Mack-Cali Realty 10-Q 2006
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
MACK-CALI REALTY CORPORATION
Consolidated Balance Sheets as of June 30, 2006
Consolidated Statements of Operations for the three and six month
Consolidated Statement of Changes in Stockholders Equity for the
Consolidated Statements of Cash Flows for the six months
MACK-CALI REALTY CORPORATION
Part I Financial Information
The accompanying unaudited consolidated balance sheets, statements of operations, of changes in stockholders equity, and of cash flows and related notes thereto, have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. The financial statements reflect all adjustments consisting only of normal, recurring adjustments, which are, in the opinion of management, necessary for a fair presentation for the interim periods.
The aforementioned financial statements should be read in conjunction with the notes to the aforementioned financial statements and Managements Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included in Mack-Cali Realty Corporations Annual Report on Form 10-K for the fiscal year ended December 31, 2005.
The results of operations for the three and six month periods ended June 30, 2006 are not necessarily indicative of the results to be expected for the entire fiscal year or any other period.
MACK-CALI REALTY CORPORATION AND SUBSIDIARIES
MACK-CALI REALTY CORPORATION AND SUBSIDIARIES
MACK-CALI REALTY CORPORATION AND SUBSIDIARIES
MACK-CALI REALTY CORPORATION AND SUBSIDIARIES
MACK-CALI REALTY CORPORATION AND SUBSIDIARIES
Mack-Cali Realty Corporation, a Maryland corporation, together with its subsidiaries (collectively, the Company), is a fully-integrated, self-administered, self-managed real estate investment trust (REIT) providing leasing, management, acquisition, development, construction and tenant-related services for its properties and third-parties. As of June 30, 2006, the Company owned or had interests in 319 properties plus developable land (collectively, the Properties). The Properties aggregate approximately 35.8 million square feet, which are comprised of 212 office buildings and 96 office/flex buildings, totaling approximately 35.4 million square feet (which include 42 office buildings and one office/flex building aggregating 5.2 million square feet owned by unconsolidated joint ventures in which the Company has investment interests), six industrial/warehouse buildings totaling approximately 387,400 square feet, two retail properties totaling approximately 17,300 square feet, a hotel (which is owned by an unconsolidated joint venture in which the Company has an investment interest) and two parcels of land leased to others. The Properties are located in nine states, primarily in the Northeast, plus the District of Columbia.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include all accounts of the Company, its majority-owned and/or controlled subsidiaries, which consist principally of Mack-Cali Realty, L.P. (the Operating Partnership) and variable interest entities for which the Company has determined itself to be the primary beneficiary, if any. See Note 2: Significant Accounting Policies Investments in Unconsolidated Joint Ventures for the Companys treatment of unconsolidated joint venture interests. Intercompany accounts and transactions have been eliminated.
The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The Company considers a construction project as substantially completed and held available for occupancy upon the completion of tenant improvements, but no later than one year from cessation of major construction activity (as distinguished from activities such as routine maintenance and cleanup). If portions of a rental project are substantially completed and occupied by tenants, or held available for occupancy, and other portions have not yet reached that stage, the substantially completed portions are accounted for as a separate project. The Company allocates costs incurred between the portions under construction and the portions substantially completed and held available for occupancy, and capitalizes only those costs associated with the portion under construction.
Properties are depreciated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives are as follows:
Upon acquisition of rental property, the Company estimates the fair value of acquired tangible assets, consisting of land, building and improvements, and identified intangible assets and liabilities, generally consisting of the fair value of (i) above and below market leases, (ii) in-place leases and (iii) tenant relationships. The Company allocates the purchase price to the assets acquired and liabilities assumed based on their relative fair values. In estimating the fair value of the tangible and intangible assets acquired, the Company considers information obtained about each property as a result of its due diligence and marketing and leasing activities, and utilizes various valuation methods, such as estimated cash flow projections utilizing appropriate discount and capitalization rates, estimates of replacement costs net of depreciation, and available market information. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant.
Above-market and below-market lease values for acquired properties are recorded based on the present value, (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) managements estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases. The capitalized above-market lease values are amortized as a reduction of base rental revenue over the remaining term of the respective leases, and the capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any below-market fixed rate renewal options of the respective leases.
Other intangible assets acquired include amounts for in-place lease values and tenant relationship values, which are based on managements evaluation of the specific characteristics of each tenants lease and the Companys overall relationship with the respective tenant. Factors to be considered by management in its analysis of in-place lease values include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, management considers leasing commissions, legal and other related expenses. Characteristics considered by management in valuing tenant relationships include the nature and extent of the Companys existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenants credit quality and expectations of lease renewals. The value of in-place leases are amortized to expense over the remaining initial terms of the respective leases. The value of tenant relationship intangibles are amortized to expense over the anticipated life of the relationships.
On a periodic basis, management assesses whether there are any indicators that the value of the Companys real estate properties held for use may be impaired. A propertys value is impaired only if managements estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property is less than the carrying value of the property. To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the property over the fair value of the property. The Companys
estimates of aggregate future cash flows expected to be generated by each property are based on a number of assumptions that are subject to economic and market uncertainties including, among others, demand for space, competition for tenants, changes in market rental rates, and costs to operate each property. As these factors are difficult to predict and are subject to future events that may alter managements assumptions, the future cash flows estimated by management in its impairment analyses may not be achieved. Management does not believe that the value of any of the Companys rental properties is impaired.
