Impairment of Real Estate, Impairment of Unconsolidated Entities and Write-Off of Abandoned Development Projects

Impairment of Real Estate

The Company reviews its real estate portfolio, including land held for development and sale, for impairment whenever events or changes indicate that its carrying value may not be recoverable. In cases where the Company does not expect to recover its carrying costs, an impairment charge is recorded. In order to determine whether the carrying costs are recoverable from estimated future undiscounted cash flows, the Company uses various assumptions that include future net operating income, estimated holding periods, risk of foreclosure and estimated cash proceeds received upon the disposition of the asset. If the carrying costs are not recoverable, the Company is required to record an impairment to reduce the carrying costs to estimated fair value. The assumptions used to estimate fair value are considered to be Level 2 or 3 inputs. The Company’s assumptions were based on current information. If the conditions mentioned above continue to deteriorate, or if the Company’s plans regarding its assets change, additional impairment charges may occur in the future.

The impairments recorded during the years ended January 31, 2013, 2012 and 2011 represent write-downs to estimated fair value due to a change in events, such as a change in strategy for certain assets, bona fide third-party purchase offers or changes in certain assumptions, including estimated holding periods and current market conditions and the impact of these assumptions to the properties’ estimated future cash flows.

The following table summarizes the Company’s impairment of real estate included in continuing operations.



		Years Ended January 31,
		2013		2012		2011
		(in thousands)
Halle Building (Office Building)	Cleveland, Ohio	$	30,200	$	—	$	—
Development property at Waterfront Station	Washington, D.C.	—		—		3,103
Other		460		235		1,660
		$	30,660	$	235	$	4,763

During 2012, preliminary negotiations with a potential tenant to lease a majority of the Halle Building were discontinued by the Company, as the Company was unwilling to invest the significant amount of capital necessary to execute the proposed lease. As a result, the Company began evaluating several long-term strategies for the building, as it has below average occupancy, has continued to lose tenants in 2012 and requires significant capital investment. The strategies considered included a near-term disposition of the asset in its current state, investing significant capital to re-tenant the space and hold on a long term basis, or invest additional capital to position the asset for sale, which may increase the sales price. The Company determined it is not likely to invest any significant additional capital and would pursue the repositioning of the asset for redevelopment through a joint venture or exploration of an outright sale. The change in strategy reduced the long-term hold probability and our estimated probability weighted undiscounted cash flows no longer exceed the carrying value of the asset requiring the Company to adjust the carrying value to its estimated fair value of $10,500,000. As such, the Company has recorded an impairment charge of $30,200,000 during the year ended January 31, 2013.

In addition, the Company had impairments related to consolidated real estate assets that were disposed of during the periods presented. The following table summarizes the Company’s impairment of real estate included in discontinued operations.



		Years Ended January 31,
		2013		2012		2011
		(in thousands)
Investment in triple net lease retail property	Portage, Michigan	$	2,263	$	3,435	$	—
White Oak Village (Specialty Retail Center)	Richmond, Virginia	1,566		—		—
250 Huron (Office Building)	Cleveland, Ohio	—		10,257		2,040
Simi Valley Town Center (Regional Mall)	Simi Valley, California	—		—		76,962
Investment in triple net lease retail property	Pueblo, Colorado	—		—		2,641
Other		425		—		—
		$	4,254	$	13,692	$	81,643

In 2008, 250 Huron was vacated by its single tenant that occupied the entire building. A lease termination payment received by the Company was placed into escrow for the purpose of servicing the nonrecourse mortgage debt until new tenants for the building could be obtained. During 2010, the Company entered into an option to sell the building at a sales price that was below the carrying value, resulting in an impairment charge of $2,040,000 during the year ended January 31, 2011. Unable to obtain the necessary lender approval for the purchaser to assume the nonrecourse mortgage debt, the option to sell expired in August 2011. Subsequently, the Company received a notice of default from the loan servicer. As a result, the Company no longer intended to hold the property long term and dramatically shortened its estimated holding period. This reduced estimate of future undiscounted cash flows was not sufficient to recover the carrying value of the asset, resulting in an impairment charge of $10,257,000 during the year ended January 31, 2012. The impairment, which was recorded prior to the ultimate disposition, resulted in the carrying value of the real estate being less than the nonrecourse mortgage. During December 2011, the lender sold the nonrecourse mortgage debt to a third party with whom the Company entered into negotiations to transfer the property to in full satisfaction of the outstanding nonrecourse mortgage debt balance. During January 2012, the Company transferred the property to the new nonrecourse mortgage debt holder in full satisfaction of the debt. As a result, the Company recorded a gain on disposition of $9,428,000 for the year ended January 31, 2012. Upon disposition, the Company reclassified all revenues and expenses, as well as the gain, to discontinued operations.

