|
|
 | | | |
- close
- close
- close
- close
| |||||||||
Mack-Cali Realty 10-Q 2009 UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
SECURITIES EXCHANGE ACT OF
1934
or
[ ] TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE>
SECURITIES EXCHANGE ACT OF
1934
MACK-CALI
REALTY CORPORATION
FORM
10-Q
INDEX
2
MACK-CALI
REALTY CORPORATION
Part
I – Financial Information
Item
1. Financial
Statements
The
accompanying unaudited consolidated balance sheets, statements of operations, of
changes in 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 Management’s Discussion and
Analysis of Financial Condition and Results of Operations and the financial
statements and notes thereto included in Mack-Cali Realty Corporation’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2008.
The
results of operations for the three and nine month periods ended September 30,
2009 are not necessarily indicative of the results to be expected for the entire
fiscal year or any other period. 3
MACK-CALI
REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
>(in
thousands, except per share amounts) (unaudited)
4
MACK-CALI
REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
OPERATIONS> (in thousands,
except per share amounts) (unaudited)
5
MACK-CALI
REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN
EQUITY >(in thousands)
(unaudited)
6
MACK-CALI
REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS >(in thousands)
(unaudited)
7
MACK-CALI
REALTY CORPORATION AND SUBSIDIARIES
ORGANIZATION
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 September 30, 2009, the
Company owned or had interests in 288 properties plus developable land
(collectively, the “Properties”). The Properties aggregate
approximately 33.1 million square feet, which are comprised of 276 buildings,
primarily office and office/flex buildings, totaling approximately 32.7 million
square feet (which include 19 buildings, primarily office buildings, aggregating
approximately 2.1 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 three parcels
of land leased to others. The Properties are located in five states
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 Company’s
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 evaluated subsequent events through October
27, 2009, the date these financial statements were available to be
issued. Certain reclassifications have been made to prior period
amounts in order to conform with current period presentation.
On July
1, 2009, the Financial Accounting Standards Board (“FASB”) issued the FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles, also known as FASB Accounting Standards Codification
(“ASC”) 105-10, General Accepted Accounting Principles, (“ASC
105-10”). ASC 105-10 establishes the FASB Accounting Standards
Codification (“Codification”) as the single source of authoritative U.S. GAAP
recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. The Codification
supersedes all existing non-SEC accounting and reporting
standards. All other nongrandfathered, non-SEC accounting literature
not included in the Codification will become
nonauthoritative. Following the Codification, the FASB will not issue
new standards in the form of Statements, FASB Staff Positions or Emerging Issues
Task Force Abstracts. Instead, it will issue Accounting Standards
Updates, which will serve to update the Codification, provide background
information about the guidance and provide the basis for conclusions on the
changes to the Codification. GAAP was not intended to be changed as a
result of the FASB’s Codification project, but it will change the way the
guidance is organized and presented. As a result, these changes will
have a significant impact on how companies reference GAAP in their financial
statements and in their accounting policies for financial statements issued for
interim and annual periods ending after September 15, 2009. The
Company has implemented the Codification in this quarterly report by providing
references to the Codification topics, as appropriate.
8
Rental
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 assumed, 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 fair
values. The Company records goodwill or a gain on bargain purchase
(if any) if the net assets acquired/liabilities assumed exceed the purchase
consideration of a transaction. 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) management’s 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.
9
Other
intangible assets acquired include amounts for in-place lease values and tenant
relationship values, which are based on management’s evaluation of the specific
characteristics of each tenant’s lease and the Company’s 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 Company’s existing business relationships with the tenant, growth
prospects for developing new business with the tenant, the tenant’s 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 Company’s real estate properties held for use may be
impaired. A property’s value is impaired only if management’s
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 Company’s 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
management’s assumptions, the future cash flows estimated by management in its
impairment analyses may not be achieved.
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.