Held for Sale and
If circumstances arise that previously were considered unlikely and, as a result, the Company decides not to sell a property previously classified as held for sale, the property is reclassified as held and used. A property that is reclassified is measured and recorded individually at the lower of (a) its carrying amount before the property was classified as held for sale, adjusted for any depreciation (amortization) expense that would have been recognized had the property been continuously classified as held and used, or (b) the fair value at the date of the subsequent decision not to sell.
FIN 46 provides guidance on the identification of entities for which control is achieved through means other than voting rights (variable interest entities or VIEs) and the determination of which business enterprise, if any, should consolidate the VIE (the primary beneficiary). Generally, FIN 46 applies when either (1) the equity investors (if any) lack one or more of the essential characteristics of a controlling financial interest, (2) the equity investment at risk is insufficient to finance that entitys activities without additional subordinated financial support or (3) the equity investors have voting rights that are not proportionate to their economic interests and the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest.
The Company has evaluated its joint ventures with regards to FIN 46. As of June 30, 2006, the Company has identified its Meadowlands Xanadu joint venture as a VIE, but is not consolidating such venture as the Company is not the primary beneficiary. Disclosure about this VIE is included in Note 4: Investments in Unconsolidated Joint Ventures.
On a periodic basis, management assesses whether there are any indicators that the value of the Companys investments in unconsolidated joint ventures may be impaired. An investment is impaired only if managements estimate of the value of the investment is less than the carrying value of the investment, and such decline in value is deemed to be other than temporary. To the extent impairment has occurred, the loss shall be measured as the excess of
the carrying amount of the investment over the value of the investment. Management does not believe that the value of any of the Companys investments in unconsolidated joint ventures is impaired. See Note 4: Investments in Unconsolidated Joint Ventures.
Cash and Cash
The Companys marketable securities at December 31, 2005 carried a value of $50.8 million and consisted of 1,468,300 shares of common stock in CarrAmerica Realty Corporation, which were all acquired in 2005. The Companys marketable securities at December 31, 2005 were all classified as available-for-sale and were carried at fair value based on quoted market prices. The Company recorded an unrealized holding loss of $790,000 as other comprehensive loss in 2005. From January 1, 2006 through January 25, 2006, the Company purchased an additional 336,500 shares of common stock in CarrAmerica for a total purchase price of $11.9 million.
The Company received dividend income of approximately $902,000 from its holdings in CarrAmerica stock during the three months ended March 31, 2006, which is recorded in interest and dividend income. During the three months ended March 31, 2006, the Company sold all of its 1,804,800 shares of CarrAmerica common stock realizing a gain of approximately $15.1 million, which is recorded in gain on sale of marketable securities.
hedged item affects earnings. Changes in fair value of derivative instruments not designated as hedging and ineffective portions of hedges are recognized in earnings in the affected period.
minimum tax) on its taxable income at regular corporate tax rates. The Company is subject to certain state and local taxes.
The dividends and distributions payable at December 31, 2005 represents dividends payable to preferred shareholders (10,000 shares) and common shareholders (62,028,306 shares), and distributions payable to minority interest common unitholders of the Operating Partnership (13,650,439 common units) for all such holders of record as of January 5, 2006 with respect to the fourth quarter 2005. The fourth quarter 2005 preferred stock dividends of $50.00 per share, common stock dividends and common unit distributions of $0.63 per common share and unit were approved by the Board of Directors on December 6, 2005. The common stock dividends and common unit distributions payable were paid on January 13, 2006. The preferred stock dividends payable were paid on January 17, 2006.
In 2002, the Company adopted the provisions of FASB No. 123, and in 2006, the Company adopted the provisions of FASB No. 123(R), which did not have a material effect on the Companys financial position and results of operations. These provisions require that the estimated fair value of restricted stock (Restricted Stock Awards) and stock options at the
grant date be amortized ratably into expense over the appropriate vesting period. For the three months ended June 30, 2006 and 2005, the Company recorded restricted stock and stock options expense of $884,000 and $828,000, respectively and $1,614,000 and $1,625,000 for the six months ended June 30, 2006 and 2005, respectively. FASB No. 148, Accounting for Stock-Based Compensation Transition and Disclosure, was issued in December 2002 and amends FASB No. 123, Accounting for Stock Based Compensation. FASB No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock based compensation. In addition, this Statement amends the disclosure requirements of FASB No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. FASB No. 148 disclosure requirements are presented below:
The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested stock awards for the three and six month periods ended June 30, 2005: (dollars in thousands)
On May 9, 2006, the Company completed the acquisitions of: (i) The Gale Company and certain of its related businesses, which engage in construction, property management, facilities management, and leasing services (collectively, the Gale Company); (ii) three office properties; and (iii) indirect interests in a portfolio of office properties, located primarily in New Jersey, which were owned indirectly by The Gale Company and its affiliates (Gale) and affiliates of S.L. Green Realty Corporation (SL Green). The agreements to complete the aforementioned acquisitions (collectively, the Gale/Green Transactions) required that the Company complete all of the acquisitions.
The Gale Company was acquired by the Company for initial purchase consideration of approximately $22.3 million consisting of the issuance by the Company of 224,719 common units of the Operating Partnership and the payment of approximately $12 million in cash, which was primarily funded through borrowing under the Companys revolving credit facility. Additionally, the agreement to acquire the Gale Company (Gale Agreement) contains earn-out provisions providing for the payment of contingent purchase consideration of up to $18 million in cash based upon the achievement of Gross Income and NOI (as such terms are defined in the Gale Agreement) targets and other events for the three years following the closing date.
