Note 16—CONSOLIDATED FUNDS AND VENTURES

Due to the Company’s minimal equity ownership interests in certain consolidated entities, the assets, liabilities, revenues, expenses, equity in losses from those entities’ unconsolidated Lower Tier Property Partnerships and the losses allocated to the noncontrolling interests of the consolidated entities have been separately identified on the consolidated balance sheets and statements of operations. Third-party ownership in these CFVs is recorded in equity as “Noncontrolling interests in CFVs and IHS.”

The total assets, by type of consolidated fund or venture, at September 30, 2013 and December 31, 2012 are summarized as follows:

(in thousands)		September 30, 2013		December 31, 2012
LIHTC Funds	$	343,544	$	381,394
SA Fund		184,770		175,572
Consolidated Lower Tier Property Partnerships		162,286		135,674
Other consolidated entities		2,065		922
Total assets of CFVs	$	692,665	$	693,562

The following provides a detailed description of the nature of these entities.

LIHTC Funds

In general, the LIHTC Funds invest in limited partnerships that develop or rehabilitate and operate affordable multifamily housing rental properties. These properties generate tax operating losses and federal and state income tax credits for their investors, enabling them to realize a return on their investment through reductions in income tax expense. The LIHTC Funds’ primary assets are their investments in Lower Tier Property Partnerships, which are the owners of the affordable housing properties (see Investments in Lower Tier Property Partnerships in the Asset Summary below). The LIHTC Funds account for these investments using the equity method of accounting. The Company sold its GP interest in substantially all of the LIHTC Funds through the sale of its TCE business in July 2009. However, the Company retained its GP interest in certain LIHTC Funds. The Company continues to consolidate 11 funds at September 30, 2013 and December 31, 2012. The Company’s GP ownership interests of the funds remaining at September 30, 2013 ranges from 0.01% to 0.04%. The Company has guarantees associated with these funds. These guarantees, along with the Company’s ability to direct the activities of the funds, have resulted in the Company being the primary beneficiary for financial reporting purposes. At September 30, 2013 and December 31, 2012, the Company’s maximum exposure under these guarantees is estimated to be approximately $659.7 million; however, the Company does not anticipate any losses under these guarantees.

SA Fund

The Company is the majority owner of the GP of the SA Fund, which is an investment fund formed to invest directly or indirectly in affordable for-sale and rental housing in South Africa and, to a lesser extent, Sub-Saharan Africa (see SA Fund investments in the Asset Summary below). The SA Fund has $125.8 million in equity commitments from investors, of which $115.3 million has been funded at September 30, 2013. As a 2.7% limited partner of the SA Fund, the Company’s portion of this equity commitment is $3.4 million. At September 30, 2013, the Company had funded $3.2 million of this equity commitment. The SA Fund also has an agreement with Overseas Private Investment Corporation (“OPIC”), an agency of the US, to provide loan financing not to exceed $80.0 million, of which $49.1 million has been funded. Because the Company is deemed the primary beneficiary of the SA Fund through its majority owned GP interest in the SA Fund, the Company’s 2.7% equity investment is eliminated and the SA Fund is consolidated. The Company is allocated 2.7% of the SA Fund’s operating activities through an income or loss allocation.

Consolidated Lower Tier Property Partnerships

Due to financial or operating issues at a Lower Tier Property Partnership, the Company may assert its rights to assign the GP’s interest in the Lower Tier Property Partnership to affiliates of the Company. Generally, the Company will take these actions to either preserve the tax status of the Company’s bonds and/or to protect the LIHTC Fund’s interests in the tax credits. As a result of its ownership interest, controlling financial interest or its designation as the primary beneficiary, the Company consolidates these Lower Tier Property Partnerships. The Company consolidated 14 and 12 Lower Tier Property Partnerships at September 30, 2013 and December 31, 2012, respectively. Lower Tier Property Partnerships own and operate affordable multifamily housing rental properties (see real estate held-for-use, net and held-for-sale in the Asset Summary below).

Other Consolidated Entities

The Company also has other consolidated entities where it has been deemed to be the primary beneficiary or the Company has a controlling interest. At September 30, 2013, these entities include two non-profit entities that provide charitable services and programs for the affordable housing market.

The following section provides more information related to the assets of the CFVs at September 30, 2013 and December 31, 2012.

