4. INVESTMENT IN UNCONSOLIDATED REAL ESTATE VENTURES

As of September 30, 2017, the Company held ownership interests in 13 unconsolidated Real Estate Ventures for an aggregate investment balance of $236.3 million. The Company formed or acquired interests in these Real Estate Ventures with unaffiliated third parties to develop or manage office, residential and/or mixed-use properties or to acquire land in anticipation of possible development of office, residential and/or mixed-use properties. As of September 30, 2017, seven of the real estate ventures owned properties that contain an aggregate of approximately 7.8 million net rentable square feet of office space; four real estate ventures owned 5.7 acres of land held for development; and two real estate ventures owned residential towers that contain 345 and 321 apartment units, respectively.

The Company accounts for its unconsolidated interests in the Real Estate Ventures using the equity method. The Company’s unconsolidated interests range from 20% to 70%, subject to specified priority allocations of distributable cash in certain of the Real Estate Ventures.

The Company earned management fees from its Real Estate Ventures of $1.7 million and $4.9 million for the three- and nine-month periods ended September 30, 2017, respectively, and $1.7 million and $4.8 million for the three- and nine-month periods ended September 30, 2016, respectively.

The Company earned leasing commission income from its Real Estate Ventures of $0.4 million and $3.3 million for the three- and nine-month periods ended September 30, 2017, respectively, and $0.8 million and $1.9 million for the three- and nine-month periods ended September 30, 2016, respectively.

The Company has outstanding accounts receivable balances from its Real Estate Ventures of $1.1 million and $1.4 million as of September 30, 2017 and December 31, 2016, respectively.

The amounts reflected in the following tables (except for the Company’s share of equity and income) are based on the financial information of the individual Real Estate Ventures. The Company does not record operating losses of a Real Estate Venture in excess of its investment balance unless the Company is liable for the obligations of the Real Estate Venture or is otherwise committed to provide financial support to the Real Estate Venture.

The following is a summary of the financial position of the Real Estate Ventures in which the Company held interests as of September 30, 2017 and December 31, 2016 (in thousands):

	September 30, 2017		December 31, 2016
Net property	$	1,329,601	$	1,483,067
Other assets		205,631		231,972
Other liabilities		109,041		129,486
Debt, net		910,842		989,738
Equity		515,349		595,815

Company’s share of equity (Company’s basis) (a)	$	236,313	$	281,331

(a)

This amount includes the effect of the basis difference between the Company's historical cost basis and the basis recorded at the Real Estate Venture level, which is typically amortized over the life of the related assets and liabilities. Basis differentials occur from the impairment of investments, purchases of third party interests in existing Real Estate Ventures and upon the transfer of assets that were previously owned by the Company into a Real Estate Venture. In addition, certain acquisition, transaction and other costs may not be reflected in the net assets at the Real Estate Venture level.

The following is a summary of results of operations of the Real Estate Ventures in which the Company held interests during the three- and nine-month periods ended September 30, 2017 and 2016 (in thousands):

	Three-month periods ended September 30,						Nine-month periods ended September 30,
	2017			2016			2017			2016
Revenue	$	56,511		$	57,710		$	169,609		$	157,641
Operating expenses		(27,419	)		(27,592	)		(77,757	)		(81,347	)
Provision for impairment		-			(10,476	)		-			(10,476	)
Interest expense, net		(11,670	)		(12,102	)		(33,771	)		(32,019	)
Depreciation and amortization		(20,684	)		(22,722	)		(61,816	)		(63,125	)
Net loss (a)	$	(3,262	)	$	(15,182	)	$	(3,735	)	$	(29,326	)

Equity in loss of Real Estate Ventures (b)	$	(5,723	)	$	(7,254	)	$	(5,387	)	$	(9,323	)

(a)	The nine-month period ended September 30, 2016 amount includes $7.1 million of acquisition deal costs related to the formation of the MAP Venture.

(b)	The three- and nine-month periods ended September 30, 2017 include a $4.8 million other than temporary impairment charge related to the BDN-AI Venture that was recorded during the three months ended September 30, 2017.

Brandywine AI Venture – 7101 Wisconsin Property Sale

On December 20, 2011, the Company formed a real estate venture, Brandywine - AI Venture LLC, (the "BDN-AI Venture"), with Current Creek Investments, LLC ("Current Creek"), a wholly-owned subsidiary of Allstate Insurance Company. The Company and Current Creek each own a 50% interest in the BDN-AI Venture. The BDN-AI Venture owned six office properties, which the Company contributed three properties to the BDN-AI Venture upon its formation and three properties that were acquired by the BDN-AI Venture subsequent to its formation. The contributed office properties contain an aggregate of 587,317 net rentable square feet and consist of 3130 and 3141 Fairview Park Drive, both located in Falls Church, Virginia, and 7101 Wisconsin Avenue located in Bethesda, Maryland. On July 10, 2012, the BDN-AI Venture acquired three office properties containing an aggregate 510,202 net rentable square feet and consist of 1010 Wayne Avenue, 1100 Wayne Avenue and 8484 Georgia Avenue located in Silver Spring, Maryland.

