Related Party Transactions and Investments in Non-Consolidated Entities

12 Months Ended

Dec. 31, 2023

Related Party Transactions and Investments in Non-Consolidated Entities

Related Party Transactions and Investments in Non-Consolidated Entities

3.   Related Party Transactions and Investments in Non-Consolidated Entities

Investment in Sponsored REITs

The Company held a common stock interest in 1, 1 and 2 sponsored REITs at December 31, 2023, 2022 and 2021, respectively. The Company held a non-controlling preferred stock investment in two sponsored REITs, FSP 303 East Wacker Drive Corp. (“East Wacker”) and FSP Grand Boulevard Corp. (“Grand Boulevard”), each of which were liquidated during the three months ended September 30, 2018.

Equity in income (loss) of investments in non-consolidated REITs were derived from the Company’s share of income or loss in the operations of those entities and includes gain or loss on liquidation. The Company exercised influence over, but did not control these entities, and investments were accounted for using the equity method.

Equity in income of investment in non-consolidated REITs:

The following table includes equity in income of investments in non-consolidated REITs:

		Year Ended
		December 31,
(in thousands)	2021
Equity in income of East Wacker	$	421
Total	$	421

Equity in income of East Wacker was derived from the Company’s preferred stock investment in the entity. In December 2007, the Company purchased 965.75 preferred shares or 43.7% of the outstanding preferred shares, of East Wacker. On September 24, 2018, the property owned by East Wacker was sold at a gain. On October 6, 2021, the Company received a liquidating distribution of $0.4 million, which is included in equity in income of non-consolidated

REITs on the consolidated statements of income. The following table includes distributions received from non-consolidated REITs:

		Year Ended
		December 31,
(in thousands)	2021
Distributions from East Wacker	$	421
	$	421

Non-consolidated REITs

At December 31, 2022, the Company held a non-controlling common stock interest in one Sponsored REIT.

Management fees and interest income from loans:

Asset management fees range from 1% to 5% of collected rents, and the applicable contracts are cancelable with 30 day notice. Asset management fee income from non-consolidated entities amounted to approximately $0, $28,000 and $61,000 for the years ended December 31, 2023, 2022 and 2021, respectively.

Prior to the consolidation of Monument Circle on January 1, 2023, the Company held the Sponsored REIT Loan, which was reported in the balance sheet as a related party mortgage loan receivable. The Company reviewed the need for an allowance under the current expected credit loss model for the Sponsored REIT Loan at each reporting period. The measurement of expected credit losses was based upon historical experiences, current conditions, and reasonable and supportable forecasts that affected the collectability of the reported amount. The Company had elected to apply the practical expedient for financial assets secured by collateral in instances where the borrower was experiencing financial difficulty and repayment of the Sponsored REIT Loan was expected to be provided substantially through operation or sale of the collateral. The Company used the fair value of the collateral at the reporting date and an adjustment to the allowance for expected credit losses was recorded when the amortized cost basis of the financial asset exceeded the fair value of the collateral, less costs to sell.

The Company regularly evaluated the extent and impact of any credit deterioration that could affect performance and the value of the secured property, as well as the financial and operating capability of the borrower. A property’s operating results and existing cash balances were considered and used to assess whether cash flows from operations were sufficient to cover the current and future operating and debt service requirements. The Company also evaluated the borrower’s competency in managing and operating the secured property and considered the overall economic environment, real estate sector and geographic sub-market in which the secured property was located. The Company applied normal loan review and underwriting procedures (as may be implemented or modified from time to time) in making that judgment.

The Company recognized interest income and fees from the Sponsored REIT Loan of approximately $0.0 million, $1.8 million and $1.6 million for the years ended December 31, 2023, 2022 and 2021, respectively.

On October 29, 2021, the Company agreed to amend and restate the Sponsored REIT Loan to extend the maturity date from December 6, 2022 to June 30, 2023 and to advance an additional $3.0 million tranche of indebtedness to FSP Monument Circle LLC with the same June 30, 2023 maturity date, effectively increasing the aggregate principal amount of the Sponsored REIT Loan from $21 million to $24 million. In addition, the Company agreed to defer all principal and interest payments due under the Sponsored REIT Loan until the maturity date. As part of its consideration for agreeing to amend and restate the Sponsored REIT Loan, the Company obtained from the stockholders of the parent of Monument Circle the right to vote their shares in favor of any sale of the property owned by Monument Circle any time on or after January 1, 2023. The amended and restated Sponsored REIT Loan qualified as a troubled debt restructuring. There were no commitments to lend additional funds to the Sponsored REIT. On June 26, 2023, the Sponsored REIT Loan maturity was extended to September 30, 2023. On September 26, 2023, the Sponsored REIT Loan maturity was extended to September 30, 2024.

As of December 31, 2021 and 2020, the Company did not have an allowance for credit losses recorded on the consolidated balance sheet. The Company recorded a $4.2 million increase in its provision for credit losses during the

year ended December 31, 2022. The change in the allowance for credit losses during the year ended December 31, 2022 is primarily due to the deterioration within the current real estate market, changes to key assumptions applied within the Company’s financial model to reflect these market changes, such as the exit capitalization and discount rates, and due to an increase in the accrued interest receivable balance. The Company recorded a $4.2 million decrease in its provision for credit losses during the year ended December 31, 2023. The change in the allowance for credit losses during the year ended December 31, 2023 is due to the consolidation of Monument Circle. The following table presents a roll-forward of the Company’s allowance for credit losses.

	For the Year Ended December 31,
(In thousands)		2023		2022		2021
Beginning allowance for credit losses	$	(4,237)	$	—	$	—
Additional increases to the allowance for credit losses		—		(4,237)		—
Reductions to the allowance for credit losses		4,237		—
Ending allowance for credit losses	$	—	$	(4,237)	$	—

The following is quantitative information about significant unobservable inputs in our Level 3 measurement of the collateral of the Sponsored REIT Loan measured at fair value on a nonrecurring basis at December 31, 2022:

	Fair Value (1) at			Significant	Range				Weighted
Description	December 31, 2022		Valuation Technique	Unobservable Input	Min		Max		Average (2)
		(in thousands)
Sponsored REIT Loan	$	19,763	Discounted Cash Flows	Exit Cap Rate	7.50	%	7.50	%	7.50	%
				Discount Rate	9.50	%	9.50	%	9.50	%
(1) Classified within Level 3 of the fair value hierarchy.
(2) Unobservable inputs were weighted based on the fair value of the related instrument.