In connection with the Companys acquisition of the Gale Company, Mr. Stanley C. Gale and certain other affiliates of Gale are restricted from competing with the Company or soliciting the Companys employees for a period of four years expiring on May 9, 2010.
In addition, the Gale Agreement provides for the Company to acquire certain other ownership interests in up to 11 real estate projects (the Non-Portfolio Properties), subject to obtaining certain third party consents and the satisfaction of various project-related and/or other conditions. Each of the Companys acquired interests in the Non-Portfolio Properties will provide for the initial distributions of net cash flow solely to the Company, and thereafter an affiliate of Gale controlled by Stanley C. Gale (Gale Affiliate) has participation rights ("Gale Participation Rights") in 50 percent of the excess net cash flow remaining after the distribution to the Company of the aggregate amount equal to the sum of: (a) the Companys capital contributions, plus (b) an internal rate of return (IRR) of 10 percent per annum, accruing on the date or dates of the Companys investments. The Company anticipates that Mr. Gale will cause the Gale Affiliate to transfer certain of his interests in the Non-Portfolio Properties, directly or indirectly, to several former employees of Gale, some of whom are current employees of the Company, including Mark Yeager, one of the Companys executive officers.
Through June 30, 2006, the Company completed six of the acquisitions of interests in the Non-Portfolio Properties, which included the acquisitions of: a 530,000 square foot, mixed-use office/retail complex; an office property in development; two vacant land parcels and two pre-developed projects. The aggregate cost of the completed acquisitions was approximately $17.8 million.
In connection with the execution of the Gale Agreement, the Company entered into agreements to acquire three office properties directly and indirect ownership interests in entities which own a portfolio of office properties (collectively, the Gale/Green Agreements). Under the Gale/Green Agreements, the Company acquired 100 percent of the ownership interests in three office properties located in New Jersey, aggregating 516,162 square feet, (the Wholly-Owned Properties). The Wholly-Owned Properties were acquired for approximately $106 million, consisting of the assumption of $39.9 million in existing mortgage indebtedness and the payment of $66.1 million in cash, which was funded primarily through borrowing under the Companys revolving credit facility.
Also, as part of the Gale/Green Agreements, the Company entered into a joint venture with SL Green, known as Mack-Green-Gale LLC (Mack-Green), to hold a 96 percent interest and act as general partner of Gale SLG NJ Operating Partnership, L.P. (the OP LP). The Company acquired its interest in Mack-Green for approximately $116 million, which was funded primarily through borrowing under the Companys revolving credit facility. The OP LP owns 100 percent of entities which own 25 office properties (collectively, the OP LP Properties) which aggregate 3.5 million square feet (consisting of 17 office properties aggregating 2.3 million square feet located in New Jersey and eight properties aggregating 1.2 million square feet located in Troy, Michigan), as well as a minor, non-controlling interest in four office properties aggregating 419,000 square feet located in Naperville, Illinois. For
a discussion of the ownership interests in Mack-Green, see Note 4: Investments in Unconsolidated Joint Ventures Mack-Green-Gale LLC.
The Company has not yet obtained all the information necessary to finalize its estimates to complete the purchase price allocations related to the Gale/Green Transactions. The purchase price allocations will be finalized once the information identified by the Company has been received, which should not be longer than one year from the date of acquisition.
The Company acquired the following office properties during the six months ended June 30, 2006: (dollars in thousands)
The Company sold the following office properties during the six months ended June 30, 2006: (dollars in thousands)
On July 31, 2006, the Company acquired 395 West Passaic Street, a 100,589 square-foot office building in Rochelle Park, New Jersey, for approximately $21 million.
The debt of the Companys unconsolidated joint ventures aggregating $539.9 million as of June 30, 2006 is non-recourse to the Company, except for customary exceptions pertaining to such matters as intentional misuse of funds, environmental conditions and material misrepresentations, and except as otherwise indicated below.
On November 25, 2003, the Company and affiliates of The Mills Corporation (Mills) entered into a joint venture agreement (Meadowlands Xanadu Venture Agreement) to form Meadowlands Mills/Mack-Cali Limited Partnership (Meadowlands Venture) for the purpose of developing a $1.3 billion family entertainment, recreation and retail complex with an office and hotel component to be built at the Meadowlands sports complex in East Rutherford, New Jersey (Meadowlands Xanadu). The First Amendment to the Meadowlands Xanadu Venture Agreement was entered into as of June 30, 2005. Meadowlands Xanadu's approximately 4.76 million-square-foot
complex is expected to feature a family entertainment, recreation and retail destination comprising five themed zones: sports; entertainment; childrens education; fashion; and food and home, in addition to four office buildings, aggregating approximately 1.8 million square feet, and a 520-room hotel.
