Net Investments in Properties and Real Estate Under Construction

Real Estate

Real estate, which consists of land and buildings leased to others, at cost, and which are subject to operating leases, is summarized as follows (in thousands):



	June 30, 2014			December 31, 2013
Land	$	525,783		$	553,389
Buildings	1,902,223			1,848,926
Less: Accumulated depreciation	(156,019		)	(129,051		)
	$	2,271,987		$	2,273,264

During the six months ended June 30, 2014, we entered into a domestic investment, which was deemed to be a real estate acquisition because we entered into a new lease with the seller, for a manufacturing facility located in New Concord, Ohio at a cost of $4.4 million, including net lease intangible assets of $1.0 million (Note 7) and acquisition-related costs and fees of $0.4 million, which were capitalized.

Additionally, we acquired an investment in an office building and an adjacent plot of land located in Tucson, Arizona at a cost of $19.0 million, comprised primarily of land of $2.5 million, buildings of $11.2 million, net lease intangible assets of $6.0 million (Note 7), and a purchase option of $0.6 million to acquire an adjacent office building. We assumed a non-recourse mortgage loan of $10.3 million (Note 10). We deemed this investment to be a business combination because we assumed the existing lease on the property. In connection with this investment, we expensed acquisition-related costs and fees of $1.0 million, which are included in Acquisition expenses in the consolidated financial statements.

The impact on the carrying value of our Real estate due to the strengthening of the U.S. dollar relative to foreign currencies during the six months ended June 30, 2014 was a $5.6 million decrease from December 31, 2013 to June 30, 2014.

Operating Real Estate

Operating real estate, which consists primarily of our domestic hotel and self-storage operations, at cost, is summarized as follows (in thousands):



	June 30, 2014			December 31, 2013
Land	$	66,066		$	66,066
Buildings	205,670			217,304
Less: Accumulated depreciation	(18,244		)	(15,354		)
	$	253,492		$	268,016

Partial Sale

In December 2011, we entered into a contract with I Shops LLC, a real estate developer, to finance the renovation of a hotel and construction of a shopping center. Additionally, as a condition to providing the construction loan, we entered into a contract with the developer that grants us the option to acquire a 15% equity interest in the parent company that owns I Shops LLC. We consolidated I Shops LLC, which held title to the property that secured our loan, because we had (i) control over the decisions that most significantly impacted the developer’s economic performance and (ii) the obligation to absorb losses and right to receive benefits from I Shops LLC. The property included an operating hotel and vacant land. We accounted for the construction loan as real estate under construction. During 2013, the hotel renovation was completed and during 2013 and 2014 portions of the shopping center were placed into service. However, as of June 30, 2014, two retail properties remained under construction which we also have the option to purchase from I Shops LLC.

In April 2014, the developer repaid $68.3 million of the outstanding $84.6 million loan balance. The remaining balance of the loan relates to the two retail properties under construction. Upon substantial repayment of the loan, I Shops LLC no longer met the criteria for consolidation and was deconsolidated, with the exception of the two retail properties under construction. We expect to exchange the remaining loan balance for those properties when construction is completed.

These transactions were accounted for as a partial sale resulting in a reduction in assets of $55.4 million, of which $27.9 million was included in Real estate, at cost, and $25.8 million was included in Operating real estate and $4.8 million was reclassified from Real estate, at cost, to Real estate under construction. We recognized a gain on disposition of real estate of $12.5 million associated with the completed hotel and portions of the shopping center that were transferred to the developer.

Real Estate Under Construction

The following table provides the activity of our Real estate under construction (in thousands):



	Six Months Ended			Year Ended
	June 30, 2014			December 31, 2013
Beginning balance	$	127,935		$	71,285
Capitalized funds	58,172			90,007
Placed into service	(57,131		)	(42,225		)
Capitalized interest	3,865			5,208
Building improvements and other	(78		)	3,660
Ending balance	$	132,763		$	127,935

Capitalized Funds

During the six months ended June 30, 2014, total capitalized funds were primarily comprised of $43.6 million in construction draws related to five build-to-suit projects, $9.5 million for the initial funding of two new build-to-suit projects, and $4.8 million that was reclassified to Real estate under construction from Real estate, at cost as a result of the partial sale of I Shops LLC. This reclassification was made to account for the two retail properties that we will purchase once construction is completed. See discussion above under Partial Sale. The amount capitalized also included acquisition-related costs and fees of $1.6 million related to the two new build-to-suit projects.

During the year ended December 31, 2013, costs attributable to five ongoing build-to-suit projects comprised the balance of Real estate under construction, including capitalized acquisition-related costs and fees of $2.3 million.

Placed into Service

During the six months ended June 30, 2014, we placed into service two build-to-suit projects, of which one was completed and one was partially-completed, in the amount of $57.1 million. Of the total, $42.2 million was reclassified to Real estate, at cost and $14.9 million was reclassified to Operating real estate, at cost.

During the year ended December 31, 2013, we placed into service three build-to-suit projects, of which two were completed and one was partially-completed, in the amount of $42.2 million. Of the total, $26.1 million was reclassified to Real estate, at cost, and $12.6 million was reclassified to Operating real estate, at cost. The remaining $3.5 million was related to improvements on an existing building that was reclassified to Real estate, at cost, at December 31, 2013.

Capitalized Interest

Capitalized interest includes amortization of the mortgage discount and deferred financing costs and interest costs incurred during construction, totaling $3.9 million and $5.2 million for the six months ended June 30, 2014 and the year ended December 31, 2013, respectively.

Ending Balance

At June 30, 2014, we had four open build-to-suit projects. At December 31, 2013, we had three open build-to-suit projects. The aggregate unfunded commitment on the remaining open projects totaled approximately $19.9 million and $46.7 million at June 30, 2014 and December 31, 2013, respectively.