Investments
in
Unconsolidated
10
On a
periodic basis, management assesses whether there are any indicators that the
value of the Company’s investments in unconsolidated joint ventures may be
impaired. An investment is impaired only if management’s 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. The Company’s estimates of value for each investment
(particularly in commercial real estate joint ventures) 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 operating costs. As these factors are difficult to
predict and are subject to future events that may alter management’s
assumptions, the values estimated by management in its impairment analyses may
not be realized. See Note 4: Investments in Unconsolidated Joint
Ventures.
The fair
value of the marketable securities was determined using level I inputs under the
authoritative guidance for fair value measurements. Level I inputs
represent quoted prices available in an active market for identical investments
as of the reporting date.
The
Company received approximately $65,000 in dividend income from its holdings in
marketable securities during the nine months ended September 30,
2008. The Company disposed of its marketable securities in April 2008
for aggregate net proceeds of approximately $5.4 million and realized a gain of
$471,000.
Deferred
11
Derivative
Revenue
Allowance
for
12
Income
and
The
Company adopted the amended provisions of the authoritative guidance on income
taxes on January 1, 2007. As a result of the implementation of the
guidance, the Company recognized no material adjustments regarding its tax
accounting treatment. The Company expects to recognize interest and
penalties related to uncertain tax positions, if any, as income tax expense,
which is included in general and administrative expense.
Distributions
The
dividends and distributions payable at December 31, 2008 represents dividends
payable to preferred shareholders (10,000 shares) and common shareholders
(66,419,764 shares), and distributions payable to noncontrolling interest common
unitholders of the Operating Partnership (14,437,731 common units) for all such
holders of record as of January 6, 2009 with respect to the fourth quarter
2008. The fourth quarter 2008 preferred stock dividends of $50.00 per
share, common stock dividends and common unit distributions of $0.64 per common
share and unit were approved by the Board of Directors on December 9,
2008. The common stock dividends and common unit distributions
payable were paid on January 12, 2009. The preferred stock dividends
payable were paid on January 15, 2009. 13
Costs
Incurred For
In 2002,
the Company adopted the provisions of the authoritative guidance on
compensation-stock compensation. In 2006, the Company adopted the
amended authoritative guidance, which did not have a material effect on the
Company’s 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. The Company
recorded stock expense of $517,000 and $715,000 for the three months ended
September 30, 2009 and 2008, respectively, and $1,551,000 and $2,135,000 for the
nine months ended September 30, 2009 and 2008, respectively.
On March
1, 2009, the Company placed in service a 249,409 square-foot, class A office
building, which is fully leased for 15 years. The building is located
in the Mack-Cali Business Campus in Parsippany, New Jersey.
On April
29, 2009, the Company acquired SL Green’s interests in the Mack-Green-Gale LLC
(“Mack-Green”) and 55 Corporate Partners, LLC (“55 Corporate”) joint ventures
(the “SL Green Transactions”) for $5 million. As a result, the
Company owns 100 percent of Mack-Green and 55 Corporate. Concurrent with the SL
Green Transactions, the loan agreement with an affiliate of Gramercy Capital
Corporation (“Gramercy”) on six office properties indirectly owned by Mack-Green
was restructured providing Gramercy with the power to control the activities
that are most important to the properties’ economic performance. At
the time of the restructuring, the estimated fair value of the six properties
was less than the aggregate carrying amount of the non-recourse mortgage
loans.
As a
result of the SL Green Transactions and the agreement with Gramercy, as of April
29, 2009, the Company began consolidating 11 office properties, aggregating
approximately 1.5 million square feet, owned and controlled by Mack-Green, and a
pre-leased 205,000 square foot office development project owned and controlled
by 55 Corporate. The Company also has retained a non-controlling
interest in entities that own 100 percent of six office properties, aggregating
786,198 square feet, which were previously indirectly owned by Mack-Green. The
consolidated properties’ aggregate acquisition amounts were allocated as
follows: $43.0 million to land and leasehold interests, $150.1
million to buildings and improvements, $14.3 million to tenant improvements,
$43.7 million to deferred lease costs and other lease intangibles, net, $13.1
million to other assets acquired (including cash and accounts receivable) and
$156.8 million to liabilities (including mortgage debt with a fair market value
of approximately $151.1 million), as well as an allocation to noncontrolling
interests in consolidated joint ventures of $3.2 million. There was no
contingent consideration associated with the acquisition. See
“Mack-Green-Gale LLC” and “55 Corporate Partners, LLC” under Note 4: Investments
in Unconsolidated Joint Ventures for further discussion on the
transactions.
