Investments in real estate, net (Notes)

12 Months Ended

Dec. 31, 2013

Real Estate [Abstract]

Investments in real estate, net

Investments in real estate, net

Our investments in real estate, net, consisted of the following as of December 31, 2013 and 2012 (in thousands):

	December 31, 2013				December 31, 2012
Rental properties:
Land (related to rental properties)	$	553,388			$	522,664
Buildings and building improvements	5,714,673				4,933,314
Other improvements	174,147				189,793
Rental properties	6,442,208				5,645,771
Less: accumulated depreciation	(952,106		)		(875,035		)
Rental properties, net	5,490,102				4,770,736
Construction in progress (“CIP”)/current value-creation projects:
Current development in North America	511,838				431,578
Investment in unconsolidated joint venture	46,644			(1)	28,656			(1)
Current redevelopment in North America	8,856				199,744
Current development and redevelopment in Asia	60,928				101,602
Generic infrastructure/building improvement projects in North America	—				80,599			(2)
	628,266				842,179
Subtotal	6,118,368				5,612,915
Land/value-creation projects:
Land undergoing predevelopment activities (CIP) in North America	367,225				433,310
Land held for development in North America	191,127				296,039
Land held for development/undergoing predevelopment activities (CIP) in Asia	77,251				82,314
Land subject to sale negotiations	22,943				—
	658,546				811,663
Investments in real estate, net	$	6,776,914			$	6,424,578

(1) The book value for this unconsolidated joint venture represents our equity investment in the 360 Longwood Avenue development project.

(2) Includes the book value associated with 205,164 square feet at eight projects undergoing construction of generic laboratory/office improvements as of December 31, 2012, which were delivered during the year ended December 31, 2013.

Acquisitions

On July 5, 2013, we acquired 10121/10151 Barnes Canyon Road, a 115,895 RSF office property located in the Sorrento Mesa submarket of San Diego for $13.1 million. We funded $5.4 million of the acquisition costs in August 2013 and an additional $7.7 million will be funded no later than October 2014.  The property is currently 100% occupied with leases that expire in 2014 and 2015. We intend to convert the existing office space through redevelopment when the spaces become available.

On September 16, 2013, we acquired 407 Davis Drive, an 81,956 RSF Class A laboratory/office property located in the Research Triangle Park market, for $19.4 million. The building is 100% leased to Bayer AG.

On November 12, 2013, we acquired 11055, 11065, and 11075 Roselle Street, three adjacent buildings aggregating 55,213 RSF located in the Sorrento Valley submarket of San Diego, for $8.3 million. The buildings are currently undergoing redevelopment. Subsequent to the acquisitions of these buildings, we pre-leased 75% of the space to Tandem Diabetes Care, Inc.

On November 27, 2013, we acquired 150 Second Street, a 123,210 RSF, newly developed Class A laboratory/office property located in the Cambridge submarket of Greater Boston, for $94.5 million. The building is 85% leased to two publicly traded life science companies.

Acquired below market leases

The balances of acquired below market leases, net of related amortization, classified in accounts payable, accrued expenses, and tenant security deposits as of December 31, 2013 and 2012, were as follows (in thousands):

	December 31,
	2013			2012
Acquired below market leases	$	55,599		$	55,599
Accumulated amortization	(44,194		)	(40,878		)
Acquired below market leases, net	$	11,405		$	14,721

For the years ended December 31, 2013, 2012, and 2011, we recognized an increase in rental income of approximately $3.3 million, $3.2 million, and $9.3 million, respectively, related to the amortization of acquired below market leases. The weighted average amortization period of acquired below market leases was approximately 2.4 years as of December 31, 2013. The estimated annual amortization of the valueof acquired below market leases is as follows (in thousands):

Year	Amount
2014	$	3,223
2015	3,011
2016	2,641
2017	2,038
2018	492
Thereafter	—
Total	$	11,405

Acquired in-place leases

The balances of our other identified intangible assets (primarily acquired in-place leases, net of related amortization) are classified in other assets in the accompanying consolidated balance sheets. As of December 31, 2013 and 2012, these amounts were as follows (in thousands):

	December 31,
	2013			2012
Acquired in-place leases	$	48,189		$	45,225
Accumulated amortization	(28,927		)	(26,600		)
Acquired in-place leases, net	$	19,262		$	18,625

Amortization for these intangible assets, classified in depreciation and amortization expense in the accompanying consolidated statements of income, was approximately $2.4 million, $2.7 million, and $3.4 million, for the years ended December 31, 2013, 2012, and 2011, respectively. As of December 31, 2013, the estimated annual amortization expense for acquired in-place leases is expected to be recognized over a weighted average period of approximately 8.6 years, and is as follows (in thousands):

Year	Amount
2014	$	2,633
2015	2,506
2016	2,299
2017	2,124
2018	1,949
Thereafter	7,751
Total	$	19,262

Minimum lease payments

Minimum lease payments to be received under the terms of the operating lease agreements, excluding expense reimbursements, in effect as of December 31, 2013, are outlined in the table below (in thousands):

Year	Amount
2014	$	443,942
2015	466,037
2016	444,082
2017	408,935
2018	362,370
Thereafter	2,161,810
Total	$	4,287,176

Real estate asset sales

During the year ended December 31, 2013, we sold seven properties for an aggregate price of $128.6 million and a loss of $121 thousand. This loss upon sale has been classified in income from discontinued operations before impairment of real estate in the accompanying consolidated statements of income.