On December 3, 2003, the Meadowlands Venture entered into a redevelopment agreement (the Redevelopment Agreement) with the New Jersey Sports and Exposition Authority (NJSEA) for the redevelopment of the area surrounding the Continental Airlines Arena in East Rutherford, New Jersey and the construction of the Meadowlands Xanadu project. The Redevelopment Agreement provides for a 75-year ground lease and requires the Meadowlands Venture to pay the NJSEA a $160 million development rights fee and fixed rent over the term. Fixed rent will be in the amount of $1,000 per year for the first 15 years, increasing to $7.5 million from the 16th to the 18th years, increasing to $8.4 million in the 19th year, increasing to $8.7 million in the 20th year, increasing to $9.0 million in the 21st year, then to $9.2 million in the 23rd to 26th years, with additional increases over the remainder of the term, as set forth in the ground lease. The ground lease also allows for the potential for participation rent payments by the Meadowlands Venture, as described in the ground lease agreement. The First Amendment to the Redevelopment Agreement and the ground lease, itself, were signed on October 5, 2004. The Meadowlands Venture received all necessary permits and approvals from the NJSEA and U.S. Army Corps of Engineers in March 2005 and commenced construction in the same month. As a condition to fill wetlands pursuant to the permit issued by the U.S. Army Corps of Engineers and pursuant to the Redevelopment Agreement, as amended, Mills conveyed certain vacant land, known as the Empire Tract, to a conservancy trust. On June 30, 2005, the $160 million development rights fee was deposited into an escrow account by the Meadowlands Venture in accordance with the terms of the First Amendment to the Redevelopment Agreement. On such date, the following amounts were paid from escrow: (i) approximately $37.2 million to defease certain debt obligations of the NJSEA; and (ii) $26.8 million to the NJSEA, which, in turn, paid such amount to the Meadowlands Venture for the Empire Tract. Subsequently, the remainder of the monies were released from the escrow account to the NJSEA.
The Company and Mills own a 20 percent and 80 percent interest, respectively, in the Meadowlands Venture. These interests were subject to certain participation rights by The New York Giants, which were subsequently terminated in April 2004. The Meadowlands Xanadu Venture Agreement required the Company to make an equity contribution up to a maximum of $32.5 million, which it fulfilled in April 2005. Pursuant to the Meadowlands Xanadu Venture Agreement, Mills has received subordinated capital credit in the venture of approximately $118.0 million, which represents certain costs incurred by Mills in connection with the Empire Tract prior to the creation of the Meadowlands Venture. However, under the First Amendment to the Meadowlands Xanadu Venture Agreement, the Company and Mills agreed that due to the expected receipt by the Meadowlands Venture of certain other sums and certain development costs savings in connection with Meadowlands Xanadu, Mills subordinated capital credit in the venture for the Empire Tract should be reduced to $60.0 million as of the date of the First Amendment to the Meadowlands Xanadu Venture Agreement. The Meadowlands Xanadu Venture Agreement requires Mills to contribute the balance of the capital required to complete the entertainment phase, subject to certain limitations. The Company will receive a 9 percent preferred return on its equity investment, only after Mills receives a 9 percent preferred return on its equity investment. Residual returns, subject to participation by other parties, will be in proportion to each partners respective percentage interest.
Mills will develop, lease and operate the entertainment phase of the Meadowlands Xanadu project. The Meadowlands Venture has formed and owns, directly and indirectly, all of the partnership interests in and to the component ventures which were formed for the future development of the office and hotel phases, which the Company will develop, lease and operate. Upon the Companys exercise of its rights under the Meadowlands Xanadu Venture Agreement to develop the office and hotel phases, the Meadowlands Venture will convey ownership of the component ventures to the Company and Mills or its affiliate, and the Company or its affiliate will own an 80 percent interest and Mills or its affiliate will own a 20 percent interest in such component ventures. However, under the First Amendment to the Meadowlands Xanadu Venture Agreement, if the Meadowlands Venture develops a hotel that has video lottery terminals (or slots), or any other legalized form of gaming on or in its premises, then the Company or its affiliate will own a 50 percent interest in such component venture and Mills or its affiliate will own a 50 percent interest. The Meadowlands Xanadu Venture Agreement requires that the Company must exercise its rights with respect to the first office and hotel phase no later than four years after the grand opening of the entertainment phase, and requires that the Company exercise all of its rights with respect to the office and hotel phases no later than 10 years from such date, but does not require that any or all components be developed. However, under the Meadowlands Xanadu Venture Agreement, Mills has the right to accelerate such
exercise schedule, subject to certain conditions. Should the Company fail to meet the time schedule described above for the exercise of its rights with respect to the office and hotel phases, the Company will forfeit its rights to control future development. If this occurs, Mills will have the right to develop the additional phases, subject to the Companys right to participate, or to cause the Meadowlands Venture to sell such components to a third party, subject to a sales price limitation of 95 percent of the value that would have been required to form such component ventures.
Commencing three years after the grand opening of the entertainment phase of the Meadowlands Xanadu project, either Mills or the Company may sell its partnership interest to a third party subject to the following provisions:
In addition, commencing on the sixth anniversary of the opening, the Company may cause Mills to purchase, and Mills may cause the Company to sell to Mills, all of the Companys partnership interests at a price based on the then fair market value of the project. Notwithstanding the exercise by Mills or the Company of any of the foregoing rights with respect to the sale of the Companys partnership interest to Mills or a third party, the Company will retain its right to component ventures for the future development of the office and hotel phases.
