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Commitments and Contingencies
3 Months Ended
Mar. 31, 2015
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies
Commitments and Contingencies
(a) Contingent liabilities
As part of the acquisition of 29A International Business Park, an asset acquisition in 2010, the seller could earn additional consideration based on future net operating income growth in excess of certain performance targets, as defined in the agreements for the acquisition. As of December 31, 2014, certain leases executed subsequent to purchase caused an amount to become probable of payment and therefore approximately $12.4 million had been accrued in accounts payable and accrued liabilities and capitalized to buildings and improvements in the condensed consolidated balance sheet as of December 31, 2014 and remains accrued as of March 31, 2015. The maximum amount that could be earned by the seller is $50.0 million SGD (or approximately $36.4 million based on the exchange rate as of March 31, 2015). The earnout contingency expires in November 2020.
One of the tenants at our Convergence Business Park property has an option to expand as part of their lease agreement, which expires in April 2017. As part of this option, development activities were not permitted on specifically identified expansion space within the property until April 2014. From April 2014 through April 2017, the tenant has the right of first refusal on any third party’s bona fide offer to buy the adjacent land. If the tenant exercises their option, we may either construct and lease to the tenant an additional shell building on the expansion space at a stipulated rate of return on cost or sell the existing building and the expansion space to the tenant for a price of approximately $24.0 million and $225,000 per square acre, respectively, plus additional adjustments as provided in the lease.
As part of the acquisition of the Sentrum Portfolio in July 2012, the seller could earn additional consideration based on future net returns on vacant space to be developed, but not currently leased, as defined in the purchase agreement for the acquisition. The initial estimate of fair value of contingent consideration was approximately £56.5 million (or approximately $87.6 million based on the exchange rate as of July 11, 2012, the acquisition date). We have adjusted the contingent consideration to fair value at each reporting date with changes in fair value recognized in operating income. During the three months ended March 31, 2015, we have reduced the fair value by approximately £30.3 million (or approximately $44.8 million based on the exchange rate as of March 31, 2015). The adjustment was the result of an evaluation by management that no additional leases would be executed for vacant space by July 11, 2015, the contingency expiration date. At March 31, 2015, the fair value of the contingent consideration for the Sentrum Portfolio was £1.4 million (or approximately $2.1 million based on the exchange rate as of March 31, 2015) and is currently accrued in accounts payable and other accrued expenses in the condensed consolidated balance sheet. We made no earnout payments during the three months ended March 31, 2015 and 2014. The change in fair value of contingent consideration for Sentrum was recorded as a reduction to operating expense of approximately $43.0 million and $3.4 million for the three months ended March 31, 2015 and 2014, respectively. This amount will be reassessed on a quarterly basis through the contingency expiration date, with any changes being recognized in earnings. Increases or decreases in the fair value of the contingent consideration can result from changes in discount periods, discount rates and probabilities that contingencies will be met.
(b) Construction Commitments
Our properties require periodic investments of capital for tenant-related capital expenditures and for general capital improvements. From time to time in the normal course of our business, we enter into various construction contracts with third parties that may obligate us to make payments. At March 31, 2015, we had open commitments related to construction contracts of approximately $124.4 million.
(c) Legal Proceedings
Although the Company is involved in legal proceedings arising in the ordinary course of business, as of March 31, 2015, the Company is not currently a party to any legal proceedings nor, to its knowledge, is any legal proceeding threatened against it that it believes would have a material adverse effect on its financial position, results of operations or liquidity.