Impairment of real estate assets

During the three months ended September 30, 2012, we committed to sell 1124 Columbia Street, located in the Seattle market, a property with 203,817 RSF, rather than to hold it on a long-term basis. At the time of our commitment to dispose of this asset, 1124 Columbia Street was 97% occupied and generated approximately $6.2 million in annual operating income. Upon our commitment to sell, we evaluated the recoverability of the carrying amount of this asset under the “held for sale” impairment model. Under the “held for sale” impairment model, we reduced the costs of this asset to our estimate of fair value, based on the anticipated sales price less cost to sell. The anticipated sales price was based on unobservable inputs, classified within level 3 of the fair value hierarchy. As a result, we recognized an impairment charge of approximately $4.8 million during the three months ended September 30, 2012. In December 2012, we entered into an agreement with a third party to sell 1124 Columbia Street at a price of $42.6 million. As a result, in December 2012, we recognized an additional impairment charge of $1.6 million in order to write down the value to approximately $40.6 million, based on the revised anticipated sales price less cost to sell. In January 2013, we completed the sale of this property at a value consistent with our estimated fair value as of December 31, 2012, and no gain or loss was recognized.

During the three months ended September 30, 2012, we committed to sell One Innovation Drive, 377 Plantation Street, and 381 Plantation Street, located in the suburban Greater Boston market, with an aggregate of 300,313 RSF, rather than to hold them on a long-term basis. At the time of our commitment to dispose of these assets, One Innovation Drive, 377 Plantation Street, and 381 Plantation Street were 92% occupied and generated approximately $6.6 million in annual operating income. Upon our commitment to sell, we evaluated the recoverability of the amounts of these assets under the “held for sale” impairment model. Under the “held for sale” impairment model, we reduced the costs of these assets to the anticipated sales price less cost to sell. The anticipated sales price was based on unobservable inputs classified within level 3 of the fair value hierarchy. As a result, during the three months ended September 30, 2012, we recognized an impairment charge of approximately $5.0 million in order to write down the value to approximately $39.6 million, based on the anticipated sales price less cost to sell.

During the three months ended September 30, 2011, we recognized an impairment charge of approximately $1.0 million related to a 30,000 RSF property, located in the suburban Greater Boston market, to adjust the carrying value to our estimate of fair value less costs to sell. During the three months ended December 31, 2011, we sold the property for $2.9 million.

We completed the sales of 1124 Columbia Street, 25/35/45 West Watkins Mill Road, 1201 Clopper Road, One Innovation Drive, 377 Plantation Street, 381 Plantation Street, and 702 Electronic during the year ended December 31, 2013, at an aggregate loss upon sale of $121 thousand.

Current development and redevelopment projects

As of December 31, 2013, we had five ground-up development projects in process in North America, including an unconsolidated joint venture development project, aggregating approximately 1,361,463 RSF. We also had one project undergoing conversion into laboratory/office space through redevelopment in North America aggregating approximately 55,213 RSF.

Investment in unconsolidated real estate entity

We have a 27.5% interest in an unconsolidated joint venture that is currently developing a building aggregating 413,536 RSF in the Longwood Medical Area of the Greater Boston market. The project is 37% pre-leased to Dana-Farber Cancer Institute, Inc. Our total investment into this project is approximately $46.6 million as of December 31, 2013. The total project costs are being funded primarily from a $213.2 million non-recourse secured construction loan, of which $87.9 million was drawn and outstanding at December 31, 2013. The loan bears interest at a rate of LIBOR+3.75%, with a floor of 5.25%. This loan has a maturity date of April 1, 2019, assuming the joint venture exercises its two separate one-year options to extend the stated maturity date of April 1, 2017.

We do not qualify as the primary beneficiary of the unconsolidated joint venture since we do not have the power to direct the activities of the entity that most significantly impacts its economic performance. The decisions that most significantly impact the entity’s economic performance require both our consent and that of our partners, including all major operating, investing, and financing decisions, as well as decisions involving major expenditures. Consequently, we do not consolidate this joint venture, and we account for our investment under the equity method of accounting.

