Fair Value Measurements

The Company’s financial assets and liabilities subject to fair value measurements are interest rate caps, interest rate swap agreements, TRS and borrowings subject to TRS (see Note I – Derivative Instruments and Hedging Activities). The Company’s impairment of real estate and unconsolidated entities is also subject to fair value measurements (see Note L – Land Held for Divestiture, Note T – Impairment of Real Estate, Impairment of Unconsolidated Entities and Write-Off of Abandoned Development Projects and Demolition Costs and Note V – Discontinued Operations and Gain (Loss) on Disposition of Rental Properties).

Fair Value Hierarchy

The accounting guidance related to estimating fair value specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions that other market participants would use based upon market data obtained from independent sources (also referred to as observable inputs). The following summarizes the fair value hierarchy:


•	Level 1 – Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;


•	Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant observable inputs are available, either directly or indirectly, such as interest rates and yield curves that are observable at commonly quoted intervals; and


•	Level 3 – Prices or valuations that require inputs that are unobservable.

Inputs used to measure fair value may fall into different levels of the fair value hierarchy. In these cases, the level in the fair value hierarchy is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

Measurement of Fair Value

The Company estimates the fair value of its hedging instruments based on interest rate market and bond pricing models. Although the Company has determined that the significant inputs used to value its hedging instruments fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with the Company’s counterparties and its own credit risk utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. As of December 31, 2013, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its hedging instruments’ positions and has determined that the credit valuation adjustments are significant to the overall valuation of one interest rate swap and are not significant to the overall valuation of all of its other hedging instruments. As a result, one interest rate swap is classified in Level 3 and the remaining hedging instruments valuations are classified in Level 2.

The Company’s TRS have termination values equal to the difference between the fair value of the underlying bonds and the bonds base (acquired) price times the stated par amount of the bonds. Upon termination of the contract with the counterparty, the Company is entitled to receive the termination value if the underlying fair value of the bonds is greater than the base price and is obligated to pay the termination value if the underlying fair value of the bonds is less than the base price. The underlying borrowings generally have call features at par and without prepayment penalties. The call features of the underlying borrowings would result in a significant discount factor to any value attributed to the exchange of cash flows in these contracts by another market participant willing to purchase the Company’s positions. Therefore, the Company believes the termination value of the TRS approximates the fair value another market participant would assign to these contracts. The Company compares estimates of fair value to those provided by the respective counterparties on a quarterly basis. The Company has determined its fair value estimate of TRS is classified in Level 3 of the fair value hierarchy.

To determine the fair value of the underlying borrowings subject to TRS, the base price is initially used as the estimate of fair value. The Company adjusts the fair value based upon observable and unobservable measures such as the financial performance of the underlying collateral, interest rate risk spreads for similar transactions and loan to value ratios. In the absence of such evidence, management’s best estimate is used. At December 31, 2013, the notional amount of TRS borrowings subject to fair value adjustments is approximately $358,755,000.

Items Measured at Fair Value on a Recurring Basis

The Company’s financial assets consist of interest rate caps, interest rate swap agreements and TRS with positive fair values included in other assets. The Company’s financial liabilities consist of interest rate swap agreements and TRS with negative fair values included in accounts payable, accrued expenses and other liabilities and borrowings subject to TRS included in mortgage debt and notes payable, nonrecourse. The Company records the redeemable noncontrolling interest related to Brooklyn Arena, LLC at redemption value, which approximates fair value.

The following table presents information about financial assets and liabilities and redeemable noncontrolling interest that were measured at fair value on a recurring basis, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value:



	Fair Value Measurements
	December 31, 2013
	Level 1		Level 2			Level 3			Total
	(in thousands)
Interest rate caps	$	—	$	155		$	—		$	155
Interest rate swap agreements (liabilities)	—		(498		)	(97,360		)	(97,858		)
TRS (assets)	—		—			903			903
TRS (liabilities)	—		—			(25,249		)	(25,249		)
Fair value adjustment to the borrowings subject to TRS	—		—			8,869			8,869
Redeemable noncontrolling interest	—		—			(171,743		)	(171,743		)
Total	$	—	$	(343	)	$	(284,580	)	$	(284,923	)

	January 31, 2013
	Level 1		Level 2			Level 3			Total
	(in thousands)
Interest rate caps	$	—	$	7		$	—		$	7
Interest rate swap agreements (assets)	—		241			—			241
Interest rate swap agreements (liabilities)	—		(3,016		)	(126,506		)	(129,522		)
TRS (assets)	—		—			21,066			21,066
TRS (liabilities)	—		—			(26,202		)	(26,202		)
Fair value adjustment to the borrowings subject to TRS	—		—			9,950			9,950
Redeemable noncontrolling interest	—		—			(239,136		)	(239,136		)
Total	$	—	$	(2,768	)	$	(360,828	)	$	(363,596	)