Asset Summary:

(in thousands)		September 30, 2013		December 31, 2012
Cash, cash equivalents and restricted cash	$	55,945	$	53,957
Investments in Lower Tier Property Partnerships		299,730		333,335
SA Fund investments		157,791		161,433
Real estate held-for-use, net		103,649		111,931
Real estate held-for-sale		51,836		15,338
Other assets		23,714		17,568
Total assets of CFVs	$	692,665	$	693,562

Substantially all of the assets of the CFVs are restricted for use by the specific owner entity and are not available for the Company’s general use.

LIHTC Funds’ Investments in Lower Tier Property Partnerships

The Lower Tier Property Partnerships of the LIHTC Funds are considered variable interest entities; although in most cases it is the third party GP who is the primary beneficiary. Therefore, substantially all of the LIHTC Funds’ investments in Lower Tier Property Partnerships are accounted for under the equity method. The following table provides the LIHTC Funds’ investment balances in the unconsolidated Lower Tier Property Partnerships as well as the assets and liabilities of the Lower Tier Property Partnerships at September 30, 2013 and December 31, 2012:

(in thousands)		September 30, 2013		December 31, 2012
LIHTC Funds’ investment in Lower Tier Property Partnerships	$	299,730	$	333,335
Total assets of Lower Tier Property Partnerships ⁽¹⁾	$	1,335,223	$	1,371,880
Total liabilities of Lower Tier Property Partnerships ⁽¹⁾		1,039,405		1,041,961


	⁽¹⁾	The assets of the Lower Tier Property Partnerships are primarily real estate and the liabilities are predominantly mortgage debt.

The Company’s maximum exposure to loss from the LIHTC Funds and the underlying Lower Tier Property Partnerships relate to the guarantee exposure associated with the LIHTC Funds discussed above and the Company’s bonds which represent the primary mortgage debt obligation held by the LIHTC Funds’ underlying Lower Tier Property Partnerships. The fair value of the Company’s bonds secured by properties owned by the Lower Tier Property Partnerships at September 30, 2013 and December 31, 2012, was $63.6 million and $421.3 million, respectively.

SA Fund Investments

The SA Fund was organized under South African law in a similar manner to US investment companies and therefore follows accounting guidance specific to investment companies which requires fair value accounting for investments. The Company calculates such fair value based on estimates because there are no readily available market values. In establishing fair values of its investments, the Company considers financial conditions and operating results, local market conditions, market values of comparable companies and real estate, the stage of each investment, and other factors as appropriate, including obtaining appraisals from independent third-party licensed appraisers.

As required by GAAP, assets and liabilities are classified into levels based on the lowest level of input that is significant to the fair value measurement, see Note 9, “Fair Value Measurements.” The SA Fund investments are carried at their fair value of $157.8 million and $161.4 million at September 30, 2013 and December 31, 2012, respectively and are considered Level 3 valuations. As noted in the following table, during the first nine months of 2013, the Fund recorded fair value gains of $20.2 million based on internal fair value estimates; however, these gains were more than offset by $27.2 million of foreign currency translation losses. Because the SA Fund’s functional currency is the South African rand and the Company’s functional currency is the US dollar, the Company translates the SA Fund’s rand balance sheet into a dollar denominated balance sheet as part of consolidating the SA Fund into the Company’s balance sheet. The translation losses recorded for the first nine months of 2013 were a result of the weakening of the South African rand as compared to the US dollar.

The following table presents the activity for the SA Fund investments at fair value on a recurring basis using Level 3 inputs for the three months ended September 30, 2013 and 2012:

	For the three months ended September 30,
(in thousands)	2013		2012
Balance, July 1,	$	156,723	$	126,950
Net gains (losses) included in earnings		2,882		(4,511)
Net foreign currency translation losses included in other comprehensive income		(2,658)		(153)
Impact from purchases		8,029		22,713
Impact from sales		(7,185)		(73)
Balance, September 30,	$	157,791	$	144,926

The following table presents the activity for the SA Fund investments at fair value on a recurring basis using Level 3 inputs for the nine months ended September 30, 2013 and 2012.

	For the nine months ended September 30,
(in thousands)	2013		2012
Balance, January 1,	$	161,433	$	108,329
Net gains included in earnings		20,178		5,480
Net foreign currency translation losses included in other comprehensive income		(27,226)		(3,836)
Impact from purchases		15,699		42,449
Impact from sales		(12,293)		(7,496)
Balance, September 30,	$	157,791	$	144,926

The SA Fund has committed $171.3 million of capital to the project entities who in turn invest that capital into affordable for-sale and rental properties of which $132.3 million was funded at September 30, 2013.

