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, 2015

 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 26, 2015, there were 89,310,574 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):
3
       
   
Consolidated Balance Sheets as of September 30, 2015
4
   
     and December 31, 2014
 
       
   
Consolidated Statements of Operations for the three and nine months 
5
   
     ended September 30, 2015 and 2014
 
       
   
Consolidated Statement of Changes in Equity for the nine months 
6
   
     ended September 30, 2015
 
       
   
Consolidated Statements of Cash Flows for the nine months 
7
   
     ended September 30, 2015 and 2014
 
       
   
Notes to Consolidated Financial Statements
8
       
 
Item 2.
Management’s Discussion and Analysis of Financial Condition 
37
   
     and Results of Operations
 
       
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
57
       
 
Item 4.
Controls and Procedures
58
       
Part II
Other Information
 
       
 
Item 1.
Legal Proceedings
59
       
 
Item 1A.
Risk Factors
59
       
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
59
       
 
Item 3.
Defaults Upon Senior Securities
59
       
 
Item 4.
Mine Safety Disclosures
59
       
 
Item 5.
Other Information
59
       
 
Item 6.
Exhibits
59
       
Signatures
   
60
       
Exhibit Index
   
61
       


 
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, 2014.
 
The results of operations for the three and nine month periods ended September 30, 2015 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
 
2015
   
2014
Rental property
         
Land and leasehold interests
$
 706,122
 
$
 760,855
Buildings and improvements
 
 3,619,200
   
 3,753,300
Tenant improvements
 
 398,812
   
 431,969
Furniture, fixtures and equipment
 
 13,582
   
 12,055
   
 4,737,716
   
 4,958,179
Less – accumulated depreciation and amortization
 
 (1,434,603)
   
 (1,414,305)
           
Net investment in rental property
 
 3,303,113
   
 3,543,874
Cash and cash equivalents
 
 30,866
   
 29,549
Investments in unconsolidated joint ventures
 
 299,486
   
 247,468
Unbilled rents receivable, net
 
 118,466
   
 123,885
Deferred charges, goodwill and other assets, net
 
 200,723
   
 204,650
Restricted cash
 
 40,068
   
 34,245
Accounts receivable, net of allowance for doubtful accounts
         
of $1,579 and $2,584
 
 9,180
   
 8,576
           
Total assets
$
 4,001,902
 
$
 4,192,247
           
LIABILITIES AND EQUITY
         
Senior unsecured notes
$
 1,268,568
 
$
 1,267,744
Revolving credit facility
 
 35,000
   
 -
Mortgages, loans payable and other obligations
 
 740,024
   
 820,910
Dividends and distributions payable
 
 15,582
   
 15,528
Accounts payable, accrued expenses and other liabilities
 
 136,673
   
 126,971
Rents received in advance and security deposits
 
 47,645
   
 52,146
Accrued interest payable
 
 27,413
   
 26,937
Total liabilities
 
 2,270,905
   
 2,310,236
Commitments and contingencies
         
           
Equity:
         
Mack-Cali Realty Corporation stockholders’ equity:
         
Common stock, $0.01 par value, 190,000,000 shares authorized,
         
89,310,243 and 89,076,578 shares outstanding
 
 893
   
 891
Additional paid-in capital
 
 2,565,143
   
 2,560,183
Dividends in excess of net earnings
 
 (1,070,456)
   
 (936,293)
Total Mack-Cali Realty Corporation stockholders’ equity
 
 1,495,580
   
 1,624,781
           
Noncontrolling interests in subsidiaries:
         
Operating Partnership
 
 180,691
   
 202,173
Consolidated joint ventures
 
 54,726
   
 55,057
Total noncontrolling interests in subsidiaries
 
 235,417
   
 257,230
           
Total equity
 
 1,730,997
   
 1,882,011
           
Total liabilities and equity
$
 4,001,902
 
$
 4,192,247

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
   
2015
   
2014
   
2015
   
2014
Base rents
 
$
 119,707 
 
$
 125,793 
 
$
 364,746 
 
$
 393,054 
Escalations and recoveries from tenants
   
 15,050 
   
 19,172 
   
 49,291 
   
 61,736 
Real estate services
   
 7,510 
   
 7,622 
   
 22,555 
   
 21,323 
Parking income
   
 2,749 
   
 2,255 
   
 8,141 
   
 6,605 
Other income
   
 1,142 
   
 647 
   
 3,707 
   
 2,667 
Total revenues
   
 146,158 
   
 155,489 
   
 448,440 
   
 485,385 
                         
EXPENSES
                       
Real estate taxes
   
 19,143 
   
 22,154 
   
 63,005 
   
 69,880 
Utilities
   
 13,172 
   
 15,701 
   
 44,146 
   
 58,555 
Operating services
   
 24,535 
   
 26,519 
   
 78,607 
   
 83,581 
Real estate services expenses
   
 6,673 
   
 6,933 
   
 19,520 
   
 20,213 
General and administrative
   
 13,670 
   
 12,665 
   
 36,669 
   
 49,219 
Depreciation and amortization
   
 44,099 
   
 41,983 
   
 127,266 
   
 131,679 
Impairments
   
 164,176 
   
 -
   
 164,176 
   
 -
Total expenses
   
 285,468 
   
 125,955 
   
 533,389 
   
 413,127 
Operating income (loss)
   
 (139,310)
   
 29,534 
   
 (84,949)
   
 72,258 
                         
OTHER (EXPENSE) INCOME
                       
Interest expense
   
 (24,689)
   
 (27,353)
   
 (78,677)
   
 (85,458)
Interest and other investment income
   
 5 
   
 908 
   
 563 
   
 2,216 
Equity in earnings (loss) of unconsolidated joint ventures
   
 3,135 
   
 (1,268)
   
 (2,723)
   
 (2,060)
Realized gains (losses) on disposition of rental property, net
   
 18,718 
   
 264 
   
 53,261 
   
 54,848 
Gain on sale of investment in unconsolidated joint venture
   
 -
   
 -
   
 6,448 
   
 -
Total other (expense) income
   
 (2,831)
   
 (27,449)
   
 (21,128)
   
 (30,454)
Net income (loss)
   
 (142,141)
   
 2,085 
   
 (106,077)
   
 41,804 
Noncontrolling interest in consolidated joint ventures
   
 (281)
   
 145 
   
 582 
   
 757 
Noncontrolling interest in Operating Partnership
   
 15,530 
   
 (248)
   
 11,461 
   
 (4,754)
Net income (loss) available to common shareholders
 
$
 (126,892)
 
$
 1,982 
 
$
 (94,034)
 
$
 37,807 
                         
Basic earnings per common share:
                       
Net income (loss) available to common shareholders
 
$
 (1.42)
 
$
 0.02 
 
$
 (1.05)
 
$
 0.43 
                         
Diluted earnings per common share:
                       
Net income (loss) available to common shareholders
 
$
 (1.42)
 
$
 0.02 
 
$
 (1.05)
 
$
 0.43 
                         
Basic weighted average shares outstanding
   
 89,249 
   
 88,875 
   
 89,229 
   
 88,621 
                         
Diluted weighted average shares outstanding
   
 100,172 
   
 100,052 
   
 100,236 
   
 100,014 

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, 2015
 
 89,077
 
$
 891
 
$
 2,560,183
 
$
 (936,293)
 
$
 257,230
 
$
 1,882,011
Net income (loss)
 
 -
   
 -
   
 -
   
 (94,034)
   
 (12,043)
   
 (106,077)
Common stock dividends
 
 -
   
 -
   
 -
   
 (40,129)
   
 -
   
 (40,129)
Common unit distributions
 
 -
   
 -
   
 -
   
 -
   
 (4,927)
   
 (4,927)
Increase in noncontrolling interest
                                 
  in consolidated joint ventures
 
 -
   
 -
   
 -
   
 -
   
 251
   
 251
Redemption of common units
                                 
  for common stock
 
 294
   
 3
   
 5,367
   
 -
   
 (5,370)
   
 -
Shares issued under Dividend
                                 
  Reinvestment and Stock Purchase Plan
 
 2
   
 -
   
 54
   
 -
   
 -
   
 54
Directors' deferred compensation plan
 
 -
   
 -
   
 297
   
 -
   
 -
   
 297
Stock compensation
 
 46
   
 -
   
 1,556
   
 -
   
 -
   
 1,556
Cancellation of shares
 
 (109)
   
 (1)
   
 (2,038)
   
 -
   
 -
   
 (2,039)
Rebalancing of ownership percentage
                                 
  between parent and subsidiaries
 
 -
   
 -
   
 (276)
   
 -
   
 276
   
 -
Balance at September 30, 2015
 
 89,310
 
$
 893
 
$
 2,565,143
 
$
 (1,070,456)
 
$
 235,417
 
$
 1,730,997

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
   
2015
   
2014
Net income (loss)
 
$
 (106,077)
 
$
 41,804 
Adjustments to reconcile net income to net cash provided by
           
Operating activities:
           
Depreciation and amortization, including related intangible assets
   
 128,422 
   
 132,698 
Amortization of deferred stock units
   
 297 
   
 309 
Amortization of stock compensation
   
 1,500 
   
 6,439 
Amortization of deferred financing costs
   
 2,846 
   
 2,306 
Amortization of debt discount and mark-to-market
   
 2,791 
   
 5,502 
Equity in (earnings) loss of unconsolidated joint ventures
   
 2,723 
   
 2,060 
Distributions of cumulative earnings from unconsolidated joint ventures
   
 3,145 
   
 10,974 
Realized (gains) loss on disposition of rental property, net
   
 (53,261)
   
