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Investment in Unconsolidated Joint Ventures

6 Months Ended

Jun. 30, 2012

Investment in Unconsolidated Joint Ventures

Investment in Unconsolidated Joint Ventures

6. Investment in Unconsolidated Joint Ventures

We have investments in several real estate joint ventures with various partners, including The City Investment Fund, or CIF, SITQ Immobilier, a subsidiary of Caisse de depot et placement du Quebec, or SITQ, Canada Pension Plan Investment Board, or CPPIB, a fund managed by JP Morgan Investment Management, or JP Morgan, Prudential Real Estate Investors, or Prudential, Onyx Equities, or Onyx, The Witkoff Group, or Witkoff, Credit Suisse Securities (USA) LLC, or Credit Suisse, Jeff Sutton, or Sutton, Harel Insurance and Finance, or Harel, Louis Cappelli, or Cappelli, The Moinian Group, or Moinian, Vornado Realty Trust (NYSE: VNO), or Vornado, as well as private investors. All the investments below are voting interest entities, except for 3 Columbus Circle and 180/182 Broadway which are VIEs in which we are not the primary beneficiary. Our net equity investment in these two VIEs was $167.2 million and, $161.9 million at June 30, 2012 and December 31, 2011, respectively. As we do not control the joint ventures listed below, we account for them under the equity method of accounting. We assess the accounting treatment for each joint venture on a stand-alone basis. This includes a review of each joint venture or LLC agreement to determine which party has what rights and whether those rights are protective or participating. In situations where we or our partner are involved in some or all of the following: approving the annual budget, receiving a detailed monthly reporting package from us, meeting with us on a quarterly basis to review the results of the joint venture, reviewing and approving the joint venture’s tax return before filing, and approving all leases that cover more than a nominal amount of space relative to the total rentable space at each property, we do not consolidate the joint venture as we consider these to be substantive participation rights. Our joint venture agreements typically contain certain protective rights such as the requirement of partner approval to sell, finance or refinance the property and the payment of capital expenditures and operating expenditures outside of the approved budget or operating plan.

The table below provides general information on each of our joint ventures as of June 30, 2012 (amounts in thousands):

Property		Partner		Ownership Interest		Economic Interest		Square Feet		Acquired		Acquisition Price($)(1)

100 Park Avenue		Prudential		49.90	%	49.90	%	834		02/00		95,800
21 West 34th Street		Sutton		50.00	%	50.00	%	30		07/05		22,400
1604-1610 Broadway		Onyx/Sutton		45.00	%	63.00	%	30		11/05		4,400
27-29 West 34th Street		Sutton		50.00	%	50.00	%	41		01/06		30,000
717 Fifth Avenue(10)		Sutton/Nakash		10.92	%	10.92	%	120		09/06		251,900
800 Third Avenue		Private Investors		42.95	%	42.95	%	526		12/06		285,000
One Court Square(9)		JP Morgan		30.00	%	30.00	%	1,402		01/07		533,500
1745 Broadway		Witkoff/SITQ/Lehman Bros.		32.26	%	32.26	%	674		04/07		520,000
1 and 2 Jericho Plaza		Onyx/Credit Suisse		20.26	%	20.26	%	640		04/07		210,000
16 Court Street		CIF		35.00	%	35.00	%	318		07/07		107,500
The Meadows(2)		Onyx		50.00	%	50.00	%	582		09/07		111,500
388 and 390 Greenwich Street(3)		SITQ		50.60	%	50.60	%	2,600		12/07		1,575,000
180/182 Broadway(4)		Harel/Sutton		25.50	%	25.50	%	71		02/08		43,600
600 Lexington Avenue		CPPIB		55.00	%	55.00	%	304		05/10		193,000
11 West 34th Street(5)		Private Investor/Sutton		30.00	%	30.00	%	17		12/10		10,800
7 Renaissance		Cappelli		50.00	%	50.00	%	37		12/10		4,000
3 Columbus Circle(6)		Moinian		48.90	%	48.90	%	769		01/11		500,000
280 Park Avenue(7)		Vornado		50.00	%	50.00	%	1,237		03/11		400,000
1552-1560 Broadway(8)		Sutton		50.00	%	50.00	%	49		08/11		136,550
747 Madison Avenue		Harel/Sutton		33.33	%	33.33	%	10		09/11		66,250
724 Fifth Avenue		Sutton		50.00	%	50.00	%	65		01/12		223,000
10 East 53rd Street		CPPIB		55.00	%	55.00	%	390		02/12		252,500

(1) Acquisition price represents the actual or implied purchase price for the joint venture.

