Net Gain on Disposition of Partial Interests in Rental Properties and Other Investment

6 Months Ended

Jul. 31, 2011

Net Gain Loss On Disposition Of Partial Interests In Rental Properties And Other Investments [Abstract]

Net Gain on Disposition of Partial Interests in Rental Properties and Other Investments

K. Net Gain on Disposition of Partial Interests in Rental Properties and Other Investment

The net gain on disposition of partial interests in rental properties and other investment is comprised of the following:

	Three Months Ended July 31,				Six Months Ended July 31,
	2011		2010		2011		2010
			(in thousands)
New York Retail Joint Venture	$	-	$	-	$	9,561	$	-
University Park Joint Venture		-		204,269		-		175,793
The Nets		-		55,112		-		55,112
Bernstein Joint Venture		-		-		-		29,342
	$	-	$	259,381	$	9,561	$	260,247

New York Retail Joint Venture

On March 29, 2011, the Company entered into joint venture agreements with an outside partner, an affiliated entity of Madison International Realty LLC. The outside partner invested in a total of 15 retail properties located in the New York City metropolitan area. The outside partner received a 49% equity interest in 15 mature retail properties, 14 of which were formerly wholly-owned by the Company and one retail property that was owned 75% by the Company.

For its 49% equity interests, the outside partner invested cash and assumed debt of $244,952,000, representing 49% of the nonrecourse mortgage debt on the 15 properties. As of July 31, 2011, the Company received proceeds of $178,286,000, primarily in the form of a loan. Based on the net amount of cash received, the outside partner’s minimum initial investment requirement of 20% was not met. As such, the transaction did not qualify for full gain recognition under accounting guidance related to real estate sales. Therefore, the installment method of gain recognition was applied, resulting in a net gain on disposition of partial interest in rental properties of $9,561,000 during the six months ended July 31, 2011 with the remaining gain of $115,388,000 deferred and included in accounts payable and accrued expenses at July 31, 2011. Transaction costs totaled $11,776,000, of which, $5,779,000 relating to participation payments made to the ground lessors of two of the properties in accordance with the respective ground lease agreements, did not qualify for deferral and were included in the calculation of the net gain on disposition of partial interests in rental properties of $9,561,000 for the six months ended July 31, 2011. As a result of this transaction, the Company is accounting for the 15 properties as equity method investments since both partners have joint control of the properties.

University Park Joint Venture

On February 22, 2010, the Company formed a joint venture with an outside partner, HCN FCE Life Sciences, LLC, to acquire seven life science office buildings in the Company’s mixed-use University Park project in Cambridge, Massachusetts, formerly wholly-owned by the Company.

For its 49% share of the joint venture, the outside partner invested cash and the joint venture assumed approximately $320,000,000 of nonrecourse mortgage debt on the seven buildings. In exchange for the contributed ownership interest, the Company received net cash proceeds of $140,545,000, of which $135,117,000 was in the form of a loan from the joint venture, during the six months ended July 31, 2010.

During the first quarter of 2010, six of the seven properties had been contributed to the joint venture. Based on the form and timing of the proceeds received from the contribution of the first six properties, the transaction did not qualify for full gain recognition under accounting guidance related to real estate sales, resulting in a deferred gain of $188,410,000 recorded at April 30, 2010. Transaction costs of $28,476,000 related to the closing of the six properties did not qualify for deferral and were included as a loss on disposition of partial interests in rental properties and other investment for the three months ended April 30, 2010. Included in those transaction costs were $21,483,000 of participation payments made to the ground lessor of the six properties in accordance with the respective ground lease agreements.

During the second quarter of 2010, contribution of the seventh property closed and the cash received exceeded the threshold to allow for full gain recognition. As a result, the Company recognized the gain deferred at April 30, 2010 plus the net gain associated with the contribution of the seventh building which amounted to a gain on partial disposition in rental properties of $204,269,000 for the three months ended July 31, 2010. The gain recognized upon the contribution of the seventh building is net of additional transaction costs of $2,792,000 which includes $1,768,000 of participation payments made to the ground lessor of the seventh property in accordance with the ground lease agreement. As a result of this transaction, the Company is accounting for the new joint venture and the seven properties as equity method investments since both partners have joint control of the new venture and the properties.

The Nets

On May 12, 2010, entities controlled by Mikhail Prokhorov (“MP Entities”) invested $223,000,000 and made certain funding commitments to acquire 80% of The Nets, 45% of Brooklyn Arena, LLC (“Arena”), the entity that through its subsidiaries is overseeing the construction of and has a long-term lease in the Barclays Center arena, and the right to purchase up to 20% of Atlantic Yards Development Company, LLC, which will develop non-arena real estate.

The transaction resulted in a change of controlling ownership interest in The Nets and a pre-tax net gain recognized by the Company of $55,112,000 ($31,437,000 after noncontrolling interest). This net gain is comprised of the gain on the transfer of ownership interest combined with the adjustment to fair value of the 20% retained noncontrolling interest.

In accordance with accounting guidance on real estate sales, the sale of 45% interest in Arena was not deemed a culmination of the earning process since no cash was withdrawn; therefore the transaction does not have an earnings impact.

The MP Entities have the right to put their Arena ownership interests to the Company during a four-month period following the ten-year anniversary of the completion of the Barclays Center arena for fair market value, as defined in the agreement. Due to the put option, the noncontrolling interest is redeemable and does not qualify as permanent equity. As a result, this is recorded as redeemable noncontrolling interest in the mezzanine section of the Company’s consolidated balance sheet and will be reported at redemption value, which represents fair market value, on a recurring basis.

NS&E has a similar right to put its noncontrolling interest in The Nets to the MP Entities at fair market value during the same time period as the MP Entities have their put right on Arena.

Bernstein Joint Venture

On February 19, 2010 the Company formed a new joint venture with the Bernstein Development Corporation to hold the Company’s previously held investment interests in three residential properties totaling 1,340 rental units located within the Washington, D.C. metropolitan area. Both partners in the new joint venture have a 50% interest and joint control over the properties.

The Company received $28,922,000 in cash proceeds and the joint venture assumed $163,000,000 of the nonrecourse mortgage debt on the properties resulting in gains on disposition of partial interests in rental properties and other investment of $29,342,000 for the six months ended July 31, 2010. As a result of this transaction, the Company is accounting for the new joint venture and the three properties as equity method investments since both partners have joint control of the new venture and the properties.