14
The
Company has not yet obtained all of the information necessary to finalize its
estimates to complete the purchase price allocations related to the SL 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 closing date.
The debt
of the Company’s unconsolidated joint ventures generally 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.
PLAZA
VIII AND IX ASSOCIATES, L.L.C.
Plaza
VIII and IX Associates, L.L.C. is a joint venture between the Company and
Columbia Development Company, L.L.C. (“Columbia”). The venture was
formed to acquire land for future development, located on the Hudson River
waterfront in Jersey City, New Jersey, adjacent to the Company’s Harborside
Financial Center office complex. The Company and Columbia each hold a
50 percent interest in the venture. Among other things, the
partnership agreement provides for a preferred return on the Company’s invested
capital in the venture, in addition to the Company’s proportionate share of the
venture’s profit, as defined in the agreement. The venture owns
undeveloped land currently used as a parking facility.
RAMLAND
REALTY ASSOCIATES L.L.C. (One Ramland Road)
On August
20, 1998, the Company entered into a 50/50 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
venture recorded an impairment loss of approximately $4.3 million on its rental
property as of December 31, 2007. On December 31, 2008, the venture
transferred the deed to the lender in satisfaction of its obligations, including
its mortgage with a balance of $14.7 million. The venture recorded a
gain on the disposal of its office property of $7.5 million.
The
Company performed management, leasing and other services for the property when
owned by the joint venture and recognized $10,000 in fees for such services for
the three months ended September 30, 2008 and $42,000 for the nine months ended
September 30, 2008.
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 has a mortgage loan with a balance as of September 30, 2009 of $67.5
million collateralized by the hotel property. The loan carries an
interest rate of 6.15 percent and matures in November 2016. The
venture has a loan with a balance as of September 30, 2009 of $6.3 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 $6.3 million letter of credit in support of this loan, $3.2
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. The property is fully leased to Hovnanian
Enterprises, Inc. through September 30, 2017. 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 funded the costs of development up to the value
of the land contributed by PRC of $3.5 million as its initial
capital.
15
On
October 20, 2006, the venture entered into a $22.0 million construction loan
with a commercial bank collateralized by the land and development
project. The loan (with a balance as of September 30, 2009 of $20.8
million), carried an interest rate of LIBOR plus 130 basis points through March
2008. In April 2008, the interest rate was reduced to LIBOR plus 125
basis points and the maturity was extended to April 2010. The loan
currently has a one-year extension option subject to certain conditions, which
requires payment of a fee.
In
September 2007, the joint venture completed development of the property and
placed the office building in service. The Company performs
management, leasing and other services for the property owned by the joint
venture and recognized $25,100 and $30,500 in fees for such services during the
three months ended September 30, 2009 and 2008, respectively and $73,000 and
$82,000 for the nine months ended September 30, 2009 and 2008,
respectively.
On July
20, 2006, the Company entered into a second joint venture agreement with PRC to
form Red Bank Corporate Plaza II L.L.C. The venture was formed to
hold land able to accommodate an 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.
MACK-GREEN-GALE
LLC/GRAMERCY AGREEMENT
On May 9,
2006, the Company entered into a joint venture, Mack-Green-Gale LLC
(“Mack-Green”), with SL Green, pursuant to which Mack-Green held an approximate
96 percent interest in and acted as general partner of Gale SLG NJ Operating
Partnership, L.P. (the “OPLP”). The Company’s acquisition cost for
its interest in Mack-Green was approximately $125 million, which was funded
primarily through borrowing under the Company’s revolving credit
facility. At the time, the OPLP owned 100 percent of entities
(“Property Entities”) which owned 25 office properties (the “OPLP Properties”)
which aggregated 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). In
December 2007, the OPLP sold its eight properties located in Troy, Michigan for
$83.5 million. The venture recognized a loss of approximately $22.3
million from the sale.
