13.  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 $279,000 and $247,000 for the three months ended September 30, 2016 and 2015,  respectively, and $798,000 and $742,000 for the nine months ended September 30, 2016 and 2015, 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 $1.1 million and  $854,000 for the three months ended September 30, 2016 and 2015,  respectively, and $2.9 million and $2.6 million for the nine months ended September 30, 2016 and 2015, respectively.



The Port Imperial 4/5 Garage development project agreement with the City of Weehawken 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 at zero percent year one and 80 percent in years two through five.



The Port Imperial South 1/3 Garage development project agreement with the City of Weehawken has a term of five years beginning when the project is substantially complete, which occurred in the fourth quarter of 2015.  The agreement provides that real estate taxes be paid at 100 percent on the land value of the project only over the five year period and allows for a phase in of real estate taxes on the building improvement value at zero percent in year one and 95 percent in years two through five.



The Port Imperial Hotel development project agreement with the City of Weehawken is for a term of 15 years following substantial completion, which is anticipated to be in the first quarter 2018.  The annual PILOT is equal to two percent of Total Project Costs, as defined. 



The Port Imperial South 11 development project agreement with the City of Weehawken is for a term of 15 years following substantial completion, which is anticipated to be in the first quarter 2018.  The annual PILOT is equal to 10 percent of Gross Revenues, as defined.



The 111 River Realty agreement with the City of Hoboken, which commenced on October 1, 2001 expires in April 2022.  The PILOT payment equals $1,227,708 annually through April 2017 and then increases to $1,406,064 annually until expiration.  The PILOT totaled $306,927 for the three months ended September 30, 2016.



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.



LITIGATION

The Company is a defendant in litigation arising in the normal course of its business activities.  Management does not believe that the ultimate resolution of these matters will have a materially adverse effect upon the Company’s financial condition taken as whole.



GROUND LEASE AGREEMENTS

Future minimum rental payments under the terms of all non-cancelable ground leases under which the Company is the lessee, as of September 30, 2016, are as follows: (dollars in thousands)

 

Ground lease expense incurred by the Company amounted to $538,000 and $102,000  during the three months ended September 30, 2016 and 2015, respectively, and $767,000 and $305,000 during the nine months ended September 30, 2016 and 2015, respectively.  



CONSTRUCTION PROJECTS

The Company owns a 76.25 percent interest in a consolidated joint venture which is constructing a 108-unit multi-family development rental property located in Eastchester, New York (the “Eastchester Project”).  The project is expected to be ready for occupancy in the fourth quarter of 2016.  The Eastchester Project is estimated to cost a total of $53.1 million (of which development costs of $49.4 million have been incurred through September 30, 2016).  The venture has a $28.8 million construction loan (with $25.2 million outstanding as of September 30, 2016).  The Company expects to fund costs of approximately $24 million for the development of the project (of which, as of September 30, 2016, the Company has funded $20.1 million of the development costs and estimates it will need to fund an additional $3.9 million for the completion of the project). 



On April 1, 2015, the Company acquired vacant land in Worcester, Massachusetts to accommodate a two-phase development of 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, 2016), subject to certain conditions, in accordance with the terms of the purchase and sale agreement.  The first phase with 237 units started construction in the third quarter 2015 with anticipated initial deliveries in the fourth quarter 2017.  The second phase with 128 units started construction in the third quarter 2016 with anticipated initial deliveries in the third quarter 2018.  The Company has a construction loan with a maximum borrowing amount of $41.5 million and has received a term sheet to increase the loan to $58 million related to the construction of the second phase (with no outstanding balance as of September 30, 2016).  Total development costs for both phases are estimated to be approximately $90.5 million (of which $23.9 million was incurred by the Company through September 30, 2016 and estimates it will need to fund an additional $8.6 million for the completion of the project).



On October 6, 2015, the Company entered into a joint venture partnership with XS Port Imperial Hotel, LLC (“XS”) to form XS Hotel Urban Renewal Associates LLC (“XS Hotel URA”) for the development and ownership of a 372-key dual branded hotel property located in Weehawken, New Jersey (“Port Imperial Hotel”).  Concurrently, the Company and XS entered into a separate joint venture partnership to form XS Hotel Associates, L.L.C. (“XS Hotel”) for the management and operations of the completed hotel development.  The Company holds a 90 percent interest and XS holds the remaining 10 percent interest in the consolidated joint ventures, XS Hotel URA and XS Hotel, with the Company having full and complete authority, power, and discretion to manage and control the ventures’ business, affairs, and property.  The construction of the Port Imperial Hotel is estimated to cost a total of $105.9 million.  The venture has a $94 million construction loan (with $8.3 million outstanding as of September 30, 2016).  As of September 30, 2016, the Company incurred development costs of $8.4 million and will not need to fund additional costs for the completion of the project.