On September 14, 2017, the BDN-AI Venture completed the sale of 7101 Wisconsin Avenue containing 230,904 rentable square feet located in Bethesda, Maryland, for a gross sales price of $105.7 million. At the time of sale, the property was encumbered by a $37.4 million of first mortgage financing, which was repaid in full resulting in a debt prepayment penalty of $0.8 million. Subsequent to the sales transaction, first mortgage payoff and closing costs, BDN-AI Venture received cash proceeds of $63.6 million. The Company was allocated 50% for its interest and received net cash proceeds of $31.8 million and recognized a $13.8 million gain on the real estate venture’s transaction. Subsequent to the sale transaction, the BDN-AI Venture owned 5 properties consisting of 874,479 rentable square feet and the Company’s equity method investment balance in the BDN-AI Venture was $49.1 million.

Brandywine AI Venture – Other Than Temporary Impairment

Each quarter, management estimates the fair value of its ownership interest in the Real Estate Ventures, considering the estimated fair value of the real estate assets owned by the Real Estate Ventures and the related indebtedness, as well as the working capital assets and liabilities of the Real Estate Ventures and the terms of the related Real Estate Venture agreements. The Company’s estimates of fair value of the real estate assets incorporate a number of assumptions that are subject to economic and market uncertainties including demand for space, competition for tenants, current market rental rates, changes in market rental rates, operating costs, capitalization rates, holding periods and discount rates. For these assumptions, the Company considered its experience and historical performance in the various markets and data provided by market research organizations. In assessing whether the impairment is other than temporary, the Company considers several factors. The longevity and severity of the impairment are considered as well as the expected time for recovery of value to occur, if ever.

As of September 30, 2017, the Company evaluated the recoverability of its investment basis in BDN-AI Venture utilizing a discounted cash flow model. Based on the Company’s evaluation of the fair value of the Company’s investment in the five remaining properties within BDN-AI Venture subsequent to the disposition of 7101 Wisconsin Avenue, it was determined that a continuing situation of weak demand for space and intense competition for tenants was leading to the Company’s share of fair value of the remaining properties to be less than its investment basis in the unconsolidated real estate venture. This continuing and sustained impairment in value, as suggested by the discounted cash flows and the other assessment considerations described above, caused the Company to conclude that the decline in value was other than temporary for its investment in the BDN-AI Venture. During the nine-month period ended September 30, 2017, the Company’s investment basis was $49.1 million, before a $4.8 million impairment charge. Subsequent to the impairment charge, the Company had a net basis of $44.3 million.

Determining the current fair value of the Company’s investment is based on a number of factors that are difficult to predict. The market may decline further and future impairment charges may be needed. The Company measured this impairment based on a discounted cash flow analysis, using a hold period of 10 years, a residual capitalization rate of 7.5% and discount rates ranging from 7.8% to 8.5%. The assumptions to determine fair value under the income approach are Level 3 inputs in accordance with the fair value hierarchy established by Accounting Standards Codification (ASC) Topic 820, “Fair Value Measurements and Disclosures.”

The Parc at Plymouth Meeting Venture

On January 31, 2017, the Company sold its 50% interest in TB-BDN Plymouth Apartments, L.P., a 50/50 real estate venture with Toll Brothers, at a gross sales value of $100.5 million, of which the Company was allocated 50% for its interest. The venture developed and operated a 398-unit multi-family complex in Plymouth Meeting, Pennsylvania encumbered by a $54.0 million construction loan. The construction loan was repaid commensurate with the sale of the Company’s 50% interest. As a result, the Company is no longer subject to a $3.2 million payment guarantee on the construction loan. The cash proceeds, after the payment of the Company’s share of the debt and closing costs, were $27.2 million. The carrying amount of the Company’s investment at the time of sale was $12.6 million, resulting in a $14.6 million gain on sale of interest in the real estate venture.

Guarantees

As of September 30, 2017, the Company’s unconsolidated real estate ventures had aggregate indebtedness to third parties of $915.0 million. These loans are generally mortgage or construction loans, most of which are non-recourse to the Company. As of September 30, 2017, the loans for which there is recourse to the Company consist of the following: (i) a $55.4 million payment guaranty on the term loan for evo at Cira Centre South; (ii) a joint and several cost overrun guaranty on the $88.9 million construction loan for the development project undertaken by 1919 Market Street LP; and (iii) a $0.4 million payment guarantee on a loan provided to PJP VII. In addition, during construction undertaken by real estate ventures, the Company has provided and expects to continue to provide cost overrun and completion guarantees, with rights of contribution among partners or members in the real estate ventures, as well as customary environmental indemnities and guarantees of customary exceptions to nonrecourse provisions in loan agreements. For additional information regarding these real estate ventures, including their indebtedness, see Note 4, "Investment in Unconsolidated Real Estate Ventures," in the notes to the audited financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016.