends payable to common shareholders (87,537,250 shares) and distributions payable to noncontrolling interest common unitholders of the Operating Partnership (12,141,836 common units) for all such holders of record as of January 4, 2013 with respect to the fourth quarter 2012.  The fourth quarter 2012 common stock dividends and common unit distributions of $0.45 per common share and unit were approved by the Board of Directors on December 3, 2012.  The common stock dividends and common unit distributions payable were paid on January 11, 2013.

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 compensation in accordance with the provisions of ASC 718, Compensation-Stock Compensation.  These provisions require that the estimated fair value of restricted stock (“Restricted Stock Awards”), TSR-based Performance Shares and stock options (if any) at the grant date be amortized ratably into expense over the appropriate vesting period.  The Company recorded stock compensation expense of $755,000 and $579,000 for the three months ended September 30, 2013 and 2012, respectively, and $2,402,000 and $1,971,000 for the nine months ended September 30, 2013 and 2012, 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.  There was no difference in other comprehensive income to net income for the three and nine months ended September 30, 2013 and 2012, and no accumulated other comprehensive income as of September 30, 2013 and 2012.


3.    REAL ESTATE TRANSACTIONS

Acquisitions
On January 18, 2013, the Company acquired Alterra at Overlook Ridge 1A (“Alterra 1A”), a 310-unit multi-family rental property located in Revere, Massachusetts, for approximately $61.3 million in cash, which was funded primarily through borrowings under the Company’s unsecured revolving credit facility.

On April 4, 2013, the Company acquired Alterra at Overlook Ridge IB (“Alterra 1B”), a 412-unit multi-family rental property located in Revere, Massachusetts, for approximately $88 million in cash, which was funded primarily through borrowings under the Company’s unsecured revolving credit facility.
 
 
 
 
14

 

 
The purchase prices were allocated to the net assets acquired during the nine months ended September 30, 2013 as follows (in thousands):

                       
                   
Total
 
   
Alterra 1A
     
Alterra 1B
     
Acquisitions
 
Land
$
 9,042
   
$
12,055
   
$
21,097
 
Buildings and improvements
 
 50,671
     
71,409
     
122,080
 
Furniture, fixtures and equipment
 
 801
     
1,474
     
2,275
 
In-place lease values
 
 931
 (1)
   
3,148
 (1)
   
4,079
 
   
 61,445
     
88,086
     
149,531
 
                       
Less: Below market lease values
 
 195
 (1)
   
136
 (1)
   
331
 
   
 195
     
136
     
331
 
                       
Net cash paid at acquisition
$
 61,250
   
$
87,950
   
$
149,200
 

 
(1)   In-place lease values and below market lease values will be amortized over one year or less.

For the nine months ended September 30, 2013, included in general and administrative expense was an aggregate of approximately $214,000 in transaction costs related to the property acquisitions.

Consolidation
On October 23, 2012, as part of the Roseland transaction, the Company had acquired a 26.25 percent interest in a to-be-built, 108-unit multi-family rental property located in Eastchester, New York (the “Eastchester Project”) for approximately $4.9 million.  The remaining interests in the development project-owning entity, 150 Main Street, L.L.C. (“Eastchester”) was owned 26.25 percent by JMP Eastchester, L.L.C. and 47.5 percent by Hudson Valley Land Holdings, L.L.C. (“HVLH”). The Eastchester Project is expected to start in the near term.  Estimated total development costs of $46 million are expected to be funded with a $27.5 million construction loan and the balance of $18.5 million to be funded with member capital.

On August 22, 2013, the operating agreement of Eastchester was modified which increased the Company’s effective ownership to 76.25 percent, with the remaining 23.75 percent owned by HVLH.  The agreement also provided the Company with control of all major decisions.  Accordingly, effective from this date, the Company is consolidating Eastchester under the provisions of ASC 810, Consolidation.  As the carrying value approximated the fair value of the net assets acquired, there was no holding period gain or loss recognized on this transaction.  The following table summarizes the net assets recorded upon consolidation (in thousands):


       
   Land
 
$
5,585
   Construction in progress
   
3,387
     
8,972
   Cash and cash equivalents
   
79
   Other assets
   
47
   Accounts payable
   
(325)
     
(199)
       
Noncontrolling interest recorded upon consolidation
   
(1,252)
       
Net assets recorded upon consolidation
 
$
7,521


 
15

 


Properties Commencing Initial Operations
The following properties commenced initial operations during the nine months ended September 30, 2013 (dollars in thousands, except per square foot):

                           
           
Garage
   
Development
     
Development
       
# of
Rentable
Parking
   
Costs Incurred
     
Costs Per
Date
Property/Address
Location
Type
Bldgs.
Square Feet
Spaces
   
by Company
     
Square Foot
06/05/13
14 Sylvan Way
Parsippany, New Jersey
Office
1
203,506
 -
 
$
 51,484 
(a)
 
$
 253 
08/01/13
Port Imperial South 4/5
Weehawken, New Jersey
Parking/Retail
1
16,736
 850 
   
 71,107 
(b)
   
N/A
                           
Totals
     
2
220,242
 850 
 
$
 122,591 
       
                         
(a)      Development costs included approximately $13.0 million in land costs and $4.3 million in leasing costs.  Amounts are as of September 30, 2013.
(b)      Development costs included approximately $13.1 million in land costs.  Amounts are as of September 30, 2013.

Property Sales
On August 27, 2013, the Company completed the sale of its 1.66 million square foot Pennsylvania office portfolio and three developable land parcels for approximately $233 million: $201 million in cash, a $10 million mortgage on one of the properties ($8 million of which was funded at closing) and subordinated equity interests in each of the properties being sold with capital accounts aggregating $22 million.  Net sale proceeds from the sale aggregated $207 million which was comprised of the $233 million gross sales price less the subordinated equity interests of $22 million and $4 million in closing costs.  As of September 30, 2013, approximately $55.3 million of the cash received from the sale was being held by a qualified intermediary pending reinvestment, which is a noncash item included in deferred charges, goodwill and other assets.  The purchasers of the Pennsylvania office portfolio are joint ventures formed between the Company and affiliates of the Keystone Property Group (the “Keystone Affiliates”).  The mortgage loan has a term of two years with a one year extension option and bears interest at LIBOR plus six percent.  The Company's equity interests in the joint ventures will be subordinated to Keystone Affiliates receiving a 15 percent internal rate of return (“IRR”) after which the Company will receive a ten percent IRR on its subordinated equity and then all profit will be split equally.  In connection with these partial sale transactions, because the buyer receives a preferential return, the Company only recognized profit to the extent that they received net proceeds in excess of their entire carrying value of the properties, effectively reflecting their retained subordinate equity interest at zero.

As part of the transaction, the Company has rights to own, after zoning-approval-subdivision, land at the 150 Monument Road property located in Bala Cynwyd, Pennsylvania, for a contemplated multi-family residential development. 

The Company sold the following office properties during the nine months ended September 30, 2013 (dollars in thousands):  See Note 7: Discontinued Operations.
 
 
                           
                           
       
Rentable
   
Net
   
Net
     
Sale
   
# of
Square
   
Sales
   
Book
   
Realized
Date
Property/Address
Location
Bldgs.
 Feet
   
Proceeds
   
Value
   
Gain (loss)
04/10/13
19 Skyline Drive (a)
Hawthorne, New York
1
 248,400 
 
$
16,131
 
$
 16,005 
 
$
126
04/26/13
55 Corporate Drive
Bridgewater, New Jersey
1
 204,057 
   
70,967
   
 51,308 
   
19,659
05/02/13
200 Riser Road
Little Ferry, New Jersey
1
 286,628 
   
31,775
   
 14,852 
   
16,923
05/13/13
777 Passaic Avenue
Clifton, New Jersey
1
 75,000 
   
5,640
   
 3,713 
   
1,927
05/30/13
16 and 18 Sentry Parkway West (b)
Blue Bell, Pennsylvania
2
 188,103 
   
19,041
   
 19,721 
   
 (680)
05/31/13
51 Imclone Drive (c)
Branchburg, New Jersey
1
 63,213 
   
6,101
   
 5,278 
   
823
06/28/13
40 Richards Avenue
Norwalk, Connecticut
1
 145,487 
   
15,858
   
17,027
   
 (1,169)
07/10/13
106 Allen Road
Bernards Township, New Jersey
1
 132,010 
   
 17,677 
   
13,522
   
 4,155 
08/27/13
Pennsylvania office portfolio (d) (e)
Suburban Philadelphia, Pennsylvania
15
 1,663,511 
   
 207,425 
   
164,259
   
 43,166 
                         
Totals:
 
24
3,006,409
 
$
390,615
 
$
305,685
 
$
84,930
                           
(a)  
The Company recognized a valuation allowance of $7.1 million on this property at December 31, 2012.  In connection with the sale, the Company provided an interest-free note receivable to the buyer of $5 million (with a net present value of $3.6 million at September 30, 2013) which matures in ten years and requires monthly payments of principal.  See Note 5: Deferred charges, goodwill and other assets.
(b)  
The Company recorded an $8.4 million impairment charge on these properties at December 31, 2012.  The Company has retained a subordinated interest in these properties.
(c)  
The property was encumbered by a mortgage loan which was satisfied by the Company at the time of the sale.  The Company incurred $0.7 million in costs for the debt satisfaction, which was included in discontinued operations:  loss from early extinguishment of debt for the nine months ended September 30, 2013.
(d)  
In order to reduce the carrying value of five of the properties to their estimated fair market values, the Company recorded impairment charges of $23.9 million at June 30, 2013.   The fair value used in the impairment charges was based on the purchase and sale agreement for the properties ultimately sold.
(e)  
The portfolio sale also included three developable land parcels.
 