On February 12, 2003, the NJSEA selected The Mills Corporation and the Company to redevelop the Continental Airlines Arena site (Arena Site) for mixed uses, including retail. In March 2003, Hartz Mountain Industries, Inc., (Hartz), filed a lawsuit in the Superior Court of New Jersey, Law Division, for Bergen County, seeking to enjoin NJSEA from entering into a contract with the Meadowlands Venture for the redevelopment of the Continental Airlines Arena site. In May 2003, the court denied Hartzs request for an injunction and dismissed its suit for failure to exhaust administrative remedies. In June 2003, the NJSEA held hearings on Hartzs protest, and on a parallel protest filed by another rejected developer, Westfield, Inc. (Westfield). On September 10, 2003, the NJSEA ruled against Hartzs and Westfields protests. Hartz and Westfield, as well as Elliot Braha and three other taxpayers (collectively Braha), thereafter filed appeals from the NJSEAs final decision. By decision dated May 14, 2004, the Appellate Division of the Superior Court of New Jersey rejected the appellants contention that the NJSEA lacks statutory authority to allow retail development of its property. The Appellate Division also remanded Harts claim under the Open Public Records Acts, seeking disclosure of additional documents from NJSEA, to the Law Division for further proceedings. The Supreme Court of New Jersey declined to review the Appellate Divisions decision. On August 19, 2004, the Law Division issued a decision resolving Hartzs Open Public Records Act claim and ordered NJSEA to disclose some, but not all, of the documents Hartz was seeking. The Appellate Division, in a decision rendered on November 24, 2004, upheld the findings of the Law Division in the remand proceeding. The Supreme Court of New Jersey declined to review the Appellate Divisions decision. At Hartzs request, the NJSEA thereafter held further hearings on December 15 and 16, 2004, to review certain additional facts in support of Hartzs and Westfields bid protest. Braha, as a taxpayer, did not have standing to participate in the supplemental protest hearing. On March 4, 2005, the Hearing Officer rendered his Supplemental Report and Recommendation to the NJSEA, finding no merit in the protests presented by Hartz and Westfield. The NJSEA accepted the Hearing Officers Supplemental Report and Recommendation on March 30, 2005 and Hartz and Braha have appealed that decision to the Appellate Division.
In January 2004, Hartz and Westfield also appealed to the Appellate Division of the Superior Court of New Jersey from the NJSEAs December 2003 approval and execution of the Redevelopment Agreement with the Meadowlands Venture.
In November 2004, Hartz and Westfield filed additional appeals in the Appellate Division challenging NJSEAs resolution authorizing the execution of the First Amendment to the Redevelopment Agreement with Meadowlands Venture and the ground lease with the Meadowlands Venture.
All of the above appeals have been consolidated by the Appellate Division and are pending.
On September 30, 2004, the Borough of Carlstadt filed an action in the Superior Court of New Jersey Law Division, challenging Meadowlands Xanadu, which asserts claims that are substantially the same as claims asserted by Hartz
and Braha in the above appeals. By Order dated November 19, 2004, the Law Division transferred that matter to the Superior Court of New Jersey, Appellate Division. This matter was voluntarily dismissed by Carlstadt in accordance with a March 22, 2006, Settlement Agreement and Release between Carlstadt and the Meadowlands Venture.
Several appeals filed by Hartz, Westfield and others, including certain environmental groups, that challenge certain approvals received by the Meadowlands Venture from the NJSEA, the New Jersey Meadowlands Commission (NJMC) and the New Jersey Department of Environmental Protection (NJDEP) remain pending before the Appellate Division. Some of these appeals challenge NJDEPs issuance of a stream encroachment permit, waterfront development permit, and coastal zone consistency determination for Meadowlands Xanadu. Other of these appeals are from NJDEPs and NJMCs issuance of reports in connection with a consultation process the NJSEA was statutorily required to undertake in connection with any NJSEA-development project.
A Hartz affiliate and a trade association have filed an appeal from an advisory opinion favorable to the Meadowlands Venture issued by the Director of the Division of Alcoholic Beverage Control concerning the availability of special concessionaire permits. That appeal is also pending in the Appellate Division of the Superior Court of New Jersey.
Three separate lawsuits have been filed in the United States District Court for the District of New Jersey, challenging a permit issued by the U.S. Army Corps of Engineers (USACE) in connection with the project. The first suit was filed on March 30, 2005, by the Sierra Club, the New Jersey Public Interest Research Group, Citizen Lobby, Inc. and the New Jersey Environmental Federation. Additional suits were filed on May 16 and May 31, 2005, respectively, by Hartz (together with one of its officers as an individually-named plaintiff) and the Borough of Carlstadt. The Sierra Club also filed a motion for a preliminary injunction to stop certain construction activities on the project, which the Court denied on July 6, 2005. The parties have filed cross motions for summary judgment on the merits of the Sierra Clubs claims. A decision is expected sometime in the latter part of 2006. On October 26, 2005, the court granted the motions of the Meadowlands Venture and the USACE to dismiss the Hartz complaint for lack of standing. The deadline for appealing that decision has passed, so the Hartz action is ended. On October 31, 2005, the USACE filed a motion to dismiss the complaint filed by the Borough of Carlstadt for lack of standing. On February 7, 2006, the Court granted the motion and dismissed the Borough of Carlstadts complaint in its entirety. On March 9, 2006, Carlstadt filed a notice of appeal of this decision to the United States Court of Appeals for the Third Circuit. This appeal has been dismissed pursuant to the Settlement Agreement and Release executed by Carlstadt and the Meadowlands Venture.
On April 5, 2005, the New York Football Giants (Giants) filed an emergent application with the Supreme Court of New Jersey, Chancery Division, seeking an injunction stopping all work on the Meadowlands Xanadu project as being in violation of its existing lease with the NJSEA. After hearing oral argument on the application on August 5, 2005, the court denied the Giants motion for preliminary injunctive relief. On June 22, 2006, the court entered a Stipulation and Consent Order that dismissed without prejudice the parties respective claims.