 (54,848)
Realized (gains) loss on sale of investment in unconsolidated joint venture
   
 (6,448)
   
 -
Impairments
   
 164,176 
   
 -
Changes in operating assets and liabilities:
           
Decrease (increase) in unbilled rents receivable, net
   
 17 
   
 (4,477)
Increase in deferred charges, goodwill and other assets
   
 (23,387)
   
 (28,544)
Increase in accounts receivable, net
   
 (603)
   
 (1,911)
Increase in accounts payable, accrued expenses and other liabilities
   
 5,298 
   
 13,565 
Decrease in rents received in advance and security deposits
   
 (4,502)
   
 (5,938)
Increase (decrease) in accrued interest payable
   
 7,751 
   
 (4,440)
             
Net cash provided by operating activities
 
$
 124,688 
 
$
 115,499 
             
CASH FLOWS FROM INVESTING ACTIVITIES
           
Rental property acquisitions and related intangibles
 
$
 (6,057)
 
$
 (46,883)
Rental property additions and improvements
   
 (59,700)
   
 (77,109)
Development of rental property and other related costs
   
 (49,959)
   
 (4,881)
Proceeds from the sales of rental property
   
 81,049 
   
 274,839 
Proceeds from the sale of investment in unconsolidated joint venture
   
 6,448 
   
 -
Investments in notes receivable
   
 -
   
 (62,276)
Repayment of notes receivable
   
 7,750 
   
 10,250 
Investment in unconsolidated joint ventures
   
 (68,468)
   
 (57,568)
Distributions in excess of cumulative earnings from unconsolidated joint ventures
   
 4,329 
   
 36,303 
Increase in restricted cash
   
 (5,823)
   
 (6,777)
             
Net cash (used in) provided by investing activities
 
$
 (90,431)
 
$
 65,898 
             
CASH FLOW FROM FINANCING ACTIVITIES
           
Borrowings from revolving credit facility
 
$
 179,000 
 
$
 262,328 
Repayment of revolving credit facility
   
 (144,000)
   
 (262,328)
Repayment of senior unsecured notes
   
 -
   
 (200,000)
Proceeds from mortgages and loans payable
   
 6,193 
   
 28,350 
Repayment of mortgages, loans payable and other obligations
   
 (29,307)
   
 (44,825)
Payment of contingent consideration
   
 -
   
 (5,228)
Payment of financing costs
   
 (98)
   
 (1,021)
Cash from noncontrolling interests
   
 251 
   
 -
Payment of dividends and distributions
   
 (44,979)
   
 (74,851)
             
Net cash used in financing activities
 
$
 (32,940)
 
$
 (297,575)
             
Net increase (decrease) in cash and cash equivalents
 
$
 1,317 
 
$
 (116,178)
Cash and cash equivalents, beginning of period
   
 29,549 
   
 221,706 
             
Cash and cash equivalents, end of period
 
$
 30,866 
 
$
 105,528 


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, 2015, the Company owned or had interests in 274 properties, consisting of 146 office and 109 flex properties, totaling approximately 29.7 million square feet, leased to approximately 1,900  commercial tenants, and 19 multi-family rental properties containing  5,644 residential units, plus developable land (collectively, the “Properties”).  The Properties are comprised of 146 office buildings totaling approximately 24.4 million square feet (which include 36 buildings, aggregating approximately 5.6 million square feet owned by unconsolidated joint ventures in which the Company has investment interests), 94 office/flex buildings totaling approximately 4.8 million square feet, six industrial/warehouse buildings totaling approximately 387,400 square feet, 19 multi-family properties totaling 5,644 apartments (which include 13 properties aggregating 4,343 apartments owned by unconsolidated joint ventures in which the Company has investment interests), five parking/retail properties totaling approximately 121,500 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 (i) the ability to make decisions about the entity's activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; (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.

As of September 30, 2015 and December 31, 2014, the Company’s investments in consolidated real estate joint ventures in which the Company is deemed to be the primary beneficiary have total real estate assets of $254 million and $242.9 million, respectively, mortgages of $100.7 million and $94.3 million, respectively, and other liabilities of $17.5 million and $15.7 million, respectively. 

The preparation of financial statements in conformity with 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 $0.9 million and $1.0 million for the three months ended September 30, 2015 and 2014, respectively, and $3.5 million and $2.7 million for the nine months ended September 30, 2015 and 2014, respectively.  Included in total rental property is construction, tenant improvement and development in-progress of $103.1 million and $62.8 million as of September 30, 2015 and December 31, 2014, 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 substantial 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.

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.
 
 
 
9

 

 
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 value 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.  See Note 3: Recent Transactions – Impairments on Properties Held and Used.

Rental Property
 
Held for Sale
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.
 
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 value 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 extent 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 value of the investment over the value of the investment.  The Company’s estimates of value for each investment (particularly in 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. 
 
 
 
 
10

 
 
 
 
 
  
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 $945,000 and $778,000 for the three months ended September 30, 2015 and 2014, respectively, and $2,846,000 and $2,306,000 for the nine months ended September 30, 2015 and 2014, respectively.  If a financing obligation is extinguished early, any unamortized deferred financing costs are written off and included in gains (losses) from early extinguishment of debt.  No such unamortized costs were written off for the nine months ended September 30, 2015 and 2014.
 
 
Deferred
Leasing Costs
Costs incurred in connection with commercial 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 related to commercial leases, which is capitalized and amortized, was approximately $922,000 and $940,000 for the three months ended September 30, 2015 and 2014, respectively, and approximately $2,738,000 and $2,816,000 for the nine months ended September 30, 2015 and 2014, respectively.
 
 
Goodwill
Goodwill represents the excess of the purchase price over the fair value of net tangible and intangible assets acquired in a business combination. Goodwill is allocated to various reporting units, as applicable.  Each of the Company’s segments consists of a reporting unit. Goodwill is not amortized.  Management performs an annual impairment test for goodwill during the fourth quarter and between annual tests, management evaluates the recoverability of goodwill whenever events or changes in circumstances indicate that the carrying value of goodwill may not be fully recoverable.  In its impairment tests of goodwill, management first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value.  If, based on this assessment, management determines that the fair value of the reporting unit is not less than its carrying value, then performing the additional two-step impairment test is unnecessary. If the carrying value of goodwill exceeds its fair value, an impairment charge is recognized.
 
 
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.
 
 
 
11

 

 
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 13: Tenant Leases.

Real estate services revenue includes property management, development, construction 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.

Parking income includes income from parking spaces leased to tenants and others.

Other income includes income from tenants for additional services arranged for by the Company and income from tenants for early lease terminations.
 
 
Allowance for
Doubtful Accounts
Management performs a detailed review of amounts due from tenants to determine if an allowance for doubtful accounts is required based on factors affecting the collectability of the accounts receivable balances. The factors considered by management in determining which individual tenant receivable balances, or aggregate receivable balances, require a collectability allowance include the age of the receivable, the tenant’s payment history, the nature of the charges, any communications regarding the charges and other related information. 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 (determined by excluding any net capital gains) to its shareholders.  If and to the extent the Company retains and does not distribute any net capital gains, the Company will be required to pay federal, state and local taxes on such net capital gains at the rate applicable to capital gains of a corporation.  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.   The Company has conducted business through its TRS entities for certain property management, development, construction and other related services, as well as to hold a joint venture interest in a hotel and other matters.

As of September 30, 2015, the Company had a deferred tax asset related to its TRS activity with a balance of approximately $16.0 million which has been fully reserved for through a valuation allowance.  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, 2015, the tax years that remain subject to examination by the major tax jurisdictions under the statute of limitations are generally from the year 2010 forward.
 
 
 
12

 
 
 
 
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 from continuing operations 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).

Dividends and
 
Distributions
Payable
The dividends and distributions payable at September 30, 2015 represents dividends payable to common shareholders (89,310,308 shares) and distributions payable to noncontrolling interest common unitholders of the Operating Partnership (10,790,142 common units) for all such holders of record as of October 5, 2015 with respect to the third quarter 2015.  The third quarter 2015 common stock dividends and common unit distributions of $0.15 per common share and unit were approved by the Board of Directors on September 22, 2015 and paid on October 15, 2015.

The dividends and distributions payable at December 31, 2014 represents dividends payable to common shareholders (88,866,652 shares) and distributions payable to noncontrolling interest common unitholders of the Operating Partnership (11,083,876 common units) for all such holders of record as of January 6, 2015 with respect to the fourth quarter 2014.  The fourth quarter 2014 common stock dividends and common unit distributions of $0.15 per common share and unit were approved by the Board of Directors on December 9, 2014 and paid on January 14, 2015.

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”), restricted stock units (“RSUs”), performance share units (“PSUs”), total stockholder return based performance shares (“TSR”)  and stock options at the grant date be amortized ratably into expense over the appropriate vesting period.  The Company recorded stock compensation expense of $695,000 and $830,000 for the three months ended September 30, 2015 and 2014, respectively, and $1,500,000 and $5,094,000 for the nine months ended September 30, 2015 and 2014, respectively.  The amount for the nine months ended September 30, 2014 included $3,150,000 related to the departure of certain executive officers.

Other
 
Comprehensive
 
Income
Other comprehensive income (loss), if any, 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, 2015 and 2014, and no accumulated other comprehensive income as of September 30, 2015 and December 31, 2014.