As
defined in the Mack-Green operating agreement, the Company shared
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 OPLP.
The
Mack-Green operating agreement generally provided for profits and losses to be
allocated as follows:
Substantially
all of the OPLP Properties were encumbered by mortgage loans with an aggregate
outstanding principal balance of $275.3 million at March 31,
2009. $185.0 million of the mortgage loans bore interest at a
weighted average fixed interest rate of 6.26 percent per annum and matured at
various times through May 2016.
Six of
the OPLP Properties (the “Portfolio Properties”) were encumbered by $90.3
million of mortgage loans which bore interest at a floating rate of LIBOR plus
275 basis points per annum and were scheduled to mature in May 2009. The
floating rate mortgage loans were provided to the six entities which owned the
Portfolio Properties (collectively, the “Portfolio Entities”) by Gramercy, which
was a related party of SL Green. Based on the venture’s anticipated
holding period pertaining to the Portfolio Properties, the venture believed that
the carrying amounts of these properties may not have been recoverable at
December 31, 2008. Accordingly, as the venture determined that its
carrying value of these properties exceeded the estimated fair value, it
recorded an impairment charge of approximately $32.3 million as of December 31,
2008.
16
On April
29, 2009, the Company acquired the remaining interests in Mack-Green from SL
Green. As a result, the Company owns 100 percent of
Mack-Green. Additionally, on April 29, the mortgage loans with
Gramercy on the Portfolio Properties (the “Gramercy Agreement”) were modified to
provide for, among other things, interest to accrue at the current rate of LIBOR
plus 275 basis point per annum, with the interest pay rate capped at 3.15
percent per annum. Under the Gramercy Agreement, the payment of debt
service is subordinate to the payment of operating expenses. Interest
at the pay rate is payable only out of funds generated by the Portfolio
Properties and only to the extent that the Portfolio Properties’ operating
expenses have been paid, with any accrued unpaid interest above the pay rate
serving to increase the balance of the amounts due at the termination of the
agreement. Any excess funds after payment of debt service generally
will be escrowed and available for future capital and leasing costs, as well as
to cover future cash flow shortfalls, as appropriate. The Gramercy
Agreement has a term of two years and terminates on May 9,
2011. Approximately six months in advance of the end of the term of
the Gramercy Agreement, the Portfolio Entities are to provide estimates of
each property’s fair market value (“FMV”). Gramercy has the
right to accept or reject the FMV. If Gramercy rejects the FMV,
Gramercy must market the property for sale in cooperation with the Portfolio
Entities and must approve the ultimate sale. However, Gramercy has no
obligation to market a Portfolio Property if the FMV is less than the allocated
amount due, including accrued, unpaid interest. If any Portfolio Property is not
sold, the Portfolio Entities have agreed to give a deed in lieu of foreclosure,
unless the FMV was equal to or greater than the allocated amount due for such
Portfolio Property, in which case they can elect to have that Portfolio Property
released by paying the FMV. If Gramercy accepts the FMV, the
Portfolio Property will be released from the Gramercy Agreement upon payment of
the FMV.
The
Company continues to perform management, leasing, and construction services for
the Portfolio Properties at market terms. The Portfolio Entities have
a participation interest which provides for sharing 50 percent of any amount
realized in excess of the allocated amounts due for each Portfolio
Property.