The New Jersey Builders Association (NJBA) has commenced an action, which is pending in the Appellate Division, alleging that the NJSEA has failed to meet a purported obligation to provide affordable housing at the Meadowlands Complex and seeking, among other relief, an order enjoining the construction of Meadowlands Xanadu. NJBA filed an application for preliminary injunctive relief seeking to enjoin further construction of Meadowlands Xanadu, which the Appellate Division denied on July 28, 2005. The Meadowlands Venture is not a party to that action.
On January 25, 2006, the Bergen Cliff Hawks Baseball Club, LLC (the Cliff Hawks), filed a complaint against the Company and Mills, alleging that the Company and Mills breached an agreement to provide the Cliff Hawks with a minor league baseball park as part of the Xanadu Project. This matter is pending.
The Company believes that the Meadowlands Ventures proposal and the planned project comply with applicable laws, and the Meadowlands Venture intends to continue its vigorous defense of its rights under the Redevelopment Agreement and Ground Lease. Although there can be no assurance, the Company does not believe that the pending lawsuits will have any material affect on its ability to develop the Meadowlands Xanadu project.
G&G MARTCO (Convention Plaza)
The Company holds a 50 percent interest in G&G Martco, which owns Convention Plaza, a 305,618 square foot office building, located in San Francisco, California. The venture has a mortgage loan with a $47.3 million balance at June 30, 2006 collateralized by its office property. The loan also provides the venture the ability to increase the balance of the loan up to an additional $373,000 for the funding of qualified leasing costs. The loan bears interest at a rate of the London Inter-Bank Offered Rate (LIBOR) (5.334 percent at June 30, 2006) plus 162.5 basis points and matures in August 2006. The Company performs management and leasing services for the property owned by the joint venture and recognized $37,000 and $34,000 in fees for such services in the three months ended June 30, 2006 and 2005, respectively, and $83,000 and $69,000 for the six months ended June 30, 2006 and 2005, respectively.
PLAZA VIII AND IX ASSOCIATES, L.L.C./AMERICAN FINANCIAL EXCHANGE L.L.C.
On May 20, 1998, the Company entered into a joint venture with Columbia Development Company, L.L.C. (Columbia) to form American Financial Exchange L.L.C. (AFE). The venture was formed to acquire land for future development, located on the Hudson River waterfront in Jersey City, New Jersey, adjacent to the Companys Harborside Financial Center office complex. Among other things, the partnership agreement provides for a preferred return on the Companys invested capital in the venture, in addition to the Companys proportionate share of the ventures profit, as defined in the agreement.
AFE distributed its interests in Plaza VIII and IX Associates, L.L.C., which owned the undeveloped land currently used as a parking facility, to its then partners, the Company and Columbia. The Company and Columbia subsequently entered into a new joint venture to own and manage the undeveloped land and related parking operations through Plaza VIII and IX Associates, L.L.C. The Company and Columbia each hold a 50 percent interest in the new venture.
RAMLAND REALTY ASSOCIATES L.L.C. (One Ramland Road)
On August 20, 1998, the Company entered into a joint venture with S.B. New York Realty Corp. to form Ramland Realty Associates L.L.C. The venture was formed to own, manage and operate One Ramland Road, a 232,000 square foot office/flex building and adjacent developable land, located in Orangeburg, New York. In August 1999, the joint venture completed redevelopment of the property and placed the office/flex building in service. The Company holds a 50 percent interest in the joint venture. The venture has a mortgage loan with a $14.9 million balance at June 30, 2006 secured by its office/flex property. The mortgage bears interest at a rate of LIBOR plus 175 basis points and matures in January 2007, with two one-year extension options, subject to certain conditions.
The Company performs management, leasing and other services for the property owned by the joint venture and recognized $31,000 and $46,000 in fees for such services in the three months ended June 30, 2006 and 2005, respectively, and $47,000 and $55,000 for the six months ended June 30, 2006 and 2005, respectively.
ASHFORD LOOP ASSOCIATES L.P. (1001 South Dairy Ashford/2100 West Loop South)
On September 18, 1998, the Company entered into a joint venture with Prudential to form Ashford Loop Associates L.P. The venture was formed to own, manage and operate 1001 South Dairy Ashford, a 130,000 square foot office building acquired on September 18, 1998, and 2100 West Loop South, a 168,000 square foot office building acquired on November 25, 1998, both located in Houston, Texas. The Company held a 20 percent interest in the joint venture. On February 25, 2005, the Company sold its interest in the venture to Prudential for $2.7 million.
SOUTH PIER AT HARBORSIDE HOTEL DEVELOPMENT
On November 17, 1999, the Company entered into a joint venture with Hyatt Corporation (Hyatt) to develop a 350-room hotel on the South Pier at Harborside Financial Center, Jersey City, New Jersey, which was completed and commenced initial operations in July 2002. The Company owns a 50 percent interest in the venture.