(2) We, along with Onyx, acquired the remaining 50% interest on a pro-rata basis in September 2009. We recorded a $2.8 million depreciable real estate reserve in 2010 against this joint venture investment.

(3) The property is subject to a 13-year triple-net lease arrangement with a single tenant. The lease commenced in 2007.

(4) In December 2010, our 180-182 Broadway joint venture with Jeff Sutton announced an agreement with Pace University to convey a long-term ground lease condominium interest to Pace University for 20 floors of student housing. The joint venture also admitted Harel, which contributed $28.1 million to the joint venture, for a 49% partnership interest. In August 2011, the joint venture sold the property located at 63 Nassau Street for $2.8 million.

(5) In December 2010, our $12.0 million first mortgage collateralized by 11 West 34th Street was repaid at par, resulting in our recognition of additional income of approximately $1.1 million. Simultaneous with the repayment, the joint venture was recapitalized with the Company having a 30 percent interest. The property is subject to a long-term net lease arrangement.

(6) We issued 306,296 operating partnership units in connection with this investment. We have committed to fund an additional $47.5 million to the joint venture, of which $33.0 million has been funded as of June 30, 2012. This liability is recorded in accrued interest payable and other liabilities. In addition, we made a $125.0 million bridge loan to this joint venture which was bearing interest at a rate of 7.5%. This loan was repaid when the joint venture refinanced its debt in April 2011.

(7) In March 2011, we contributed our debt investment with a carrying value of $286.6 million to a newly formed joint venture in which we hold a 50% interest. We realized $38.7 million of additional income upon the contribution. This income is included in preferred equity and investment income. The joint venture paid us approximately $111.3 million and also assumed $30 million of related floating rate financing which matures in June 2016. In May 2011, this joint venture took control of the underlying property as part of a recapitalization transaction which valued the investment at approximately $1.1 billion. We hold an effective 49.5% ownership interest in the joint venture.

(8) In connection with this acquisition, the joint venture also acquired a long-term leasehold interest in the retail space and certain other spaces at 1560 Broadway, which is adjacent to 1552 Broadway. The purchase price relates only to the purchase of the 1552 Broadway interest which comprises 13,045 square feet. In May 2012, we, along with Sutton, acquired the property at 155 West 46th Street for $8.4 million. This property is adjacent to 1552 and 1560 Broadway.

(9) In November 2011, we, along with our joint venture partner, reached an agreement to sell One Court Square to a private investor group for approximately $475.6 million. The transaction included $315.0 million of existing debt, which will be assumed by the purchaser. In November 2011, we recorded a $5.8 million impairment charge in connection with the expected sale of this investment. This entire impairment charge was reversed in June 2012. On subsequent dates in 2012, the closing date was extended and the purchase price was increased to $481.1 million. This transaction closed on July 18, 2012.

(10) In June 2012, this retail condominium was recapitalized. The recapitalization triggered a promote which resulted in a reduction of our economic interest. In addition, we sold 50% of our remaining interest at a property valuation of $617.6 million. We recognized $67.9 million of additional cash income, equivalent to profit, due to the distribution of refinancing proceeds and a gain on sale of $3.0 million.

In April 2012, we, along with our joint venture partner, Jeff Sutton, sold the property located at 379 Broadway for $48.5 million, inclusive of the fee position which was acquired for $13.5 million. We recognized a gain on sale of this investment of $6.5 million.

In March 2012, we, along with our joint venture partner, Jeff Sutton, sold the property located at 141 Fifth Avenue for $46.0 million. We recognized a gain on sale of this investment of $7.3 million.

In November 2011, we acquired the remaining 50% interest in the joint venture which held an investment in a debt position on the property located at 450 West 33rd Street. As we own 100% of this investment, we have reclassified it and recorded it as a debt investment. See Note 5, “Debt and Preferred Equity Investments.”

In August 2011, we sold our 10% interest in the joint venture that held 1551-1555 Broadway for approximately $9.7 million. We recognized a gain of $4.0 million on the sale.

