Note 4 – Investments in Unconsolidated Joint Ventures

The Company conducts a portion of its property rental activities through investments in unconsolidated joint ventures. The Company’s partners in these joint ventures are unrelated real estate entities or commercial enterprises. The Company and its joint venture partners make initial and/or ongoing capital contributions to these unconsolidated joint ventures. The obligations to make capital contributions are governed by each unconsolidated joint venture’s respective operating agreement and related governing documents.

As of June 30, 2018, the Company had investments in seven unconsolidated joint ventures as follows:

		Seritage %			# of		Total
Unconsolidated Joint Venture	Joint Venture Partner	Ownership			Properties		GLA
GS Portfolio Holdings II LLC ("GGP I JV")	GGP Inc.		50.0	%		4		550,600
GS Portfolio Holdings (2017) LLC ("GGP II JV")	GGP Inc.		50.0	%		5		1,175,600
MS Portfolio LLC ("Macerich JV")	The Macerich Company		50.0	%		9		1,575,600
SPS Portfolio Holdings II LLC ("Simon JV")	Simon Property Group, Inc.		50.0	%		5		872,200
Mark 302 JV LLC ("Mark 302 JV")	Invesco Real Estate		50.1	%		1		96,400
SI UTC JV LLC ("UTC JV")	Invesco Real Estate		50.0	%		1		226,200
SF WH Joint Venture LLC ("West Hartford JV")	First Washington Realty		50.0	%		1		163,700
						26		4,660,300

(1)	Represents the Company’s gross investment in each JV, including its share of the property contribution value at the formation of each JV plus its share of any development expenses incurred in each JV.

Mark 302 JV

In March 2018, the Company contributed its property located in Santa Monica, CA to the Mark 302 JV and sold a 49.9% interest to an investment fund managed by Invesco Real Estate based on a contribution value of $90.0 million (the “Initial Mark 302 Contribution Value”) and pre-transaction development and other costs of approximately $10.4 million. As a result of the transaction, the Company received cash of approximately $50.1 million and recorded a gain of $39.1 million (the “Initial Mark 302 Gain”) which is included in gain on sale of real estate within the condensed consolidated statements of operations. The Initial Mark 302 Gain is comprised of $19.6 million attributable to the increase in fair value of the retained 50.1% interest due to application of the ASU 2017-05, while the remaining $19.5 million is the gain on sale of the remaining 49.9% interest.

The Mark 302 JV is subject to a revaluation upon the earlier of the first anniversary of project stabilization (as defined in the operating agreement of the Mark 302 JV) or December 31, 2020. Upon revaluation, the primary inputs in determining the Initial Mark 302 Contribution Value, which consist of property operating income and total project costs, will be updated for actual results and a value (the “Final Mark 302 Contribution Value”) will be calculated to yield a pre-determined rate of return to the investment fund managed by Invesco Real Estate. The Final Mark 302 Contribution Value cannot be more than $105.0 million or less than $60.0 million and will result in a cash settlement between the two parties.

The Company recorded the Initial Mark 302 Gain based on the Initial Mark 302 Contribution Value because it determined it to be the expected amount in the range of possible amounts. The Company made this determination based on its analysis of the primary inputs that determine both the Initial Mark 302 Contribution Value and Final Mark 302 Contribution Value, which consist of property operating income and total project costs. The gain on sale of real estate based on the Final Mark 302 Contribution Value (the “Final Mark 302 Gain”) will not be more than $54.1 million or less than $9.1 million.

Each reporting period the Company re-analyzes the primary inputs that determine the Final Mark 302 Contribution Value and Final Mark 302 Gain. For the three months ended June 30, 2018, there were no adjustments to the Initial Mark 302 Contribution Value or the Initial Mark 302 Gain resulting from such analysis.

UTC JV

During the three months ended June 30, 2018, the Company contributed its property located in San Diego, CA to the UTC JV and sold a 50.0% interest to a separate account advised by Invesco Real Estate based on a contribution value of $68.0 million and pre-transaction development and other costs of approximately $19.2 million. As a result of the transaction, the Company received cash of approximately $43.6 million and recorded a gain of $27.5 million which is included in gain on sale of real estate within the condensed consolidated statements of operations. The gain is comprised of $13.7 million attributable to the increase in fair value of the retained 50.0% interest due to application of the ASU 2017-05, while the remaining $13.7 million is the gain on sale of the remaining 50.0% interest.