The venture had a mortgage loan with a commercial bank with a $62.9 million balance at December 31, 2003 collateralized by its hotel property. The debt bore interest at a rate of LIBOR plus 275 basis points, which was scheduled to mature in December 2003, and was extended through January 29, 2004. On that date, the venture repaid the mortgage loan using the proceeds from a new $40.0 million mortgage loan, (with a balance as of June 30, 2006 of $39.0 million) collateralized by the hotel property, as well as capital contributions from the Company and Hyatt of $10.8 million each. The new loan carries an interest rate of LIBOR plus 200 basis points and matures in
February 2007. The loan currently has two one-year extension options remaining subject to certain conditions, which require payment of a fee. On May 25, 2004, the venture obtained a second mortgage loan with a commercial bank for $20.0 million (with a balance as of June 30, 2006 of $2.3 million) collateralized by the hotel property, in which each partner, including the Company, has severally guaranteed repayment of approximately $1.1 million. The loan carries an interest rate of LIBOR plus 175 basis points and matures in February 2007. The loan currently has two one-year extension options remaining subject to certain conditions, which require payment of a fee. The proceeds from this loan were used to make distributions to the Company and Hyatt in the amount of $10.0 million each. Additionally, the venture has a loan with a balance as of June 30, 2006 of $7.6 million with the City of Jersey City, provided by the U.S. Department of Housing and Urban Development. The loan currently bears interest at fixed rates ranging from 6.09 percent to 6.62 percent and matures in August 2020. The Company has posted a $7.6 million letter of credit in support of this loan, $3.8 million of which is indemnified by Hyatt.
RED BANK CORPORATE PLAZA L.L.C./RED BANK CORPORATE PLAZA II, L.L.C.
On March 23, 2006, the Company entered into a joint venture with the PRC Group (PRC) to form Red Bank Corporate Plaza L.L.C. The venture was formed to develop Red Bank Corporate Plaza, a 92,878 square foot office building located in Red Bank, New Jersey, which has been fully pre-leased to Hovnanian Enterprises, Inc. for a 10-year term. The Company holds a 50 percent interest in the venture. PRC contributed the vacant land for the development of the office building as its initial capital in the venture. The Company will fund the costs of development up to the value of the land contributed by PRC of $3.5 million, and the Company and PRC will fund the remaining costs of construction equally. The venture is pursuing financing for the project.
On July 20, 2006, the Company entered into a joint venture agreement with PRC to form Red Bank Corporate Plaza II L.L.C. The venture was formed to hold land on which it plans to develop Red Bank Corporate Plaza II, a 18,561 square foot office building located in Red Bank, New Jersey. The Company holds a 50 percent interest in the venture. The terms of the venture are similar to Red Bank Corporate Plaza L.L.C. PRC contributed the vacant land as its initial capital in the venture.
On May 9, 2006, as part of the Gale/Green Transactions, the Company entered into a joint venture, Mack-Green-Gale LLC (Mack-Green), with SL Green, pursuant to which Mack-Green holds a 96 percent interest and acts as general partner of Gale SLG NJ Operating Partnership, L.P. (the OP LP). The Company acquired its interest in Mack-Green for approximately $116 million, which was funded primarily through borrowing under the Companys revolving credit facility. The OP LP owns 100 percent of entities which own 25 office properties (the OP LP Properties) which aggregate 3.5 million square feet (consisting of 17 office properties aggregating 2.3 million square feet located in New Jersey and eight properties aggregating 1.2 million square feet located in Troy, Michigan), as well as a minor, non-controlling interest in four office properties aggregating 419,000 square feet located in Naperville, Illinois.
As defined in the Mack-Green operating agreement, the Company shares decision-making equally with SL Green regarding: (i) all major decisions involving the operations of Mack-Green; and (ii) overall general partner responsibilities in operating the OP LP.
The Mack-Green operating agreement generally provides for profits and losses to be allocated as follows:
Substantially all of the OP LP Properties are encumbered by mortgage loans with an aggregate outstanding principal balance of $350.3 million. $190.3 million of the mortgage loans bear interest at a weighted average fixed interest rate of 6.32 percent per annum and mature through May 2016. $160.0 million of the mortgage loans bear interest at a floating rate interest rate ranging from LIBOR plus 275 basis points to LIBOR plus 295 basis points per annum and mature through May 2008. Included in the floating rate mortgage loans are $90.3 million provided by an affiliate of SL Green.
The Company performs management, leasing, and construction services for the properties owned by the joint venture and recognized $800,000 in income (net of $427,000 in direct costs) for such services in the three and six months ended June 30, 2006.
GE/GALE FUNDING LLC (PFV)
On May 9, 2006, as part of the Gale/Green Transactions, the Company acquired from a Gale Affiliate for $1.8 million a 50 percent controlling interest in GMW Village Associates, LLC (GMW Village). GMW Village holds a 20 percent interest in GE/Gale Funding LLC (GE Gale). GE Gale owns a 100 percent interest in the entities owning Princeton Forrestal Village, a mixed-use, office/retail complex aggregating 530,000 square feet and located in Plainsboro, New Jersey (Princeton Forrestal Village or PFV).
In addition to the cash consideration paid to acquire the interest, the Company provided a Gale Affiliate with the Gale Participation Rights.
The operating agreement of GE Gale, which is owned 80 percent by GEBAM, Inc., provides for, among other things, distributions of net cash flow, initially, in proportion to each members interest and subject to adjustment upon achievement of certain financial goals, as defined in the operating agreement.
GE Gale has a mortgage loan in an amount not to exceed $52.8 million, which has a balance at June 30, 2006, of $37 million. The loan provides the venture the ability to draw additional monies for qualified leasing and capital improvement costs. The loan bears interest at a rate of LIBOR plus 275 basis points and matures on October 9, 2008, with an extension option through November 9, 2010.