 
13

 

Fair Value
 
Hierarchy
The standard Fair Value Measurements specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs).  The following summarizes the fair value hierarchy:

·  
Level 1: Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
·  
Level 2: Quoted prices for identical assets and liabilities in markets that are inactive, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly, such as interest rates and yield curves that are observable at commonly quoted intervals and
·  
Level 3: Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy.  In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety.  The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

Discontinued
 
Operations
In April 2014, the Financial Accounting Standards Board (“FASB”) issued guidance related to the reporting of discontinued operation and disclosures of disposals of components of an entity.  This guidance defines a discontinued operation as a component or group of components disposed or classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity’s operations and final result; the guidance states that a strategic shift could include a disposal of a major geographical area of operations, a major line of business, a major equity method investment or other major parts of an entity.  The guidance also provides for additional disclosure requirements in connection with both discontinued operations and other dispositions not qualifying as discontinued operations.  The guidance is effective for all companies for annual and interim periods beginning on or after December 15, 2014.  The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date.  All entities could early adopt the guidance for new disposals (or new classifications as held for sale) that had not been reported in financial statements previously issued or available for issuance. The Company elected to early adopt this standard effective with the interim period beginning January 1, 2014. Prior to January 1, 2014, properties identified as held for sale and/or disposed of were presented in discontinued operations for all periods presented. 

Impact Of
Recently-Issued
Accounting
Standards
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"). ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. In adopting ASU 2014-09, companies may use either a full retrospective or a modified retrospective approach. Additionally, this guidance requires improved disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.  ASU 2014-09 is effective for the first interim period within annual reporting periods beginning after December 15, 2017, and early adoption is permitted for periods beginning after December 15, 2016.  The Company is currently in the process of evaluating the impact the adoption of ASU 2014-09 will have on the Company’s financial position or results of operations. 

In June 2014, the FASB issued ASU 2014-12 Compensation—Stock Compensation (Topic 718) - Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (“ASU 2014-12”). The amendments in ASU 2014-12 apply to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. That is, the employee would be eligible to vest in the award regardless of whether the employee is rendering service on the date the performance target is achieved. Current GAAP does not contain explicit guidance on how to account for those share-based payments. ASU 2014-12 is intended to resolve the accounting treatment of such awards. The amendments in ASU 2014-12 are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015 with early adoption permitted. The Company is currently in the process of evaluating the impact the adoption of ASU 2014-12 will have on the Company’s financial position or results of operations. 
 
 
 
14

 
 

 
In August 2014, the FASB issued ASU 2014-15, which requires management to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern, and to provide certain disclosures when it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. ASU 2014-15 is effective for the annual period ended December 31, 2016 and for annual periods and interim periods thereafter with early adoption permitted. The adoption of ASU 2014-15 is not expected to materially impact the Company’s consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02, Consolidation–Amendments to the Consolidation Analysis (Topic 810) (“ASU 2015-02”).  ASU 2015-02 updates guidance related to accounting for consolidation of certain limited partnerships. ASU 2015-02 does not add or remove any of the five characteristics that determine if an entity is a VIE; however, it changes the manner in which a reporting entity assesses its ability to make decisions about the entity's activities. Additionally, ASU 2015-02 removes three of the six criteria that must be met for a fee arrangement to not be a VIE and modifies how an entity assesses interests held through related parties. ASU 2015-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2015, with early adoption permitted.  The Company is currently evaluating the impact this guidance will have on its consolidated financial statements when adopted.

In April 2015, the FASB issued ASU 2015-03, Interest–Imputation of Interest-Simplifying the Presentation of Debt Issuance Costs (Subtopic 835-30) (“ASU 2015-03”).  ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  The recognition and measurement guidance for debt issuance costs are not affected by this update.  Debt issuance costs related to revolving lines of credit are not within the scope of this new guidance. Additionally, in August 2015 the FASB issued guidance expanding the April 2015 update (ASU 2015-15).  It states that, given the absence of authoritative guidance within the update, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset for revolving lines of credit and subsequently amortizing the deferred debt issuance costs ratably over the term of the arrangement, regardless of whether there are any outstanding borrowings on the line of credit.  This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted for financial statements that have not been previously issued.  Full retrospective application is required.  The Company is currently evaluating the impact this guidance will have on its consolidated financial statements when adopted. 

 
 
3.    RECENT TRANSACTIONS

Acquisitions
On October 23, 2015, the Company signed an agreement to acquire a 196,000 square-foot office property located in Edison, New Jersey, for approximately $53.1 million, subject to certain conditions.  The acquisition is expected to be completed in the fourth quarter of 2015.

On April 1, 2015, the Company acquired vacant land to accommodate a two-phase development of 365 multi-family residential units located in Worcester, Massachusetts (the “CitySquare Project”) for a purchase price of $3.1 million with an additional $1.25 million to be paid (which is accrued as of September 30, 2015), subject to certain conditions, in accordance with the terms of the purchase and sale agreement.  The purchase price for the acquisition was funded primarily through borrowing under the Company’s unsecured revolving credit facility.  The first phase with 237 units started construction in the third quarter 2015 with anticipated initial deliveries in the second quarter 2017.  The second phase, with 128 units, is projected to begin construction in 2017.  Total development costs are estimated to be approximately $92.5 million (of which $7.1 million was incurred by the Company through September 30, 2015).  For the nine months ended September 30, 2015, included in general and administrative expense was approximately $111,000 in transaction costs related to this acquisition.
 
 
 
15

 
 

 
Dispositions
On June 26, 2015, the Company sold its 203,506 square foot office property located at 14 Sylvan Way in Parsippany, New Jersey for net sales proceeds of approximately $80 million, with a gain of approximately $24.7 million from the sale.

On June 1, 2015, the Company sold its 25 percent equity interest in Rosewood Lafayette Holdings L.L.C., a joint venture which owns the Highlands at Morristown Station, a 217-unit multi-family property located in Morristown, New Jersey, to its joint venture partner with a gain on the sale of approximately $6.4 million.

On January 15, 2015, the Company sold its 21,600 square foot office/flex property located at 1451 Metropolitan Drive in West Deptford, New Jersey for net sales proceeds of approximately $1.1 million, with a gain of approximately $0.1 million from the sale.

During the three months ended September 30, 2015, the Company transferred the deeds for two of its office properties to the lender in satisfaction of its mortgage loan obligations. The properties transferred consisted of 5 Becker Farm Road in Roseland, New Jersey, aggregating 118,343 square feet, which was collateral for a $14.4 million mortgage loan scheduled to mature on May 11, 2016, and 210 Clay Avenue in Lyndhurst, New Jersey, aggregating 121,203 square feet, which was collateral for a $13.8 million mortgage loan also scheduled to mature on May 11, 2016.  During the three months ended June 30, 2015, the Company transferred the deeds for two of its office properties to the lender in satisfaction of its mortgage loan obligations. The properties transferred consisted of 4 Sylvan Way in Parsippany, New Jersey, aggregating 105,135 square feet, which was collateral for a $14.6 million mortgage loan that matured on August 11, 2014, and 10 Independence Boulevard in Warren, New Jersey, aggregating 120,528 square feet, which was collateral for a $16.9 million mortgage loan that matured on August 11, 2014.   The Company had previously recorded impairment charges on these four properties totaling $25.2 million during the year ended December 31, 2013.  During the three and nine months ended September 30, 2015, the Company recorded gains on the disposal of these office properties for a total of $18.7 million and $28.4 million, respectively.

On January 1, 2014, the Company early adopted the new discontinued operations accounting standard and as the properties disposed of during the nine months ended September 30, 2015 will not represent a strategic shift (as the Company is not entirely exiting markets or property types), they have not been reflected as part of discontinued operations.

The following table summarizes income (loss) for the three and nine month periods ended September 30, 2015 and 2014 from the properties disposed of during the nine months ended September 30, 2015 and the 16 properties sold during the year ended December 31, 2014: (dollars in thousands)
                         
     
              Three Months Ended
   
              Nine Months Ended
       
  September 30,
     
  September 30,
     
2015
   
2014
   
2015
   
2014
Total revenues
 
$
 225
 
$
 8,891
 
$
 9,118
 
$
 48,196
Operating and other expenses
   
 (700)
   
 (3,627)
   
 (4,136)
   
 (22,576)
Depreciation and amortization
   
 (3,585)
   
 (1,363)
   
 (7,509)
   
 (9,178)
Interest expense
   
 (1,146)
   
 (2,588)
   
 (6,374)
   
 (7,795)
                         
Income (loss) from properties disposed of
 
$
 (5,206)
 
$
 1,313
 
$
 (8,901)
 
$
 8,647
                         
Realized gains on dispositions
   
 18,718
   
 264
   
 53,261
   
 54,848
                         
Total income from properties disposed of
 
$
 13,512
 
$
 1,577
 
$
 44,360
 
$
 63,495

Impairments on Properties Held and Used
In September 2015, the Company announced a three-year strategic initiative to transform the Company into a more concentrated owner of New Jersey Hudson River waterfront and transit-oriented office properties and a regional owner of luxury multi-family residential properties.  In connection with the transformation of the Company’s portfolio, management began developing a disposition plan in September 2015, which will be an ongoing assessment process.  Through this plan, the Company, in the coming years, expects to dispose of primarily office properties considered non-core to its ongoing operations.  As a result, at September 30, 2015, the Company evaluated the recoverability of the carrying values of these non-core properties, and determined that due to the shortening of the expected periods of ownership, it was necessary to reduce the carrying values of 22 rental properties to their estimated fair values.  Accordingly, the Company recorded an impairment charge of $158.6 million at September 30, 2015 reducing the aggregate carrying values of these properties from $554.3 million to their estimated fair values of $395.7 million.

