3.    REAL ESTATE TRANSACTIONS

 

Acquisitions

The following multi-family rental properties were acquired during the year ended December 31, 2013 (dollars in thousands):

 

 

 

(a)The acquisition cost was funded primarily through borrowings under the Company’s unsecured revolving credit facility.

(b)The acquisition cost consisted of $43,421,000 in cash consideration and future purchase price earn out payment obligations, subsequent to conditions related to a real estate tax appeal, recorded at fair value of $2,955,000 at closing.  $42,613,355 of the cash consideration was funded from funds held by a qualified intermediary, which were proceeds from the Company’s prior property sales.  The remaining cash consideration was funded primarily from available cash on hand.  $2,550,000 of the earn-out obligation amount was paid in January 2014, with the remaining balance still potentially payable in the future.

(c)$12,701,925 of the acquisition cost was funded from funds held by a qualified intermediary, which were proceeds from the Company’s prior property sales.  The remaining acquisition cost was funded primarily from available cash on hand.

 

The purchase prices were allocated to the net assets acquired during the year ended December 31, 2013, as follows (in thousands):

 

 

 

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

 

For the year ended December 31, 2013, included in general and administrative expense was an aggregate of approximately $642,000 in transaction costs related to the property acquisitions.

 

Roseland Transaction

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 Roseland Assets consisted primarily of interests in: six operating multi-family properties totaling 1,769 apartments, one condo-residential property totaling three units and four commercial properties totaling approximately 212,000 square feet; 13 in-process development projects, which included nine multi-family properties totaling 2,149 apartments, two garages totaling 1,591 parking spaces and two retail properties totaling approximately 35,400 square feet; and land parcels or options in land parcels which may support approximately 5,980 apartments, approximately 736,000 square feet of commercial space, and a 321-key hotel. 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 (see Note 4).

 

The total purchase price for accounting purposes of $115,602,000 includes cash paid of approximately $115,579,000 and the fair value of contingent consideration pursuant to an earn-out (“Earn Out”) agreement of approximately $10 million.

 

The Earn Out largely represents contingent consideration and requires the Company to pay Roseland Partners an aggregate maximum of $15.6 million.  The Earn Out is based on defined criteria, as follows: (i) the Roseland Assets component of up to $8.6 million for the completion of certain developments ($2.8 million), and the start of construction on others ($2.8 million), obtaining tax credits/grants on others ($3.0 million), all of which are payable over various periods of up to three years; and (ii) total return to shareholders (“TRS”) for up to an additional $7 million based on a TRS measured on a three year cumulative basis and on discrete years, both on an absolute basis and in comparison to a peer group.  Each of the Earn Out elements were separately valued as of the acquisition date with an aggregate fair value of contingent consideration of approximately $10 million (representing $6.3 million for the Roseland Assets and $3.7 million for the TRS component).  Prospectively, the Earn Out liability will be remeasured at fair value quarterly until the contingency has been resolved, with any changes in fair value representing a charge or benefit directly to earnings (with no adjustment to purchase accounting). 

 

The measures of the contingent consideration were based on significant inputs that are not observable in the market, which ASU 820 refers to as Level 3 inputs.  In addition to an appropriate discount rate, the key assumption affecting the valuation for the Roseland Assets component was the probability of occurrence of the payment events under the relevant provisions (management assumed between 92 and 99 percent for completion/start criteria and 50 percent for the tax credit/grant criteria in its initial valuation).  The valuation of the TRS component includes assumptions for the risk-free rate and various other factors (i.e., stock price, dividend levels and volatility) for the Company and the relevant peer group, as defined in the Earn Out.

 

The purchase accounting for the Roseland Transaction resulted in goodwill of $2.9 million, which represented the excess of the purchase price over the fair value of net tangible and intangible assets acquired.

 

The purchase consideration is subject to the return of a portion of the purchase price of up to $2.0 million upon the failure to achieve a certain level of fee revenue from the Roseland Business during the 33-month period following the closing date.  Because the fee target was highly probable, no discount was ascribed to this contingently returnable consideration.  Also, at the closing, approximately $34 million in cash of the purchase price was deposited in escrow to secure certain of the indemnification obligations of Roseland Partners and its affiliates.

