5. Investments in Unconsolidated Joint Ventures

The investments in unconsolidated joint ventures consist of the following at December 31, 2017 and 2016:



					Carrying Value of Investment (1)
Entity	Properties	Nominal % Ownership			December 31, 2017			December 31, 2016
					(in thousands)
Square 407 Limited Partnership	Market Square North	50.0	%		$	(8,258	)	$	(8,134	)
The Metropolitan Square Associates LLC	Metropolitan Square	20.0	%		3,339			2,004
BP/CRF 901 New York Avenue LLC	901 New York Avenue	25.0	%	(2)	(13,811		)	(10,564		)
WP Project Developer LLC	Wisconsin Place Land and Infrastructure	33.3	%	(3)	39,710			41,605
Annapolis Junction NFM, LLC	Annapolis Junction	50.0	%	(4)	18,381			20,539
540 Madison Venture LLC	540 Madison Avenue	60.0	%		66,179			67,816
500 North Capitol Venture LLC	500 North Capitol Street, NW	30.0	%		(3,876		)	(3,389		)
501 K Street LLC	1001 6th Street	50.0	%	(5)	42,657			42,528
Podium Developer LLC	The Hub on Causeway	50.0	%		67,120			29,869
Residential Tower Developer LLC	The Hub on Causeway - Residential	50.0	%	(6)	28,212			20,803
Hotel Tower Developer LLC	The Hub on Causeway - Hotel	50.0	%		1,690			933
1265 Main Office JV LLC	1265 Main Street	50.0	%		4,641			4,779
BNY Tower Holdings LLC	Dock 72 at the Brooklyn Navy Yard	50.0	%		72,104			33,699
CA-Colorado Center Limited Partnership	Colorado Center	50.0	%		254,440			510,623
7750 Wisconsin Avenue LLC	7750 Wisconsin Avenue	50.0	%	(6)	21,452			N/A
					$	593,980		$	753,111

_______________


(1)	Investments with deficit balances aggregating approximately $25.9 million and $22.1 million at December 31, 2017 and 2016, respectively, have been reflected within Other Liabilities in the Company’s Consolidated Balance Sheets.


(2)	The Company’s economic ownership has increased based on the achievement of certain return thresholds.


(3)	The Company’s wholly-owned subsidiary that owns Wisconsin Place Office also owns a 33.3% interest in the joint venture entity that owns the land, parking garage and infrastructure of the project.


(4)	The joint venture owns four in-service buildings and two undeveloped land parcels.


(5)	Under the joint venture agreement for this land parcel, the partner will be entitled to up to two additional payments from the venture based on increases in total entitled square footage of the project above 520,000 square feet and achieving certain project returns at stabilization.


(6)	This entity is a VIE (See Note 2).

Certain of the Company’s unconsolidated joint venture agreements include provisions whereby, at certain specified times, each partner has the right to initiate a purchase or sale of its interest in the joint ventures. With limited exceptions under these provisions, the Company is not compelled to purchase the interest of its outside joint venture partners. Under certain of the Company's joint venture agreements, if certain return thresholds are achieved the partners will be entitled to an additional promoted interest or payments.

The combined summarized balance sheets of the Company’s unconsolidated joint ventures are as follows:



	December 31, 2017		December 31, 2016
	(in thousands)
ASSETS
Real estate and development in process, net	$	1,768,996	$	1,519,217
Other assets	367,743		297,263
Total assets	$	2,136,739	$	1,816,480
LIABILITIES AND MEMBERS’/PARTNERS’ EQUITY
Mortgage and notes payable, net	$	1,437,440	$	865,665
Other liabilities	99,215		67,167
Members’/Partners’ equity	600,084		883,648
Total liabilities and members’/partners’ equity	$	2,136,739	$	1,816,480
Company’s share of equity	$	286,495	$	450,662
Basis differentials (1)	307,485		302,449
Carrying value of the Company’s investments in unconsolidated joint ventures (2)	$	593,980	$	753,111

_______________

(1)

This amount represents the aggregate difference between the Company’s historical cost basis and the basis reflected at the joint venture level, which is typically amortized over the life of the related assets and liabilities. Basis differentials result from impairments of investments, acquisitions through joint ventures with no change in control and upon the transfer of assets that were previously owned by the Company into a joint venture. In addition, certain acquisition, transaction and other costs may not be reflected in the net assets at the joint venture level. At December 31, 2017 and 2016, there was an aggregate basis differential of approximately $322.5 million and $328.8 million, respectively, between the carrying value of the Company’s investment in the joint venture that owns Colorado Center and the joint venture’s basis in the assets and liabilities, which differential (excluding land) shall be amortized over the remaining lives of the related assets and liabilities.


(2)	Investments with deficit balances aggregating approximately $25.9 million and $22.1 million at December 31, 2017 and 2016, respectively, have been reflected within Other Liabilities in the Company’s Consolidated Balance Sheets.

