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. The impairments recorded during the three and nine months ended October 31, 2013 and 2012 represent write-downs to estimated fair value due to a change in events, such as a bona fide third-party purchase offer 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, which represents Level 3 inputs.

The following table summarizes the Company's impairment of real estate included in continuing operations:



		Three Months Ended October 31,				Nine Months Ended October 31,
		2013		2012		2013		2012
		(in thousands)
LiveWork Las Vegas	Las Vegas, Nevada	$	112,838	$	—	$	112,838	$	—
Regional Malls:
Promenade Bolingbrook	Bolingbrook, Illinois	54,194		—		54,194		—
Orchard Town Center	Westminster, Colorado	15,649		—		15,649		—
Office Buildings:
Building J at Illinois Science and Technology Park	Skokie, Illinois	17,474		—		17,474		—
Halle Building	Cleveland, Ohio	—		30,200		—		30,200
Investment in triple net lease retail property	Kansas City, Missouri	—		—		6,870		—
Other		—		—		1,185		460
		$	200,155	$	30,200	$	208,210	$	30,660

During the three months ended October 31, 2013, the Company continued to execute its strategy of focusing on core products located in core markets. In executing this strategy, the Company made a strategic business decision to reduce the expected level of development at LiveWork Las Vegas, a mixed-use project on a 13.5 acre parcel in Las Vegas, Nevada and consider ways to maximize the near-term value of the investment, which may include build to suit development, equity joint venture or marketing a portion of the land parcels to third parties. The change in strategy reduced the estimated hold period and expected cash flows. As a result, the Company’s estimated 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. As such, the Company recorded an impairment charge of $112,838,000 during the three and nine months ended October 31, 2013.

During the three months ended October 31, 2013, the Company continued to make progress on the marketing of Promenade Bolingbrook and Orchard Town Center, two of its regional malls. At October 31, 2013, discussions with potential purchasers are in various stages and remain subject to further negotiation and applicable due diligence periods. However, based on the status of the discussions, the possibility of a sale of the assets has increased and is reasonably possible. As a result, the Company reviewed and updated each impairment analysis during the three months ended October 31, 2013. The estimated probability weighted undiscounted cash flows no longer exceed the carrying value of the asset requiring the Company to adjust the carrying value to their estimated fair value. As such, the Company recorded impairment charges on Promenade Bolingbrook and Orchard Town Center of $54,194,000 and $15,649,000, respectively, during the three and nine months ended October 31, 2013.

During the three months ended October 31, 2013, the Company made a strategic business decision to modify its redevelopment plan for Building J at Illinois Science and Technology Park. The building, currently vacant, would require a significant amount of capital in order to re-tenant and continue to hold on a long term basis. The Company has determined it is no longer willing to invest any additional capital in this building without a tenant for a substantial portion of the building or without some form of significant financial subsidy. As a result of this decision, the Company's estimated 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. As such, the Company recorded an impairment charge of $17,474,000 during the three and nine months ended October 31, 2013.

During the three months ended October 31, 2013, the Company signed a nonbinding memorandum of understanding with an exclusivity period expiring December 15, 2013 (the “MOU”) with an affiliate of Greenland Group Co., an unrelated third party, for a proposed joint venture (the “JV”) to develop Brooklyn Atlantic Yards, a 22 acre residential and commercial real estate project in Brooklyn, New York (the “AY project”). The JV remains subject to negotiation and necessary United States and China regulatory approvals. Based on the signing of the MOU, the Company reviewed and updated the AY project impairment analysis during the three months ended October 31, 2013. The updated undiscounted cash flow impairment analysis is based on several reasonably possible alternative courses of action and the estimated likelihood of each scenario occurring. These estimated probability weighted undiscounted cash flows exceeded the carrying value of the AY project as of October 31, 2013, and therefore, no impairment charge was recorded during the three months ended October 31, 2013. Significant estimates were made in the determination of the future undiscounted cash flows, including construction timing and costs, expected future rents and operating expenses from the vertical development, holding periods, cash proceeds at the end of the estimated holding period and the probability of the various reasonably possible scenarios. Changes to the estimates made by management could affect whether or not any impairment would be required. If the MOU does not result in a final executed joint venture, the Company will consider marketing the opportunity to other third parties. If the Company enters into a joint venture with the Greenland Group affiliate or another third party and the terms result in the Company granting joint control or losing control of the AY project, the Company may be required to deconsolidate the AY project. Upon deconsolidation, the investment balance would be compared to the estimated fair value and recorded at the lesser of fair value or book value. If this outcome were to occur, the Company would record an estimated impairment charge ranging from $250,000,000 to $350,000,000.

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, had continued to lose tenants in 2012 and required 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 have increased the sales price. The Company determined it was 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 the 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 recorded an impairment charge of $30,200,000 during the three and nine months ended October 31, 2012.

Impairment of Real Estate - Discontinued Operations

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:



		Three Months Ended October 31,				Nine Months Ended October 31,
		2013		2012		2013		2012
		(in thousands)
Investment in triple net lease retail property	Portage, Michigan	$	—	$	—	$	—	$	2,263
White Oak Village (Specialty Retail Center)	Richmond, Virginia	—		—		—		1,566
Other		—		164		—		425
		$	—	$	164	$	—	$	4,254

The following table presents quantitative information about the significant unobservable inputs used to determine the fair value of the impairment of real estate (including discontinued operations) for the nine months ended October 31, 2013 and 2012:



	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value		Valuation Technique	Unobservable Input	Range of Input Values
	(in thousands)
October 31, 2013
Impairment of real estate	$	212,204	Indicative Bids	Indicative Bids	N/A ⁽¹⁾
Impairment of real estate	$	29,500	Comparable Property Market Analysis	Price Per Square Foot	$22 to $55 per square foot ⁽²⁾
October 31, 2012
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 bona fide purchase offers from third party prospective buyers, subject to the Company’s corroboration for reasonableness.


(2)	Weighted average price is $45 per square foot.

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, all of 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 Company recorded no impairments of unconsolidated entities during the three and nine months ended October 31, 2013. The Company recorded $0 and $390,000 of impairments of unconsolidated entities during the three and nine months ended October 31, 2012.

Write-Off of Abandoned Development Projects

On a quarterly basis, the Company reviews each project under development to determine whether it is probable that the project will be developed. If management determines that the project will not be developed, project costs and other expenses related to the project are written off and expensed as an abandoned development project cost. The Company abandons 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 $26,540,000 and $29,317,000 during the three and nine months ended October 31, 2013, respectively, and $370,000 and $14,029,000 during the three and nine months ended October 31, 2012, respectively, which were recorded in operating expenses.