 
 
 
16

 

 
Impairments
Nine of the Company’s office properties located in Roseland, Parsippany, Warren and Lyndhurst, New Jersey, aggregating approximately 1.3 million square feet, are collateral for mortgage loans scheduled to mature on August 11, 2014 and May 11, 2016, with principal balances totaling $159.2 million as of September 30, 2013. As of September 30, 2013, the Company estimated that the carrying value of the properties may not be recoverable over their anticipated holding periods.  In order to reduce the carrying value of the properties to their estimated fair market values, the Company recorded impairment charges of $48.5 million at September 30, 2013, which resulted from the current decline in leasing activity and market rents of the properties identified.  The Company’s estimated fair values were derived utilizing a discounted cash flow (“DCF”) model including all estimated cash inflows and outflows over a specified holding period.  These cash flows were comprised of inputs which included contractual revenues and forecasted revenues and expenses based upon market conditions and expectations for growth.  The capitalization rate of 8.5 percent and discount rates ranging from 10 percent to 15 percent utilized in DCF were based upon the risk profile of the properties’ cash flows and observable rates that the Company believes to be within a reasonable range of current market rates for each respective property.  Based on these inputs the Company determined that its valuation of these investments was classified within Level 3 of the fair value hierarchy, as provided by ASC 820, Fair Value Measurements and Disclosures.




 
17

 

4.    INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES

As of September 30, 2013, the Company had an aggregate investment of approximately $131.9 million in its equity method joint ventures.  The Company formed these ventures with unaffiliated third parties, or acquired interests in them, to develop or manage primarily office and multi-family rental properties, or to acquire land in anticipation of possible development of office and multi-family rental properties.  As of September 30, 2013, the unconsolidated joint ventures owned: 20 office and two retail properties aggregating approximately 2.3 million square feet, seven multi-family properties totaling 2,597 apartments, a 350-room hotel, a senior mezzanine loan position in the capital stack of a 1.7 million square foot commercial property; development projects for up to approximately 2,631 apartments; and interests and/or rights to developable land parcels able to accommodate up to 3,708 apartments, and 1.2 million square feet of office space.  The Company’s unconsolidated interests range from 7.5 percent to 80 percent subject to specified priority allocations in certain of the joint ventures.

The amounts reflected in the following tables (except for the Company’s share of equity in earnings) are based on the historical financial information of the individual joint ventures.  The Company does not record losses of the joint ventures in excess of its investment balances unless the Company is liable for the obligations of the joint venture or is otherwise committed to provide financial support to the joint venture.  The outside basis portion of the Company’s joint ventures is amortized over the anticipated useful lives of the underlying ventures’ tangible and intangible assets acquired and liabilities assumed.  Unless otherwise noted below, 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.  The Company had $856,000 and $370,000 in accounts receivable due from its unconsolidated joint ventures as of September 30, 2013 and December 31, 2012, respectively.

Included in the Company’s investments in unconsolidated joint ventures as of September 30, 2013 are five unconsolidated development joint ventures, which are VIEs for which the Company is not the primary beneficiary. These joint ventures are primarily established to develop real estate property for long-term investment and were deemed VIEs primarily based on the fact that the equity investment at risk was not sufficient to permit the entities to finance their activities without additional financial support.  The initial equity contributed to these entities was not sufficient to fully finance the real estate construction as development costs are funded by the partners throughout the construction period.  The Company determined that it was not the primary beneficiary of these VIEs based on the fact that the Company has shared control of these entities along with the entity’s partners and therefore does not have controlling financial interests in these VIEs.  The Company’s aggregate investment in these VIEs was approximately $10.7 million as of September 30, 2013.  The Company’s maximum exposure to loss as a result of its involvement with these VIEs is estimated to be approximately $13.7 million, which includes the Company’s current investment and estimated future funding commitments of approximately $3.1 million.  The Company has not provided financial support to these VIEs that it was not previously contractually required to provide. In general, future costs of development not financed through third party will be funded with capital contributions from the Company and its outside partners in accordance with their respective ownership percentages.   


 
18

 

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, 2013 and December 31, 2012: (dollars in thousands)

             
     
September 30,
   
December 31,
     
2013
   
2012
Assets:
           
   Rental property, net
 
$
 736,487 
 
$
 180,254 
   Loan receivable
   
 44,459 
   
 42,276 
   Other assets
   
 434,714 
   
 311,847 
   Total assets
 
$
 1,215,660 
 
$
 534,377 
Liabilities and partners'/
           
members' capital:
           
   Mortgages and loans payable
 
$
 600,473 
 
$
 168,908 
   Other liabilities
   
 71,552 
   
 12,141 
   Partners'/members' capital
   
 543,635 
   
 353,328 
   Total liabilities and
           
   partners'/members' capital
 
$
 1,215,660 
 
$
 534,377 

The following is a summary of the Company's investments in unconsolidated joint ventures as of September 30, 2013 and December 31, 2012: (dollars in thousands)

           
   
September 30,
   
December 31,
Entity
 
2013
   
2012
Plaza VIII & IX Associates, L.L.C.
$
 4,065 
 
$
 4,321 
South Pier at Harborside
 
 (2,095)
   
 (1,225)
Red Bank Corporate Plaza, L.L.C.
 
 3,972 
   
 3,876 
12 Vreeland Associates, L.L.C.
 
 5,439 
   
 12,840 
Boston Downtown Crossing
 
 -
   
 13,012 
Gale Jefferson, L.L.C.
 
 -
   
 1,029 
Stamford SM LLC
 
 35,667 
   
 34,006 
Marbella RoseGarden, L.L.C.
 
 15,976 
   
 16,918 
RoseGarden Monaco Holdings, L.L.C.
 
 3,524 
   
 4,761 
Rosewood Lafayette Holdings, L.L.C.
 
 1,119 
   
 1,988 
PruRose Port Imperial South 15, LLC
 
 -
   
 606 
Rosewood Morristown, L.L.C.
 
 6,603 
   
 7,091 
Overlook Ridge JV, L.L.C.
 
 178 
   
 31 
Overlook Ridge, L.L.C.
 
 -
   
 -
Overlook Ridge JV 2C/3B, L.L.C.
 
 -
   
 179 
Roseland/North Retail, L.L.C.
 
 1,967 
   
 2,161 
BNES Associates III
 
 1,708 
   
 1,955 
Portside Master Company, L.L.C.
 
 3,449 
   
 3,651 
PruRose Port Imperial South 13, LLC
 
 2,451 
   
 2,920 
Roseland/Port Imperial Partners, L.P.
 
 2,755 
   
 2,582 
RoseGarden Marbella South, L.L.C.
 
 7,160 
   
 6,182 
PruRose Riverwalk G, L.L.C.
 
 3,515 
   
 4,136 
Elmajo Urban Renewal Associates, LLC
 
 232 
   
 629 
Estuary Urban Renewal Unit B, LLC
 
 74 
   
 220 
RiverPark at Harrison I, L.L.C.
 
 3,404 
   
 2,606 
150 Main Street, L.L.C.
 
 -
   
 2,395 
RoseGarden Monaco, L.L.C.
 
 1,208 
   
 1,165 
Hillsborough 206 Holdings, L.L.C.
 
 1,989 
   
 1,967 
Grand Jersey Waterfront Urban Renewal Associates, L.L.C.
 
 397 
   
 337 
Crystal House Apartments Investors LLC
 
 26,928 
   
 -
Other
 
 174 
   
 -
Company's investment in unconsolidated joint ventures
$
 131,859 
 
$
 132,339 


 
19

 


The following is a summary of the results from operations of the unconsolidated joint ventures for the period in which the Company had investment interests during the three and nine months ended September 30, 2013 and 2012: (dollars in thousands)

                       
   
               Three Months Ended
   
               Nine Months Ended
   
               September 30,
   
               September 30,
   
2013
   
2012
   
2013
   
2012
Total revenues
$
 99,117 
 
$
 17,311 
 
$
 202,810 
 
$
 44,369 
Operating and other expenses
 
 (48,621)
   
 (9,169)
   
 (137,889)
   
 (25,428)
Depreciation and amortization
 
 (11,556)
   
 (2,497)
   
 (24,730)
   
 (7,285)
Interest expense
 
 (3,934)
   
 (1,675)
   
 (9,256)
   
 (5,017)
Net income
$
 35,006 
 
$
 3,970 
 
$
 30,935 
 
$
 6,639 

The following is a summary of the Company’s equity in earnings (loss) of unconsolidated joint ventures for the three and nine months ended September 30, 2013 and 2012: (dollars in thousands)
                       
   
                 Three Months Ended
   
                 Nine Months Ended
   
               September 30,
   
               September 30,
Entity
 
2013
   
2012
   
2013
   
2012
Plaza VIII & IX Associates, L.L.C.
$
 24 
 
$
 21 
 
$
 52 
 
$
 43 
South Pier at Harborside
 
 835 
   
 1,080 
   
 1,380 
   
 1,884 
Red Bank Corporate Plaza, L.L.C.
 
 99 
   
 94 
   
 306 
   
 298 
12 Vreeland Associates, L.L.C.
 
 (25)
   
 279 
   
 (1)
   
 603 
Boston Downtown Crossing
 
 -
   
 (6)
   
 646 
   
 (333)
Gale Jefferson, L.L.C.
 
 -
   
 23 
   
 68 
   
 63 
Stamford SM LLC
 
 1,023 
   
 927 
   
 2,805 
   
 2,193 
Marbella RoseGarden, L.L.C.
 
 (170)
   
 -
   
 (446)
   
 -
RoseGarden Monaco Holdings, L.L.C.
 
 (416)
   
 -
   
 (1,238)
   
 -
Rosewood Lafayette Holdings, L.L.C.
 
 (295)
   
 -
   
 (869)
   
 -
PruRose Port Imperial South 15, LLC
 
 -
   
 -
   
 (606)
   
 -
Rosewood Morristown, L.L.C.
 
