XML 29 R14.htm IDEA: XBRL DOCUMENT

Notes Receivable and Current Expected Credit Losses

3 Months Ended

Mar. 31, 2020

Notes Receivable and Current Expected Credit Losses

Notes Receivable

The Company had the following notes receivable outstanding as of March 31, 2020 and December 31, 2019 ($ in thousands):



	Outstanding loan amount										Interest compounding
Development Project	March 31, 2020			December 31, 2019		Maximum loan commitment		Interest rate			Interest compounding
The Residences at Annapolis Junction	$	42,517		$	40,049	$	48,105	10.0	%		Monthly
Delray Plaza	15,484			12,995		17,000		15.0	%	^(a)	Annually
Nexton Square	15,904			15,097		17,000		10.0	%		Monthly
Interlock Commercial	75,846			59,224		95,000		15.0	%		None
Solis Apartments at Interlock	26,425			25,588		41,100		13.0	%		Annually
Total mezzanine	176,176			152,953		$	218,205
Other notes receivable	1,167			1,147
Notes receivable guarantee premium	4,511			5,271
Allowance for credit losses	(3,202		)	—
Total notes receivable	$	178,652		$	159,371

________________________________________

(a) $2.0 million of this loan is subject to an interest rate of 6%.

Interest on the mezzanine loans is accrued and funded utilizing the interest reserves for each loan, which are components of the respective maximum loan commitments, and such accrued interest is added to the loan receivable balances. The Company recognized interest income for the three months ended March 31, 2020 and 2019 as follows (in thousands):



	Three Months Ended March 31,
Development Project	2020			2019
1405 Point	$	—		$	610
The Residences at Annapolis Junction	2,468		^(a)	2,024		^(b)
North Decatur Square	—			638
Delray Plaza	489			310
Nexton Square	391			510
Interlock Commercial	3,017		^(a)	743
Solis Apartments at Interlock	838			463
Total mezzanine	7,203			5,298
Other interest income	23			21
Total interest income	$	7,226		$	5,319

________________________________________

(a) Includes partial recognition of interest income related to an exit fee that is due upon repayment of the loan.

(b) Includes amortization of the $5.0 million loan modification fee paid by the borrower in November 2018.

Delray Plaza

On March 3, 2020, the Delray Plaza loan was modified to increase the maximum amount of the loan to $17.0 million, with $2.0 million of additional funds borrowed at an interest rate of 6% in order to fund final development activities. The borrower pledged 125,832 Class A Units as additional collateral for this loan.

Current Expected Credit Losses

The Company is exposed to credit losses primarily through its mezzanine lending activities. As of March 31, 2020, the Company had five mezzanine loans, all of which are secured by second liens on development projects in various stages of

completion or lease-up. Each of these projects is subject to a loan that is senior to the Company’s mezzanine loan. Interest on these loans is paid in kind and is generally not expected to be paid until a sale of the project after completion of the development.

The Company's management performs a quarterly analysis of the loan portfolio to determine the risk of credit loss based on the progress of development activities including leasing activities, projected development costs, and current and projected mezzanine and senior construction loan balances. The Company estimates future losses on its notes receivable using risk ratings that correspond to probabilities of default and loss given default. The Company's risk ratings are as follows:


•	Pass: loans in this category are adequately collateralized by a development project with conditions materially consistent with the Company's underwriting assumptions.


•	Special Mention: loans in this category show signs that the economic performance of the project may suffer as a result of slower-than-expected leasing activity or an extended development or marketing timeline. Loans in this category warrant increased monitoring by management.

•

Substandard: loans in this category may not be fully collected by the Company unless remediation actions are taken. Remediation actions may include obtaining additional collateral or assisting the borrower with asset management activities to prepare the project for sale. The Company may also consider placing the loan on non-accrual status if it does not believe that additional interest accruals will ultimately be collected.

On a quarterly basis, the Company compares the risk inherent in its loans to industry loan loss data experienced during past business cycles. The Company updated the risk ratings for each of its notes receivable during the three months ended March 31, 2020. The Company obtained industry loan loss data relative to these risk ratings as of December 31, 2019.

The following table presents amortized cost basis of the portfolio by year of origination and risk rating as of March 31, 2020 (in thousands):



	Year of Origination
Risk Ratings	2020		2019		2018		2017		2016		Total
Pass	$	—	$	—	$	120,495	$	—	$	—	$	120,495
Special Mention	—		—		—		—		—		—
Substandard	—		—		—		14,839		42,150		56,989
Total amortized cost basis	$	—	$	—	$	120,495	$	14,839	$	42,150	$	177,484

As of December 31, 2019, there was no allowance for loan losses. At March 31, 2020, the Company reported $178.7 million of notes receivable, net of allowances of $3.2 million. Changes in the allowance for the three months ended March 31, 2020 were as follows (in thousands):



	Three Months Ended March 31, 2020
Beginning balance (December 31, 2019)	$	—
Cumulative effect of accounting change	2,825
Provision for unrealized credit losses	377
Ending balance	$	3,202

The Company places loans on non-accrual status when the loan balance, together with the balance of any senior loan, approximately equal the estimated realizable value of the underlying development project. As of March 31, 2020 and December 31, 2019, there were no loans on non-accrual status. Effective April 1, 2020, the Company placed the loans for Delray Plaza and The Residences at Annapolis Junction on non-accrual status.