The following table below presents a reconciliation of financial assets and liabilities and redeemable noncontrolling interest measured at fair value on a recurring basis using significant unobservable inputs (Level 3):



	Fair Value Measurements
	Redeemable Noncontrolling Interest			Interest Rate Swaps			Net TRS			Fair value adjustment to the borrowings subject to TRS			Total TRS Related			Total
	(in thousands)
Balance, February 1, 2012	$	(229,149	)	$	(143,303	)	$	(15,013	)	$	9,180		$	(5,833	)	$	(378,285	)
Transfers in	—			—			(2,125		)	—			(2,125		)	(2,125		)
Contribution from redeemable noncontrolling interest	(11,348		)	—			—			—			—			(11,348		)
Loss attributable to redeemable noncontrolling interest	9,785			—			—			—			—			9,785
Total realized and unrealized gains (losses):
Included in earnings	—			—			11,798			770			12,568			12,568
Included in noncontrolling interest	—			—			204			—			204			204
Included in other comprehensive income	—			16,797			—			—			—			16,797
Included in additional paid-in capital	(8,424		)	—			—			—			—			(8,424		)
Balance, January 31, 2013	$	(239,136	)	$	(126,506	)	$	(5,136	)	$	9,950		$	4,814		$	(360,828	)
Loss attributable to redeemable noncontrolling interest	16,847			—			—			—			—			16,847
Total realized and unrealized gains (losses):
Included in earnings	—			—			(10		)	(1,081		)	(1,091		)	(1,091		)
Included in other comprehensive income	—			29,146			—			—			—			29,146
Included in additional paid-in capital	50,546			—			—			—			—			50,546
Settlement	—			—			(19,200		)	—			(19,200		)	(19,200		)
Balance, December 31, 2013	$	(171,743	)	$	(97,360	)	$	(24,346	)	$	8,869		$	(15,477	)	$	(284,580	)

The following table presents quantitative information about the significant unobservable inputs used to estimate the fair value of financial instruments measured on a recurring basis as of December 31, 2013:



	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value December 31, 2013			Valuation Technique	Unobservable Input	Range of Input Values
	(in thousands)
Credit valuation adjustment of interest rate swap	$	7,023		Potential future exposure	Credit spread	4.25%
TRS	$	(24,436	)	Bond quote	Discount rate	N/A ⁽¹⁾
					Capitalization rate	N/A ⁽¹⁾
Fair value adjustment to the borrowings subject to TRS	$	8,869		Bond quote	Discount rate	N/A ⁽¹⁾
					Capitalization rate	N/A ⁽¹⁾
Redeemable noncontrolling interest	$	(171,743	)	Discounted cash flows	Discount rate	9.89%


(1)	The Company does not have access to certain significant unobservable inputs used by third parties to determine these fair values.

Third party service providers involved in fair value measurements are evaluated for competency and qualifications. Fair value measurements, including unobservable inputs, are evaluated based on current transactions and experience in the real estate and capital markets.

The Company does not deem the impact of changes in unobservable inputs used to determine the fair market value of the credit valuation adjustment, TRS and fair value adjustment to the borrowings subject to TRS to be significant; however, changes in the discount rate used to determine the fair market value of the redeemable noncontrolling interest could have a significant impact on its fair market value.

Fair Value of Other Financial Instruments

The carrying amount of notes and accounts receivable, excluding the Stapleton advances, and accounts payable, accrued expenses and other liabilities approximates fair value based upon the short-term nature of the instruments. The carrying amount of the Stapleton advances approximates fair value since the interest rates on these advances approximates current market rates. The Company estimates the fair value of its debt instruments by discounting future cash payments at interest rates that the Company believes approximate the current market. Estimated fair value is based upon market prices of public debt, available industry financing data, current treasury rates, recent financing transactions and loan to value ratios. The fair value of the Company’s debt instruments is classified as Level 3 in the fair value hierarchy.

The following table summarizes the fair value of nonrecourse mortgage debt and notes payable (exclusive of the fair value of derivatives), bank revolving credit facility, senior and subordinated debt and nonrecourse mortgage debt and notes payable of land held for divestiture and development project held for sale:



	December 31, 2013				January 31, 2013
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
Fixed Rate Debt	$	3,281,337	$	3,488,406	$	4,791,113	$	5,147,849
Variable Rate Debt	1,998,169		1,954,136		1,982,516		1,940,374
Total	$	5,279,506	$	5,442,542	$	6,773,629	$	7,088,223