 (152)
   
 -
   
 (393)
   
 -
Overlook Ridge JV, L.L.C.
 
 -
   
 -
   
 -
   
 -
Overlook Ridge, L.L.C.
 
 -
   
 -
   
 -
   
 -
Overlook Ridge JV 2C/3B, L.L.C.
 
 53 
   
 -
   
 204 
   
 -
Roseland/North Retail, L.L.C.
 
 (62)
   
 -
   
 (194)
   
 -
BNES Associates III
 
 (37)
   
 -
   
 (108)
   
 -
Portside Master Company, L.L.C.
 
 (109)
   
 -
   
 (222)
   
 -
PruRose Port Imperial South 13, LLC
 
 (181)
   
 -
   
 (459)
   
 -
Roseland/Port Imperial Partners, L.P.
 
 -
   
 -
   
 -
   
 -
RoseGarden Marbella South, L.L.C.
 
 (20)
   
 -
   
 (57)
   
 -
PruRose Riverwalk G, L.L.C.
 
 (198)
   
 -
   
 (576)
   
 -
Elmajo Urban Renewal Associates, LLC
 
 (87)
   
 -
   
 (255)
   
 -
Estuary Urban Renewal Unit B, LLC
 
 (44)
   
 -
   
 (107)
   
 -
RiverPark at Harrison I, L.L.C.
 
 -
   
 -
   
 -
   
 -
150 Main Street, L.L.C.
 
 -
   
 -
   
 -
   
 -
RoseGarden Monaco, L.L.C.
 
 -
   
 -
   
 -
   
 -
Hillsborough 206 Holdings, L.L.C.
 
 -
   
 -
   
 -
   
 -
Grand Jersey Waterfront Urban Renewal Associates, L.L.C.
 
 -
   
 -
   
 -
   
 -
Crystal House Apartments Investors LLC
 
 (1,149)
   
 -
   
 (2,671)
   
 -
Other
 
 682 
         
 682 
     
Company's equity in earnings of unconsolidated joint ventures
$
 (229)
 
$
 2,418 
 
$
 (2,059)
 
$
 4,751 


 
20

 

Plaza VIII and IX Associates, L.L.C. 
The Company has a joint venture with Columbia Development Company, L.L.C. (“Columbia”), which owns land for future development currently used as a parking facility and located on the Hudson River waterfront in Jersey City, New Jersey, adjacent to the Company’s Harborside complex.  The Company holds a 50 percent interest in the venture.
 
South Pier at Harborside – Hotel 
The Company has a joint venture with Hyatt Corporation (“Hyatt”) which owns a 350-room hotel on the South Pier at Harborside, Jersey City, New Jersey.  The Company holds a 50 percent interest in the venture.   
 
The venture has a non-recourse mortgage loan with a balance as of September 30, 2013 of $63.1 million collateralized by the hotel property.  The loan carries an interest rate of 6.15 percent and matures in November 2016.  The venture also has a loan with a balance as of September 30, 2013 of $4.6 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 $4.6 million letter of credit in support of this loan, half of which is indemnified by Hyatt.   
 
Red Bank Corporate Plaza, L.L.C.  
The Company has a joint venture with The PRC Group, which owns 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.   
 
The venture has a $16.8 million mortgage loan collateralized by the office property, which bears interest at a rate of the London Interbank Offered Rate (“LIBOR”) plus 300 basis points and matures in May 2016.  LIBOR was 0.18 percent at September 30, 2013.  The loan includes contingent guarantees for a portion of the principal by the Company based on certain conditions.  On September 22, 2011, the interest rate on 75 percent of the loan was fixed at 3.99375 percent effective from October 17, 2011 through maturity.   
 
The Company performed management, leasing, and other services for the property owned by the joint venture and recognized $26,000 and $25,000 in fees for such services in the three months ended September 30, 2013 and 2012, respectively, and $80,000 and $75,000 for the nine months ended September 30, 2013 and 2012, respectively. 

12 Vreeland Associates, L.L.C.  
The Company entered into a joint venture to form M-C Vreeland, LLC (“M-C Vreeland”), which acquired a 50 percent interest in 12 Vreeland Associates, L.L.C., which owns a 139,750 square foot office property located at 12 Vreeland Road, Florham Park, New Jersey. 
 
On June 18, 2013, 12 Vreeland Associates, L.L.C. obtained a mortgage loan which is collateralized by its office property.  The amortizable loan with a balance of $15.8 million as of September 30, 2013 bears interest at 2.87 percent and matures on July 2023.  The venture subsequently distributed $14.8 million of the loan proceeds, of which the Company’s share was $7.4 million.

The operating agreement of M-C Vreeland provides, among other things, for the Participation Rights (see Note 16: Noncontrolling Interests in Subsidiaries – Participation Rights).  

Boston Downtown Crossing 
The Company had a joint venture with affiliates of Vornado Realty LP (“Vornado”) and JP Morgan Chase Bank (“JPM”), which was created to acquire and redevelop the Filenes property located in the Downtown Crossing district of Boston, Massachusetts (the “Filenes Property”).  The venture was organized 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, aggregating 1.2 million square feet.  The Company, through subsidiaries, separately holds approximately a 15 percent indirect ownership interest in each of the units.  The project is subject to governmental approvals. 

On April 23, 2013, the Company and JPM sold their interests in the venture for $45 million, of which the Company’s share was $13.5 million.  The Company realized its share of the gain on the sale of $754,000 which is included in equity in earnings. 
 
 
 
21

 
 
Gale Jefferson, L.L.C. 
The Company had a joint venture with a Gale Affiliate to form M-C Jefferson, L.L.C. (“M-C Jefferson”) which owned an 8.33 percent indirect interest in One Jefferson Road LLC (“One Jefferson”), which developed and managed a 100,010 square foot office property at One Jefferson Road, Parsippany, New Jersey (the “Jefferson Property”).  The property is fully leased to a single tenant through August 2025. 
 
One Jefferson had a loan in the amount of $20.2 million, which bore interest at a rate of LIBOR plus 160 basis points and was scheduled to mature in October 2013.  On January 4, 2013, Gale Jefferson, L.L.C. sold its membership interest to JPM for $3.2 million, of which the Company’s share was $1.1 million.  The Company realized its share of the gain on the sale of $69,000 which is included in equity in earnings.

The Company performed management, leasing, and other services for the Jefferson Property and recognized zero and $48,000 in income for such services in the three months ended September 30, 2013 and 2012, respectively, and zero and $144,000 for the nine months ended September 30, 2013 and 2012, respectively. 

Stamford SM LLC
On February 17, 2012, the Company entered into a joint venture to form Stamford SM LLC (“Stamford SM”) which acquired a senior mezzanine loan (the “Mezz Loan”) position in the capital stack of a 1.7 million square foot class A portfolio in Stamford, Connecticut for $40 million.  The Mezz Loan has a face value of $50 million and is secured by the equity interests in a seven-building portfolio containing 1.67 million square feet of class A office space and 106 residential rental units totaling 70,500 square feet, all located in the Stamford Central Business District.  The interest-only Mezz Loan has a carrying value of $44.3 million as of September 30, 2013.  The Mezz Loan is subject to an agreement, which provides subject to certain conditions, that principal proceeds above $47 million are paid to another party.  The Mezz Loan bears interest at LIBOR plus 325 basis points and matures in August 2014.
 
The operating agreement of Stamford SM provides, among other things, for distributions of net available cash in accordance with its members’ respective ownership percentages.  The Company holds an 80 percent interest in the venture.  The Company and the 20 percent member share equally in decision-making on all major decisions involving the operations of the venture. 

Marbella RoseGarden, L.L.C.
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 24.27 percent indirect residual interest in an entity that owns a 412-unit, 40-story multi-family rental property which aggregates 369,607 square feet and is located in Jersey City, New Jersey (the “Marbella Property”).

The Company owns 48.5325 percent of Marbella RoseGarden, L.L.C. (“RoseGarden”) with the remaining interest owned by MG Marbella Partners, L.L.C.

RoseGarden owns a 50 percent interest in the property-owning entity, PruRose/Marbella I, L.L.C. (“PruRose/Marbella”), with the remaining interest owned by Prudential-Marbella Partnership (“Prudential-Marbella”).

In general, the operating agreement of PruRose/Marbella provides that operating cash flows are distributed to members first to Prudential-Marbella and then to RoseGarden based on a 9.5 percent operating return on each members’ capital balance in priorities as detailed in the operating agreement.  Excess operating cash flows are distributed to the members in accordance with their ownership percentages.  As of September 30, 2013, Prudential-Marbella had a capital balance of $7.6 million and RoseGarden had a capital balance of $0.1 million.  There was no accumulated unpaid operating return as of September 30, 2013.

Net cash flows from a capital event are distributed first to the extent of any accumulated unpaid operating return and then to repay each members’ capital balance in the same priority as operating cash flows, with any excess distributed to the members in accordance with their ownership percentages.

In general, the operating agreement of RoseGarden provides for the distribution of available cash flow to the members in accordance with their ownership percentages.

PruRose/Marbella has a mortgage loan, with a balance of $95 million as of September 30, 2013, which bears interest at 4.99 percent and matures in May 2018.  The interest-only loan is collateralized by the Marbella Property.
 
 
 
22

 

 
The Company performed management, leasing, and other services for PruRose/Marbella and recognized $83,000 and $262,000 in income for such services in the three and nine months ended September 30, 2013, respectively.

RoseGarden Monaco Holdings, L.L.C.
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 15 percent indirect residual interest in an entity that owns two 50-story multi-family rental properties with 523 units (the “Monaco Property”). The Monaco Property aggregates 477,254 square feet and is located in Jersey City, New Jersey.

