Debt and Preferred Equity Investments (Tables)

9 Months Ended

Sep. 30, 2012

Debt and Preferred Equity Investments

Summary of debt investments

As of September 30, 2012 and December 31, 2011, we held the following debt investments with an aggregate weighted average current yield of approximately 9.3% (amounts in thousands):

Loan Type	September 30, 2012 Senior Financing		September 30, 2012 Carrying Value, Net of Discounts			December 31, 2011 Carrying Value, Net of Discounts			Initial Maturity Date
Other Loan	$	15,000	$	3,500		$	3,500		September 2021
Mortgage/Mezzanine Loan(1)	1,109,000		113,828			108,817			March 2017
Mezzanine Loan	165,000		71,015			40,375			November 2016
Junior Participation	133,000		49,000			49,000			June 2016
Mortgage/Mezzanine Loan	169,822		46,476			46,416			May 2016
Mezzanine Loan	177,000		16,205			17,112			May 2016
Mezzanine Loan	205,000		66,147			64,973			February 2016
Junior Participation(2)(4)	—		—			8,725			—
Junior Participation(3)(4)	—		—			11,000			—
Total fixed rate	$	1,973,822	$	366,171		$	349,918
Mezzanine Loan(5)	$	81,000	$	34,940		$	34,940		October 2016
Mezzanine Loan	55,000		35,000			35,000			July 2016
Mortgage/Mezzanine Loan	—		41,647			—			February 2015
Mezzanine Loan	45,000		10,000			10,000			January 2015
Mortgage	—		15,000			—			September 2014
Mezzanine Loan	170,000		60,000			60,000			August 2014
Mortgage/Mezzanine Loan(9)	330,000		132,000			30,747			July 2014
Mezzanine Loan	62,500		37,500			—			July 2014
Mezzanine Loan(6)	75,000		7,650			7,650			July 2013
Junior Participation(4)	60,250		10,875			10,875			June 2013
Mortgage(7)	28,500		3,000			3,000			February 2013
Mezzanine Loan(8)	—		—			8,392			—
Mortgage(10)	—		—			86,339			—
Other Loan	—		—			3,196			—
Total floating rate	$	907,250	$	387,612		$	290,139
Total	2,881,072		753,783			640,057
Loan loss reserve(4)	—		(7,000		)	(19,125		)	—
Total	$	2,881,072	$	746,783		$	620,932

(1)Interest is added to the principal balance for this accrual only loan.

(2)This loan was in default and on non-accrual status.  We sold our interest in the loan in February 2012 and recovered $0.4 million against the reserve on this loan.

(3)In March 2012, we sold our interest in this loan and recovered $2.0 million against the reserve on this loan.

(4)Loan loss reserves are specifically allocated to investments.  Our reserves reflect management’s judgment of the probability and severity of losses based on Level 3 data.  We cannot be certain that our judgment will prove to be correct or that reserves will be adequate over time to protect against potential future losses.

(5)As of September 30, 2012, we were committed to fund an additional $15.0 million in connection with this loan.

(6)In November 2011, we entered into a loan participation agreement in the amount of $7.4 million on a $15.0 million mortgage. Due to our continued involvement with the loan, the portion that was participated out has been recorded in other assets and other liabilities in the accompanying consolidated balance sheet.

(7)In June 2011, we funded an additional $5.5 million and extended the maturity date of this loan to February 2013. In September 2011, we entered into a loan participation in the amount of $28.5 million on a $31.5 million mortgage. We have assigned our right as servicer to a third party. Due to our continued involvement with the loan, the portion that was participated out has been recorded in other assets and other liabilities in the accompanying consolidated balance sheet.

(8)In connection with the extension of this loan, a portion of the mezzanine loan was converted to preferred equity. See note 4 to the next table. This mezzanine loan was on non-accrual status as of January 2012. In June 2012, we acquired an additional 38.6% participation interest in this mezzanine loan. As a result of this acquisition, we have complete control over this position and can, therefore, control any restructuring. On July 26, 2012, the mezzanine holders foreclosed out the equity position and  as a result, we consolidated the operations of this investment in August and September 2012. In September 2012, we, together with Blackstone Real Estate Partners VII, or Blackstone, Gramercy Capital Corp. and Square Mile Capital Management LLC, formed a joint venture to recapitalize the underlying West Coast office portfolio and restructure the senior and mezzanine loans that expired in August 2012. We contributed our debt and preferred equity investment to the joint venture, and accounted for our investment under the equity method as of September 28, 2012 because we no longer controlled the joint venture. We own a 27.63% ownership interest in the joint venture. Blackstone, holding a 56.3% ownership interest in the joint venture, will oversee the portfolio’s management and leasing activities through its Equity Office Properties affiliate. See Note 6, “Investments in Unconsolidated Joint Ventures.”