 
16

 


Four of the Company’s office properties are collateral for a mortgage loan that matured on August 11, 2014, with a principal balance of $65.0 million as of September 30, 2015.  The loan was not repaid at maturity and the Company is in discussions with the lender regarding potential options in satisfaction of the obligation (see Note 9: Mortgages, Loans Payable and Other Obligations).   As of September 30, 2015, the Company estimated that the carrying value of three of these properties, aggregating 479,877 square feet and located in Roseland and Parsippany, New Jersey, may not be recoverable over their anticipated holding periods.  In order to reduce the carrying values of the properties to their estimated fair values, the Company recorded impairment charges of $5.6 million at September 30, 2015, which resulted from the current decline in leasing activity and market rents of the properties identified.   The Company had previously recorded impairment charges on these properties at September 30, 2013 of $12.5 million.

Appointment of executive officers
On June 3, 2015, the Company announced the appointments of Mitchell E. Rudin as chief executive officer and Michael J. DeMarco as president and chief operating officer of the Company, effective immediately.  The Company entered into employment agreements dated June 3, 2015 with each of Messrs. Rudin and DeMarco (together, the “Executive Employment Agreements”) that each provide as follows:

·  
A term that ends on December 31, 2018 (the “Employment Term”) unless earlier terminated;
·  
An annual base salary for each of Messrs. Rudin and DeMarco of $700,000, subject to potential merit increases (but not decreases) each year;
·  
A target annual bonus opportunity of one hundred percent (100%) of base salary, or $700,000, for each of Messrs. Rudin and DeMarco, with a threshold bonus of fifty percent (50%) of base salary, or $350,000, and a maximum bonus of two hundred percent (200%) of base salary, or $1,400,000, a pro rata bonus opportunity for 2015 based on the assessment of the Executive Compensation and Option Committee of the Board of Directors (“Committee”) of each executive’s development of a strategic plan for the Company and bonuses for 2016 and subsequent years to be based on objective performance goals to be established annually by the Committee;
·  
2015 long-term incentive (“LTI”) awards under the Company’s 2013 Incentive Stock Plan (the “2015 LTI Awards”), consisting of the granting to each of Messrs. Rudin and DeMarco on June 5, 2015 of 18,775.27 restricted stock units subject to time-based vesting over three years, and of 56,325.82 performance share units (“PSUs”) which will vest from 0 to 150 percent of the number of PSUs granted based on the Company’s total shareholder return relative to a peer group of equity office REITs over a three-year performance period; and
·  
The grant on June 5, 2015 (the “Grant Date”) to each of Messrs. Rudin and DeMarco of options to purchase 400,000 shares of the Company’s common stock, exercisable for a period of ten years with an exercise price equal to the closing price of the Company’s common stock on the NYSE on the Grant Date (which price was $17.31 per share), with 200,000 of such options vesting in three equal annual installments commencing on the first anniversary of the Grant Date, and 200,000 of such options vesting if the Company’s common stock trades at or above $25.00 per share for 30 consecutive trading days while Mr. Rudin and Mr. DeMarco is employed, as applicable, or on or before June 30, 2019 if Mr. Rudin and Mr. DeMarco is employed for the entire Employment Term (except if the executive’s employment has been terminated by the Company for cause following expiration of the Employment Term). 
 

4.    INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES

As of September 30, 2015, the Company had an aggregate investment of approximately $299.5 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, 2015, the unconsolidated joint ventures owned: 36 office and two retail properties aggregating approximately 5.7 million square feet, 13 multi-family properties totaling 4,343 apartments, a 350-room hotel, development projects for up to approximately 1,074 apartments; and interests and/or rights to developable land parcels able to accommodate up to 2,910 apartments and 1.4 million square feet of office space.  The Company’s unconsolidated interests range from 7.5 percent to 85 percent subject to specified priority allocations in certain of the joint ventures.

On October 23, 2012, the Company acquired the real estate development and management businesses (the “Roseland Business”) of Roseland Partners, L.L.C. (“Roseland Partners”), a premier multi-family rental community developer and manager based in Short Hills, New Jersey, and the Roseland Partners’ interests (the “Roseland Transaction”), principally through unconsolidated joint venture interests in various entities which, directly or indirectly, own or have rights with respect to various residential and/or commercial properties or vacant land (collectively, the “Roseland Assets”).  The locations of the properties extend from New Jersey to Massachusetts, with the majority of the properties located in New Jersey.  Certain of the entities which own the Roseland Assets are controlled by the Company upon acquisition and are therefore consolidated. However, many of the entities are not controlled by the Company and, therefore, are accounted for under the equity method as investments in unconsolidated joint ventures.
 
 
 
17

 
 

 
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 investments in 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 has agreed to guarantee repayment of a portion of the debt of its unconsolidated joint ventures.  As of September 30, 2015, such debt had a total facility amount of $453.6 million of which the Company agreed to guarantee up to $62 million.  As of September 30, 2015, the outstanding balance of such debt totaled $268.3 million of which $53.1 million was guaranteed by the Company.  The Company also posted a $3.6 million letter of credit in support of the South Pier at Harborside joint venture, half of which is indemnified by Hyatt Corporation, the Company’s joint venture partner.  The Company performed management, leasing, development and other services for the properties owned by the unconsolidated joint ventures and recognized $1.3 million and $1.9 million for such services in the three months ended September 30, 2015 and 2014, respectively, and $4.4 million and $5.1 million for the nine months ended September 30, 2015 and 2014, respectively, which are included in real estate services revenue for the periods presented.  The Company had $0.7 million and $1.0 million in accounts receivable due from its unconsolidated joint ventures as of September 30, 2015 and December 31, 2014.

Included in the Company’s investments in unconsolidated joint ventures as of September 30, 2015 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 $168.4 million as of September 30, 2015.  The Company’s maximum exposure to loss as a result of its involvement with these VIEs is estimated to be approximately $202.1 million, which includes the Company’s current investment and estimated future funding commitments/guarantees of approximately $33.7 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 Company's unconsolidated joint ventures as of September 30, 2015 and December 31, 2014: (dollars in thousands, including footnotes)

                                   
                         
Property Debt
 
 
Number of
Company's
   
Carrying Value
   
As of September 30, 2015
 
 
Apartment Units
Effective
   
September 30,
   
December 31,
     
Maturity
Interest
 
Entity / Property Name
or Square Feet (sf)
Ownership % (a)
   
2015
   
2014
   
Balance
Date
Rate
 
Multi-family
                                 
Marbella RoseGarden, L.L.C./ Marbella  (b)
 412
units
 24.27
%
 
$
 15,686
 
$
 15,779
 
$
 95,000
05/01/18
 4.99
%
 
RoseGarden Monaco Holdings, L.L.C./ Monaco   (b)
 523
units
 15.00
%
   
 1,237
   
 2,161
   
 165,000
02/01/21
 4.19
%
 
Rosewood Lafayette Holdings, L.L.C./ Highlands at Morristown Station (c)
 217
units
 25.00
%
   
 -
   
 62
   
 -
 -
-
   
PruRose Port Imperial South 15, LLC /RiversEdge at Port Imperial (b)
 236
units
 50.00
%
   
 -
   
 -
   
 57,500
09/01/20
 4.32
%
 
Rosewood Morristown, L.L.C. / Metropolitan at 40 Park  (d) (e)
 130
units
 12.50
%
   
 5,810
   
 6,029
   
 46,206
(f)
(f)
   
Overlook Ridge JV 2C/3B, L.L.C./The Chase at Overlook Ridge  (b)
 371
units
 50.00
%
   
 2,261
   
 2,524
   
 52,662
12/26/15
L+2.50
%
(g)
PruRose Riverwalk G, L.L.C./ RiverTrace at Port Imperial   (b)
 316
units
 25.00
%
   
 274
   
 955
   
 79,380
07/15/21
 6.00
%
(h)
Elmajo Urban Renewal Associates, LLC / Lincoln Harbor (Bldg A&C)  (b)
 355
units
 7.50
%
   
 -
   
 -
   
 128,100
03/01/30
 4.00
%
(i)
Crystal House Apartments Investors LLC / Crystal House  (j)
 798
units
 25.00
%
   
 27,716
   
 27,051
   
 165,000
04/01/20
 3.17
%
 
Portside Master Company, L.L.C./ Portside at Pier One - Bldg 7  (b)
 176
units
 38.25
%
   
 -
   
 1,747
   
 42,336
12/04/15
L+2.50
%
(k)
PruRose Port Imperial South 13, LLC / RiverParc at Port Imperial  (b)
 280
units
 20.00
%
   
 -
   
 1,087
   
 69,916
06/27/16
L+2.15
%
(l)
Roseland/Port Imperial Partners, L.P./ Riverwalk C  (b) (m)
 363
units
 20.00
%
   
 1,678
   
 1,800
   
 -
-
-
   
RoseGarden Marbella South, L.L.C./ Marbella II
 311
units
 24.27
%
   
 15,946
   
 11,282
   
 63,627
03/30/17
L+2.25
%
(n)
Estuary Urban Renewal Unit B, LLC / Lincoln Harbor (Bldg B)  (b)
 227
units
 7.50
%
   
