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 $349,000 and $247,000 for the three months ended March 31, 2017 and 2016,  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 $1.3 million and  $854,000 for the three months ended March 31, 2017 and 2016,  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 second 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 $307,000 for the three months ended March 31, 2017.



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 March 31, 2017, are as follows: (dollars in thousands)

 

Ground lease expense incurred by the Company amounted to $590,000 and $102,000  during the three months ended March 31, 2017 and 2016, respectively.  



CONSTRUCTION PROJECTS

In 2014, the Company entered into a joint venture agreement with Ironstate Harborside-A LLC to form Harborside Unit A Urban Renewal, L.L.C. that is developing a high-rise tower of approximately 762 multi-family apartment units above a parking pedestal at the Company’s Harborside complex in Jersey City, New Jersey.  The Company owns an 85 percent interest in the joint venture with shared control over major decisions.  The construction of the project, which is projected to be ready for occupancy by second quarter 2017, is estimated to cost $320 million (of which development costs of $308.6 million have been incurred by the venture through March 31, 2017).  The venture has a construction/permanent loan with a maximum borrowing amount of $192 million (with $173.9 million outstanding as of March 31, 2017).  The Company does not expect to fund any future development costs of the project, as future development costs will be funded by using the loan financing.



In 2015, the Company commenced development of a two-phase multi-family development of the CitySquare project in Worcester, Massachusetts.  The first phase, with 237 units, is under construction 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.  Total development costs for both phases are estimated to be $92 million with development costs of $44.7 million incurred through March 31, 2017.  The Company has a construction loan with a maximum borrowing amount of $58 million (with $5 million outstanding as of March 31, 2017).  The Company does not expect to fund additional costs for the completion of the project as future development costs will be funded by using the loan financings.  



In 2015, the Company entered into a 90-percent owned joint venture with XS Port Imperial Hotel, LLC to form XS Hotel Urban Renewal Associates LLC, which is developing a 372-key hotel in Weehawken, New Jersey.  The construction of the project is estimated to cost $129.6 million, with development costs of $64.7 million incurred by the venture through March 31, 2017.  The venture has a $94 million construction loan (with $24.5 million outstanding as of March 31, 2017).  The Company does not expect to fund additional costs for the completion of the project as future costs will be funded by using the loan financing.



In 2016, the Company commenced the repurposing of a former office property site in Morris Plains, New Jersey into a 197-unit multi-family development project.  The project, which is estimated to cost $58.7 million of which development costs of $26.9 million have been incurred through March 31, 2017, is expected to be ready for occupancy by the fourth quarter of 2017.  The remaining project costs are expected to be funded primarily from a $42 million construction loan (with $6.1 million outstanding as of March 31, 2017). 



In 2016, the Company started construction of a 296-unit multi-family project in East Boston, Massachusetts.  The project is expected to be ready for occupancy by second quarter 2018 and is estimated to cost $111.4 million of which development costs of $48.1 million have been incurred through March 31, 2017.  The remaining project costs are expected to be funded primarily from a $73 million construction loan (with $8.1 million outstanding as of March 31, 2017).



The Company is developing a 295-unit multi-family project in Weehawken, New Jersey, which began construction in first quarter 2016.  The project, which is expected to be ready for occupancy by first quarter 2018, is estimated to cost $124 million (of which development costs of $52.5 million have been incurred through March 31, 2017).  The project costs are expected to be funded primarily from a $78 million construction loan (with $22.2 million outstanding as of March 31, 2017).  The Company expects to fund $46 million for the development of the project, of which the Company has funded $30.3 million as of March 31, 2017.



The Company is developing a 310-unit multi-family project in Conshohocken, Pennsylvania, which began construction in third quarter 2016 with anticipated initial occupancy in second quarter 2019.  The project is estimated to cost $89.4 million (of which development costs of $22.4 million have been incurred through March 31, 2017).  The project costs are expected to be funded primarily from a $54 million construction loan and the balance of $35.4 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 may 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 General Partner’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 in 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 General Partner’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 the General Partner’s Advisory Board), and the Cali Group (which includes John R. Cali, a former director and current member of the General Partner’s Advisory Board).  As of March 31, 2017,  102 of the Company’s properties, with an aggregate carrying value of approximately $1.2 billion, have lapsed restrictions and are subject to these conditions.   