The combined summarized statements of operations of the Company’s unconsolidated joint ventures are as follows:



	For the year ended December 31,
	2017			2016			2015
	(in thousands)
Total revenue (1)	$	222,517		$	177,182		$	155,642
Expenses
Operating	90,542			76,741			65,093
Depreciation and amortization	57,079			44,989			36,057
Total expenses	147,621			121,730			101,150
Operating income	74,896			55,452			54,492
Other expense
Interest expense	(46,371		)	(34,016		)	(32,176		)
Net income	$	28,525		$	21,436		$	22,316

Company’s share of net income (2)	$	18,439		$	9,873		$	22,031
Basis differential (3)	(7,207		)	(1,799		)	739
Income from unconsolidated joint ventures	$	11,232		$	8,074		$	22,770

Gain on sale of investment in unconsolidated joint venture	$	—		$	59,370		$	—

_______________


(1)	Includes straight-line rent adjustments of approximately $21.7 million, $18.1 million and $3.9 million for the years ended December 31, 2017, 2016 and 2015, respectively.

(2)

During the year ended December 31, 2015, the Company received a distribution of approximately $24.5 million, which was generated from the excess loan proceeds from the refinancing of 901 New York Avenue’s mortgage loan to a new 10-year mortgage loan totaling $225.0 million. The Company’s allocation of income and distributions for the year ended December 31, 2015 was not proportionate to its nominal ownership interest as a result of the achievement of specified investment return thresholds, as provided for in the joint venture agreement.


(3)	Includes straight-line rent adjustments of approximately $1.9 million and $1.4 million for the years ended December 31, 2017 and 2016, respectively. Also includes net above-/below-market rent adjustments of approximately $2.9 million and $0.9 million for the years ended December 31, 2017 and 2016, respectively.

On July 10, 2017, the Company acquired an additional 0.2% interest in the unconsolidated joint venture that owns Colorado Center located in Santa Monica, California for approximately $2.1 million in cash. Following the acquisition, the Company owns a 50% interest in the joint venture. The Company continues to account for the joint venture under the equity method of accounting as there were no changes to the rights of the members as a result of the acquisition. On July 28, 2017, the unconsolidated joint venture obtained mortgage financing collateralized by the property totaling $550.0 million. The mortgage financing bears interest at a fixed rate of 3.56% per annum and matures on August 9, 2027. The loan requires interest-only payments during the 10-year term of the loan, with the entire principal amount due at maturity. The joint venture distributed to the partners the net proceeds from the financing totaling $502.0 million, of which the Company’s share was $251.0 million. Colorado Center is a six-building office complex that sits on a 15-acre site and contains an aggregate of approximately 1,118,000 net rentable square feet with an underground parking garage for 3,100 vehicles.

On August 7, 2017, the Company entered into a joint venture with The Bernstein Companies to develop an approximately 733,000 net rentable square foot (subject to adjustment based on finalized building design) build-to-suit Class A office building and below-grade parking garage at 7750 Wisconsin Avenue in Bethesda, Maryland. The joint venture entered into a lease agreement with an affiliate of Marriott International, Inc. under which Marriott will lease 100% of the office building and garage for a term of 20 years, and the building will serve as Marriott’s new worldwide headquarters. Marriott has agreed to fund 100% of the related tenant improvement costs and leasing commissions for the office building. The Company will serve as co-development manager for the venture and expects to commence construction in 2018. The Company and The Bernstein Companies each own a 50% interest in the joint venture. For its initial contribution, The Bernstein Companies contributed land with an initial fair value of $72.0 million and cash and improvements aggregating approximately $4.9 million. The Company contributed cash and improvements aggregating approximately $20.8 million for its initial contribution, of which $11.0 million was distributed to The Bernstein Companies. In addition, the Company was required to fund $25.0 million into an escrow account to be used by the joint venture to fund future development costs. See also Note 10.

On September 6, 2017, a joint venture in which the Company has a 50% interest obtained construction financing with a total commitment of $204.6 million collateralized by its Hub on Causeway development project. The construction financing bears interest at a variable rate equal to LIBOR plus 2.25% per annum and matures on September 6, 2021, with two, one-year extension options, subject to certain conditions. The Hub on Causeway is an approximately 385,000 net rentable square foot project containing retail and office space located in Boston, Massachusetts. In connection with the construction financing, the Company obtained the right to complete the construction of the garage underneath the project being developed by an affiliate of its joint venture partner and obtain funding from the garage construction lender. The Company agreed to guarantee completion of the garage to the construction lender and an affiliate of its partner agreed to reimburse the Company for the partner’s share of any payments made under the guarantee.

On December 1, 2017, a joint venture in which the Company has a 50% interest commenced construction of a residential project aggregating approximately 320,000 square feet comprised of 440 residential units at its Hub on Causeway mixed-use development project located in Boston, Massachusetts.