We generally finance our joint ventures with non-recourse debt. However, in certain cases we have provided guarantees or master leases for tenant space. These guarantees and master leases terminate upon the satisfaction of specified circumstances or repayment of the underlying loans. The first mortgage notes and other loan payable collateralized by the respective joint venture properties and assignment of leases at June 30, 2012 and December 31, 2011, respectively, are as follows (amounts in thousands):

Property		Maturity Date		Interest Rate(1)		June 30, 2012			December 31, 2011
717 Fifth Avenue(9)		06/2024		9.00	%	$	290,000		$	—
717 Fifth Avenue(9)		07/2022		4.45	%	300,000			—
388 and 390 Greenwich Street(2)		12/2017		5.19	%	1,106,756			1,106,757
800 Third Avenue		08/2017		6.00	%	20,910			20,910
1 and 2 Jericho Plaza		05/2017		5.65	%	163,750			163,750
1745 Broadway		01/2017		5.68	%	340,000			340,000
21 West 34th Street		12/2016		5.76	%	100,000			100,000
280 Park Avenue		06/2016		6.57	%	710,000			710,000
11 West 34th Street		01/2016		4.82	%	17,628			17,761
One Court Square		09/2015		4.91	%	315,000			315,000
7 Renaissance		02/2015		10.00	%	856			—
100 Park Avenue		09/2014		6.64	%	213,476			214,625
1604-1610 Broadway(3)		04/2012		5.66	%	27,000			27,000
141 Fifth Avenue		—		—		—			25,000
Total fixed rate debt						$	3,605,376		$	3,040,803
388 and 390 Greenwich Street(2)		12/2017		1.41	%	$	31,622		$	31,622
600 Lexington Avenue		10/2017		2.48	%	125,000			125,000
10 East 53rd Street		02/2017		2.74	%	125,000			—
724 Fifth Avenue		01/2017		2.59	%	120,000			—
Other loan payable		06/2016		1.14	%	30,000			30,000
3 Columbus Circle(4)		04/2016		2.58	%	251,120			254,896
747 Madison Avenue		10/2014		3.00	%	33,125			33,125
180/182 Broadway(5)		12/2013		2.99	%	53,082			30,722
16 Court Street		10/2013		2.74	%	85,290			85,728
1552 Broadway(6)		08/2013		3.24	%	98,321			95,405
27-29 West 34th Street(7)		05/2013		2.24	%	53,650			53,900
The Meadows(8)		09/2012		1.61	%	83,517			84,698
717 Fifth Avenue(9)		—		—		—			245,000
379 West Broadway(10)		—		—		—			20,991
Total floating rate debt						$	1,089,727		$	1,091,087
Total mortgages and other loan payable						$	4,695,103		$	4,131,890

(1) Interest rate represents the effective weighted average interest rate for the quarter ended June 30, 2012.

(2) Comprised of a $576.0 million mortgage and a $562.4 million mezzanine loan, both of which are fixed rate loans, except for $16.0 million of the mortgage and $15.6 million of the mezzanine loan which are floating. Up to $200.0 million of the mezzanine loan, secured indirectly by these properties, is recourse to us. We believe it is unlikely that we will be required to perform under this guarantee.

(3) This loan went into default in November 2009 due to the non-payment of debt service. The joint venture is in discussions with the special servicer to resolve this default.

(4) We provided 50% of a bridge loan to this joint venture. In April 2011, our joint venture with The Moinian Group which owns the property located at 3 Columbus Circle, New York, refinanced the bridge loan and replaced it with a $260.0 million 5-year mortgage with the Bank of China, which carries a floating rate of interest of 210 basis points over the 30-day LIBOR, at which point SL Green and Deutsche Bank’s bridge loan was repaid. The joint venture has the ability to increase the mortgage by $40.0 million based on meeting certain performance hurdles. In connection with this obligation, we executed a master lease agreement. Our partner has executed a contribution agreement to reflect its pro rata obligation under the master lease.

(5) This loan has a committed amount of $90.0 million.

(6) This loan has a committed amount of $125.0 million.

(7) In April 2012, this loan was extended by 1-year.

(8) This loan has a committed amount of $91.2 million.

(9) This loan was repaid in June 2012 and was replaced with a $300 million mortgage and a $290 million mezzanine loan. See Note 10 to the prior table.

(10) This property was sold in April 2012 and the mortgage was repaid at a discount.