The Company performs management, leasing, and construction services for PFV and recognized $0 for such services in the three and six months ended June 30, 2006.
ROUTE 93 MASTER LLC/ROUTE 93 BEDFORD MASTER LLC (collectively, the Route 93 Ventures)
On June 1, 2006, the Route 93 Ventures were formed between a majority-owned subsidiary of the Company, having a 30 percent interest and the Commingled Pension Trust Fund (Special Situation Property) of JPMorgan Chase Bank having a 70 percent interest, for the purpose of acquiring seven office buildings, aggregating 670,000 square feet, located in the towns of Andover, Bedford and Billerica, Massachusetts. Profits and losses are shared by the partners in proportion to their respective interest until the investment yields an 11 percent IRR, then sharing will shift to 40/60, and when the IRR reaches 15 percent, sharing will shift to 50/50.
The Companys acquired interests in the Route 93 Ventures will provide for the initial distributions of net cash flow solely to the Company, and thereafter an affiliate of Gale has participation rights in 50 percent of the excess net cash flow remaining after the distribution from its interests to the Company of the aggregate amount equal to the sum of: (a) the Companys capital contributions, plus (b) an IRR of 11 percent per annum.
The Route 93 Ventures have mortgage loans with an amount not to exceed $58.6 million, with a $39.4 million balance at June 30, 2006 collateralized by its office properties. The loan provides the venture the ability to draw additional monies for qualified leasing and capital improvement costs. The loan bears interest at a rate of LIBOR plus 220 basis points and matures on July 11, 2008, with three one-year extension options.
The Company performs management and construction services for the properties owned by the Route 93 Ventures and recognized $0 for such services in the three and six months ended June 30, 2006.
GALE KIMBALL, L.L.C.
On June 15, 2006, the Company entered into a joint venture with a Gale Affiliate to form M-C Kimball, LLC (M-C Kimball). M-C Kimball was formed for the sole purpose of acquiring a Gale Affiliates 33.33 percent membership interest in Gale Kimball, L.L.C. (Gale Kimball), an entity holding a 25 percent interest in 100 Kimball Drive LLC (100 Kimball), which is developing a 175,000 square foot office property located at 100 Kimball Drive, Parsippany, New Jersey (the Kimball Property).
The operating agreement of M-C Kimball provides, among other things, for the Gale Participation Rights.
Gale Kimball is owned 33.33 percent by M-C Kimball and 66.67 percent by the Hampshire Generational Fund, L.L.C. (Hampshire). The operating agreement of Gale Kimball provides, among other things, for the distribution of net cash flow, initially, in accordance with its members respective membership interests and, upon achievement of certain financial conditions, 50 percent to each of the Company and Hampshire.
100 Kimball is owned 25 percent by Gale Kimball and 75 percent by 100 Kimball Drive Realty Member LLC, an affiliate of JP Morgan (JPM). The operating agreement of 100 Kimball provides, among other things, for the distributions to be made in the following order:
100 Kimball has a construction loan in an amount not to exceed $29 million, with a balance at June 30, 2006 of $8 million. The loan bears interest at a rate of LIBOR plus 195 basis points and matures on December 8, 2008 with a one-year extension option.
The Company performs construction and development services for the property owned by 100 Kimball for which it recognized $146,000 in income (net of $3.3 million in direct costs) in the three and six months ended June 30, 2006.
55 CORPORATE PARTNERS, LLC
On June 9, 2006, the Company entered into a joint venture with a Gale Affiliate to form 55 Corporate Partners, LLC (55 Corporate). 55 Corporate was formed for the sole purpose of acquiring from a Gale Affiliate a 50 percent interest in SLG 55 Corporate Drive II, LLC (SLG 55), an entity indirectly holding a condominium interest in a vacant land parcel located in Bridgewater, New Jersey, which can accommodate development of an approximately 200,000 square foot office building. Sanofi-Aventis, which occupies neighboring buildings, has an option to cause the venture to construct the building, which it would lease on a long-term basis. Sanofi-Aventis is required to pay a penalty, subject to certain conditions, in the event it fails to exercise the option. If the venture is unable to obtain certain approvals to construct the building, it would be liable to Sanofi-Aventis for certain penalties. The remaining 50 percent in SLG 55 is owned by SLG Gale 55 Corporate LLC, an affiliate of SL Green Realty Corp (SLG Gale 55).
The operating agreement of 55 Corporate provides, among other things, for the Gale Participation Rights.
The operating agreement of SLG 55 provides, among other things, for the distribution of the available net cash flow to each of 55 Corporate and SLG Gale 55 in proportion to their respective membership interests in SLG 55 (50 percent each).
SUMMARIES OF UNCONSOLIDATED JOINT VENTURES
The following is a summary of the financial position of the unconsolidated joint ventures in which the Company had investment interests as of June 30, 2006 and December 31, 2005: (dollars in thousands)
SUMMARIES OF UNCONSOLIDATED JOINT VENTURES
The following is a summary of the results of operations of the unconsolidated joint ventures for the period in which the Company had investment interests during the three months ended June 30, 2006 and 2005: (dollars in thousands)
SUMMARIES OF UNCONSOLIDATED JOINT VENTURES
The following is a summary of the results of operations of the unconsolidated joint ventures for the period in which the Company had investment interests during the six months ended June 30, 2006 and 2005: (dollars in thousands)