The Company owns 50 percent of RoseGarden Monaco Holdings L.L.C. (“RoseGarden Monaco”) with the remaining interest owned by MG Monaco, L.L.C.  RoseGarden Monaco holds a 60 percent interest in Monaco Holdings, L.L.C. (“Monaco Holdings”) with the remaining interest owned by Hudson Hotel Monaco L.L.C.

Monaco Holdings owns a 50 percent interest in the property-owning entity, PruRose Monaco Holdings, L.L.C. (“PruRose Monaco”) with the remaining interest owned by The Prudential Insurance Company of America (“Prudential”).

In general, the operating agreement of PruRose Monaco provides that operating cash flows are distributed to members first to Prudential and then to Monaco Holdings based on a nine percent operating return on each members’ capital balance in priorities as detailed in the operating agreement.  Excess operating cash flows are distributed to the members in accordance with their ownership percentages.  As of September 30, 2013, Prudential had a capital balance of $76 million and an accumulated unpaid operating return of $3.4 million.  It is not anticipated that Monaco Holdings will be required to fund any capital.

Net cash flows from a capital event are distributed first to the extent of any accumulated unpaid operating return and then to repay each members’ capital balance in the same priority as operating cash flows, with any excess distributed to the members in accordance with their ownership percentages.

The operating agreement of Monaco Holdings provides, among other things, for the distributions of net cash flows to the members, first, in respect of unrecovered capital on a pro rata basis, with any remaining cash flow in accordance with their ownership percentages.

The operating agreement of RoseGarden Monaco provides, among other things, for the distribution of available cash flow to the members in accordance with their ownership percentages.

PruRose Monaco has an interest-only mortgage loan, collateralized by the property with a balance of $165 million as of September 30, 2013.  The mortgage loan bears interest at 4.19 percent and matures in February 2021.

The Company performed management, leasing, and other services for PruRose Monaco and recognized $115,000 and $350,000 in income for such services in the three and nine months ended September 30, 2013, respectively.

Rosewood Lafayette Holdings, L.L.C.
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 25 percent indirect residual interest in an entity that owns a 217-unit multi-family rental property which aggregates 185,733 square feet and is located in Morristown, New Jersey (the “Highlands Property”).

The Company owns 50 percent of Rosewood Lafayette Holdings, L.L.C. (“Rosewood”) with the remaining interest owned by Woodmont Transit Village, L.L.C.

Rosewood owns a 50 percent interest in the property-owning entity, Rosewood Lafayette Commons, L.L.C. (“Rosewood Lafayette”) with the remaining interest owned by Prudential.

In general, the operating agreement of Rosewood Lafayette provides that operating cash flows are distributed to members first to Prudential and then to Rosewood based on an eight percent operating return to December 23, 2012 and nine percent thereafter on each members’ capital balance in priorities as detailed in the operating agreement.  Excess operating cash flows are distributed to the members in accordance with their ownership percentages.  As of September 30, 2013, Prudential had a capital balance of $29.5 million and an accumulated unpaid operating return of $2.1 million.  It is not anticipated that Rosewood will be required to fund any capital.
 
 
23

 
 

 
Net cash flows from a capital event are distributed first to the extent of any accumulated unpaid operating return and then to repay each members’ capital balance in the same priority as operating cash flows, with any excess distributed to the members in accordance with their ownership percentages.

In general, the operating agreement of Rosewood provides for the distribution of available cash flow to the members in accordance with their ownership percentages.

Rosewood Lafayette has a mortgage loan, with a balance of $39.5 million as of September 30, 2013, which bears interest at 4.0 percent and matures in July 2015.  The loan requires principal and interest payments based on a 30-year amortization schedule and is collateralized by the Highlands Property.

The Company performed management, leasing, and other services for Rosewood Lafayette and recognized $48,000 and $142,000 in income for such services in the three and nine months ended September 30, 2013, respectively.

PruRose Port Imperial South 15, LLC
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 50 percent residual interest in PruRose Port Imperial South 15, LLC (“Port Imperial 15”), an entity that owns a 236-unit multi-family rental property which aggregates 214,402 square feet and is located in Weehawken, New Jersey (the “RiversEdge Property”).

Port Imperial 15 is owned 50 percent by the Company and 50 percent by PRII Port Imperial South 15, LLC (“Prudential-Port”).

In general, the operating agreement of Port Imperial 15 provides that operating cash flows are distributed to members first to Prudential-Port and then to the Company based on a nine percent operating return on each members’ capital balance in priorities as detailed in the operating agreement.  Excess operating cash flows are distributed to the members in accordance with their ownership percentages.  As of September 30, 2013, Prudential-Port had a capital balance of $33.8 million and an accumulated unpaid operating return of $5.1 million.  It is not anticipated that the Company will be required to fund any capital.

Net cash flows from a capital event are distributed first to the extent of any accumulated unpaid operating return and then to repay each members’ capital balance in the same priority as operating cash flows, with any excess distributed to the members in accordance with their ownership percentages.

Subject to a letter agreement, 20 percent of distributions received by the Company, in excess of an eight percent IRR shall be paid to a third party based on certain conditions.

Port Imperial 15 had a mortgage loan, with a balance of $57 million which bore interest at LIBOR plus 235 basis points and was scheduled to mature in August 2013.  On August 29, 2013, Port Imperial 15 refinanced such mortgage loan.  The new loan has a balance of $57.5 million as of September 30, 2013, bears interest at 4.32 percent and matures in September 2020.   The interest-only loan is collateralized by the RiversEdge Property.

The Company performed management, leasing, and other services for Port Imperial 15 and recognized $62,000 and $185,000 in income for such services in the three and nine months ended September 30, 2013, respectively.

 
24

 

Rosewood Morristown, L.L.C.
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 50 percent interest in Rosewood Morristown, L.L.C. (“Rosewood”) with the remaining interest owned by Woodmont Epsteins, L.L.C.

Rosewood owns a 50 percent interest in Morristown Epsteins, L.L.C. (“Morristown”) with the remaining 50 percent owned by a third party. Morristown owns an interest in a 76-unit-for-sale luxury condominium community (the “40 Park Condominiums Property”), three of which were unsold at acquisition, all of which have been sold as of September 30, 2013.  Morristown also owns land where it intends to build a 91-unit, seven-story, multi-family rental property (the “Lofts at 40 Park Property”).  Morristown also owns a 50 percent residual interest in the entity that owns a 130-unit multi-family rental and 10,730 square feet retail building (the “Metropolitan Property”) and a 50,973 square feet retail building (the “Shops at 40 Park Property”), Epsteins B Rentals, L.L.C. (“Epsteins”), with the remaining interest owned by Prudential.  All of the properties are located in Morristown, New Jersey.

The operating agreement of Morristown provides, among other things, for the distribution of net available cash to the members, as follows:

·  
to pay accrued and unpaid interest at a rate of eight percent on the balance note, as defined;
·  
to Rosewood in an amount equal to its current year’s annual preferred return rate of eight percent on its adjusted capital, as defined;
·  
to pay the outstanding balance remaining on the balance note, which was $975,000 as of September 30, 2013;
·  
to Rosewood in an amount equal to its adjusted capital balance, which was $3.2 million as of September 30, 2013; and
·  
to the members in accordance with their ownership percentages.

The operating agreement of Rosewood provides, among other things, for the distribution of net cash flow to the members in accordance with their ownership percentages.

PR II/Morristown Prudential, LLC, an affiliate of Prudential, has a 15 percent participating interest in the net sales proceeds from the sale of the 40 Park Condominiums Property units, as defined, pursuant to an August 2011 Participation Agreement, related to a previously satisfied mezzanine loan.

In general, the operating agreement of Epsteins provides that operating cash flows are distributed to members first to Prudential and then to Rosewood based on a nine percent return on each members’ capital balance in priorities as detailed in the operating agreement.  Excess operating cash flows are distributed to the members in accordance with their ownership percentages.  As of September 30, 2013, Prudential had a capital balance of $19.1 million and an accumulated operating return of $203,000 and Rosewood had a capital balance of $0.7 million and no accumulated unpaid operating returns as of September 30, 2013.

Net cash flows from a capital event are distributed first to the extent of any accumulated unpaid operating return balance and then to repay each members’ capital balance in the same priority as operating cash flows, with any excess distributed to the members in accordance with their ownership percentages.

Epsteins had a mortgage loan with a balance of $48.5 million bearing interest at LIBOR plus 275 basis points which was refinanced on August 14, 2013 with loan proceeds and Prudential Capital.  The new loan, collateralized by the Metropolitan Property, with a balance of $38.6 million bearing interest at 3.25 percent matures in September 2020 and is interest-only through September 2015.  The new loan, collateralized by the Shops at 40 Park Property, with a balance of $6.5 million bearing interest at 3.63 percent matures in August 2018 and is interest-only through July 2015.  The loan provides for additional proceeds of $1 million based on certain operating thresholds being achieved.

Morristown has a mortgage loan, with a balance of $1.1 million as of September 30, 2013, which bears interest at LIBOR plus 250 basis points and matures in September 2014.  The loan is collateralized by the Lofts at 40 Park Property and is fully guaranteed by the Company.

The Company performed management, leasing, and other services for Epsteins and recognized $47,000 and $134,000 in income for such services in the three and nine months ended September 30, 2013, respectively.
 
 
 
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Overlook Ridge JV, L.L.C.
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 25 percent indirect interest in an entity that owns a 251-unit multi-family rental property (“Quarrystone I Property”) and a 50 percent indirect interest in an entity that owns a land parcel located in Malden, Massachusetts (“Overlook Phase III”).  The Quarrystone I Property aggregates 278,721 square feet and is located in Malden, Massachusetts.

The Company owns 50 percent of Overlook Ridge JV, L.L.C. (“Overlook Ridge JV”) with the remaining interest owned by Rowe Contracting Company (“Rowe”).