The Company owns developable land to accommodate a multi-phase development project of approximately 1,034-unit multi-family rental property located in Malden, Massachusetts.  The initial phase commenced construction of 292 units in the third quarter of 2015 (the “Chase II Project”).  The Chase II project is estimated to cost a total of $74.9 million (of which the Company has funded $26.9 million through September 30, 2016) and is expected to be ready for occupancy by fourth quarter of 2016.  The Company has a construction loan with a maximum borrowing amount of $48 million (with $23.6 million outstanding as of September 30, 2016).  The Company will not need to fund additional costs for the completion of the Chase II Project.  



The Company owned an office property that has been repurposed for residential use.  The 197-unit multi-family development project, which is located in Morris Plains, New Jersey (“Signature Place Project”), is expected to be ready for occupancy by the fourth quarter of 2017. The Signature Place Project, which is estimated to cost a total of $58.7 million (of which development costs of $13.1 million have been incurred through September 30, 2016) is expected to be funded by a $42 million construction loan.  The Company expects to fund costs of approximately $16.7    million for the development of the project, of which the Company has incurred $12.9 million as of September 30, 2016. 



The Company owns a leasehold interest in developable land for a 296-unit multi-family development project located in East Boston, Massachusetts (“Portside 5/6 Project”).  The project is expected to be ready for occupancy by the first quarter of 2018.  The Portside 5/6 Project, which is estimated to cost a total of $111.4 million (of which development costs of $27.7 million have been incurred through September 30, 2016), is expected to be funded primarily by a $73 million construction loan.  The Company expects to fund costs of $38.4 million for the development of the project, of which the Company has funded  $26.0 million as of September 30, 2016.  



The Company owns developable land for a 295-unit multi-family development project located in Weehawken, New Jersey (“RiverHouse 11 Project”), which began construction in the first quarter 2016.  The project is expected to be ready for occupancy by first quarter 2018.  The RiverHouse 11 Project, which is estimated to cost a total of $124 million (of which development costs of $33 million have been incurred through September 30, 2016), is expected to be funded primarily by a $78 million construction loan.  The Company expects to fund costs of $46 million for the development of the project, of which the Company has funded $25.8 million as of September 30, 2016.



The Company owns developable land to accommodate a development project of approximately 310-unit multi-family rental property located in Conshohocken, Pennsylvania, which began construction in the third quarter of 2016 (the “51 Washington Street Project”) with anticipated initial occupancy in the fourth quarter of 2018.  The 51 Washington Street Project, which is estimated to cost a total of $86.1 million (of which development costs of $19.5 million have been incurred through September 30, 2016), is expected to be funded with a $54 million construction loan and the balance of $32.1 million from the Company.



OTHER

Through February 2016, the Company could not dispose of or distribute certain of its properties which were originally contributed by certain unrelated common unitholders of the Operating Partnership, without the express written consent of such common unitholders, as applicable, except in a manner which did not result in recognition of any built-in-gain (which could result in an income tax liability) or which reimbursed the appropriate specific common unitholders for the tax consequences of the recognition of such built-in-gains (collectively, the “Property Lock-Ups”).  The aforementioned restrictions did not apply in the event that the Company sold all of its properties or in connection with a sale transaction which the Company’s Board of Directors determined was reasonably necessary to satisfy a material monetary default on any unsecured debt, judgment or liability of the Company or to cure any material monetary default on any mortgage secured by a property.  The Property Lock-Ups expired as of February 2016.  Upon the expiration of the Property Lock-Ups, the Company is generally required to use commercially reasonable efforts to prevent any sale, transfer or other disposition of the subject properties from resulting in the recognition of built-in gain to the specific common unitholders, which include members of the Mack Group (which includes William L. Mack, Chairman of the Company’s Board of Directors; David S. Mack, director; and Earle I. Mack, a former director); the Robert Martin Group (which includes Robert F. Weinberg, a former director and current member of its Advisory Board), and the Cali Group (which includes John R. Cali, a former director and current member of its Advisory Board).  As of September 30, 2016,  116 of the Company’s properties, with an aggregate carrying value of approximately $1.3 billion, have lapsed restrictions and are subject to these conditions.   