(9)As a result of the acquisition of the remaining 50% interest in November 2011 in the joint venture which held an investment in a debt position on the property located at 450 West 33rd Street, we have reclassified our investment as a debt investment. See Note 6, “Investments in Unconsolidated Joint Ventures.” As part of the restructuring and refinancing of the related senior mortgage in July 2012, our outstanding investment in the amount of $49.9 million was repaid in full at maturity and we also entered into a loan participation in the amount of $182 million on the $462 million outstanding senior mortgage which maturity was extended to July 2014. In September 2012, we sold $50 million of our interest in the senior mortgage to a third party.

(10)We hold an 88% interest in the consolidated joint venture that acquired this loan. This investment is denominated in British Pounds. This loan was not repaid on its maturity date and was placed in receivership. The entity that holds the property which served as collateral for our loan position was determined to be a VIE under a reconsideration event and we have been determined to be the primary beneficiary. As a result of this determination, we consolidated the entity and reclassified the investment to assets held for sale on the consolidated balance sheet in June 2012.

Summary of preferred equity investments

As of September 30, 2012 and December 31, 2011, we held the following preferred equity investments, with an aggregate weighted average current yield of approximately 10.11% (amounts in thousands):

Type	September 30, 2012 SeniorFinancing		September 30, 2012 Carrying Value, Net of Discounts		December 31, 2011 Carrying Value, Net of Discounts			InitialMandatory Redemption
Preferred equity(1)	$	926,260	$	208,903	$	203,080		July 2016
Preferred equity(1)(2)	57,087		17,747		—			April 2016
Preferred equity(1)(3)	480,000		98,208		141,980			July 2014
Preferred equity(1)(4)(5)	—		—		51,000			—
Loan loss reserve(5)	—		—		(31,050		)	—
	$	1,463,347	$	324,858	$	365,010

(1)	The difference between the pay and accrual rates is included as an addition to the principal balance outstanding.
(2)	We are committed to fund an additional $10.0 million on this loan. As of September 30, 2012, we had funded $2.2 million of this commitment.
(3)	This is a fixed rate investment. This investment was classified as held for sale at June 30, 2009, but as held-to-maturity for all periods subsequent to June 30, 2009. The reserve previously taken against this loan is being accreted up to the face amount through the maturity date. In connection with a recapitalization of the investment, our mezzanine loan was converted to preferred equity in 2011. We also made an additional $50.0 million junior preferred equity loan. This junior preferred equity loan was repaid at par in February 2012.
(4)	This investment was on non-accrual status. In connection with the extension of this loan, a portion of the mezzanine loan was converted to preferred equity in 2011. See Note 8 of the prior table. In June 2012, we acquired 100% of the interests in the most senior preferred equity position. In September 2012, we have reclassified our debt and preferred equity investments as investments in unconsolidated joint ventures as part of the recapitalization and refinancing transaction discussed in Note 8 of the prior table.
(5)	Loan loss reserves are specifically allocated to investments. Our reserves reflect management’s judgment of the probability and severity of losses based on Level 3 data. We cannot be certain that our judgment will prove to be correct and that reserves will be adequate over time to protect against potential future losses.

Rollforward of total allowance for loan loss reserves

	September 30,2012			December 31, 2011
Balance at beginning of year	$	50,175		$	61,361
Expensed	3,000			10,875
Recoveries	(2,436		)	(4,370		)
Charge-offs and reclassifications	(43,739		)	(17,691		)
Balance at end of period	$	7,000		$	50,175

Summary of impaired loans, which may include non-accrual loans

	September 30, 2012						December 31, 2011
	Unpaid Principal Balance		Recorded Investment		Allowance Allocated		Unpaid Principal Balance		Recorded Investment		Allowance Allocated
With no related allowance recorded:
Commercial real estate	$	—	$	—	$	—	$	106,623	$	83,378	$	—
With an allowance recorded:
Commercial real estate	10,750		10,750		7,000		86,121		81,475		50,175
Total	$	10,750	$	10,750	$	7,000	$	192,744	$	164,853	$	50,175

Summary of average recorded investment in impaired loans, including non-accrual loans and the related investment and preferred equity income recognized

	Three Months EndedSeptember 30,2012			Three Months EndedSeptember 30,2011		Nine Months EndedSeptember 30,2012		Nine Months EndedSeptember 30,2011
Average recorded investment in impaired loans	$	40,304		$	174,790	$	63,391	$	214,310
Investment and preferred equity income (loss) recognized	(298		)	1,181		3,480		7,542