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 $349,000 and $247,000 for the three months ended March 31, 2017 and 2016,  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 $1.3 million and  $854,000 for the three months ended March 31, 2017 and 2016,  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 second 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 $307,000 for the three months ended March 31, 2017.



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 March 31, 2017, are as follows: (dollars in thousands)

 

Ground lease expense incurred by the Company amounted to $590,000 and $102,000  during the three months ended March 31, 2017 and 2016, respectively.  



CONSTRUCTION PROJECTS

In 2014, the Company entered into a joint venture agreement with Ironstate Harborside-A LLC to form Harborside Unit A Urban Renewal, L.L.C. that is developing a high-rise tower of approximately 762 multi-family apartment units above a parking pedestal at the Company’s Harborside complex in Jersey City, New Jersey.  The Company owns an 85 percent interest in the joint venture with shared control over major decisions.  The construction of the project, which is projected to be ready for occupancy by second quarter 2017, is estimated to cost $320 million (of which development costs of $308.6 million have been incurred by the venture through March 31, 2017).  The venture has a construction/permanent loan with a maximum borrowing amount of $192 million (with $173.9 million outstanding as of March 31, 2017).  The Company does not expect to fund any future development costs of the project, as future development costs will be funded by using the loan financing.



In 2015, the Company commenced development of a two-phase multi-family development of the CitySquare project in Worcester, Massachusetts.  The first phase, with 237 units, is under construction 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.  Total development costs for both phases are estimated to be $92 million with development costs of $44.7 million incurred through March 31, 2017.  The Company has a construction loan with a maximum borrowing amount of $58 million (with $5 million outstanding as of March 31, 2017).  The Company does not expect to fund additional costs for the completion of the project as future development costs will be funded by using the loan financings.  



In 2015, the Company entered into a 90-percent owned joint venture with XS Port Imperial Hotel, LLC to form XS Hotel Urban Renewal Associates LLC, which is developing a 372-key hotel in Weehawken, New Jersey.  The construction of the project is estimated to cost $129.6 million, with development costs of $64.7 million incurred by the venture through March 31, 2017.  The venture has a $94 million construction loan (with $24.5 million outstanding as of March 31, 2017).  The Company does not expect to fund additional costs for the completion of the project as future costs will be funded by using the loan financing.



In 2016, the Company commenced the repurposing of a former office property site in Morris Plains, New Jersey into a 197-unit multi-family development project.  The project, which is estimated to cost $58.7 million of which development costs of $26.9 million have been incurred through March 31, 2017, is expected to be ready for occupancy by the fourth quarter of 2017.  The remaining project costs are expected to be funded primarily from a $42 million construction loan (with $6.1 million outstanding as of March 31, 2017). 



In 2016, the Company started construction of a 296-unit multi-family project in East Boston, Massachusetts.  The project is expected to be ready for occupancy by second quarter 2018 and is estimated to cost $111.4 million of which development costs of $48.1 million have been incurred through March 31, 2017.  The remaining project costs are expected to be funded primarily from a $73 million construction loan (with $8.1 million outstanding as of March 31, 2017).



The Company is developing a 295-unit multi-family project in Weehawken, New Jersey, which began construction in first quarter 2016.  The project, which is expected to be ready for occupancy by first quarter 2018, is estimated to cost $124 million (of which development costs of $52.5 million have been incurred through March 31, 2017).  The project costs are expected to be funded primarily from a $78 million construction loan (with $22.2 million outstanding as of March 31, 2017).  The Company expects to fund $46 million for the development of the project, of which the Company has funded $30.3 million as of March 31, 2017.



The Company is developing a 310-unit multi-family project in Conshohocken, Pennsylvania, which began construction in third quarter 2016 with anticipated initial occupancy in second quarter 2019.  The project is estimated to cost $89.4 million (of which development costs of $22.4 million have been incurred through March 31, 2017).  The project costs are expected to be funded primarily from a $54 million construction loan and the balance of $35.4 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 may 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 General Partner’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 in 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 General Partner’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 the General Partner’s Advisory Board), and the Cali Group (which includes John R. Cali, a former director and current member of the General Partner’s Advisory Board).  As of March 31, 2017,  102 of the Company’s properties, with an aggregate carrying value of approximately $1.2 billion, have lapsed restrictions and are subject to these conditions.