 

The Company accounted for the Roseland Transaction using the purchase method of accounting.  As discussed in Note 2: Significant accounting policies, the Company utilized several sources in making estimates of fair value for purposes of allocating the purchase price to tangible and intangible assets acquired and liabilities assumed.  The fair values of the investments in unconsolidated joint ventures and the noncontrolling interests in consolidated ventures were estimated upon acquisition by applying the income approach and a market approach.  These fair value measurements were based on significant inputs that are not observable in the market and thus represent a Level 3 measurement as defined in ASU 820. Key assumptions include: (i) a discount rate range of 10 percent to 15 percent, (ii) a terminal value based on a range of direct cap rates between 5 percent and 7.5 percent; and (iii) adjustments because of the lack of control or lack of marketability that market participants would consider when estimating the fair value of the unconsolidated joint ventures and the noncontrolling interests in consolidated ventures.

 

The purchase price was allocated to the net assets acquired during the year ended December 31, 2012 as follows (in thousands):

 

(2)Contract value which will be amortized over four years.

(3)Future changes in the value of contingent consideration will be reflected in earnings pursuant to ASC 805.

 

For the year ended December 31, 2012, included in general and administrative expense was approximately

$5.8 million of transaction costs related to the Roseland Transaction.

 

As a result of the achievement of certain of the defined criteria, the Company paid Roseland Partners $2.8 million of

the Earn Out on January 25, 2013.

 

Consolidation

On August 22, 2013, the Company contributed an additional $4.9 million and the operating agreement of Eastchester was modified which increased the Company’s effective ownership to 76.25 percent, with the remaining 23.75 percent owned by HVLH.  The agreement also provided the Company with control of all major decisions.  Accordingly, effective August 22, 2013, the Company consolidated Eastchester under the provisions of ASC 810, Consolidation.  As the carrying value approximated the fair value of the net assets acquired, there was no holding period gain or loss recognized on this transaction. 

 

On October 23, 2012, as part of the Roseland Transaction, the Company had acquired a 26.25 percent interest in a to-be-built, 108-unit multi-family rental property located in Eastchester, New York (the “Eastchester Project”) for approximately $2.1 million.  The remaining interests in the development project-owning entity, 150 Main Street, L.L.C. (“Eastchester”) was owned 26.25 percent by JMP Eastchester, L.L.C. and 47.5 percent by Hudson Valley Land Holdings, L.L.C. (“HVLH”).  The Eastchester Project began construction in late 2013.  Estimated total development costs of $46 million are expected to be funded with a $27.5 million construction loan and the balance of $18.5 million to be funded with member capital.

 

The following table summarizes the net assets recorded upon consolidation (in thousands):

 

 

 

 

Properties Commencing Initial Operations

The following properties commenced initial operations during the year ended December 31, 2013 (dollars in thousands):

 

 

(a)Development costs included approximately $13.0 million in land costs and $4.3 million in leasing costs.  Amounts are as of December 31, 2013.

(b)Development costs included approximately $13.1 million in land costs.  Amounts are as of December 31, 2013.

 

Property Sales

The Company sold the following office properties during the year ended December 31, 2013 (dollars in thousands):  See Note 7: Discontinued Operations.

 

   

 

 

 

 

 

 

The Company sold the following office properties during the year ended December 31, 2012 (dollars in thousands):  See Note 7: Discontinued Operations.

 

(c)Also included in realized gains(loss) for the year ended December 31, 2012, was a $4.5 million gain recorded on the disposal of the office property located at 2200 Renaissance Boulevard.  This office property, aggregating 174,124 square feet, was collateral for a $16.2 million mortgage loan scheduled to mature on December 1, 2012.  The Company previously recorded an impairment charge on the property of $9.5 million at December 31, 2010.  On March 28, 2012, the Company transferred the deed for 2200 Renaissance Boulevard to the lender in satisfaction of its obligations, which resulted in recording the gain.