As the
Company acquired SL Green’s interests in Mack-Green, the Company owns 100
percent of Mack-Green and is consolidating Mack-Green as of the closing
date. Mack-Green, in turn, has been and will continue consolidating
the OPLP as Mack-Green’s approximate 96 percent, general partner ownership
interest in the OPLP remained unchanged as of the closing
date. Additionally, as of the closing date, the OPLP continues to
consolidate its Property Entities which own 11 office properties aggregating 1.5
million square feet as its 100-percent ownership and rights regarding these
entities were unchanged in the transaction. The OPLP will not be
consolidating the Portfolio Entities that own six office properties, aggregating
786,198 square feet, as the Gramercy Agreement is considered a reconsideration
event under the provisions of the authoritative guidance on consolidation and
accordingly, the Portfolio Entities were deemed to be variable interest entities
for which the OPLP was not considered the primary beneficiary based on the
Gramercy Agreement as described above. As a result of the SLG
Transactions, the Company has an unconsolidated joint venture interest in the
Portfolio Properties.
In
connection with these transactions, at the closing date, the Company also
acquired the remaining 50 percent interest in 55 Corporate Partners L.L.C. from
an affiliate of SL Green (see “55 Corporate Partners, LLC” below).
The
Company performs management, leasing, and construction services for properties
owned by the unconsolidated joint ventures and recognized $299,000 and $863,000
in income (net of $0 and $209,000 in direct costs) for such services in the
three months ended September 30, 2009 and 2008, respectively, and $1.9 million
and $2.8 million in income (net of $1.1 million and $1.5 million in direct
costs) for the nine months ended September 30, 2009 and 2008,
respectively.
GE/GALE
FUNDING LLC (PFV)
The Gale
agreement signed as part of the Gale/Green transactions in May 2006 provides for
the Company to acquire certain ownership interests in 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 Company’s acquired interests in the
Non-Portfolio Properties provide for the initial distributions of net cash flow
solely to the Company, and thereafter an affiliate of Mr. 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 Company’s capital
contributions, plus (b) an internal rate of return (“IRR”) of 10 percent per
annum, accruing on the date or dates of the Company’s investments.
17
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 entity owning Princeton Forrestal Village, a mixed-use,
office/retail complex aggregating 527,015 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 member’s interest and subject to adjustment upon achievement
of certain financial goals, as defined in the operating agreement.
GE Gale
has a mortgage loan with a balance of $51.6 million at September 30,
2009. The loan bears interest at a rate of LIBOR plus 275 basis
points and matures on January 9, 2010, with an extension option, subject to
certain conditions, through January 9, 2011.
The
Company performs management, leasing, and other services for PFV and recognized
$236,000 and $217,300 in income (net of $0 and $31,700 in direct costs) for such
services in the three months ended September 30, 2009 and 2008, respectively and
$758,000 and $655,000 in income (net of $0 and $288,000 in direct costs) for the
nine months ended September 30, 2009 and 2008, respectively.
ROUTE
93 MASTER LLC (“Route 93 Participant”)/ROUTE 93 BEDFORD MASTER LLC (with the
Route 93 Participant, collectively, the “Route 93 Venture”)
On June
1, 2006, the Route 93 Venture was formed between the Route 93 Participant, 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 666,697 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 interests until the investment
yields an 11 percent IRR, then sharing will shift to 40/60, and when the IRR
reaches 15 percent, then sharing will shift to 50/50.
The Route
93 Participant is a joint venture between the Company and a Gale
affiliate. Profits and losses are shared by the partners under this
venture in proportion to their respective interests (83.3/16.7) until the
investment yields an 11 percent IRR, then sharing will shift to
50/50.
On March
31, 2009, on account of the recent deterioration in the commercial real estate
markets in the Boston area, the Company wrote off its investment in the venture
and recorded an impairment charge in equity in earnings (loss) of $4.0 million
(of which $0.6 million was attributable to noncontrolling interest in
consolidated joint ventures) during the period.
The Route
93 Ventures had a mortgage loan with a $44.2 million balance at September 1,
2009 collateralized by its office properties. The loan bore interest
at a rate of LIBOR plus 220 basis points and was scheduled to mature on July 11,
2009. On September 2, 2009, the venture transferred the deeds to the
lender in satisfaction of its obligations.