13.  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 $279,000 and $247,000 for the three months ended September 30, 2016 and 2015,  respectively, and $798,000 and $742,000 for the nine months ended September 30, 2016 and 2015, 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 $1.1 million and  $854,000 for the three months ended September 30, 2016 and 2015,  respectively, and $2.9 million and $2.6 million for the nine months ended September 30, 2016 and 2015, respectively.



The Port Imperial 4/5 Garage development project agreement with the City of Weehawken 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 at zero percent year one and 80 percent in years two through five.



The Port Imperial South 1/3 Garage development project agreement with the City of Weehawken has a term of five years beginning when the project is substantially complete, which occurred in the fourth quarter of 2015.  The agreement provides that real estate taxes be paid at 100 percent on the land value of the project only over the five year period and allows for a phase in of real estate taxes on the building improvement value at zero percent in year one and 95 percent in years two through five.



The Port Imperial Hotel development project agreement with the City of Weehawken is for a term of 15 years following substantial completion, which is anticipated to be in the first quarter 2018.  The annual PILOT is equal to two percent of Total Project Costs, as defined. 



The Port Imperial South 11 development project agreement with the City of Weehawken is for a term of 15 years following substantial completion, which is anticipated to be in the first quarter 2018.  The annual PILOT is equal to 10 percent of Gross Revenues, as defined.



The 111 River Realty agreement with the City of Hoboken, which commenced on October 1, 2001 expires in April 2022.  The PILOT payment equals $1,227,708 annually through April 2017 and then increases to $1,406,064 annually until expiration.  The PILOT totaled $306,927 for the three months ended September 30, 2016.



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.



LITIGATION

The Company is a defendant in litigation arising in the normal course of its business activities.  Management does not believe that the ultimate resolution of these matters will have a materially adverse effect upon the Company’s financial condition taken as whole.



GROUND LEASE AGREEMENTS

Future minimum rental payments under the terms of all non-cancelable ground leases under which the Company is the lessee, as of September 30, 2016, are as follows: (dollars in thousands)

 

Ground lease expense incurred by the Company amounted to $538,000 and $102,000  during the three months ended September 30, 2016 and 2015, respectively, and $767,000 and $305,000 during the nine months ended September 30, 2016 and 2015, respectively.  



CONSTRUCTION PROJECTS

The Company owns a 76.25 percent interest in a consolidated joint venture which is constructing a 108-unit multi-family development rental property located in Eastchester, New York (the “Eastchester Project”).  The project is expected to be ready for occupancy in the fourth quarter of 2016.  The Eastchester Project is estimated to cost a total of $53.1 million (of which development costs of $49.4 million have been incurred through September 30, 2016).  The venture has a $28.8 million construction loan (with $25.2 million outstanding as of September 30, 2016).  The Company expects to fund costs of approximately $24 million for the development of the project (of which, as of September 30, 2016, the Company has funded $20.1 million of the development costs and estimates it will need to fund an additional $3.9 million for the completion of the project). 



On April 1, 2015, the Company acquired vacant land in Worcester, Massachusetts to accommodate a two-phase development of 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, 2016), subject to certain conditions, in accordance with the terms of the purchase and sale agreement.  The first phase with 237 units started construction in the third quarter 2015 with anticipated initial deliveries in the fourth quarter 2017.  The second phase with 128 units started construction in the third quarter 2016 with anticipated initial deliveries in the third quarter 2018.  The Company has a construction loan with a maximum borrowing amount of $41.5 million and has received a term sheet to increase the loan to $58 million related to the construction of the second phase (with no outstanding balance as of September 30, 2016).  Total development costs for both phases are estimated to be approximately $90.5 million (of which $23.9 million was incurred by the Company through September 30, 2016 and estimates it will need to fund an additional $8.6 million for the completion of the project).



On October 6, 2015, the Company entered into a joint venture partnership with XS Port Imperial Hotel, LLC (“XS”) to form XS Hotel Urban Renewal Associates LLC (“XS Hotel URA”) for the development and ownership of a 372-key dual branded hotel property located in Weehawken, New Jersey (“Port Imperial Hotel”).  Concurrently, the Company and XS entered into a separate joint venture partnership to form XS Hotel Associates, L.L.C. (“XS Hotel”) for the management and operations of the completed hotel development.  The Company holds a 90 percent interest and XS holds the remaining 10 percent interest in the consolidated joint ventures, XS Hotel URA and XS Hotel, with the Company having full and complete authority, power, and discretion to manage and control the ventures’ business, affairs, and property.  The construction of the Port Imperial Hotel is estimated to cost a total of $105.9 million.  The venture has a $94 million construction loan (with $8.3 million outstanding as of September 30, 2016).  As of September 30, 2016, the Company incurred development costs of $8.4 million and will not need to fund additional costs for the completion of the project.