Overlook Ridge JV owns a 50 percent interest in the property-owning entity, LR JV-C Associates, L.L.C. (“LR Overlook”) with the remaining interest owned by Lennar Massachusetts Properties Inc. (“Lennar”) and a 100 percent interest in the property-owning entity LR Overlook Phase III, L.L.C. (“LR Overlook Phase III”).

In general, the operating agreement of LR Overlook provides, among other things, for distributions of cash flow to the members in accordance with their ownership percentages, subject to the repayment of priority partnership loans.  As of September 30, 2013, Lennar has a priority partnership loan of $18.8 million, which has an accrued interest balance of $14.4 million.

The operating agreement of Overlook Ridge JV provides, among other things, for the distribution of distributable cash, as defined, to the members, as follows:

·  
First, to the members in proportion to their respective unrecovered capital percentages, as defined in the agreement, until each member’s unrecovered capital has been reduced to zero; and
·  
Second, to the members in accordance with their ownership percentages.

LR Overlook has mortgage loans, with a balance of $69.9 million as of September 30, 2013, which mature in March 2016.  The senior loan, with a balance of $52.9 million, which bears interest at LIBOR plus 200 basis points is collateralized by the Quarrystone I property.  The junior loan, with a balance of $17 million, which bears interest at LIBOR plus 90 basis points is collateralized by a $17 million letter of credit provided by an affiliate of Lennar.

LR Overlook Phase III has a mortgage loan, with a balance of $5.6 million as of September 30, 2013, which bears interest at a rate of LIBOR plus 250 basis points and matures in April 2015.  The loan provides, subject to certain conditions, a one-year extension option with a fee of 25 basis points.  The interest-only loan is collateralized by the Overlook Phase III Land.  The Company has guaranteed repayment of up to $1.5 million and all interest under the loan.

The Company performed management, leasing, and other services for LR Overlook and recognized $46,000 and $137,000 in income for such services in the three and nine months ended September 30, 2013, respectively.

Overlook Ridge, L.L.C.
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 50 percent interest in land parcels at Overlook Ridge, L.L.C. (“Overlook Ridge”), referred to as Sites IIIA, IIIC, and IIID (“Overlook Land”), which are located in Malden and Revere, Massachusetts.  The remaining interest in the property-owning entity, Overlook Ridge, is owned by Rowe.

The operating agreement of Overlook Ridge provides, among other things, for the distribution of net cash flow to the members, as follows:

·  
First, to the members in proportion to their unrecovered capital percentages, as defined, until the cumulative amounts distributed  equal such member’s return of six percent on the unrecovered capital; and
·  
Second, to the members in accordance with their ownership percentages.

In addition, the operating agreement provides that both Rowe and the Company receive a notional land capital account based on the development of each Overlook Land, as defined.  Based on the anticipated development of each remaining Overlook Land, the total notional land capital account is approximately $20 million, and is allocated 97 percent to Rowe and three percent to the Company.
 
 
 
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Overlook Ridge has a mortgage loan collateralized by Overlook Land, not to exceed $17.4 million, with a balance of $16.5 million as of September 30, 2013.  The loan bears interest at a rate of LIBOR plus 350 basis points and matures in March 2014.  The loan provides, subject to certain conditions, a one-year extension option with a fee of 25 basis points.  The Company has guaranteed repayment of the outstanding principal balance of the loan.

Overlook Ridge JV 2C/3B, L.L.C.
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 25 percent indirect residual interest in a to-be-built, 371-unit multi-family rental development spanning four buildings (the “Overlook 2C/3B Project”) which is located in Malden, Massachusetts.  Construction began in January 2013 with anticipated initial deliveries in the first quarter 2014.

The Company owns a 50 percent interest in Overlook Ridge JV 2C/3B, L.L.C. (“Overlook 2C/3B”) with the remaining interest owned by Rowe.  Overlook 2C/3B owns a 50 percent interest in the development project-owning entity, Overlook Ridge Apartments Investors LLC (“Overlook Apartments Investors”) with the remaining interests owned by Overlook Ridge Apartments Member LLC (“Overlook Apartments Member”).  Pursuant to the operating agreement Overlook Apartments Member is required to fund $23.9 million of the total development costs of $79.4 million, with the balance to be funded by a $55.5 million construction loan.

In general, the operating agreement of Overlook Apartments Investors provides that operating cash flows are distributed to members first to Overlook Apartments Member and then to Overlook 2C/3B based on a 6.5 percent preferred return on each members’ capital balance in priorities as detailed in the operating agreement.  Excess operating cash flows are distributed to the members in accordance with their ownership percentages.  As of September 30, 2013, Overlook Apartments Member had a capital balance of $23.9 million with an accumulated unpaid preferred return of $1.1 million.  It is anticipated that Overlook 2C/3B will not be required to fund any capital.

Net cash flows from a capital event are distributed first to the extent of any accumulated unpaid preferred return, then to repay each members’ capital balance in the same priority as operating cash flows, then 100 percent to Overlook Apartments Member until it receives a nine percent IRR, and then 70 percent to Overlook Apartments Member and 30 percent to Overlook 2C/3B, pari passu, until Overlook Apartments Member receives an 11 percent IRR, as defined, with any excess distributed to the members in accordance with their ownership percentages.

Overlook 2C/3B and its affiliates are restricted from commencing any new residential real property development at Overlook Ridge until January 2015, without the prior written consent of Overlook Apartments Member.  Thereafter, Overlook Apartments Member has a right of first offer to participate in future Overlook Ridge Projects, all as more fully set forth in the operating agreement of Overlook Ridge Apartments Investors.

Overlook Apartments Investors has a construction loan not to exceed $55.5 million with a balance of $5.2 million as of September 30, 2013, which bears interest at LIBOR plus 250 basis points and matures in December 2015.  The loan provides, subject to certain conditions, two one-year extension options with a fee of 25 basis points each.  The Company has guaranteed lien-free completion of the project to the lender and Overlook Apartments Member.  The Company has also guaranteed repayment of $8.3 million of the loan.  Upon the project achieving a debt service coverage ratio of 1.25, as defined, the repayment guaranty ends.  Additionally, the Company has guaranteed payment of all interest due under the loan.  On January 18, 2013, the interest rate on an amount not expected to exceed 95 percent of the outstanding loan balance was fixed at 3.0875 percent from September 3, 2013 to November 2, 2015.

The operating agreement of Overlook 2C/3B provides, among other things, for the distribution of net operating cash flow to the members, as follows:

·  
First, to each member in proportion to and to the extent of such member’s unrecovered return of nine percent on unrecovered capital; and
·  
Second, to the members in accordance with their ownership percentages.
 
 
 
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Rowe has an unrecovered notional capital account balance of $7.2 million and the Company has an unrecovered capital account with $0.2 million associated with its land capital as of September 30, 2013.

The Company performed development, management, and other services for Overlook Apartments Investors and recognized $209,000 and $387,000 in income for such services in the three and nine months ended September 30, 2013, respectively.

Roseland/North Retail, L.L.C.
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 20 percent residual interest in Port Imperial North Retail, L.L.C. (“PI North Retail”), an entity that owns commercial condominium units (the “Riverwalk Property”), with the remaining interest owned by PR II Port Imperial Retail, LLC (“Prudential-PI”).  The Riverwalk Property aggregates 30,745 square feet of retail space and is located in West New York, New Jersey.

In general, the operating agreement of PI North Retail provides that operating cash flows are distributed first to Prudential-PI and then to the Company based on a nine percent operating return on each members’ capital balance in priorities as detailed in the operating agreement.  Excess operating cash flows are distributed to the members in accordance with ownership percentages.  As of September 30, 2013, Prudential-PI had a capital balance of $4.3 million and an accumulated unpaid operating return of $1.6 million and the Company had no capital balance.

Net cash flows from a capital event are distributed first to the extent of any accumulated unpaid operating return and then to repay each members’ capital balance in the same priority as operating cash flows, with any excess distributed to the members in accordance with their ownership percentages.

The Company performed management, leasing, and other services for PI North Retail and recognized $8,000 and $23,000 in income for such services in the three and nine months ended September 30, 2013, respectively.

BNES Associates III
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 31.25 percent indirect interest in an entity that owns a 106,345 square foot fully-leased office property located in West Orange, New Jersey.

The Company owns 50 percent of BNES Associates III (“BNES”) with the remaining interest owned by L.A.H. Partners Crystal Lake, L.L.C.  BNES owns a 62.50 percent interest in the property-owning entity, The Offices at Crystal Lake, L.L.C. (“Crystal Lake”).

The operating agreement of Crystal Lake provides, among other things, for the distribution of net cash flow to the members in accordance with their percentage interests.

Crystal Lake has a mortgage loan, with a balance of $7.5 million as of September 30, 2013 collateralized by the office property, which bears interest at 4.76 percent and matures in November 2023.

Portside Master Company, L.L.C.
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 38.25 percent indirect residual interest in a to-be-built, 176-unit multi-family rental property (“Portside at Pier One Building Seven Project”).  The Portside at Pier One Building Seven Project is located in East Boston, Massachusetts and began construction in December 2012 with anticipated initial deliveries in the third quarter 2014.  The project is subject to a ground lease with the Massachusetts Port Authority.  The ground lease provides for fixed and percentage rent.

The Company owns 85 percent of Portside Master Company, L.L.C. (“Portside Master”) with the remaining interest owned by Portside Boston, L.L.C.  Portside Master holds a 45 percent interest in the development project-owning entity, Portside Apartment Holdings, L.L.C. (“Portside Apartment Holdings”) with the remaining interest owned by PR II Portside Investors L.L.C. (“Prudential Portside”).  Pursuant to the operating agreement, Prudential Portside is required to fund $23.8 million of the estimated total development costs of $66.3 million, with the balance to be funded by a $42.5 million construction loan.

