Investment in Unconsolidated Real Estate Ventures

3 Months Ended

Mar. 31, 2019

Equity Method Investments And Joint Ventures [Abstract]

INVESTMENT IN UNCONSOLIDATED REAL ESTATE VENTURES

4. INVESTMENT IN UNCONSOLIDATED REAL ESTATE VENTURES

As of March 31, 2019, the Company held ownership interests in ten unconsolidated Real Estate Ventures for an aggregate investment balance of $161.6 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 March 31, 2019, six real estate ventures owned properties that contain an aggregate of approximately 5.8 million net rentable square feet of office space; two real estate ventures owned 1.4 acres of land held for development; one real estate venture owned 1.3 acres of land in active development; and one real estate venture owned a residential tower that contains 321 apartment units.

The Company accounts for its unconsolidated interests in the Real Estate Ventures using the equity method. The Company’s unconsolidated interests range from 15% 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 $1.1 million and $1.3 million for the three-month periods ended March 31, 2019 and March 31, 2018, respectively.

The Company earned leasing commission income from its Real Estate Ventures of $0.2 million and $0.8 million for the three-month periods ended March 31, 2019, and March 31, 2018, respectively.

The Company had outstanding accounts receivable balances from its Real Estate Ventures of $0.8 million as of both March 31, 2019 and December 31, 2018.

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 March 31, 2019 and December 31, 2018 (in thousands):

	March 31, 2019		December 31, 2018
Net property	$	835,827	$	835,983
Other assets (a)		365,840		159,499
Other liabilities (a)		287,138		85,681
Debt, net (b)		490,840		365,707
Equity (c)		423,689		544,094

(a) The increase in ‘Other assets’ and ‘Other liabilities’ for the period ended March 31, 2019 compared to the period ended December 31, 2018 is due to the recording of the right of use asset and lease liability of $197.1 million and $249.3 million, respectively, for the MAP Venture ground lease upon adoption of Topic 842, which was adopted by the venture on January 1, 2019. 

(b) This amount increased as a result of third-party debt financing received by Herndon Innovation Center Venture, an unconsolidated real estate venture on March 29, 2019. See “Herndon Innovation Center Metro Portfolio Venture” section below for further information.

(c) 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--month periods ended March 31, 2019 and 2018, respectively (in thousands):

	Three-month period ended March 31, 2019
	evo at Cira Centre South (a)			MAP Venture			Other			Total
Revenue	$	-		$	18,288		$	16,771		$	35,059
Operating expenses		-			(12,155	)		(6,563	)		(18,718	)
Interest expense, net		-			(2,536	)		(1,384	)		(3,920	)
Depreciation and amortization		-			(6,349	)		(7,363	)		(13,712	)
Net income (loss)	$	-		$	(2,752	)	$	1,461		$	(1,291	)
Ownership interest %		50	%		50	%	(b)			(b)
Company's share of net income (loss)	$	-		$	(1,376	)	$	64		$	(1,312	)
Basis adjustments and other		-			(56	)		10			(46	)
Equity in income (loss) of Real Estate Ventures	$	-		$	(1,432	)	$	74		$	(1,358	)

	Three-month period ended March 31, 2018
	evo at Cira Centre South (a)			MAP Venture			Other			Total
Revenue	$	995		$	17,080		$	24,746		$	42,821
Operating expenses		(250	)		(10,307	)		(10,211	)		(20,768	)
Interest expense, net		(388	)		(3,791	)		(3,947	)		(8,126	)
Depreciation and amortization		(376	)		(4,701	)		(9,307	)		(14,384	)
Loss on early extinguishment of debt		(718	)		-			-			(718	)
Net income (loss)	$	(737	)	$	(1,719	)	$	1,281		$	(1,175	)
Ownership interest %		50	%		50	%	(b)			(b)
Company's share of net income (loss)	$	(369	)	$	(860	)	$	523		$	(706	)
Basis adjustments and other		11			7			(137	)		(119	)
Equity in income (loss) of Real Estate Ventures	$	(358	)	$	(853	)	$	386		$	(825	)

(a) The Company sold its 50% ownership interest in evo at Cira Centre South Venture during the first quarter of 2018.

(b) The Company’s unconsolidated ownership interests ranged from 15% to 70% during the three-month periods ended March 31, 2019 and 25% to 70% during the three-month periods ended March 31, 2018, subject to specified priority allocations of distributable cash in certain of the Real Estate Ventures.

MAP Venture

MAP Ground Lease Venture LLC (the “MAP Venture”), an unconsolidated real estate venture in which the Company holds a 50% ownership interest, is the lessee under a 99-year ground lease of land parcels underlying 58 office properties owned by the MAP Venture. Upon adoption of Topic 842, Leases on January 1, 2019, the MAP Venture determined that the carrying amount of the right of use asset was greater than the fair value of the underlying right of use asset. The fair value of the underlying right of use asset was determined using the purchase price paid by a third-party to acquire the ground lease. As a result, the venture recorded a $9.2 million cumulative effect of accounting change adjustment simultaneously with the recording of the right of use asset to reduce the value of the right of use asset to its estimated fair value. The Company recorded its $4.6 million proportionate share of the cumulative effect of accounting change adjustment through the "Cumulative earnings” caption on its consolidated balance sheets.

Herndon Innovation Center Metro Portfolio Venture, LLC

On March 29, 2019, Herndon Innovation Center Metro Portfolio Venture, LLC (“Herndon Innovation Center Venture”), in which the Company holds a 15% ownership interest, obtained $134.1 million of third-party debt financing, secured by four properties within the venture, with an initial advance of $113.1 million. On April 1, 2019, the venture received $111.0 million in net cash proceeds from the financing, of which $16.7 million was distributed to the Company for its share in the venture. The loan bears interest at LIBOR + 1.95% capped at a total maximum interest rate of 5.45% - 6.45% over the term of the loan and matures on March 29, 2024.

Guarantees

As of March 31, 2019, the Real Estate Ventures had aggregate indebtedness of $498.2 million. These loans are generally mortgage or construction loans, most of which are nonrecourse to the Company, except for customary carve-outs. As of March 31, 2019, the loans to Real Estate Ventures for which there is recourse to the Company consist of the following: (i) a $0.3 million payment guarantee on a loan with a $3.7 million outstanding principal balance, provided to PJP VII; and (ii) up to a $41.3 million payment guarantee on a $150.0 million construction loan provided to 4040 Wilson. In addition, during construction undertaken by Real Estate Ventures, including 4040 Wilson, 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.