Investments in real estate

9 Months Ended

Sep. 30, 2012

Investments in real estate

Investments in real estate

3.Investments in real estate

Our investments in real estate, net, consisted of the following as of September 30, 2012, and December 31, 2011 (in thousands):

	September 30, 2012			December 31, 2011
	Book Value			Book Value
Land (related to rental properties)	$	506,823		$	510,630
Buildings and building improvements	4,682,998			4,417,093
Other improvements	184,301			185,036
Rental properties	5,374,122			5,112,759
Less: accumulated depreciation	(854,332		)	(742,535		)
Rental properties, net	4,519,790			4,370,224
Construction in progress (“CIP”)/current value-added projects:
Active development in North America	304,619			198,644
Active redevelopment in North America	277,506			281,555
Generic infrastructure/building improvement projects in North America	72,739			92,338
Active development and redevelopment in Asia	95,301			106,775
	750,165			679,312
Subtotal	5,269,955			5,049,536
Land/future value-added projects:
Land held for future development in North America	326,932			305,981
Land undergoing preconstruction activities (additional CIP) in North America	597,631			574,884
Land held for future development/land undergoing preconstruction activities (additional CIP) in Asia	78,511			35,697
	1,003,074			916,562
Investment in unconsolidated real estate entity	26,998			42,342
Investments in real estate, net	$	6,300,027		$	6,008,440

Land held for future development represents real estate we plan to develop in the future but on which, as of each period presented, no construction or preconstruction activities were ongoing.  As a result, interest, property taxes, insurance, and other costs are expensed as incurred.  As of September 30, 2012, and December 31, 2011, we held land in North America supporting an aggregate of 5.5 million and 4.8 million rentable square feet of future ground-up development, respectively.  Additionally, as of September 30, 2012, and December 31, 2011, we held land undergoing preconstruction activities in North America totaling 2.4 million and 2.7 million rentable square feet, respectively.  Land undergoing preconstruction 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) that are also classified as construction in progress.  Our objective with preconstruction is to reduce the time it takes to deliver projects to prospective client tenants.  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.  We generally will not commence ground-up development of any parcels undergoing preconstruction activities without first securing pre-leasing for such space.  If vertical aboveground construction is not initiated at completion of preconstruction activities, the land parcel will be classified as land held for future development.  The two largest projects included in land undergoing preconstruction consist of our 1.6 million developable square feet at Alexandria Center™ at Kendall Square in East Cambridge, Massachusetts, and our 419,806 developable square feet site for the West Tower of the Alexandria Center™ for Life Science – New York City.

Real estate asset sales

The following table summarizes our real estate asset disposition activities for the nine months ended September 30, 2012 (dollars in thousands, except per square foot amounts):

			Rentable/	Sales
		Date	Developable	Price		Sales			Gain
Description	Location	of Sale	Square Feet	per SF		Price (1)			on Sale
Land parcels and assets with a previous operating component:
1201/1209 Mercer Street (2)	Seattle	September 2012	76,029	$	73	$	5,570		$	54
801 Dexter Avenue North (2)	Seattle	August 2012	120,000	$	72	8,600			$	55
Land parcel	Greater Boston	March 2012	(3)	$	275	31,360			$	1,864
Sale of land parcels and assets with a previous operating component						45,530
Income-producing properties:
200 Lawrence Drive/210 Welsh Pool Road	Pennsylvania	July 2012	210,866	$	94	19,750		(4)	$	103
155 Fortune Boulevard (5)	Route 495/Worcester	July 2012	36,000	$	222	8,000			$	1,350
5110 Campus Drive (5)	Pennsylvania	May 2012	21,000	$	86	1,800			$	2
Sales of income-producing properties						29,550
Total						$	75,080

(1)Represents contractual sales price for assets sold or contractual/estimated sale price for sales in process.

(2)Properties sold to residential developers.

(3)In March 2012, we sold one-half of our 55% interest in a land parcel supporting a project with 414,000 rentable square feet for approximately $31.4 million, or approximately $275 per rentable square foot.

(4)Sales price reflects the near-term lease expiration of a client tenant occupying 38,513 rentable square feet, or 18% of the total rentable square feet, on the date of sale.  In connection with the sale, we received an interest-only secured note receivable for $6.1 million due in 2018.

(5)Properties were sold to client tenants.

Impairment of real estate assets held for sale

In September 2012, four properties aggregating 504,130 rentable square feet met the classification requirements for held for sale.  During the three months ended September 30, 2012, we recorded impairment charges aggregating approximately $9.8 million to reduce the aggregate carrying value of the properties to the estimated sales price less costs to sell. We used the preliminary sales price estimates based on offers from prospective buyers as a significant observable input (level 2) within the valuation hierarchy to determine the estimated fair value of these assets.

Sale of land parcel

In March 2012, we contributed our 55% ownership interest in a land parcel supporting a future building with 414,000 rentable square feet in the Longwood Medical Area of the Greater Boston market to a newly formed joint venture (the “Restated JV”) with National Development and Charles River Realty Investors, 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 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 Securities and Exchange Commission (“SEC”), gains or losses on sales or disposals by a REIT that do not qualify as discontinued operations are classified below (loss) income from discontinued operations in the income statement.  Accordingly, we classified the $1.9 million gain on sale of land below (loss) income from discontinued operations, net, in the condensed consolidated statements of income.  Our 27.5% share of the land was sold at approximately $31 million (including closing costs), or approximately $275 per rentable square foot.  Upon formation of the Restated JV, the existing $38.4 million secured loan was refinanced with a seven-year (including two one-year extension options) non-recourse $213 million secured construction loan with initial loan proceeds of $50 million.  As of September 30, 2012, the outstanding balance on the construction loan was $56.4 million.  We do not expect our share of capital contributions through the completion of the project to exceed the approximate $22.3 million in net proceeds received in this transaction.  Construction of this $350 million project commenced in April 2012.  The initial occupancy date for this project is expected to be in the fourth quarter of 2014.  The project is 37% pre-leased to Dana-Farber Cancer Institute, Inc.  In addition, Dana-Farber Cancer Institute, Inc. has an option to lease an additional two floors approximating 99,000 rentable square feet, or 24% of the total rentable square feet of the project.  In addition to our economic share of the joint venture, we also expect to earn development and other fees of approximately $3.5 million through 2015, and recurring annual property management fees thereafter, from this project.

We do not qualify as the primary beneficiary of the Restated JV 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 for all major operating, investing, and financing decisions, as well as decisions involving major expenditures.  As of September 30, 2012, and December 31, 2011, our investment in the unconsolidated real estate entity of approximately $27.0 million and $42.3 million, respectively, was classified as an investment in real estate in the accompanying condensed consolidated balance sheets.

Our investment in the unconsolidated real estate entity is adjusted for additional contributions and distributions, the proportionate share of the net earnings or losses, and other comprehensive income or loss.  Distributions, profits, and losses related to this entity are allocated in accordance with the operating agreement.  When circumstances indicate that there may have been a reduction in value of an equity investment, we evaluate the equity investment and any advances made for impairment by estimating our ability to recover our investment from future expected cash flows.  If we determine the loss in value is other than temporary, we recognize an impairment charge to reflect the equity investment and any advances made at fair value.