West Hartford JV

During the three months ended June 30, 2018, the Company contributed its property located in West Hartford, CT to the West Hartford JV and sold a 50.0% interest to First Washington Realty based on a contribution value of $25.0 million (the “Initial West Hartford JV Contribution Value”) and pre-transaction development and other costs of approximately $20.2 million. As a result of the transaction, the Company received cash of approximately $22.6 million and recorded a gain of $5.6 million (the “Initial West Hartford JV Gain”) which is included in gain on sale of real estate within the condensed consolidated statements of operations. The Initial West Hartford JV Gain is comprised of $2.8 million attributable to the increase in fair value of the retained 50.0% interest due to application of the ASU 2017-05, while the remaining $2.8 million is the gain on sale of the remaining 50.0% interest.

The West Hartford JV is subject to (i) a revaluation upon the earlier of the first anniversary of project stabilization (as defined in the operating agreement of the West Hartford JV) or December 31, 2019, and (ii) an adjustment based on the timing, method and magnitude of the reassessment of the property for real estate tax purposes between 2018 and 2022. Upon revaluation, the primary inputs in determining the Initial West Hartford JV Contribution Value, which consist of property operating income and total project costs, will be updated for actual results and a value (the “Final West Hartford JV Contribution Value”) will be calculated to yield a pre-determined rate of return to First Washington Realty. The Final West Hartford JV Contribution Value cannot be more than $29.6 million or less than $20.4 million. Upon adjustment for real estate tax purposes, an amount based on the difference between actual real estate taxes and tenant recoveries for such real estate taxes will be determined and the capitalized value of such amount will be applied as an adjustment to the transaction price (the “Real Estate Tax Adjustment Amount”). The Real Estate Tax Adjustment Amount, and the aggregate transaction price adjustment resulting from (i) the difference between the Initial West Hartford JV Contribution Value and the Final West Hartford JV Contribution Value, and (ii) the Real Estate Tax Adjustment Amount, cannot exceed $4.6 million and will result in a cash settlement between the two parties.

The Company recorded the Initial West Hartford JV Gain based on the Initial West Hartford JV Contribution Value because it determined it to be the expected amount in the range of possible amounts. The Company made this determination based on its analysis of the primary inputs that determine both the Initial West Hartford JV Contribution Value and Final West Hartford JV Contribution Value, which consist of property operating income, including the difference between actual real estate taxes and tenant recoveries for such real estate taxes, and total project costs. The gain on sale of real estate based on the Final West Hartford JV Contribution Value (the “Final West Hartford JV Gain”) will not be more than $10.2 million or less than $1.0 million.

Each unconsolidated joint venture is obligated to maintain financial statements in accordance with GAAP. The Company shares in the profits and losses of these unconsolidated joint ventures generally in accordance with the Company’s respective equity interests. In some instances, the Company may recognize profits and losses related to investment in an unconsolidated joint venture that differ from the Company’s equity interest in the unconsolidated joint venture. This may arise from impairments that the Company recognizes related to its investment that differ from the impairments the unconsolidated joint venture recognizes with respect to its assets, differences between the Company’s basis in assets it has transferred to the unconsolidated joint venture and the unconsolidated joint venture’s basis in those assets or other items. There were no joint venture impairment charges for the three or six months ended June 30, 2018 or June 30, 2017.

The following tables present combined condensed financial data for the Company’s unconsolidated joint ventures (in thousands):

	June 30, 2018			December 31, 2017
ASSETS
Investment in real estate
Land	$	348,902		$	191,853
Buildings and improvements		472,256			388,363
Accumulated depreciation		(59,916	)		(48,306	)
		761,242			531,910
Construction in progress		48,012			21,000
Net investment in real estate		809,254			552,910
Cash and cash equivalents		11,050			4,549
Tenant and other receivables, net		4,516			3,843
Other assets, net		37,034			45,605
Total assets	$	861,854		$	606,907
LIABILITIES AND MEMBERS INTERESTS
Liabilities
Mortgage loans payable, net	$	134,754		$	122,875
Accounts payable, accrued expenses and other liabilities		44,617			28,201
Total liabilities		179,371			151,076
Members Interest
Additional paid in capital		691,964			473,098
Retained earnings		(9,481	)		(17,267	)
Total members interest		682,483			455,831
Total liabilities and members interest	$	861,854		$	606,907

	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
EQUITY IN INCOME OF UNCONSOLIDATED JOINT VENTURES
Total revenue	$	12,116		$	17,168		$	23,343		$	33,512
Property operating expenses		(2,103	)		(3,195	)		(3,815	)		(6,517	)
Depreciation and amortization		(7,030	)		(16,725	)		(14,616	)		(27,697	)
Operating income		2,983			(2,752	)		4,912			(702	)
Other expenses		(7,298	)		(331	)		(14,392	)		(377	)
Net (loss) income	$	(4,315	)	$	(3,083	)	$	(9,480	)	$	(1,079	)
Equity in (loss) income of unconsolidated joint ventures	$	(2,158	)	$	(1,542	)	$	(4,740	)	$	(540	)