The Company owns developable land to accommodate a multi-phase development project of approximately 1,034-unit multi-family rental property located in Malden, Massachusetts.  The initial phase commenced construction of 292 units in the third quarter of 2015 (the “Chase II Project”).  The Chase II project is estimated to cost a total of $74.9 million (of which the Company has funded $26.9 million through September 30, 2016) and is expected to be ready for occupancy by fourth quarter of 2016.  The Company has a construction loan with a maximum borrowing amount of $48 million (with $23.6 million outstanding as of September 30, 2016).  The Company will not need to fund additional costs for the completion of the Chase II Project.  



The Company owned an office property that has been repurposed for residential use.  The 197-unit multi-family development project, which is located in Morris Plains, New Jersey (“Signature Place Project”), is expected to be ready for occupancy by the fourth quarter of 2017. The Signature Place Project, which is estimated to cost a total of $58.7 million (of which development costs of $13.1 million have been incurred through September 30, 2016) is expected to be funded by a $42 million construction loan.  The Company expects to fund costs of approximately $16.7    million for the development of the project, of which the Company has incurred $12.9 million as of September 30, 2016. 



The Company owns a leasehold interest in developable land for a 296-unit multi-family development project located in East Boston, Massachusetts (“Portside 5/6 Project”).  The project is expected to be ready for occupancy by the first quarter of 2018.  The Portside 5/6 Project, which is estimated to cost a total of $111.4 million (of which development costs of $27.7 million have been incurred through September 30, 2016), is expected to be funded primarily by a $73 million construction loan.  The Company expects to fund costs of $38.4 million for the development of the project, of which the Company has funded  $26.0 million as of September 30, 2016.  



The Company owns developable land for a 295-unit multi-family development project located in Weehawken, New Jersey (“RiverHouse 11 Project”), which began construction in the first quarter 2016.  The project is expected to be ready for occupancy by first quarter 2018.  The RiverHouse 11 Project, which is estimated to cost a total of $124 million (of which development costs of $33 million have been incurred through September 30, 2016), is expected to be funded primarily by a $78 million construction loan.  The Company expects to fund costs of $46 million for the development of the project, of which the Company has funded $25.8 million as of September 30, 2016.



The Company owns developable land to accommodate a development project of approximately 310-unit multi-family rental property located in Conshohocken, Pennsylvania, which began construction in the third quarter of 2016 (the “51 Washington Street Project”) with anticipated initial occupancy in the fourth quarter of 2018.  The 51 Washington Street Project, which is estimated to cost a total of $86.1 million (of which development costs of $19.5 million have been incurred through September 30, 2016), is expected to be funded with a $54 million construction loan and the balance of $32.1 million from the Company.



OTHER

Through February 2016, the Company could not dispose of or distribute certain of its properties which were originally contributed by certain unrelated common unitholders of the Operating Partnership, without the express written consent of such common unitholders, as applicable, except in a manner which did not result in recognition of any built-in-gain (which could result in an income tax liability) or which reimbursed the appropriate specific common unitholders for the tax consequences of the recognition of such built-in-gains (collectively, the “Property Lock-Ups”).  The aforementioned restrictions did not apply in the event that the Company sold all of its properties or in connection with a sale transaction which the Company’s Board of Directors determined was reasonably necessary to satisfy a material monetary default on any unsecured debt, judgment or liability of the Company or to cure any material monetary default on any mortgage secured by a property.  The Property Lock-Ups expired as of February 2016.  Upon the expiration of the Property Lock-Ups, the Company is generally required to use commercially reasonable efforts to prevent any sale, transfer or other disposition of the subject properties from resulting in the recognition of built-in gain to the specific common unitholders, which include members of the Mack Group (which includes William L. Mack, Chairman of the Company’s Board of Directors; David S. Mack, director; and Earle I. Mack, a former director); the Robert Martin Group (which includes Robert F. Weinberg, a former director and current member of its Advisory Board), and the Cali Group (which includes John R. Cali, a former director and current member of its Advisory Board).  As of September 30, 2016,  116 of the Company’s properties, with an aggregate carrying value of approximately $1.3 billion, have lapsed restrictions and are subject to these conditions.