In general, the operating agreement of Portside Apartment Holdings provides that operating cash flows are distributed to members first to Prudential Portside and then to Portside Master based on a nine percent operating return on each members’ capital balance in priorities as detailed in the operating agreement.  Excess operating cash flows are distributed to the members in accordance with their ownership percentages.  As of September 30, 2013, Prudential Portside had a capital balance of $16.8 million and an unpaid operating return of $0.6 million.  It is anticipated that Portside Master will not be required to fund any capital.
 
 
 
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Net cash flows from a capital event are distributed first to the extent of any accumulated unpaid operating return, then to repay each members’ capital balance in the same priority as operating cash flows, and then 65 percent to Prudential Portside and 35 percent to Portside Master, pari passu, until Prudential Portside receives a 12 percent IRR, as defined, with any excess distributed to the members in accordance with their ownership percentages.

The operating agreement of Portside Master provides, among other things, for the distribution of net cash flow to the members in accordance with their ownership percentages.

Portside Apartment Holdings has a construction loan in an amount not to exceed $42.5 million with no balance at September 30, 2013, which bears interest at LIBOR plus 250 basis points and matures in December 2015.  The loan provides, subject to certain conditions, two one-year extension options with a fee of 12.5 basis points for year one and 25 basis points for year two.  The Company has guaranteed lien-free completion of the project to the lender, Prudential Portside and Massachusetts Port Authority.  The Company has also guaranteed repayment of 50 percent of the loan until project completion, when the repayment guaranty is reduced to 25 percent.  The Company’s repayment guaranty is further reduced to 10 percent upon achieving a debt service coverage ratio of 1.25, as defined.  Additionally, the Company has guaranteed payment of all interest due under the loan.

The Company performed development, management, and other services for Portside Apartment Holdings and recognized $149,000 and $360,000 in income for such services in the three and nine months ended September 30, 2013, respectively.

PruRose Port Imperial South 13, LLC
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 20 percent residual interest in a to-be-built, 280-unit multi-family rental property (“Port Imperial 13”) located in Weehawken, New Jersey.  Port Imperial 13 began construction in January 2013 with anticipated initial deliveries in the fourth quarter 2014.

The remaining interest in the PruRose Port Imperial South 13, LLC (“PruRose 13”) is owned by PR II Port Imperial South 13 Investor LLC (“Prudential 13”).  Pursuant to the operating agreement, Prudential 13 is required to fund $23.1 million of the estimated total development costs of $96.4 million, not including contributed land capital of $21 million, which is allocated $19.2 million to Prudential 13 and $1.8 million to the Company, with the balance to be funded by a $73.4 million construction loan.

In general, the operating agreement of PruRose 13 provides that operating cash flows are distributed to members first to Prudential 13 and then to the Company based on a nine percent operating return on each members’ capital balance in priorities as detailed in the operating agreement.  Excess operating cash flows are distributed to the members in accordance with their ownership percentages.  As of September 30, 2013, Prudential 13 had a capital balance of $40.5 million and an accumulated unpaid operating return of $2.7 million and the Company had a capital balance of $1.8 million and an accumulated unpaid operating return of $0.1 million.

Net cash flows from a capital event are distributed first to the extent of any accumulated unpaid operating return and then to repay each members’ capital balance in the same priority as operating cash flows, with any excess distributed to the members in accordance with their ownership percentages.

Subject to an agreement, 20 percent of distributions received by the Company, in excess of an eight percent IRR, shall be paid to another party.

PruRose 13 has a construction loan in an amount not to exceed $73.4 million with no balance at September 30, 2013.  The loan bears interest at a rate of LIBOR plus 215 basis points and matures in June 2016.  The loan provides, subject to certain conditions, a one-year extension option followed by a six-month extension option with a fee of 25 basis points each.  The Company has guaranteed lien-free completion of the project to the lender and Prudential.  The Company has also guaranteed repayment of up to $11 million of the loan.   The Company’s guaranty of repayment is reduced to $7.4 million upon achieving a debt service coverage ratio of 1.25, and to zero upon achieving a debt service coverage ratio of 1.40, as defined.  Additionally, the Company has guaranteed payment of all interest due under the loan.  On December 28, 2012, the interest rate on an amount not expected to exceed 95 percent of the outstanding loan balance was fixed at 2.79 percent from July 1, 2013 to January 1, 2016.
 
 
 
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The Company performed development, management, and other services for PruRose 13 and recognized $212,000 and $537,000 in income for such services in the three and nine months ended September 30, 2013, respectively.

Roseland/Port Imperial Partners, L.P.
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 20 percent residual interest in a to-be-built, 363-unit multi-family rental property (the “Parcel C Project”), undeveloped land parcels, parcels 6, I and J (“Port Imperial North Land”), and a parcel of land with a ground lease to a retail tenant all located in West New York, New Jersey.

The remaining interests in the development project-owning entity, Roseland/Port Imperial Partners, L.P. (“Roseland/PI”) are owned 79 percent by Prudential and one percent by Prudential-Port Imperial LLC (“Prudential LLC”).

The operating agreement of Roseland/PI provides, among other things, for the distribution of net cash flow to the members, as follows:

·  
to Prudential and Prudential LLC, in proportion to the excess of their operating return of ten percent on Prudential’s Parcel C contribution, as defined, accrued to the date of such distribution over the aggregate amounts previously distributed to such partner for such return;
·  
to the partners, to the extent of any excess of such partner’s operating return of ten percent on its additional capital contributions over the aggregate amounts previously distributed for such return; and
·  
to the partners in accordance with their percentage interests.

As of September 30, 2013, Prudential and Prudential LLC had a Parcel C capital balance of $18.2 million and an accumulated unpaid operating return of $3.8 million and the Company had a capital balance of $26,000.  Construction of the Parcel C Project is expected to start in 2015.

In addition, the operating agreement provides each member a land capital account associated with the Port Imperial North Land.  As of September 30, 2013, Prudential and Prudential LLC had a land capital account balance of $57.7 million and the Company had a land capital account of $5.0 million. The land capital account balances do not earn a return and will be contributed to a development entity upon construction start for each development parcel, as defined.  Also, as of September 30, 2013, Prudential and Prudential LLC had a capital balance of $584,000 and an accumulated unpaid operating return of $23,000 and the Company had a capital balance of $146,000 and an accumulated unpaid operating return of $6,000 related to the Port Imperial North land.

RoseGarden Marbella South, L.L.C.
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 24.27 percent indirect residual interest in a to-be-built, 311-unit high-rise multi-family rental property (the “Marbella II Project”) which is located in Jersey City, New Jersey.  The Marbella II Project began construction in the third quarter 2013.

The Company owns 48.5325 percent of RoseGarden Marbella South, L.L.C. (“RoseGarden South”) with the remaining interest owned by MG Marbella Partners II, L.L.C.

RoseGarden South holds a 50 percent interest in the development project-owning entity, PruRose Marbella II, L.L.C. (“PruRose/Marbella II”), with the remaining interest owned by PRISA III Investments LLC (“Prudential-Marbella II”).  Total estimated development costs of $132.1 million are anticipated to be funded with $54.7 million of member capital, $41.4 million from Prudential-Marbella II and $13.3 million from the Company, with the balance to be funded by a $77.4 million construction loan.

In general, the operating agreement of PruRose/Marbella II provides that operating cash flows are distributed to members pro-rata based on a nine percent operating return on each members’ capital balance in priorities as detailed in the operating agreement.  Excess operating cash flows are distributed to the members in accordance with their ownership percentages.  As of September 30, 2013, Prudential-Marbella II had a capital balance of $3.4 million and an accumulated unpaid operating return of $0.3 million and RoseGarden South had a capital balance of $1.7 million with an unpaid operating return of $39,000.
 
 
 
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Net cash flows from a capital event are distributed first to the extent of any accumulated unpaid operating return and then to repay each members’ capital balance in the same priority as operating cash flows, with any excess distributed to the members in accordance with their ownership percentages.

Net cash flow for RoseGarden South is distributed to the members in accordance with their ownership percentages.

On October 1, 2013, PruRose/Marbella II closed on a construction loan in an amount not to exceed $77.4 million.  The loan bears interest at a rate of LIBOR plus 225 basis points and matures April 1, 2017 and provides subject to certain conditions, two one year extension options with a fee of 25 basis points for each year.  The Company has guaranteed lien-free completion of the project to the lender and Prudential-Marbella II.  Additionally, the Company has guaranteed payments of all interest, operating deficits and deferred equity due under the loan.

The Company performed development, management and other services for PruRose Marbella II and recognized $195,000 and $213,000 in income for such services in the three and nine months ended September 30, 2013, respectively.

PruRose Riverwalk G, L.L.C.
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 25 percent indirect residual interest in a to-be-built, 12-story, 316-unit multi-family rental property (the “RiverTrace Project”).  The RiverTrace Project is located in West New York, New Jersey. The RiverTrace Project began construction in November 2011 with anticipated initial deliveries in the fourth quarter 2013.

The Company owns 50 percent of PruRose Riverwalk G, L.L.C. (“PruRose Riverwalk”) with the remaining interest owned by Prudential.

PruRose Riverwalk owns a 50 percent interest in the project-owning entity, Riverwalk G Urban Renewal, L.L.C. (“Riverwalk G”), with the remaining interest owned by West New York Parcel G Apartments Investors, LLC (“Investor”).  Pursuant to the operating agreement, Investor is required to fund $35 million of the estimated total development costs of $118.1 million, with the balance to be funded by an $83.1 million construction loan.

In general, the operating agreement of Riverwalk G provides that operating cash flows are distributed to members first to Investor and then to PruRose Riverwalk based on a 7.75 percent operating return on each members’ capital balance in priorities as detailed in the operating agreement.  Excess operating cash flows are distributed to the members in accordance with their ownership percentages.  As of September 30, 2013, Investor had a capital balance of $35 million and an unpaid operating return of $6.0 million.  It is not anticipated that PruRose Riverwalk will be required to fund any capital.