Lower Tier Property Partnership’s Real estate held-for-use, net

The real estate held-for-use by Lower Tier Property Partnerships, which are consolidated by the Company, was comprised of the following at September 30, 2013 and December 31, 2012:

(in thousands)	September 30, 2013		December 31, 2012
Building, furniture and fixtures	$	108,036	$	116,320
Accumulated depreciation		(16,274)		(15,598)
Land		11,887		11,209
Total	$	103,649	$	111,931

Depreciation expense was $6.5 million and $5.8 million for the nine months ended September 30, 2013 and 2012, respectively, of which $2.0 million and $3.7 million was recorded in discontinued operations for the nine months ended September 30, 2013 and 2012, respectively. Buildings are depreciated over a period of 40 years. Furniture and fixtures are depreciated over a period of six to seven years. The Company did not recognize any impairment losses for the nine months ended September 30, 2013 and 2012.

The Lower Tier Property Partnerships which own the real estate held-for-use (affordable multifamily properties) were consolidated by non-profit entities that are in turn consolidated by the Company. The Company does not have an equity interest in the Lower Tier Property Partnerships or the non-profit entities. However, the Company provided debt financing to the Lower Tier Property Partnerships. In consolidation, because the Company consolidates the Lower Tier Property Partnerships, the real estate held by the Lower Tier Property Partnerships is reflected on the Company’s balance sheet. The Company’s bonds have been eliminated against the related mortgage debt obligations of the Lower Tier Property Partnerships. The Company’s maximum loss exposure is the fair value of its bonds. At September 30, 2013, the fair value of these bonds was $50.5 million, including $2.7 million of net unrealized gains occurring since consolidation that have not been reflected in the Company’s common shareholders’ equity given that the Company is required to consolidate and account for the real estate, which prohibits an increase in value from its original cost basis until the real estate is sold.

The decrease in real estate held-for-use was primarily due to four rental properties, with a carrying value of $51.8 million at September 30, 2013, converting to real estate held-for-sale during the quarter. The decrease was partially offset by the consolidation of five rental properties during the second quarter of 2013, with a carrying value of $42.9 million at September 30, 2013.

Lower Tier Property Partnership’s Real estate held-for-sale

The real estate held-for-sale by Lower Tier Property Partnerships, which are consolidated by the Company, was comprised of the following at September 30, 2013 and December 31, 2012:

(in thousands)	September 30, 2013		December 31, 2012
Cash	$	4,216	$	318
Building, furniture and fixtures		48,133		14,740
Accumulated depreciation		(5,786)		(959)
Land		5,111		1,215
Other assets		162		24
Total	$	51,836	$	15,338

The Company had four and one rental properties classified as held-for-sale and reported through discontinued operations at September 30, 2013 and December 31, 2012, respectively. The properties are no longer depreciated and are carried at the lower of the property’s fair value less costs to sell or its current carry value. See Note 15, “Discontinued Operations,” for information on these properties.

The Lower Tier Property Partnerships which own real estate held-for-sale (affordable multifamily properties) were consolidated by a non-profit that is in turn consolidated by the Company. As of September 30, 2013, the Company does not have any equity in the Lower Tier Property Partnerships or the non-profit. However, the Company provided debt financing to the Lower Tier Property Partnerships. In consolidation, because the Company consolidates the Lower Tier Property Partnership, the real estate held by the Lower Tier Property Partnership is reflected on the Company’s balance sheet. The Company’s bonds have been eliminated against the related mortgage debt obligations of the Lower Tier Property Partnerships. The Company’s maximum loss exposure is the fair value of its bonds. At September 30, 2013, the fair value of our debt financing was $83.7 million, including $33.1 million of net unrealized gains occurring since consolidation that have not been reflected in the Company’s common shareholders’ equity given that the Company is required to consolidate and account for the real estate, which prohibits an increase in value from its original cost basis until the real estate is sold.

If the four rental properties are sold at the estimated fair value of $83.7 million, then the Company’s common equity will increase by $33.1 million.

Liability Summary:

The following section provides more information related to the liabilities of the CFVs at September 30, 2013 and December 31, 2012.