Through
September 30, 2008, the Company had performed services for Route 93 Master LLC
and Route 93 Bedford Master LLC and recognized $12,500 in fees for such services
for the three months ended September 30, 2008 and $45,000 for the nine months
ended September 30, 2008.
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 Affiliate’s 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 developed and placed in service a 175,000
square foot office property that is leased to a single tenant, located at 100
Kimball Drive, Parsippany, New Jersey (the “Kimball Property”). 18
The
operating agreement of M-C Kimball provides, among other things, for the Gale
Participation Rights (of which Mark Yeager, an Executive Vice President of the
Company, has a direct 26 percent interest).
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 JPMorgan (“JPM”). The operating agreement
of 100 Kimball provides, among other things, for the distributions to be made in
the following order:
On
September 21, 2007, 100 Kimball obtained a $47 million mortgage loan which bears
interest at a rate of 5.95 percent and matures in September 2012.
The
Company performs management, leasing, and other services for the property owned
by 100 Kimball for which it recognized $59,000 and $193,000 in income for the
three months ended September 30, 2009 and 2008, respectively, and $181,000 and
$316,800 in income (net of $0 and $1.0 million in direct costs) for the nine
months ended September 30, 2009 and 2008, respectively.
55
CORPORATE PARTNERS, LLC
On June
9, 2006, the
Company entered into a joint venture with a Gale Affiliate to form 55 Corporate
Partners L.L.C. (“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 presently holding a 100 percent
indirect condominium interest in a vacant land parcel located in Bridgewater,
New Jersey, which can accommodate development of an approximately 205,000 square
foot office building (the “55 Corporate Property”). The remaining 50
percent in SLG 55 was owned by SLG Gale 55 Corporate LLC, an affiliate of
SL Green Realty
Corp. (“SLG Gale
55”).
In
November 2007, Sanofi-Aventis U.S. Inc. (“Sanofi”), which occupied neighboring
buildings, exercised its option to cause the venture to construct a building on
the Property and has signed a lease thereof. The lease has a term of
fifteen years, subject to three five-year extension options. The
construction of the building, estimated to cost approximately $36 million,
commenced in 2009 and is expected to be delivered to the tenant in July
2011.
The
operating agreement of 55 Corporate provides, among other things, for the Gale
Participation Rights (of which Mr. Yeager has a direct 26 percent
interest). If Mr. Gale receives any commission payments with respect
to a Sanofi lease on the development property, Mr. Gale has agreed to pay to Mr.
Yeager 26 percent of such payments.
The
operating agreement of SLG 55 provided, 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).
On April
29, 2009, the Company acquired the remaining 50 percent interest in 55 Corporate
from SLG Gale 55 Corporate LLC, an affiliate of SL Green. As of the
closing date, the Company owns 100 percent of and is consolidating the venture,
50 percent of which remains subject to the Gale Participation
Rights. In connection with this transaction, the Company also
acquired the remaining interest in Mack-Green from an affiliate of SLG Gale 55
Corporate LLC.
19
12
VREELAND ASSOCIATES, L.L.C.
On
September 8, 2006,
the Company entered into a joint venture with a Gale Affiliate to form M-C
Vreeland, LLC (“M-C Vreeland”). M-C Vreeland was formed for the sole
purpose of acquiring a Gale Affiliate’s 50 percent membership interest in 12
Vreeland Associates, L.L.C., an entity owning an office property located at 12
Vreeland Road, Florham Park, New Jersey.
The
operating agreement of M-C Vreeland provides, among other things, for the Gale
Participation Rights (of which Mr. Yeager has a direct 15 percent
interest).
The
office property at 12 Vreeland is a 139,750 square foot office building that is
fully leased to a single tenant through June 15, 2012. The property
is subject to a mortgage loan, which matures on July 1, 2012, and bears interest
at 6.9 percent per annum. As of September 30, 2009 the outstanding
balance on the mortgage note was $5.6 million.
Under the
operating agreement of 12 Vreeland Associates, L.L.C., M-C Vreeland has a 50
percent interest, with S/K Florham Park Associates, L.L.C. (the managing member)
and its affiliate holding the other 50 percent.