Net cash flows from a capital event are distributed first to the extent of any accumulated unpaid operating return, then to repay each members’ capital balance in the same priority as operating cash flows, and then 100 percent to Investor until Investor receives a 7.75 percent IRR, as defined, with any excess distributed to the members in accordance with their ownership percentages.

The operating agreement of PruRose Riverwalk provides, among other things, for the distribution of net cash flow to the members in accordance with their ownership percentages.  In addition, the operating agreement requires that the initial $1.3 million in distributions to the Company be redirected to Prudential.

Riverwalk G has a construction loan in an amount not to exceed $83.1 million, with a balance of $54.6 million as of September 30, 2013, which bears interest at six percent and matures in July 2021.  The interest-only loan is collateralized by the RiverTrace Project.  The Company has guaranteed a lien-free completion of the project to the lender and Investor.  The Company guarantees $15.0 million of the loan principal until six months after completion of the project.

The Company performed development, management, and other services for Riverwalk G and recognized $30,000 and $379,000 in income for such services in the three and nine months ended September 30, 2013, respectively.
 
 
 
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ELMAJO Urban Renewal Associates, LLC/Estuary Urban Renewal Unit B, LLC
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 7.5 percent residual interest in a to-be-built, three-building, 582 multi-family rental property located in Weehawken, New Jersey (the “Lincoln Harbor Project”), with the remaining interest owned by ELMAJO Management, Inc. (“EMI”).  The first phase, Building A, with 181 units, and Building C, with 174 units, began construction in 2012 and the second phase, Building B, with 227 units, began construction in January 2013 with anticipated initial deliveries in the first quarter 2014.  On March 13, 2013, Estuary Urban Renewal Unit B, LLC (“Estuary UR”) was formed to own and develop the second phase, Building B.  Estimated total development costs for the Lincoln Harbor Project is $218.3 million. EMI is required to fund any capital requirements in excess of construction financing.  The Company has no funding requirements to the venture.

The operating agreements of ELMAJO Urban Renewal Associates, LLC (“ELMAJO UR”), the entity which owns the Lincoln Harbor Project, Building A and C, and Estuary UR, the entity that owns the Lincoln Harbor Project Building B, provides, among other things, for the distribution of net distributable cash to the members, as follows:

·  
First, to the members to the extent of and in proportion to their respective preferred return of 8.50 percent on the member’s unrecovered capital; and
·  
Second, to the members in accordance with their ownership percentages.

As of September 30, 2013, EMI and Estuary UR have a combined capital balance of $73.9 million and an unpaid preferred return of $13.5 million.

ELMAJO UR has a construction loan for Building A and Building C in an amount not to exceed $95 million, with a balance of $40.2 million as of September 30, 2013, which bears interest at LIBOR plus 210 basis points and matures in June 2016.  The loan provides, subject to certain conditions, a one-year extension option with a fee of 25 basis points.

Estuary UR has a construction loan for Building B in an amount not to exceed $57 million, with a balance of $4.1 million as of September 30, 2013, which bears interest at LIBOR plus 210 basis points and matures in January 2017.  The loan provides, subject to certain conditions, a one-year extension option with a fee of 25 basis points.

The Company performed development and other services for ELMAJO UR and Estuary UR and recognized $255,000 and $735,000 in income for such services in the three and nine months ended September 30, 2013, respectively.

RiverPark at Harrison I, L.L.C.
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 36 percent interest in a multi-phase project located in Harrison, New Jersey (the “RiverPark Project”).  Construction of a 141-unit multi-family rental property of the RiverPark Project is projected to start in the near term.  Estimated total development costs of $28.2 million are expected to be funded with a $23.4 million construction loan, with the balance to be funded with member capital.  The Company is required to fund 40.5 percent of capital.

The remaining interests in the development project-owning entity, RiverPark at Harrison I Urban Renewal, L.L.C. (“RiverPark”) are owned 36 percent by Chall Enterprises, L.L.C. and 28 percent by an investor group.
 
 
In general, the operating agreement of RiverPark provides, among other things, for the distribution of net cash flow to the members in accordance with their ownership percentages.

On June 27, 2013, RiverPark obtained a construction loan in an amount not to exceed $23.4 million with a balance of $0.9 million as of September 30, 2013. The loan, which bears interest at LIBOR plus 235 basis points, matures in June 2016 and provides, subject to certain conditions, two one-year extension options with a fee of 20 basis points for each year.  The Company has guaranteed lien-free completion of the project to the lender and repayment of 25 percent of the principal amount at maturity.  The Company’s repayment guaranty is reduced to 10 percent upon project completion, achieving a debt service coverage ratio of 1.30 and satisfaction of the loan-to-value ratio of 65 percent, as defined.  Additionally, the Company has guaranteed payment of all interest due under the loan.

 
 
 
32

 

 
150 Main Street, L.L.C.
On October 23, 2012, as part of the Roseland transaction, the Company had acquired a 26.25 percent interest in a to-be-built, 108-unit multi-family rental property located in Eastchester, New York (the “Eastchester Project”) for approximately $4.9 million.  The remaining interests in the development project-owning entity, 150 Main Street, L.L.C. (“Eastchester”) was owned 26.25 percent by JMP Eastchester, L.L.C. and 47.5 percent by Hudson Valley Land Holdings, L.L.C. (“HVLH”).  The Eastchester Project is expected to start in the near term.  Estimated total development costs of $46 million are expected to be funded with a $27.5 million construction loan and the balance of $18.5 million to be funded with member capital.

The operating agreement of Eastchester provides, among other things, for the distribution of net operating cash flow to the members, as follows:

·  
to HVLH to the extent of its accrued but unpaid preferred return of eight percent on the unrecovered allocated land value, as defined;
·  
to the members, pro rata, to the extent of their respective accrued but unpaid return of eight percent on their unrecovered capital percentages; and
·  
to the members in accordance with their ownership percentages.

Net cash flows from a capital event are distributed to the members, first, in respect of unrecovered return and then unrecovered capital on a pro rata basis, with any excess in accordance with their ownership percentages.

On August 22, 2013, the operating agreement of Eastchester was modified which increased the Company’s effective ownership to 76.25 percent, with the remaining 23.75 percent owned by HVLH.  The agreement also provided the Company with control of all major decisions.  Accordingly, effective from this date, the Company is consolidating Eastchester under the provisions of ASC 810, Consolidation.  As the carrying value approximated the fair value of the net assets acquired, there was no holding period gain or loss recognized on this transaction.

The Company performed development and other services for Eastchester and recognized $87,000 and $102,000 in income for such services in the three and nine months ended September 30, 2013, respectively.

RoseGarden Monaco, L.L.C.
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 41.67 percent interest in the rights to acquire a land parcel (“San  Remo Land”) located in Jersey City, New Jersey, pursuant to an agreement which expires in 2017.

The remaining interest in the rights-owning entity, RoseGarden Monaco, L.L.C. is owned by MG Monaco Partners, L.L.C.  The operating agreement requires capital contributions and distributions in accordance with their ownership percentages.

Hillsborough 206 Holdings, L.L.C.
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 50 percent interest in a site zoned for retail uses (excluding supermarkets) which is located in Hillsborough, New Jersey.

The remaining interest in the property-owning entity, Hillsborough 206 Holdings, L.L.C. (“Hillsborough 206”) is owned by BNE Investors VIII, L.L.C.

The operating agreement of Hillsborough 206 provides, among other things, for the distribution of distributable cash to the members, in accordance with their ownership percentages.

Grand Jersey Waterfront Urban Renewal Associates, L.L.C.
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 50 percent interest in an entity designated as redeveloper of a land parcel (“Liberty Landings”) located in Jersey City, New Jersey.  The remaining interest in the entity, Grand Jersey Waterfront Urban Renewal Associates, L.L.C., is owned by Waterfront Realty Company, L.L.C.

Capital requirements are funded in accordance with ownership percentages.
 
 
 
33

 
 
Crystal House Apartments Investors LLC
On March 20, 2013, the Company entered into a joint venture with a fund advised by UBS Global Asset Management (“UBS”) to form Crystal House Apartments Investors LLC (“CHAI”) which acquired the 828-unit multi-family property known as Crystal House located in Arlington, Virginia (“Crystal House Property”) for approximately $262.5 million.  The acquisition included vacant land to accommodate the development of approximately 295 additional units of which 252 are currently approved. The Company holds a 25 percent interest in the Crystal House property and a 50 percent interest in the vacant land.

In general, the operating agreement of CHAI provides that net operating cash flows are distributed to the members in accordance with ownership percentages.  Net cash flows from a capital event are distributed first to the members in accordance with ownership percentages until they receive a nine percent IRR, as defined, with any excess distributed 50 percent to the Company and 50 percent to UBS.

CHAI obtained a mortgage loan on the acquired property, which has a balance of $165 million as of September 30, 2013, bears interest at 3.17 percent and matures in March 2020.  The loan, which is interest-only during the initial 5-year term and amortizable over a 30-year period for the remaining term, is collateralized by the Crystal House Property.

The Company performed management, leasing and other services for CHAI and recognized $109,000 and $228,000 in income for such services in the three and nine months ended September 30, 2013.

Other
The Company acquires other ownership interests in various ventures from time to time, including residual interests in assets previously owned and interests in ventures whose business is related to its core operations.  These ventures are not expected to significantly impact the Company’s operations in the near term.