We act as the operating partner and day-to-day manager for all our joint ventures, except for 800 Third Avenue, 1 and 2 Jericho Plaza, 3 Columbus Circle and The Meadows. We are entitled to receive fees for providing management, leasing, construction supervision and asset management services to our joint ventures. We earned approximately $2.4 million, $5.6 million, $2.3 million and $5.7 million from these services for the three and six months ended June 30, 2012 and 2011, respectively. In addition, we have the ability to earn incentive fees based on the ultimate financial performance of certain of the joint venture properties.

The combined balance sheets for the unconsolidated joint ventures, at June 30, 2012 and December 31, 2011, are as follows (amounts in thousands):

		June 30, 2012			December 31, 2011
Assets
Commercial real estate property, net		$	6,153,652		$	5,699,113
Other assets		668,567			599,596
Total assets		$	6,822,219		$	6,298,709

Liabilities and members’ equity
Mortgages and other loan payable		$	4,695,103		$	4,131,890
Other liabilities		271,289			250,925
Members’ equity		1,855,827			1,915,894
Total liabilities and members’ equity		$	6,822,219		$	6,298,709
Company’s net investment in unconsolidated joint ventures		$	1,014,042		$	893,933

The combined statements of income for the unconsolidated joint ventures, from acquisition date through June 30, 2012 and 2011 are as follows (amounts in thousands):

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2012			2011			2012			2011
Total revenues		$	124,418		$	113,792		$	244,466		$	237,352
Operating expenses		16,949			16,080			34,633			36,681
Real estate taxes		12,483			12,290			25,857			25,740
Interest expense, net of interest income		53,506			53,587			110,141			101,224
Depreciation and amortization		35,724			33,865			72,507			65,589
Transaction related costs		90			752			358			817
Total expenses		118,752			116,574			243,496			230,051
Net income(loss)		$	5,666		$	(2,782	)	$	970		$	7,301
Company’s equity in net income of unconsolidated joint ventures		$	70,890		$	2,184		$	69,330		$	10,390

The 2012 equity in net income of unconsolidated joint ventures includes $67.9 million of additional income due to the distribution of refinancing proceeds from the recapitalization of 717 Fifth Avenue.

Gramercy Capital Corp.

In April 2004, we formed Gramercy as a commercial real estate finance business. Gramercy qualified as a REIT for federal income tax purposes and expects to qualify for its current fiscal year.

At June 30, 2012, we held 3.2 million shares, or approximately 6.3% of Gramercy’s common stock. Our total investment of approximately $8.1 million is based on the market value of our common stock investment in Gramercy at June 30, 2012. As we no longer have any significant influence over Gramercy, we account for our investment as available-for-sale securities.

Effective May 2005, June 2009 and October 2009, Gramercy entered into lease agreements with an affiliate of ours, for their corporate offices at 420 Lexington Avenue, New York, New York. The first lease is for approximately 7,300 square feet and carries a term of ten years with rents of approximately $249,000 per annum for year one increasing to $315,000 per annum in year ten. The second lease is for approximately 900 square feet pursuant to a lease which ends in April 2015, with annual rent under this lease of approximately $35,300 per annum for year one increasing to $42,800 per annum in year six. The third lease is for approximately 1,400 square feet pursuant to a lease which ends in April 2015, with annual rent under this lease of approximately $67,300 per annum for year one increasing to $80,500 per annum in year six.

Marc Holliday, our chief executive officer, remains a board member of Gramercy.

The entire disclosure for equity investment, or group of investments, for which combined disclosure is appropriate, including: (a) the name of each investee and percentage of ownership of common stock, (b) accounting policies for investments in common stock, (c) difference between the amount at which the investment is carried and the amount of underlying equity in net assets and the accounting treatment of the difference, (d) the total fair value of each identified investment for which a market value is available, (e) summarized information as to assets, liabilities, and results of operations of the investees (for investments in unconsolidated subsidiaries, common stock of joint ventures, or other investments using the equity method), and (f) material effects of possible conversions, exercises, or contingent issuances of the investee. Other disclosures include (a) the names of any investee in which the investor owns 20 percent or more of the voting stock and investment is not accounted for using the equity method, and the reasons why not, and (b) the names of any investee in which the investor owns less than 20 percent of the voting stock and the investment is accounted for using the equity method, and the reasons why it is.

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