BOSTON-DOWNTOWN
CROSSING
On
October 20, 2006, the Company formed a joint venture (the “MC/Gale JV LLC”) with
Gale International/426 Washington St. LLC (“Gale/426”), which, in turn, entered
into a joint venture (the “Vornado JV LLC”) with VNO 426 Washington Street JV
LLC (“Vornado”), an affiliate of Vornado Realty LP, which was formed to acquire
and redevelop the Filenes property located in the Downtown Crossing district of
Boston, Massachusetts (the “Filenes Property”).
On
January 25, 2007, (i) each of M-C/Gale JV LLC, Gale and Washington Street Realty
Member LLC (“JPM”) formed a joint venture (“JPM JV LLC”), (ii) M-C/Gale JV LLC
assigned its entire 50 percent ownership interest in the Vornado JV LLC to JPM
JV LLC, (iii) the Limited Liability Company Agreement of Vornado JV LLC was
amended to reflect, among other things, the change in the ownership structure
described in subsection (ii) above, and (iv) the Limited Liability Company
Agreement of MC/Gale JV LLC was amended and restated to reflect, among other
things, the change in the ownership structure described in subsection (ii)
above. The Vornado JV LLC acquired the Filenes Property on January
29, 2007, for approximately $100 million.
On or
about September 16, 2008, Vornado JV LLC was reorganized in contemplation of
developing and converting the Filenes property into a condominium consisting of
a retail unit, an office unit, a parking unit, a hotel unit and a residential
unit. Pursuant to this reorganization, (i) the Company and Gale/426
formed a new joint venture (“M-C/Gale JV II LLC”) and (ii) M-C/Gale JV II LLC
and Washington Street Realty Member II LLC (“JPM II”) formed a new joint venture
(“JPM JV II LLC”) to invest in a new joint venture (“Vornado JV II LLC”) with
Vornado RTR DC LLC, an affiliate of Vornado Realty, LP (“Vornado
II”). Following this reorganization, Vornado JV LLC owns the
interests in the retail unit and the office unit (the “Filenes Office/Retail
Component”) and Vornado JV II LLC owns the interests in the parking unit, the
hotel unit and the residential unit (“the “Filenes Hotel/Residential/Parking
Component”). In connection with the foregoing, (a) the Limited
Liability Company Agreement of Vornado JV LLC, as amended, was amended and
restated to reflect, among other things, the change in the ownership structure
described above, (b) the Limited Liability Company Agreement of JPM JV LLC was
amended and restated to reflect, among other things, the change in the ownership
structure described above and (c) the Limited Liability Company Agreement of
M-C/Gale JV LLC was amended and restated to reflect, among other things, the
change in the ownership structure described above.
As a
result of the foregoing transactions, (A) (i) the Filenes Office/Retail
Component is owned by Vornado JV LLC, (ii) Vornado JV LLC is owned 50 percent by
each of Vornado and JPM JV LLC, (iii) JPM JV LLC is owned 30 percent by M-C/Gale
JV LLC, 70 percent by JPM and managed by Gale/426, which has no ownership
interest in JPM JV LLC, and (iv) M-C/Gale JV LLC is owned 99.99 percent by the
Company and 0.01 percent by Gale/426 and (B) (i) the Filenes
Hotel/Residential/Parking Component is owned by Vornado JV II LLC, (ii) Vornado
JV II LLC is owned 50 percent by each of Vornado II and JPM JV II LLC, (iii) JPM
JV II LLC is owned 30 percent by M-C/Gale JV II LLC, 70 percent by JPM II and
managed by Gale/426, which has no ownership interest in JPM JV II LLC, and (iv)
M-C/Gale JV II LLC is owned 99.99 percent by the Company and 0.01 percent by
Gale/426. Thus, the Company holds approximately a 15 percent indirect
ownership interest in each of Vornado JV LLC and Vornado JV II LLC and the
Filenes Property.