 -
   
 -
   
 81,900
03/01/30
 4.00
%
(o)
Riverpark at Harrison I, L.L.C./ Riverpark at Harrison
 141
units
 45.00
%
   
 2,575
   
 4,744
   
 30,000
08/01/25
 3.70
%
(p)
Capitol Place Mezz LLC / Station Townhouses
 378
units
 50.00
%
   
 47,156
   
 49,327
   
 94,671
07/01/33
 4.82
%
(q)
Harborside Unit A Urban Renewal, L.L.C. / URL Harborside
 763
units
 85.00
%
   
 95,978
   
 34,954
   
 22,916
08/01/29
 5.197
%
(r)
RoseGarden Monaco, L.L.C./ San Remo Land
 250
potential units
 41.67
%
   
 1,325
   
 1,283
   
 -
-
-
   
Grand Jersey Waterfront URA, L.L.C./ Liberty Landing
 850
potential units
 50.00
%
   
 337
   
 337
   
 -
-
-
   
                                   
Office
                                 
Red Bank Corporate Plaza, L.L.C./ Red Bank
 92,878
sf
 50.00
%
   
 4,073
   
 3,963
   
 15,310
05/17/16
L+3.00
%
(s)
12 Vreeland Associates, L.L.C./ 12 Vreeland Road
 139,750
sf
 50.00
%
   
 5,730
   
 5,620
   
 12,912
07/01/23
 2.87
%
 
BNES Associates III / Offices at Crystal Lake
 106,345
sf
 31.25
%
   
 2,126
   
 1,993
   
 6,292
11/01/23
 4.76
%
 
Hillsborough 206 Holdings, L.L.C./ Hillsborough 206
 160,000
sf
 50.00
%
   
 1,962
   
 1,962
   
 -
-
-
   
KPG-P 100 IMW JV, LLC / 100 Independence Mall West
 339,615
sf
 33.33
%
   
 -
   
 -
   
 61,500
09/09/16
L+7.00
%
(t)
Keystone-Penn
 1,842,820
sf
(u)
     
 -
   
 -
   
 223,546
(v)
(v)
   
Keystone-TriState
 1,266,384
sf
(w)
     
 4,376
   
 6,140
   
 206,878
(x)
(x)
   
KPG-MCG Curtis JV, L.L.C./ Curtis Center  (y)
 885,000
sf
 50.00
%
   
 56,441
   
 59,911
   
(z)
(z)
(z)
   
                                   
Other
                                 
Plaza VIII & IX Associates, L.L.C./ Vacant land (parking operations)
 1,225,000
sf
 50.00
%
   
 3,969
   
 4,022
   
 -
-
-
   
Roseland/North Retail, L.L.C./ Riverwalk at Port Imperial  (b)
 30,745
sf
 20.00
%
   
 1,776
   
 1,828
   
 -
-
-
   
South Pier at Harborside / Hyatt Regency Jersey City on the Hudson
 350
rooms
 50.00
%
   
(aa)
   
(aa)
   
 64,092
(ab)
(ab)
   
Stamford SM LLC / Senior Mezzanine Loan  (ac)
n/a
n/a
 80.00
%
   
 -
   
 -
   
 -
-
-
   
Other (ad)
           
 1,054
   
 907
   
 -
-
-
   
Totals:
         
$
 299,486
 
$
 247,468
 
$
 1,784,744
       



   
   
(a)      
Company's effective ownership % represents the Company's entitlement to residual distributions after payments of priority returns, where applicable.
(b)      
The Company's ownership interests in this venture are subordinate to its partner's preferred capital balance and the Company is not expected to meaningfully participate in the venture's cash flows in the near term.
(c)      
See discussion in Recent Transactions following in this footnote for disposition of Company's interest in the unconsolidated joint ventures.
(d)      
Through the joint venture, the Company also owns a 12.5 percent interest in a 50,973 square feet retail building ("Shops at 40 Park") and a 25 percent interest in a to-be-built 59-unit, five story multi-family rental development property ("Lofts at 40 Park").
(e)      
The Company's ownership interests in this venture are subordinate to its partner's preferred capital balance and the payment of the outstanding balance remaining on a note ($975 as of September 30, 2015), and is not expected to meaningfully participate in the venture's cash flows in the near term.
(f)      
Property debt balance consists of: (i) a loan, collateralized by the Metropolitan at 40 Park, with a balance of $38,600, bears interest at 3.25 percent, matures in September 2020 and is interest only through September 2015; (ii) an amortizable loan, collateralized by the Shops at 40 Park, with a balance of $6,489, bears interest at 3.63 percent, matures in August 2018; and (iii) a loan, collateralized by the Lofts at 40 Park, with a balance of $1,117, bears interest at LIBOR plus 250 basis points and matures in September 2016.  The Shops at 40 Park mortgage loan also provides for additional borrowing proceeds of $1 million based on certain preferred thresholds being achieved.
(g)      
The construction loan has a maximum borrowing amount of $55,500 and provides, subject to certain conditions, two one-year extension options with a fee of 25 basis points each.  The joint venture has a swap agreement that fixes the all-in rate to 3.0875 percent per annum on an initial notional amount of $1,840, increasing to $52,000, for the period from September 3, 2013 to November 2, 2015.
(h)       
The permanent loan has a maximum borrowing amount of $80,249.
(i)       
The construction loan with a maximum borrowing amount of $91,000 converted to a permanent loan on February 27, 2015.
(j)      
The Company also owns a 50 percent interest in a vacant land to accommodate the development of approximately 295 additional units of which 252 are currently approved.
(k)       
The construction loan has a maximum borrowing amount of $42,500 and provides, subject to certain conditions, two two-year extension options with a fee of 12.5 basis points for the first two-year extension and 25 basis points for the second two-year extension.
(l)     
The construction loan has a maximum borrowing amount of $73,350 and provides, subject to certain conditions, one-year extension option followed by a six-month extension option with a fee of 25 basis points each. The joint venture has a swap agreement that fixes the all-in rate to 2.79 percent per annum on an initial notional amount of $1,620, increasing to $69,500 for the period from July 1, 2013 to January 1, 2016.
(m)      
The Company also owns a 20 percent residual interest in undeveloped land parcels: parcels 6, I, and J ("Port Imperial North Land") that can accommodate the development of 836 apartment units.
(n)      
The construction loan has a maximum borrowing amount of $77,400 and provides, subject to certain conditions, two one-year extension options with a fee of 25 basis points for each year.
(o)      
The construction loan with a maximum borrowing amount of $57,000 converted to a permanent loan on February 27, 2015.
(p)      
The construction loan with a maximum borrowing amount of $23,400 converted to a permanent loan on July 14, 2015.  See discussion in Recent Transactions following in this footnote.
(q)       
The construction/permanent loan has a maximum borrowing amount of $100,700 with amortization starting in August 2017.
(r)    
The construction/permanent loan has a maximum borrowing amount of $192,000.
(s)      
The joint venture has a swap agreement that fixes the all-in rate to 3.99375 percent per annum on an initial notional amount of $13,650 and then adjusting in accordance with an amortization schedule, which is effective from October 17, 2011 through loan maturity.
(t)       
The mortgage loan has two one-year extension options, subject to certain conditions, and includes a $25 million construction escrow with a balance of $0.5 million to be drawn at September 30, 2015.
(u)      
The Company’s equity interests in the joint ventures will be subordinated to Keystone Entities receiving a 15 percent internal rate of return (“IRR”) after which the Company will receive a 10 percent IRR on its subordinate equity and then all profit will be split equally.  See discussion in Recent Transactions following in this footnote.
(v)      
Principal balance of $127,600 bears interest at 5.114 percent and matures in August 27, 2023; principal balance of $85,521 bears interest at rates ranging from LIBOR+5.0 percent to LIBOR+5.75 percent and matures in August 27, 2016; principal balance of $10,425 bears interest at LIBOR+6.0 percent matures in August 27, 2015.
(w)     
Includes the Company’s pari-passu interests of $4.4 million in five properties and Company’s subordinated equity interests to Keystone Entities receiving a 15 percent internal rate of return (“IRR”) after which the Company will receive a 10 percent IRR on its subordinate equity and then all profit will be split equally.
(x)      
Principal balance of $41,849 bears interest at 4.95 percent and matures on July 1, 2017; principal balance of $72,329 bears interest at rates ranging from 5.65 percent to 6.75 percent and matures on September 9, 2017; principal balance of $14,250 bears interest at 4.88 percent and matures on July 6, 2024; principal balance of $63,400 bears interest at 4.93 percent and matures on July 6, 2044; principal balance of $15,050 bears interest at 4.71 percent and matures on August 6, 2044.
(y)
Includes undivided interests in the same manner as investments in noncontrolling partnership, pursuant to ASC 970-323-25-12.
(z)
See Note 9: Mortgages, Loans Payable and Other Obligations for debt secured by interests in these assets.
(aa)
The negative carrying value for this venture of $1,419 and $1,854 as of September 30, 2015 and December 31, 2014, respectively, were included in accounts payable, accrued expenses and other liabilities.
(ab)      
Balance includes: (i) mortgage loan, collateralized by the hotel property, with a balance of $60,498, bears interest at 6.15 percent and matures in November 2016, and (ii) loan with a balance of $3,594, bears interest at fixed rates ranging from 6.09 percent to 6.62 percent and matures in August 1, 2020.  The Company posted a $3.6 million letter of credit in support of this loan, half of which is indemnified by the partner.
(ac)      
The joint venture collected net proceeds of $47.2 million at maturity, of which the Company received its share of $37.8 million on August 6, 2014.
(ad)
The Company owns other interests in various unconsolidated joint ventures, including interests in assets previously owned and interest in ventures whose businesses are related to its core operations. These ventures are not expected to significantly impact the Company's operations in the near term. 