Land undergoing predevelopment activities (additional CIP)

Land undergoing predevelopment activities is classified as construction in progress and is undergoing activities prior to commencement of vertical construction of aboveground building improvements.  We generally will not commence ground-up development of any parcels undergoing predevelopment activities without first securing pre-leasing for such space, except when there is significant market demand for high-quality laboratory/office or tech office facilities.  If vertical aboveground construction is not initiated at completion of predevelopment activities, the land parcel will be classified as land held for development.  Our objective with predevelopment is to reduce the time it takes to deliver projects to prospective client tenants.  Additionally, during predevelopment, we focus on the design of cost-effective buildings with generic laboratory and office infrastructure to accommodate single and multi-tenancy. Additionally, as of December 31, 2013 and 2012, we held land undergoing predevelopment activities in North America aggregating 2.7 million and 2.9 million RSF, respectively. Land undergoing predevelopment activities (consisting of Building Information Modeling [BIM or 3-D virtual modeling], design development and construction drawings, sustainability and energy optimization review, budgeting, planning for future site and infrastructure work, and other activities prior to commencement of vertical construction of aboveground shell and core improvements) is also classified as construction in progress. Project costs are capitalized as a cost of the project during periods when activities necessary to prepare an asset for its intended use are in progress. The largest project included in land undergoing predevelopment consists of substantially all of our 1.2 million square feet at the Alexandria Center™ at Kendall Square located in East Cambridge, Massachusetts.

We are required to capitalize project costs, including interest, property taxes, insurance, and other costs directly related and essential to the development or construction of a project during periods when activities necessary to prepare an asset for its intended use are in progress.  Predevelopment costs generally include the following activities prior to commencement of vertical construction:

Ÿ Traditional predevelopment costs, including entitlement, design, construction drawings, BIM (3-D virtual modeling), budgeting, sustainability and energy optimization reviews, permitting, and planning for all aspects of the project; and

Ÿ Site and infrastructure construction costs including belowground site work, utility connections, land grading, drainage, egress and regress access points, foundation, and other costs to prepare the site for vertical construction of aboveground building improvements. For example, site and infrastructure costs for the 1.2 million RSF primarily related to 50 Binney Street and 100 Binney Street of the Alexandria Center™ at Kendall Square are classified as predevelopment prior to commencement of vertical construction.

Land held for development

Land held for development represents real estate we plan to develop in the future, but on which, as of each period presented, no construction or predevelopment activities were ongoing. As a result interest, property taxes, insurance, and other costs are expensed as incurred. As of December 31, 2013 and 2012, we held land in North America supporting an aggregate of 3.0 million and 4.7 million RSF of ground-up development, respectively.

Sales of land parcels

During the year ended December 31, 2013, we sold four parcels of land for an aggregate price of $73.3 million and recognized gains on sale of $4.8 million, which included a gain of $4.4 million on the sale of three parcels in the San Francisco Bay Area market, and a gain of $391 thousand on the sale of one parcel in Mercer County, New Jersey. These gains are classified in gains on sales of land parcels below income from discontinued operations in the accompanying consolidated statements of income.

During the three months ended December 31, 2012, we committed to sell a land parcel with 50,000 developable square feet. Prior to this determination, this land parcel was held for future development. Upon our commitment to sell, we evaluated the recoverability of the carrying amount of this land parcel under the “held for sale” impairment model. Under the “held for sale” impairment model, we reduced the costs of this asset to the anticipated sales price less cost to sell. The anticipated sales price was based in part on unobservable inputs, classified within level 3 of the fair value hierarchy. As a result, during the three months ended December 31, 2012, we recognized an impairment charge of approximately $2.1 million in order to reduce the value to fair value less cost to sell of approximately $2.0 million. In May 2013, we completed the sale of this land parcel at a gain on sale of $391 thousand.

During the year ended December 31, 2012, we completed an in-substance partial sale on a portion of our interest in a joint venture, and admitted as a 50% member Clarion Partners, LLC, resulting in a reduction of our ownership interest from 55% to 27.5%. The transfer of one-half of our 55% ownership interest in this real estate venture to Clarion Partners, LLC, was accounted for as an in-substance partial sale of an interest in the underlying real estate. In connection with the sale of one-half of our 55% ownership interest in the land parcel, we received a special distribution of approximately $22.3 million, which included the recognition of a $1.9 million gain on sale of land and approximately $5.4 million from our share of loan refinancing proceeds. The land parcel we sold in March 2012 did not meet the criteria for classification as discontinued operations since the parcel did not have any significant operations prior to disposition. Pursuant to the presentation and disclosure literature on gains/losses on sales or disposals by REITs required by the SEC, gains or losses on sales or disposals by a REIT that do not qualify as discontinued operations are classified below income from discontinued operations in the income statement. Accordingly, we classified the $1.9 million gain on sale of land below income from discontinued operations in the consolidated statements of income, and included the gain in income from continuing operations attributable to Alexandria Real Estate Equities, Inc.’s common stockholders in the “control number,” or numerator for computation of earnings per share.

During the year ended December 31, 2011, we completed the sale of a land parcel in San Diego for an aggregate sales price of approximately $17.3 million at a gain on sale of $46 thousand. The land parcel sold during the year ended December 31, 2011, did not meet the criteria for discontinued operations because the parcel did not have any significant operations prior to disposition. Accordingly, for the year ended December 31, 2011, we classified the $46 thousand gain on sale of the land parcel below income from discontinued operations in the consolidated statements of income