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Fair Value Measurements
 12 Months Ended
Dec. 31, 2014
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Fair Value Measurements
The Company’s financial assets and liabilities subject to fair value measurements are interest rate caps, interest rate swaps, TROR and borrowings subject to TROR (see Note H – Derivative Instruments and Hedging Activities). Impairment of real estate and unconsolidated entities is also subject to fair value measurements (see Note Q – Impairment of Real Estate and Impairment of Unconsolidated Entities, Note R – Net Gain (Loss) on Land Held for Divestiture Activity and Note X – 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 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 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, 2014, 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 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 TROR 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 TROR 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 TROR is classified in Level 3 of the fair value hierarchy.
To determine the fair value of the underlying borrowings subject to TROR, 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, 2014, the notional amount of TROR borrowings subject to fair value adjustments is approximately $366,985,000.
Items Measured at Fair Value on a Recurring Basis
The Company’s financial assets consist of interest rate caps, interest rate swaps and TROR with positive fair values included in other assets. The Company’s financial liabilities consist of interest rate swaps and TROR with negative fair values included in accounts payable, accrued expenses and other liabilities and borrowings subject to TROR 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. In the event the historical cost of the redeemable noncontrolling interest, which represents initial cost, adjusted for contributions, distributions and the allocation of profits or losses, is in excess of estimated fair value, the Company records the redeemable noncontrolling interest at historical cost.
The following table presents information about financial assets and liabilities and redeemable noncontrolling interest 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, 2014
 
Level 1
Level 2
Level 3
Total
 
(in thousands)
Interest rate caps
$
—

$
126

$
—

$
126

Interest rate swaps (liabilities)
—

(1,745
)
(73,536
)
(75,281
)
TROR (assets)
—

—

8,236

8,236

TROR (liabilities)
—

—

(27,081
)
(27,081
)
Fair value adjustment to the borrowings subject to TROR
—

—

5,604

5,604

Redeemable noncontrolling interest (1)
—

—

(183,038
)
(183,038
)
Total
$
—

$
(1,619
)
$
(269,815
)
$
(271,434
)
 
 
 
 
 
 
December 31, 2013
 
Level 1
Level 2
Level 3
Total
 
(in thousands)
Interest rate caps
$
—

$
155

$
—

$
155

Interest rate swaps (liabilities)
—

(498
)
(97,360
)
(97,858
)
TROR (assets)
—

—

903

903

TROR (liabilities)
—

—

(25,249
)
(25,249
)
Fair value adjustment to the borrowings subject to TROR
—

—

8,869

8,869

Redeemable noncontrolling interest
—

—

(171,743
)
(171,743
)
Total
$
—

$
(343
)
$
(284,580
)
$
(284,923
)

(1)
As of December 31, 2014, the redeemable noncontrolling interest is recorded at historical cost.
The following table presents a reconciliation of all 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
TROR
Fair value
adjustment
to the borrowings
subject to TROR
Total
TROR
Related
 
Total
 
(in thousands)
Balance, February 1, 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
)
Loss attributable to redeemable noncontrolling interest
17,095

 
—

 
—

—

—

 
17,095

Total realized and unrealized gains (losses):
 
 
 
 
 
 
 
 
 
Included in earnings
—

 
—

 
5,501

(3,265
)
2,236

 
2,236

Included in other comprehensive income
—

 
23,824

 
—

—

—

 
23,824

Included in additional paid-in capital
(28,390
)
 
—

 
—

—

—

 
(28,390
)
Balance, December 31, 2014
$
(183,038
)
 
$
(73,536
)
 
$
(18,845
)
$
5,604

$
(13,241
)
 
$
(269,815
)

As of December 31, 2013, the fair value of the redeemable noncontrolling interest was incorrectly recorded and presented at less than the historical cost. Management evaluated the impact of the error and determined the previously issued financial statements were not materially misstated. Additionally, management determined the impact of correcting the presentation of the redeemable noncontrolling interest is not material to the current period financial statements. Accordingly, at March 31, 2014, the Company corrected the carrying value of the redeemable noncontrolling interest by recording an adjustment of $28,390,000 to increase the redeemable noncontrolling interest with a corresponding decrease to additional paid-in capital. Such amount should have been reflected at December 31, 2013.
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, 2014:
 
Quantitative Information about Level 3 Fair Value Measurements
 
Fair Value December 31, 2014
Valuation
Technique
Unobservable
Input
Input Values
 
(in thousands)
 
 
 
Credit valuation adjustment of interest rate swap
$
3,740

Potential future exposure
Credit spread
4.00%
TROR
$
(18,845
)
Third party bond pricing
Bond valuation
75.59 - 109.71
Fair value adjustment to the borrowings subject to TROR
$
5,604

Third party bond pricing
Bond valuation
75.59 - 109.71

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 impact of changes in unobservable inputs used to determine the fair market value of the credit valuation adjustment, TROR and fair value adjustment to the borrowings subject to TROR are not deemed to be significant.
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 or the prevailing interest rate if long-term. 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 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), revolving credit facility, convertible senior debt and nonrecourse mortgage debt of development property held for sale:
 
December 31, 2014
 
December 31, 2013
 
Carrying Value
Fair Value
 
Carrying Value
Fair Value
 
(in thousands)
Fixed Rate Debt
$
2,993,591

$
3,421,373

 
$
3,281,337

$
3,488,406

Variable Rate Debt
1,944,610

1,924,823

 
1,998,169

1,954,136

Total
$
4,938,201

$
5,346,196

 
$
5,279,506

$
5,442,542