 
 
 
19

 
 

 
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, 2015 and 2014: (dollars in thousands)
                       
   
                  Three Months Ended
   
                   Nine Months Ended
     
    September 30,
     
     September 30,
Entity / Property Name
 
2015
   
2014
   
2015
   
2014
Multi-family
                     
Marbella RoseGarden, L.L.C./ Marbella
$
 64
 
$
 3
 
$
 186
 
$
 (13)
RoseGarden Monaco Holdings, L.L.C./ Monaco
 
 (295)
   
 (249)
   
 (924)
   
 (764)
Rosewood Lafayette Holdings, L.L.C./ Highlands at Morristown Station
 
 -
   
 (221)
   
 (62)
   
 (639)
PruRose Port Imperial South 15, LLC /RiversEdge at Port Imperial
 
 -
   
 -
   
 -
   
 -
Rosewood Morristown, L.L.C. / Metropolitan at 40 Park
 
 (93)
   
 (90)
   
 (277)
   
 (264)
Overlook Ridge JV 2C/3B, L.L.C./The Chase at Overlook Ridge
 
 (16)
   
 (217)
   
 (263)
   
 (155)
PruRose Riverwalk G, L.L.C./ RiverTrace at Port Imperial
 
 (151)
   
 (615)
   
 (681)
   
 (1,766)
Elmajo Urban Renewal Associates, LLC / Lincoln Harbor (Bldg A&C)
 
 -
   
 -
   
 -
   
 (203)
Crystal House Apartments Investors LLC / Crystal House
 
 (44)
   
 68
   
 (41)
   
 (206)
Portside Master Company, L.L.C./ Portside at Pier One - Bldg 7
 
 (379)
   
 (228)
   
 (1,736)
   
 (661)
PruRose Port Imperial South 13, LLC / RiverParc at Port Imperial
 
 (257)
   
 (220)
   
 (988)
   
 (638)
Roseland/Port Imperial Partners, L.P./ Riverwalk C
 
 (85)
   
 (173)
   
 (394)
   
 (518)
RoseGarden Marbella South, L.L.C./ Marbella II
 
 -
   
 -
   
 -
   
 -
Estuary Urban Renewal Unit B, LLC / Lincoln Harbor (Bldg B)
 
 -
   
 -
   
 -
   
 (15)
Riverpark at Harrison I, L.L.C./ Riverpark at Harrison
 
 (54)
   
 -
   
 (377)
   
 -
Capitol Place Mezz LLC / Station Townhouses
 
 (1,454)
   
 -
   
 (2,642)
   
 -
Harborside Unit A Urban Renewal, L.L.C. / URL Harborside
 
 -
   
 -
   
 -
   
 (212)
RoseGarden Monaco, L.L.C./ San Remo Land
 
 -
   
 -
   
 -
   
 -
Grand Jersey Waterfront URA, L.L.C./ Liberty Landing
 
 (12)
   
 -
   
 (32)
   
 (54)
Office
                     
Red Bank Corporate Plaza, L.L.C./ Red Bank
 
 110 
   
 101
   
 332
   
 306
12 Vreeland Associates, L.L.C./ 12 Vreeland Road
 
 38 
   
 22
   
 110
   
 165
BNES Associates III / Offices at Crystal Lake
 
 13 
   
 127
   
 133
   
 273
Hillsborough 206 Holdings, L.L.C./ Hillsborough 206
 
 -
   
 -
   
 (5)
   
 (5)
KPG-P 100 IMW JV, LLC / 100 Independence Mall West
 
 (37)
   
 (412)
   
 (800)
   
 (1,548)
Keystone-Penn
 
 3,663
   
 -
   
 3,663
   
 -
Keystone-TriState
 
 (173)
   
 (733)
   
 (1,763)
   
 (733)
KPG-MCG Curtis JV, L.L.C./ Curtis Center
 
 327
   
 113
   
 755
   
 364
Other
                     
Plaza VIII & IX Associates, L.L.C./ Vacant land (parking operations)
 
 102
   
 74
   
 258
   
 220
Roseland/North Retail, L.L.C./ Riverwalk at Port Imperial
 
 (17)
   
 (34)
   
 (52)
   
 (81)
South Pier at Harborside / Hyatt Regency Jersey City on the Hudson
 
 1,151
   
 583
   
 1,934
   
 1,874
Stamford SM LLC / Senior Mezzanine Loan
 
 -
   
 493
   
 -
   
 2,337
Other
 
 734
   
 340
   
 943
   
 876
Company's equity in earnings (loss) of unconsolidated joint ventures
$
 3,135
 
$
 (1,268)
 
$
 (2,723)
 
$
 (2,060)

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, 2015 and December 31, 2014: (dollars in thousands)
             
     
September 30,
   
December 31,
     
2015
   
2014
Assets:
           
   Rental property, net
 
$
 1,602,899
 
$
 1,534,812 
   Other assets
   
 460,762
   
 398,222 
   Total assets
 
$
 2,063,661
 
$
 1,933,034 
Liabilities and partners'/
           
members' capital:
           
   Mortgages and loans payable
 
$
 1,246,582
 
$
 1,060,020 
   Other liabilities
   
 228,045
   
 211,340 
   Partners'/members' capital
   
 589,034
   
 661,674 
   Total liabilities and
           
   partners'/members' capital
 
$
 2,063,661
 
$
 1,933,034 
 
 

 
20

 

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, 2015 and 2014: (dollars in thousands)
                       
   
         Three Months Ended
   
         Nine Months Ended
     
  September 30,
     
  September 30,
   
2015
   
2014
   
2015
   
2014
Total revenues
$
 82,586
 
$
 80,711 
 
$
 238,138
 
$
 224,822 
Operating and other expenses
 
 (55,969)
   
 (58,684)
   
 (169,278)
   
 (173,642)
Depreciation and amortization
 
 (16,823)
   
 (15,134)
   
 (51,632)
   
 (31,715)
Interest expense
 
 (14,622)
   
 (11,296)
   
 (39,280)
   
 (26,423)
Net loss
$
 (4,828)
 
$
 (4,403)
 
$
 (22,052)
 
$
 (6,958)

Recent Transactions
KEYSTONE-PENN
On August 28, 2015, Rosetree KPG III, L.L.C., which owns a 236,417 square-foot two-building office property located in Media, Pennsylvania refinanced its $31.8 million loan and obtained a new $45.5 million mortgage loan. The Company received a distribution of $3.7 million as its share of the loan proceeds recognized as equity in earnings during the three and nine months ended September 30, 2015 (as a result of having no carrying value of its investment in the unconsolidated joint venture).

RIVERPARK AT HARRISON I, L.L.C./RIVERPARK AT HARRISON
On July 14, 2015, Riverpark at Harrison I, L.L.C. (“Riverpark”), which owns a 141-unit multi-family rental property located in Harrison, New Jersey, refinanced the $23.4 million construction loan, and obtained a $30 million mortgage loan. The Company received a distribution of $1.7 million from the loan proceeds. Concurrent with the loan refinancing, the Company, which holds a 36 percent interest in Riverpark, and its venture partners that hold ownership interests aggregating 44 percent acquired the 20 percent interest of the remaining partner group for $2.1 million.  As a result of the 20 percent redemption, the Company’s ownership interest increased to 45 percent with the remaining venture partners owning 55 percent.  The Company has determined that the joint venture is not a VIE since the equity investment at risk is sufficient to permit Riverpark to finance its activities without additional financial support.  As control is shared with the partners in accordance with the operating agreement, the Company will continue to have an unconsolidated joint venture interest in Riverpark under the provisions of ASC 810, Consolidation.

ROSEWOOD LAFAYETTE HOLDINGS, L.L.C./HIGHLANDS AT MORRISTOWN STATION
On June 1, 2015, the Company sold its 25 percent equity interest in Rosewood Lafayette Holdings L.L.C., a joint venture which owns the Highlands at Morristown Station, a 217-unit multi-family property located in Morristown, New Jersey, to its joint venture partner and realized a gain on the sale of $6.4 million.

OVERLOOK RIDGE JV, LLC/QUARRYSTONE AT OVERLOOK RIDGE
On May 13, 2015, LR Overlook Phase II, LLC, of which the Company held a 50 percent interest, sold its 251-unit multi-family rental property located in Malden, Massachusetts (“Quarrystone Property”) for approximately $74.6 million.  The Company received no share of the distributable cash from the sale as the Company’s equity interest in the venture is subordinated to its joint venture partner, and realized no gain or loss from the sale.
  

5.    DEFERRED CHARGES, GOODWILL AND OTHER ASSETS, NET
           
   
September 30,
   
December 31,
(dollars in thousands)
 
2015
   
2014
Deferred leasing costs
$
 232,291
 
$
 239,138
Deferred financing costs
 
 20,823
   
 24,042
   
 253,114
   
 263,180
Accumulated amortization
 
 (119,965)
   
 (122,358)
Deferred charges, net
 
 133,149
   
 140,822
Notes receivable (a)
 
 13,557
   
 21,491
In-place lease values, related intangibles and other assets, net
 
 4,936
   
 6,565
Goodwill
 
 2,945
   
 2,945
Prepaid expenses and other assets, net
 
 46,136
   
 32,827
           
Total deferred charges, goodwill and other assets, net
$
 200,723
 
$
 204,650

(a)
Includes as of September 30, 2015: a mortgage receivable for $10.4 million which bears interest at LIBOR plus six percent and matures in August 2016; and an interest-free note receivable with a net present value of $3.1 million and matures in April 2023.  The Company believes these balances are fully collectible.
 