Occupancy levels and estimated future cash flows were significantly decreasing during 2010 at Simi Valley Town Center due to the consolidation of two anchor stores at the property, greater competition than originally anticipated and the general economic downturn. The Company had ongoing discussions with the mortgage lender regarding the performance of the property and the expectation that it would be unable to generate sufficient cash flow to cover the debt service of the nonrecourse mortgage note. During the year ended January 31, 2011, the mortgage lender determined it wanted to exit the investment by selling the nonrecourse mortgage note and the Company agreed to transfer the property to the purchaser of the nonrecourse mortgage upon a sale. Based on these events and changes in circumstances, the Company dramatically shortened its estimated asset holding period. As a result, estimated future undiscounted cash flows were not sufficient to recover the carrying value and the asset was recorded at its estimated fair value, resulting in an impairment charge of $76,962,000 during the year ended January 31, 2011. The impairment, which was recorded prior to the ultimate disposition in December 2010, resulted in the carrying value of the real estate being less than the nonrecourse mortgage. As a result, upon disposition, the Company recorded a gain of $46,802,000 for the year ended January 31, 2011. Upon disposition, the Company reclassified all revenues and expenses, as well as the gain, to discontinued operations.

In addition, the Company recorded impairments of real estate for other properties included in discontinued operations as described in the table above. These impairments represent a write down to the estimated fair value due to changes in events, related to a bona fide third-party purchase offer and consideration of current market conditions and the impact of these events to the properties’ estimated future cash flows.

The following table presents quantitative information about the significant unobservable inputs used to determine the fair value of the non-recurring impairment of real estate (including discontinued operations) for the year ended January 31, 2013:



	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value January 31, 2013		Valuation Technique	Unobservable Input	Range of Input Values
	(in thousands)
Impairment of real estate	$	83,193	Indicative Bids	Indicative Bids	N/A ⁽¹⁾
Impairment of real estate	10,500		Discounted Cash Flow	Discount Rate	10.0%


(1)	These fair value measurements were derived from five bona fide purchase offers from third party prospective buyers, subject to the Company’s corroboration for reasonableness.

Impairment of Unconsolidated Entities

The Company reviews its portfolio of unconsolidated entities for other-than-temporary impairments whenever events or changes indicate that its carrying value in the investments may be in excess of fair value. An equity method investment’s value is impaired if management’s estimate of its fair value is less than the carrying value and the difference is deemed to be other-than-temporary. In order to arrive at the estimates of fair value, the Company uses varying assumptions that may include comparable sale prices, market discount rates, market capitalization rates and estimated future discounted cash flows specific to the geographic region and property type, which are considered to be Level 3 inputs. For newly opened properties, assumptions also include the timing of initial lease up at the property. In the event the initial lease up assumptions differ from actual results, estimated future discounted cash flows may vary resulting in impairment charges in future periods.

The following table summarizes the Company’s impairment of unconsolidated entities.



		Years Ended January 31,
		2013		2012		2011
		(in thousands)
Specialty Retail Centers:
Village at Gulfstream Park	Hallandale Beach, Florida	$	—	$	35,674	$	35,000
Metreon	San Francisco, California	—		—		4,595
Commercial land and development rights	Cleveland, Ohio	—		4,610		—
Four Museum Park properties at Central Station	Chicago, Illinois	—		—		18,311
Office Buildings:
818 Mission Street	San Francisco, California	—		—		4,018
Bulletin Building	San Francisco, California	—		—		3,543
Other		390		—		6,992
		$	390	$	40,284	$	72,459

The impairments recorded during the years ended January 31, 2012 and 2011 at Village at Gulfstream Park represent other-than-temporary impairments in the Company’s equity method investment. The specialty retail center was fully opened in February 2010 and was leased during the general economic downturn, which resulted in a longer initial lease up period than originally projected and increased rent concessions to the existing tenant base. Based on these conditions, management revised its estimate of future discounted cash flows, which are a key component in estimating fair value, resulting in an impairment charge of $35,000,000 during the year ended January 31, 2011. During the year ended January 31, 2012, the general economic conditions continued to negatively impact the operating results at the specialty retail center. The specialty retail center continued to experience a slower than anticipated lease-up period and had not reached the expected level of cash flows used in previous estimates of fair value. Based on these conditions, management revised its estimate of future discounted cash flows downward. As a result, the Company’s equity method investment was recorded at its estimated fair value, resulting in an additional impairment charge of $35,674,000 during the year ended January 31, 2012. During the year ended January 31, 2013, the Company disposed of its equity method investment in Village at Gulfstream Park.

The impairments recorded during the year ended January 31, 2011 at Central Station, a mixed-use land development project in Chicago, Illinois, represent other-than-temporary impairments in the Company’s investments of four unconsolidated entities that hold investments in certain condominium buildings. Due to the continued price deterioration of the Chicago condominium market, the Company made a strategic business decision during the year ended January 31, 2011 to rent some of the condominium units. This decision combined with other changes in circumstances resulted in a reduction of estimated discounted cash flows expected from these entities, which are a key component in the associated fair value estimates. As a result, the investments in the unconsolidated entities were recorded at these reduced estimated fair values as of January 31, 2011, resulting in the impairment charges during the year ended January 31, 2011.

Write-Off of Abandoned Development Projects

On a quarterly basis, the Company reviews each project under development to determine whether it is probable the project will be developed. If management determines that the project will not be developed, project costs are written off as an abandoned development project cost. The Company abandons certain projects under development for a number of reasons, including, but not limited to, changes in local market conditions, increases in construction or financing costs or third party challenges related to entitlements or public financing. The Company wrote off abandoned development projects of $26,850,000, $8,838,000 and $9,195,000 for the years ended January 31, 2013, 2012 and 2011, respectively.