 

On February 24, 2014, the Company entered into agreements with affiliates of Keystone Property Group (“Keystone Entities”) to sell 15 of its office properties in New Jersey, New York and Connecticut, aggregating approximately 2.3 million square feet, for approximately $230.8 million, comprised of: $201.7 million in cash from a combination of Keystone Entities senior and pari-passu equity and mortgage financing; Company subordinated equity interests in each of the properties being sold with capital accounts aggregating $22.2 million; and pari passu equity interests in three of the properties being sold aggregating $6.9 million. The purchasers of the office properties will be joint ventures to be formed between the Company and the Keystone Entities. The senior and pari-passu equity will receive a 15 percent internal rate of return (“IRR”) after which the subordinated equity will receive a ten percent IRR and then all distributable cash flow will be split equally between the Keystone Entities and the Company.  As part of the transaction, the Company will participate in management, leasing and construction fees for the portfolio, and the Company and the Keystone Entities will jointly provide leasing representation for the properties.

 

The formation of the joint ventures and the completion of the sale of the properties to the joint ventures are subject to the Keystone Entities’ completion of due diligence by March 31, 2014, which may be extended for two 30-day periods, and normal and customary closing conditions.  The consummation of the transactions between the Company and the Keystone Entities also is subject to the waiver or non-exercise of certain rights of first offer with respect to

11 of the properties by certain affiliates of the Company and other third parties who are limited partners of the Company.  There can be no assurance that the transaction will be consummated.

 

Impairments on Properties Held and Used

For the year ended December 31, 2013, the Company recorded impairment charges of $110.9 million on 18 office properties.  Nine of the 18 properties located in Roseland, Parsippany, Warren and Lyndhurst, New Jersey, aggregating approximately 1.3 million square feet, are collateral for mortgage loans scheduled to mature on August 11, 2014 and May 11, 2016, with principal balances totaling $160 million as of December 31, 2013.  Seven of the 18 properties located in Fair Lawn, New Jersey, Woodcliff Lake, New Jersey, Stamford, Connecticut and Elmsford, New York, aggregating 646,000 square feet, are being considered for disposition (six of which are part of the Keystone Entities transaction described above).  Two of the 18 properties, located in Morris Plains and Upper Saddle River, New Jersey, aggregating approximately 550,000 square feet, are being considered for repositioning from office properties into multi-family rental properties.  The Company estimated that the carrying value of the 18 properties may not be recoverable over their anticipated holding periods.  The impairments in 2013 resulted primarily from the recent decline in leasing activity and market rents of the properties identified.

 

At December 31, 2012, in light of discussions to dispose of its interest, the Company determined that certain rights to participate in a future development venture, which related to a mixed use development project in East Rutherford, New Jersey, were not expected to be recovered from estimated net proceeds from its eventual disposition. Accordingly, the Company recorded an impairment charge of $6.3 million, to reduce the carrying value from $11.9 million to the estimated recoverable amount of $5.6 million at December 31, 2012. These rights are included in deferred charges, goodwill and other assets, as of December 31, 2012. The Company also recorded an impairment charge on another rental property investment of $0.5 million related to an office property in Newark, New Jersey.

 

The Company’s office property located at 9200 Edmonston Road in Greenbelt, Maryland, aggregating 38,690 square feet, is collateral for a mortgage loan scheduled to mature on May 1, 2013 with a balance of $4.3 million at December 31, 2012. At December 31, 2012, the Company estimated that the carrying value of the property may not be recoverable over its anticipated holding period. In order to reduce the carrying value of the property to its estimated fair market value, the Company recorded an impairment charge of $3.0 million at December 31, 2012.

 

The Company’s estimated fair values for the years ended December 31, 2013 and 2012 were derived utilizing a discounted cash flow (“DCF”) model including all estimated cash inflows and outflows over a specified holding period.  These cash flows were comprised of inputs which included contractual revenues and forecasted revenues and expenses based upon market conditions and expectations for growth.  The capitalization rate of 8.5 percent and nine percent for the years ended December 31, 2013 and 2012, respectively, and discount rates ranging from 10 percent to 15 percent for the years ended December 31, 2013 and 2012, utilized in DCF were based upon the risk profile of the properties’ cash flows and observable rates that the Company believes to be within a reasonable range of current market rates for each respective property.  Based on these inputs the Company determined that its valuation of these investments was classified within Level 3 of the fair value hierarchy, as provided by ASC 820, Fair Value Measurements and Disclosures.