 
 
 
21

 

 
DERIVATIVE FINANCIAL INSTRUMENTS
The Company does not have any derivative instruments designated as cash flow hedges.  The following table summarizes the notional and fair value of the Company’s derivative financial instruments, designated as fair value hedges, as of September 30, 2015 and December 31, 2014 (dollars in thousands):

                                 
                       
         Fair Value
   
Notional
   
Strike
   
Effective
 
Expiration
   
September 30,
   
December 31,
   
Value
(a)
 
Rate
   
Date
 
Date
   
2015
   
2014
LIBOR Cap
$
 51,000 
   
1.5
%
 
September 2014
 
October 2015
 
$
 -
 
$
 1 
LIBOR Cap
 
 24,000 
   
1.5
%
 
September 2014
 
October 2015
   
 -
   
 1 
LIBOR Cap
 
 51,000 
   
1.75
%
 
October 2015
 
October 2016
   
 2
   
 64 
LIBOR Cap
 
 24,000 
   
1.75
%
 
October 2015
 
October 2016
   
 1
   
 29 
                       
$
 3
 
$
 95 
 
(a)  
The notional value is an indication of the extent of our involvement in these instruments at that time, but does not represent exposure to credit, interest rate or market risks.

The Company includes these derivative financial instruments in deferred charges, goodwill and other assets, net.  As changes in the fair value of these derivative financial instruments are recorded in earnings, the Company recorded a loss on the change in fair value of $12,000 and $92,000 during the three and nine months ended September 30, 2015, respectively, which is included in interest and other investment income in the consolidated statements of operations.

 
6.    RESTRICTED CASH

Restricted cash generally includes tenant and resident 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,
   
2015
   
2014
Security deposits
$
 7,681
 
$
 7,795
Escrow and other reserve funds
 
 32,387
   
 26,450
           
Total restricted cash
$
 40,068
 
$
 34,245


 
7.    SENIOR UNSECURED NOTES

A summary of the Company’s senior unsecured notes as of September 30, 2015 and December 31, 2014 is as follows:  (dollars in thousands)

                   
     
September 30,
   
December 31,
 
Effective
 
     
2015
   
2014
 
Rate (1)
 
5.800% Senior Unsecured Notes, due January 15, 2016
 
$
 200,029
 
$
 200,086
 
 5.806
%
2.500% Senior Unsecured Notes, due  December 15, 2017
   
 249,372
   
 249,150
 
 2.803
%
7.750% Senior Unsecured Notes, due August 15, 2019
   
 249,173
   
 249,013
 
 8.017
%
4.500% Senior Unsecured Notes, due April 18, 2022
   
 299,609
   
 299,565
 
 4.612
%
3.150% Senior Unsecured Notes, due May 15, 2023
   
 270,385
   
 269,930
 
 3.517
%
                   
Total senior unsecured notes
 
$
 1,268,568
 
$
 1,267,744
     

(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.

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.   The Company was in compliance with its debt covenants under the indenture relating to its senior unsecured notes as of September 30, 2015.
 

 
22

 

8.    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 (current)
 
130.0
 
30.0
BBB or Baa2
 
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 (60 percent), the maximum amount of secured indebtedness (40 percent), the minimum amount of fixed charge coverage (1.5 times), the maximum amount of unsecured indebtedness (60 percent), the minimum amount of unencumbered property interest coverage (2.0 times) and certain investment limitations (generally 15 percent of total capitalization).  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.  The Company was in compliance with its debt covenants under its revolving credit facility as of September 30, 2015.
 
As of September 30, 2015, the Company had outstanding borrowings of $35 million under its unsecured revolving credit facility, and had no outstanding borrowings under the facility as of December 31, 2014. 
 

9.   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, 2015, 24 of the Company’s properties, with a total carrying value of approximately $917 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.  Except as noted below, the Company was in compliance with its debt covenants under its mortgages and loans payable as of September 30, 2015.


 
23

 

A summary of the Company’s mortgages, loans payable and other obligations as of September 30, 2015 and December 31, 2014 is as follows: (dollars in thousands)
                           
     
Effective
     
September 30,
   
December 31,
     
Property Name
Lender
 
Rate (a)
     
2015
   
2014
 
Maturity
 
Overlook - Site IIID,IIIC, IIIA (b)
Wells Fargo Bank N.A.
LIBOR+3.50
%
   
 -
 
$
 17,260 
 
-
 
Overlook - Site IIB (Quarrystone I) (b)
Wells Fargo Bank N.A.
LIBOR+2.50
%
   
 -
   
 5,787 
 
-
 
10 Independence (c)
Wells Fargo CMBS
 
 10.260 
%
   
 -
   
 16,924 
 
-
 
4 Sylvan (d)
Wells Fargo CMBS
 
 10.260 
%
   
 -
   
 14,575 
 
-
 
210 Clay  (e)
Wells Fargo CMBS
 
 18.100 
%
   
 -
   
 13,330 
 
-
 
5 Becker (f)
Wells Fargo CMBS
 
 19.450 
%
   
 -
   
 13,867 
 
-
 
6 Becker, 85 Livingston,
Wells Fargo CMBS
 
 10.260 
%
 
$
 65,035 
   
 65,035 
 
08/11/14
(h)
75 Livingston &
                         
20 Waterview (g)
                         
9200 Edmonston Road
Principal Commercial Funding L.L.C.
 
 5.534 
%
   
 3,809 
   
 3,951 
 
05/01/15
(i)
Port Imperial South
Wells Fargo Bank N.A.
LIBOR+1.75
%
   
 44,771 
   
 44,119 
 
11/18/15
 
4 Becker
Wells Fargo CMBS
 
 9.550 
%
   
 39,914 
   
 39,421 
 
05/11/16
 
Curtis Center (j)
CCRE & PREFG
LIBOR+5.912
%
(m)
 
 64,000 
   
 64,000 
 
10/09/16
 
Various (k)
Prudential Insurance
 
 6.332 
%
   
 144,037 
   
 145,557 
 
01/15/17
 
150 Main St.
Webster Bank
LIBOR+2.35
%
   
 6,568 
   
 1,193 
(o)
03/30/17
 
23 Main Street
JPMorgan CMBS
 
 5.587 
%
   
 28,713 
   
 29,210 
 
09/01/18
 
Harborside Plaza 5
The Northwestern Mutual Life
 
 6.842 
%
   
 218,717 
   
 221,563 
 
11/01/18
 
 
Insurance Co. & New York Life
                       
 
Insurance Co.
                       
100 Walnut Avenue
Guardian Life Insurance Co.
 
 7.311 
%
   
 18,342 
   
 18,542 
 
02/01/19
 
One River Center (l)
Guardian Life Insurance Co.
 
 7.311 
%
   
 42,018 
   
 42,476 
 
02/01/19
 
Park Square
Wells Fargo Bank N.A.
LIBOR+1.872
%
(n)
 
 27,500 
   
 27,500 
 
04/10/19
 
Port Imperial South 4/5 Retail
American General Life & A/G PC
 
4.559
%
   
 4,000 
   
 4,000 
 
12/01/21
 
Port Imperial South 4/5 Garage
American General Life & A/G PC
 
4.853
%
   
 32,600 
   
 32,600 
 
12/01/29
 
                           
Total mortgages, loans payable and other obligations
       
$
 740,024 
 
$
 820,910 
     

 
   
(a)
Reflects effective rate of debt, including deferred financing costs, comprised of the cost of terminated treasury lock agreements (if any), debt initiation costs, mark-to-market adjustment of acquired debt and other transaction costs, as applicable.
(b)
On March 27, 2015, the Company repaid these loans at par, using borrowings on the Company's unsecured revolving credit facility.
(c)
On May 27, 2015, the Company transferred the deed for 10 Independence Boulevard to the lender in satisfaction of its obligation.  See Note 3: Recent Transactions.
(d)
On June 11, 2015, the Company transferred the deed for 4 Sylvan Way to the lender in satisfaction of its obligation.  See Note 3: Recent Transactions.
(e)
On July 21, 2015, the Company transferred the deed for 210 Clay to the lender in satisfaction of its obligation.  See Note 3: Recent Transactions.
(f)
On August 24, 2015, the Company transferred the deed for 5 Becker to the lender in satisfaction of its obligation.  See Note 3: Recent Transactions.
(g)
Mortgage is cross collateralized by the four properties.
(h)
The loan was not repaid at maturity and the Company is in discussions with the lender regarding potential options in satisfaction of the obligation.
(i)
Excess cash flow, as defined, is being held by the lender for re-leasing costs.  The deed for the property was placed in escrow and is available to the lender in the event of default or non-payment at maturity.  The mortgage loan was not repaid at maturity on May 1, 2015.  The Company is in discussions with the lender regarding a further extension of the loan.
(j)
The Company owns a 50 percent tenants-in-common interest in the Curtis Center property.  The Company’s $64.0 million loan consists of its 50 percent interest in a $102 million senior loan with a current rate of 3.501 percent at September 30, 2015 and its 50 percent interest in a $26 million mezzanine loan (with a maximum borrowing capacity of $48 million) with a current rate of 9.707 percent at September 30, 2015.  The senior loan rate is based on a floating rate of one-month LIBOR plus 329 basis points and the mezzanine loan rate is based on a floating rate of one-month LIBOR plus 950 basis points.  The Company has entered into LIBOR caps for the periods of the loans.  The loans provide for three one-year extension options.
(k)
Mortgage is cross collateralized by seven properties. The Company has agreed, subject to certain conditions, to guarantee repayment of $61.1 million of the loan. 
(l)
Mortgage is collateralized by the three properties comprising One River Center. 
(m)
The effective interest rate includes amortization of deferred financing costs of 1.362 percent.
(n)
The effective interest rate includes amortization of deferred financing costs of 0.122 percent.
(o)
This construction loan has a maximum borrowing capacity of $28.8 million. 
 