(in thousands)	September 30, 2013			December 31, 2012
Liabilities of CFVs:
Debt	$	96,142	$	55,433
Unfunded equity commitments to unconsolidated Lower Tier Property Partnerships		13,461		15,881
Other liabilities		10,167		6,150
Total liabilities of CFVs	$	119,770	$	77,464

Debt

At September 30, 2013 and December 31, 2012, the debt of the CFVs had the following terms:

	September 30, 2013
(in thousands)	Carrying Amount		Face Amount		Weighted-average Effective Interest Rates		Maturity Dates
SA Fund	$	49,621	$	49,621	2.6	%	April 2018
Lower Tier Property Partnerships		46,521		46,648	6.4		Various dates through March 2049

	December 31, 2012
(in thousands)	Carrying Amount		Face Amount		Weighted-average Effective Interest Rates		Maturity Dates
SA Fund	$	49,352	$	49,352	2.6	%	April 2018
Lower Tier Property Partnerships		6,081		7,289	10.4		Various dates through October 2021

SA Fund

The SA Fund has an agreement with OPIC to provide loan financing not to exceed $80.0 million. The SA Fund has drawn a total of $49.1 million of debt against this financing arrangement as of September 30, 2013. This debt is an obligation of the SA Fund and there is no recourse to the Company.

This debt is denominated in US dollars; however, the SA Fund’s functional currency is the South African rand. Therefore, the SA Fund is exposed to foreign currency risk. In order to hedge this risk, from an economic standpoint, the SA Fund has entered into certain foreign exchange derivative contracts. As required, these derivative instruments are carried at fair value. The SA Fund does not designate these derivatives as accounting hedges and therefore, changes in fair value are recognized through the consolidated statements of operations. The change of value in the debt obligation due to currency fluctuation is also recognized through the consolidated statements of operations.

At September 30, 2013 the SA Fund had $3.4 million of cash pledged as collateral for the foreign exchange derivative contracts.

Lower Tier Property Partnerships

During the third quarter of 2013, the Company sold 10 bonds and bond interests to the Purchaser of TEB. For these bonds, our consolidated balance sheet reflected real estate instead of bond investments because a non-profit that we consolidate was deemed to be the primary beneficiary of Lower Tier Property Partnerships that held the real estate serving as collateral to the bonds. Therefore, upon the sale of TEB, the cash proceeds received on the 10 bonds and bond interests were recorded as debt owed by the Lower Tier Property Partnerships of $75.2 million. Subsequent to the TEB sale and during third quarter of 2013, we repurchased four of these bond interests thereby causing the outstanding debt obligation to decline by $28.9 million.

Other

The following section provides more information related to the income statement of the CFVs for the three months and nine months ended September 30, 2013 and 2012.

Income Statement Summary:

	For the three months ended September 30,				For the nine months ended September 30,
(in thousands)	2013		2012		2013		2012
Revenue:
Rental and other income from real estate	$	3,736	$	1,800	$	9,096	$	3,715
Interest and other income		3,739		2,267		7,784		4,743
Total revenue from CFVs		7,475		4,067		16,880		8,458

Expenses:
Depreciation and amortization		2,386		1,525		6,169		4,056
Interest expense		1,253		441		2,228		1,237
Other operating expenses		3,696		1,923		8,602		4,580
Foreign currency loss		840		330		8,390		1,148
Asset impairments		6,679		4,820		14,559		10,102
Total expenses from CFVs		14,854		9,039		39,948		21,123

Net gains (losses) related to CFVs:
Investment gains (losses)		3,554		(4,511)		20,849		5,479
Derivative gains (losses)		258		(97)		6,883		98
Net loss on sale of properties		–		–		–		(170)
Equity in losses from Lower Tier Property Partnerships of CFVs		(6,343)		(6,486)		(20,129)		(25,917)
Net loss		(9,910)		(16,066)		(15,465)		(33,175)
Net losses allocable to noncontrolling interests in CFVs ⁽¹⁾		11,046		17,268		18,426		36,526
Net income allocable to the common shareholders related to CFVs	$	1,136	$	1,202	$	2,961	$	3,351

⁽¹⁾ Net losses allocable to noncontrolling interests in CFVs have been adjusted to exclude noncontrolling interests related to IHS because the Company’s equity interest in IHS is substantial. The Company has little to no equity interest in the other CFVs including the two non-profits, the LTPPs, the LIHTC Funds and the SA Fund.

The details of Net income allocable to the common shareholders related to CFVs for the three months and nine months ended September 30, 2013 and 2012 are as follows:

	For the three months ended September 30,				For the nine months ended September 30,
(in thousands)	2013		2012		2013		2012
Interest income	$	274	$	1,169	$	1,779	$	1,789
Asset management fees		888		937		2,629		3,521
Guarantee fees		331		331		993		1,042
Equity in losses from Lower Tier Property Partnerships		(383)		(1,092)		(2,821)		(3,031)
Equity in income (loss) from SA Fund		151		(99)		643		165
Other expense		(125)		(44)		(262)		(135)
Net income allocable to the common shareholders	$	1,136	$	1,202	$	2,961	$	3,351