The Combination (Notes)

12 Months Ended

Dec. 31, 2019

Business Combination Disclosure [Text Block]

The Combination

In the Combination on July 18, 2017, we acquired the JBG Assets in exchange for approximately 37.2 million common shares and OP Units. The Combination has been accounted for at fair value under the acquisition method of accounting. The following allocation of the purchase price was based on the fair value of the assets acquired and liabilities assumed (in thousands):



Fair value of purchase consideration:
Common shares and OP Units	$	1,224,885
Cash	20,573
Total consideration paid	$	1,245,458

Fair value of assets acquired and liabilities assumed:
Land and improvements	$	338,072
Building and improvements	609,156
Construction in progress, including land	699,800
Leasehold improvements and equipment	7,890
Real estate	1,654,918
Cash	104,529
Restricted cash	13,460
Investments in unconsolidated real estate ventures	241,142
Identified intangible assets	138,371
Notes receivable ⁽¹⁾	50,934
Identified intangible liabilities	(8,687		)
Mortgages payable assumed ⁽²⁾	(768,523		)
Capital lease obligations assumed ⁽³⁾	(33,543		)
Lease assumption liabilities ⁽⁴⁾	(48,127		)
Deferred tax liability ⁽⁵⁾	(18,610		)
Other liabilities acquired, net	(60,048		)
Noncontrolling interests in consolidated subsidiaries	(3,588		)
Net assets acquired	1,262,228
Gain on bargain purchase ⁽⁶⁾	16,770
Total consideration paid	$	1,245,458

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⁽¹⁾	During the year ended December 31, 2017, we received proceeds of $50.9 million from the repayment of the notes receivable acquired in the Combination.


⁽²⁾	Subject to various interest rate swap and cap agreements assumed in the Combination that are considered economic hedges, but not designated as accounting hedges.


⁽³⁾	In the Combination, two ground leases were assumed that were determined to be capital leases. On July 25, 2017, we purchased a land parcel located in Reston, Virginia associated with one of the ground leases for $19.5 million.

⁽⁴⁾

Includes a $14.0 million payment to a tenant, which was paid in 2018, and a $34.1 million lease liability we assumed in relocating a tenant to one of our office buildings. The $34.1 million assumed lease liability was based on the contractual payments we assumed under the tenant’s previous lease, which are partially offset by estimated sub-tenant income we anticipate receiving as we actively pursue a sub-tenant.


⁽⁵⁾	Related to the management and leasing contracts acquired in the Combination.

⁽⁶⁾

The Combination resulted in a gain on bargain purchase of $24.4 million for the year ended December 31, 2017 because the fair value of the identifiable net assets acquired exceeded the purchase consideration. As a result of finalizing our fair value estimates used in the purchase price allocation related to the Combination, during the year ended December 31, 2018, we adjusted the fair value of certain assets acquired and liabilities assumed consisting of a decrease of $468,000 to investments in unconsolidated real estate ventures, an increase of $4.7 million to lease assumption liabilities and an increase of $2.4 million to other liabilities acquired, resulting in a reduction of the gain on bargain purchase of $7.6 million for the year ended December 31, 2018. The purchase consideration was based on the fair value of the common shares and OP Units issued in the Combination. We have concluded that all acquired assets and liabilities were recognized and that the valuation procedures and resulting estimates of fair values were appropriate.

The fair value of the common shares and OP Units purchase consideration was determined as follows (in thousands, except exchange ratio and price per share/unit):



Outstanding common shares and common limited partnership units prior to the Combination	100,571
Exchange ratio ⁽¹⁾	2.71
Common shares and OP Units issued in consideration	37,164
Price per share/unit ⁽²⁾	$	37.10
Fair value of common shares and OP Units issued in consideration	$	1,378,780
Fair value adjustment to OP Units due to transfer restrictions	(43,304		)
Portion of consideration attributable to performance of future services ⁽³⁾	(110,591		)
Fair value of common shares and OP Units purchase consideration	$	1,224,885

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⁽¹⁾	Represents the implied exchange ratio of one common share and OP Unit of JBG SMITH for 2.71 common shares and common limited partnership units prior to the Combination.


⁽²⁾	Represents the volume weighted average share price on July 18, 2017.

⁽³⁾

OP Unit consideration paid to certain of the owners of the JBG Assets, which have a fair value of $110.6 million, is subject to post-combination employment with vesting over periods of either 12 or 60 months and amortization is recognized as compensation expense over the period of employment in "General and administrative expense: Share-based compensation related to Formation Transaction and special equity awards" in our statements of operations.

The JBG Assets acquired on July 18, 2017 comprise: (i) 30 operating assets comprising 21 commercial assets totaling 4.1 million square feet (2.4 million square feet at our share) and nine multifamily assets with 2,883 units (1,099 units at our share); (ii) 11 commercial and multifamily assets under construction totaling over 2.5 million square feet (2.2 million square feet at our share); (iii) two near-term development commercial and multifamily assets totaling 401,000 square feet (242,000 square feet at our share); (iv) 26 future development assets totaling 11.7 million square feet (8.5 million square feet at our share) of estimated potential development density; and (v) JBG/Operating Partners, L.P., a real estate services company providing investment, development, asset management, property management, leasing, construction management and other services. Before the Combination, JBG/Operating Partners, L.P. was owned by 20 unrelated individuals, 19 of whom became our employees and three of whom serve on our Board of Trustees.

The following is a summary of the fair values of tangible and identified intangible assets and liabilities, which have definite lives:



	Total Fair Value		Weighted Average Amortization Period
	Total Fair Value		Weighted Average Amortization Period	Useful Life ⁽¹⁾
	(In thousands)		(In years)
Tangible assets:
Building and improvements	$	543,584		3 - 40 years
Tenant improvements	65,572			Shorter of useful life or remaining life of the respective lease
Total building and improvements	$	609,156
Leasehold improvements	$	4,422		Shorter of useful life or remaining life of the respective lease
Equipment	3,468			5 years
Total leasehold improvements and equipment	$	7,890
Identified intangible assets:
In-place leases	$	60,317	6.4	Remaining life of the respective lease
Above-market real estate leases	11,732		6.3	Remaining life of the respective lease
Below-market ground leases	332		88.5	Remaining life of the respective lease
Option to enter into ground lease	17,090		N/A	Remaining life of contract
Management and leasing contracts ⁽²⁾	48,900		7.5	Estimated remaining life of contracts, ranging between 3 - 9 years
Total identified intangible assets	$	138,371
Identified intangible liabilities:
Below-market real estate leases	$	8,687	10.3	Remaining life of the respective lease

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⁽¹⁾	In determining these useful lives, we considered the length of time the asset had been in existence, the maintenance history, as well as anticipated future maintenance, and any contractual stipulations that might limit the useful life.


⁽²⁾	Includesin-place property management, leasing, asset management and development management contracts.

The total revenue and net loss of the JBG Assets for the year ended December 31, 2017 included in our statements of operations from the acquisition date was $71.3 million and $23.1 million.