5.    DEFERRED CHARGES, GOODWILL AND OTHER ASSETS
           
           
   
September 30,
   
December 31,
(dollars in thousands)
 
2013
   
2012
Deferred leasing costs
$
 253,654
 
$
 267,197
Deferred financing costs
 
 25,396
   
 20,447
   
 279,050
   
 287,644
Accumulated amortization
 
 (124,437)
   
 (131,613)
Deferred charges, net
 
 154,613
   
 156,031
Notes receivable
 
 22,047
   
 -
In-place lease values, related intangible and other assets, net
 
 13,501
   
 19,284
Goodwill
 
 2,945
   
 2,945
Prepaid expenses and other assets, net
 
 91,293
   
 26,614
           
Total deferred charges, goodwill and other assets
$
 284,399
 
$
 204,874



 
34

 


6.    RESTRICTED CASH

Restricted cash includes tenant security deposits for certain of the Company’s properties, and escrow and reserve funds for debt service, real estate taxes, property insurance, capital improvements, tenant improvements, and leasing costs established pursuant to certain mortgage financing arrangements, and is comprised of the following:  (dollars in thousands)
           
           
   
September 30,
   
December 31,
   
2013
   
2012
Security deposits
$
7,780
 
$
 7,165
Escrow and other reserve funds
 
11,433
   
 12,174
           
Total restricted cash
$
19,213
 
$
 19,339



7.    DISCONTINUED OPERATIONS

The Company sold 24 office properties aggregating 3 million square feet and three developable land parcels for total net sales proceeds of approximately $390.6 million during the nine months ended September 30, 2013 and has presented them as discontinued operations in its statement of operations for all periods presented.   (See Note 3: Real Estate Transactions – Property Sales).

As the Company disposed of 2200 Renaissance Boulevard in King of Prussia, Pennsylvania; 95 Chestnut Ridge Road in Montvale, New Jersey; and three office buildings in Moorestown, New Jersey during the year ended December 31, 2012, the Company has presented the results from these assets as discontinued operations in its statements of operations for all periods presented.

The following table summarizes income from discontinued operations and the related realized gains (losses) and unrealized losses on disposition of rental property and impairments, net, for the three and nine month periods ended September 30, 2013 and 2012:  (dollars in thousands)

                         
                         
   
              Three Months Ended
 
              Nine  Months Ended
   
           September 30,
 
          September 30,
     
2013
   
2012
   
2013
   
2012
Total revenues
 
$
6,405
 
$
 17,376
 
$
33,610
 
$
 51,790
Operating and other expenses
   
(2,472)
   
 (6,606)
   
(13,454)
   
 (20,308)
Depreciation and amortization
   
(1,769)
   
 (4,351)
   
(8,196)
   
 (13,363)
Interest expense (net of interest income)
   
 -
   
 (82)
   
(118)
   
 (673)
                         
Income from discontinued operations
   
2,164
   
 6,337
   
11,842
   
 17,446
                         
Loss from early extinguishment of debt
   
 -
   
 -
   
 (703)
   
 -
Impairments
   
 -
   
 -
   
 (23,851)
   
 -
Unrealized losses on disposition of rental property
   
 -
   
 -
   
 -
   
 (2,134)
Realized gains on disposition of rental property
   
 47,321
   
 12
   
 84,930
   
 4,524
                         
Realized gains (losses) and unrealized losses on
                       
  disposition of rental property and impairments, net
 
47,321
   
 12
   
61,079
   
 2,390
                         
Total discontinued operations, net
 
$
49,485
 
$
 6,349
 
$
72,218
 
$
 19,836



 
35

 

8.    SENIOR UNSECURED NOTES

On May 8, 2013, the Company completed the sale of $275 million face amount of 3.15 percent senior unsecured notes due May 15, 2023 with interest payable semi-annually in arrears.  The net proceeds from the issuance of approximately $266.5 million, after underwriting discount and offering expenses, were used primarily to repay outstanding borrowings under the Company’s unsecured revolving credit facility.

A summary of the Company’s senior unsecured notes as of September 30, 2013 and December 31, 2012 is as follows:  (dollars in thousands)

                   
     
September 30,
   
December 31,
 
Effective
 
     
2013
   
2012
 
Rate (1)
 
4.600% Senior Unsecured Notes, due June 15, 2013 (2)
   
 -
 
$
 99,987
 
 4.742
%
5.125% Senior Unsecured Notes, due February 15, 2014
 
$
200,090
   
 200,270
 
 5.110
%
5.125% Senior Unsecured Notes, due January 15, 2015
   
149,879
   
 149,810
 
 5.297
%
5.800% Senior Unsecured Notes, due January 15, 2016
   
200,180
   
 200,237
 
 5.806
%
2.500% Senior Unsecured Notes, due  December 15, 2017
   
248,781
   
 248,560
 
 2.803
%
7.750% Senior Unsecured Notes, due August 15, 2019
   
248,746
   
 248,585
 
 8.017
%
4.500% Senior Unsecured Notes, due April 18, 2022
   
299,490
   
 299,445
 
 4.612
%
3.150% Senior Unsecured Notes, due May 15, 2023
   
269,171
   
 -
 
 3.517
%
                   
Total senior unsecured notes
 
$
1,616,337
 
$
 1,446,894
     

(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.
(2)
These notes were paid at maturity using available cash. 
 
 
The terms of the Company’s senior unsecured notes include certain restrictions and covenants which require compliance with financial ratios relating to the maximum amount of debt leverage, the maximum amount of secured indebtedness, the minimum amount of debt service coverage and the maximum amount of unsecured debt as a percent of unsecured assets. 


9.    UNSECURED REVOLVING CREDIT FACILITY

On July 16, 2013, the Company amended and restated its unsecured revolving credit facility with a group of 17 lenders.  The $600 million facility is expandable to $1 billion and matures in July 2017.  It has two six month extension options each requiring the payment of a 7.5 basis point fee.  The interest rate on outstanding borrowings (not electing the Company’s competitive bid feature) and the facility fee on the current borrowing capacity payable quarterly in arrears are based upon the Operating Partnership’s unsecured debt ratings, as follows:


         
Operating Partnership's
 
Interest Rate -
   
Unsecured Debt Ratings:
 
Applicable Basis Points
 
Facility Fee
Higher of S&P or Moody's
 
Above LIBOR
 
Basis Points
No ratings or less than BBB-/Baa3
 
170.0
 
35.0
BBB- or Baa3
 
130.0
 
30.0
BBB or Baa2(current)
 
110.0
 
20.0
BBB+ or Baa1
 
100.0
 
15.0
A- or A3 or higher
 
92.5
 
12.5

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 those above.

The terms of the unsecured facility include certain restrictions and covenants which limit, among other things 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 fixed charge coverage, the maximum amount of unsecured indebtedness, the minimum amount of unencumbered property interest coverage and certain investment limitations.  If an event of default has occurred and is continuing, the Company will not make any excess distributions except to enable the Company to continue to qualify as a REIT under the Code.
 
 
 
36

 

 
The lending group for the credit facility consists of: JPMorgan Chase Bank, N.A., as administrative agent; Bank of America, N.A., as syndication agent; Deutsche Bank AG New York Branch; U.S. Bank National Association and Wells Fargo Bank, N.A., as documentation agents; Capital One, National Association; Citibank N.A.; Comerica Bank; PNC Bank, National Association; SunTrust Bank; The Bank of Tokyo-Mitsubishi UFJ, LTD.; The Bank of New York Mellon; as managing agents; and Compass Bank; Branch Banking and Trust Company; TD Bank, N.A.; Citizens Bank of Pennsylvania; Mega International Commercial Bank Co., LTD.  New York Branch, as participants.

As of September 30, 2013 and December 31, 2012, the Company had no outstanding borrowings under its unsecured revolving credit facility.

Through July 15, 2013, the Company had a $600 million unsecured revolving credit facility, which had an interest rate on outstanding borrowings of LIBOR plus 125 basis points and a facility fee of 25 basis points.

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.  As of September 30, 2013 and December 31, 2012, the Company had no outstanding borrowings under the Money Market Loan.


10.   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, 2013, 30 of the Company’s properties, with a total book value of approximately $989 million, 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.


 
37

 

A summary of the Company’s mortgages, loans payable and other obligations as of September 30, 2013 and December 31, 2012 is as follows: (dollars in thousands)


                       
     
Effective
     
September 30,
 
December 31,
   
Property Name
Lender
 
Rate (a)
     
2013
 
2012
 
Maturity
51 Imclone (b)
Wells Fargo CMBS
 
 8.390 
%
   
 -
$
 3,878 
 
-
9200 Edmonston Road (c)
Principal Commercial Funding L.L.C.
 
 5.534 
%
 
$
4,158
 
 4,305 
 
05/01/13
6305 Ivy Lane (d)
RGA Reinsurance Company
 
 5.525 
%
   
5,811
 
 5,984 
 
10/01/13
Port Imperial South 4/5
Wells Fargo Bank N.A.
LIBOR+3.50
%
   
36,355
 
 34,889 
 
12/31/13
395 West Passaic
State Farm Life Insurance Co.
 
 6.004 
%
   
9,858
 
 10,231 
 
05/01/14
6301 Ivy Lane
RGA Reinsurance Company
 
 5.520 
%
   
5,514
 
 5,667 
 
07/01/14
35 Waterview Boulevard
Wells Fargo CMBS
 
 6.348 
%
   
18,502
 
 18,746 
 
08/11/14
6 Becker, 85 Livingston,
Wells Fargo CMBS
 
 10.220 
%
   
63,945
 
 63,126 
 
08/11/14
75 Livingston &
                     
20 Waterview (e)
                     
4 Sylvan
Wells Fargo CMBS
 
 10.190 
%
   
14,524
 
 14,485 
 
08/11/14
10 Independence
Wells Fargo CMBS
 
 12.440 
%
   
16,536
 
 16,251 
 
08/11/14
Port Imperial South
Wells Fargo Bank N.A.
LIBOR+1.75
%
   
43,045
 
 42,168 
 
09/19/15
4 Becker
Wells Fargo CMBS
 
 9.550 
%
   
38,681
 
 38,274 
 
05/11/16
5 Becker (f)