CASH PAID FOR INTEREST AND INTEREST CAPITALIZED
Cash paid for interest for the nine months ended September 30, 2015 and 2014 was $85,019,000 and $92,096,000, respectively.  Interest capitalized by the Company for the nine months ended September 30, 2015 and 2014 was $11,744,000 and $10,650,000, respectively (of which these amounts included $3,769,000 and $3,284,000 for the nine months ended September 30, 2015 and 2014, respectively, for interest capitalized on the Company’s investments in unconsolidated joint ventures which were substantially in development).

SUMMARY OF INDEBTEDNESS
As of September 30, 2015, the Company’s total indebtedness of $2,043,592,000 (weighted average interest rate of 5.41 percent) was comprised of $177,839,000 of revolving credit facility borrowings and other variable rate mortgage debt (weighted average rate of 3.41 percent) and fixed rate debt and other obligations of $1,865,753,000 (weighted average rate of 5.60 percent).
 
 
 
24

 
 

 
As of December 31, 2014, the Company’s total indebtedness of $2,088,654,000 (weighted average interest rate of 5.64 percent) was comprised of $159,860,000 of variable rate mortgage debt (weighted average rate of 3.83 percent) and fixed rate debt and other obligations of $1,928,794,000 (weighted average rate of 5.79 percent). 

 
10.  EMPLOYEE BENEFIT 401(k) PLANS AND DEFERRED RETIREMENT COMPENSATION AGREEMENTS

Employees of the Company, who meet certain minimum age and service requirements, are eligible to participate in the Mack-Cali Realty Corporation 401(k) Savings/Retirement Plan (the “401(k) Plan”).  Eligible employees may elect to defer from one percent up to 60 percent of their annual compensation on a pre-tax basis to the 401(k) Plan, subject to certain limitations imposed by federal law.  The amounts contributed by employees are immediately vested and non-forfeitable.  The Company may make discretionary matching or profit sharing contributions to the 401(k) Plan on behalf of eligible participants in any plan year.  The Company did not make any contributions to the 401(k) Plan in the nine months ended September 30, 2015.  Participants are always 100 percent vested in their pre-tax contributions and will begin vesting in any matching or profit sharing contributions made on their behalf after two years of service with the Company at a rate of 20 percent per year, becoming 100 percent vested after a total of six years of service with the Company.  All contributions are allocated as a percentage of compensation of the eligible participants for the Plan year.  The assets of the 401(k) Plan are held in trust and a separate account is established for each participant.  A participant may receive a distribution of his or her vested account balance in the 401(k) Plan in a single sum or in installment payments upon his or her termination of service with the Company.  Total expense recognized by the Company for the 401(k) Plan for the three months ended September 30, 2015 and 2014 was zero and $24,000, respectively, and zero and $77,000 for the nine months ended September 30, 2015 and 2014, respectively.

On September 12, 2012, the Board of Directors of the Company approved multi-year deferred retirement compensation agreements for those executive officers in place on such date (the “Deferred Retirement Compensation Agreements”).  Pursuant to the Deferred Retirement Compensation Agreements, the Company was to make annual contributions of stock units (“Stock Units”) representing shares of the Company’s common stock on January 1 of each year from 2013 through 2017 into a deferred compensation account maintained on behalf of each participating executive.  Vesting of each annual contribution of Stock Units was to occur on December 31 of each year, subject to continued employment.  In connection with the separation from service to the Company of certain executive officers effective March 31, 2014, the Company agreed to make cash payments totaling $1.2 million for all vested and unvested Stock Units and future cash contributions pursuant to the Deferred Retirement Compensation Agreements.  In connection with the separation from service to the Company of its former president and chief executive officer effective June 30, 2015, the Company agreed to make cash payments of $2.3 million on the separation date for all vested and unvested Stock Units and future cash contributions pursuant to his Deferred Retirement Compensation Agreement.  Total expense recognized by the Company under the Deferred Retirement Compensation Agreements for the three months ended September 30, 2015 and 2014 was zero and $47,000, respectively, and zero and $1.3 million for the nine months ended September 30, 2015 and 2014, respectively.     

 
11.  DISCLOSURE OF FAIR VALUE OF ASSETS AND LIABILITIES

The following disclosure of estimated fair value was determined by management using available market information and appropriate valuation methodologies.  However, considerable judgment is necessary to interpret market data and develop estimated fair value.  Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the assets and liabilities at September 30, 2015 and December 31, 2014.  The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

Cash equivalents, receivables, notes receivables, accounts payable, and accrued expenses and other liabilities are carried at amounts which reasonably approximate their fair values as of September 30, 2015 and December 31, 2014.

The fair value of the Company’s long-term debt, consisting of senior unsecured notes, an unsecured revolving credit facility and mortgages, loans payable and other obligations aggregated approximately $2,067,463,000 and $2,133,214,000 as compared to the book value of approximately $2,043,592,000 and $2,088,654,000 as of September 30, 2015 and December 31, 2014, respectively.  The fair value of the Company’s long-term debt was categorized as a level 3 basis (as provided by ASC 820, Fair Value Measurements and Disclosures).  The fair value was estimated using a discounted cash flow analysis valuation based on the borrowing rates currently available to the Company for loans with similar terms and maturities.  The fair value of the mortgage debt and the unsecured notes was determined by discounting the future contractual interest and principal payments by a market rate.  Although the Company has determined that the majority of the inputs used to value its derivative financial instruments fall within level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivative financial instruments utilize level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. The Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivative financial instruments. As a result, the Company has determined that its derivative financial instruments valuations in their entirety are classified in level 2 of the fair value hierarchy.
 
 
 
 
25

 

 
The fair value measurements used in the evaluation of the Company’s rental properties are considered to be Level 3 valuations within the fair value hierarchy, as there are significant unobservable inputs. Examples of inputs that were utilized in the fair value calculations include estimated holding periods, discount rates, market capitalization rates, expected lease rental rates, and third party broker information. The valuation techniques and significant unobservable inputs used for the Company’s Level 3 fair value measurements at September 30, 2015 were as follows:

                       
     
Fair Value at
 
Primary
           
     
September 30,
 
Valuation
 
Unobservable
 
Location
 
Range of
Description
   
2015
 
Techniques
 
Inputs
 
Type
 
Rates
Properties held and used on which the Company recognized impairment losses
 
$
 438,606,000
 
Discounted cash flows
 
Discount rate
 
Suburban
 
8%  - 15%
                 
Central Business District
 
6% - 8%
                       
             
Exit Capitalization rate
 
Suburban
 
7.5% - 9%
                 
Central Business District
 
4.6%  - 5.75%
                       
Disclosure about fair value of assets and liabilities is based on pertinent information available to management as of September 30, 2015 and December 31, 2014.  Although management is not aware of any factors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since September 30, 2015 and current estimates of fair value may differ significantly from the amounts presented herein.  

 
12.  COMMITMENTS AND CONTINGENCIES

TAX ABATEMENT AGREEMENTS
Pursuant to agreements with certain municipalities, the Company is required to make payments in lieu of property taxes (“PILOT”) on certain of its properties and has tax abatement agreements on other properties, as follows:

The Harborside Plaza 4-A agreement with the City of Jersey City, as amended, which commenced in 2002, is for a term of 20 years.  The annual PILOT is equal to two percent of Total Project Costs, as defined.  Total Project Costs are $49.5 million.  The PILOT totaled $247,000 and $247,000 for the three months ended September 30, 2015 and 2014, respectively, and $742,000 and $742,000 for the nine months ended September 30, 2015 and 2014, respectively.

The Harborside Plaza 5 agreement, also with the City of Jersey City, as amended, which commenced in 2002, is for a term of 20 years.  The annual PILOT is equal to two percent of Total Project Costs, as defined.  Total Project Costs are $170.9 million.  The PILOT totaled $854,000 and $854,000 for the three months ended September 30, 2015 and 2014, respectively, and $2.6 million and $2.6 million for the nine months ended September 30, 2015 and 2014, respectively.

The agreement with the City of Weehawken for its Port Imperial 4/5 garage development project has a term of five years beginning when the project is substantially complete, which occurred in the third quarter of 2013.  The agreement provides that real estate taxes be paid initially on the land value of the project only and allows for a phase in of real estate taxes on the value of the improvements over a five year period.

The agreement with the City of Rahway for its Park Square multi-family rental property provides that real estate taxes will be partially abated, on a declining scale, for four years through 2015.

At the conclusion of the above-referenced agreements, it is expected that the properties will be assessed by the municipality and be subject to real estate taxes at the then prevailing rates.