20
Distributions
are made (i) by Vornado JV LLC in proportion to its members’ respective
ownership interests, (ii) by JPM JV LLC (a) initially, in proportion to its
members’ respective ownership interests until JPM’s investment yields an 11
percent IRR, (b) thereafter, 60/40 to JPM and MC/Gale JV LLC, respectively,
until JPM’s investment yields a 15 percent IRR and (c) thereafter, 50/50 to JPM
and MC/Gale JV LLC, respectively, and (iii) by MC/Gale JV LLC (w) initially, in
proportion to its members’ respective ownership interests until each member has
received a 10 percent IRR on its investment, (x) thereafter, 65/35 to the
Company and Gale/426, respectively, until the Company’s investment yields a 15
percent IRR, (y) if by the time the Company receives a 15 percent IRR on its
investment, Gale/426 has not done so, 100 percent to Gale/426 until Gale/426’s
investment yields a 15 percent IRR, and (z) thereafter, 50/50 to each
of the Company and Gale/426.
Distributions
are made (i) by Vornado JV II LLC in proportion to its members’ respective
ownership interests, (ii) by JPM JV II LLC (a) initially, in proportion to its
members’ respective ownership interests until JPM II’s investment yields an 11
percent IRR, (b) thereafter, 60/40 to JPM II and M-C/Gale JV II LLC,
respectively, until JPM II’s investment yields a 15 percent IRR and (c)
thereafter, 50/50 to JPM II and M-C/Gale JV II LLC, respectively, and (iii) by
M-C/Gale JV II LLC (w) initially, in proportion to its members’ respective
ownership interests until each member has received a 10 percent IRR on its
investment, (x) thereafter, 65/35 to the Company and Gale/426, respectively,
until the Company’s investment yields a 15 percent IRR, (y) if by the time the
Company receives a 15 percent IRR on its investment, Gale/426 has not done so,
100 percent to Gale/426 until Gale/426’s investment yields a 15 percent IRR, and
(z) thereafter, 50/50 to each of the Company and Gale/426.
The joint
venture has suspended its plans for the development of the Filenes Property
which was to include approximately 1.2 million square feet consisting of office,
retail, condominium apartments, hotel and a parking garage. The
project is subject to governmental approvals. The venture recorded an
impairment charge of approximately $69.5 million on its development project as
of December 31, 2008.
GALE
JEFFERSON, L.L.C.
On August
22, 2007, the Company entered into a joint venture with a Gale Affiliate to form
M-C Jefferson, L.L.C. (“M-C Jefferson”). M-C Jefferson was formed for
the sole purpose of acquiring a Gale Affiliate’s 33.33 percent membership
interest in Gale Jefferson, L.L.C. (“Gale Jefferson”), an entity holding a 25
percent interest in One Jefferson Road LLC (‘One Jefferson”), which is
developing a 100,000 square foot office property at One Jefferson Road,
Parsippany, New Jersey, (“the Jefferson Property”). The property has
been fully leased to a single tenant through August 2025.
The
operating agreement of M-C Jefferson provides, among other things, for the Gale
Participation Rights (of which Mark Yeager, an Executive Vice President of the
Company, has a direct 26 percent interest). Gale Jefferson is owned
33.33 percent by M-C Jefferson and 66.67 percent by the Hampshire Generational
Fund, L.L.C. (“Hampshire”). The operating agreements of Gale
Jefferson provides, among other things, for the distribution of net cash flow,
first, in accordance with its member’s respective interests until each member is
provided, as a result of such distributions, with an annual 12 percent compound
return on the Member’s Capital Contributions, as defined in the operating
agreement and secondly, 50 percent to each of the Company and
Hampshire.
One
Jefferson is owned 25 percent by Gale Jefferson and 75 percent by One Jefferson
Road Realty Member LLC, an affiliate of JPMorgan (“JPM”). The
operating agreement of One Jefferson provides, among other things, for the
distribution of net cash flow, first, in accordance with its members’ respective
interests until each member is provided, as a result of such distributions, with
an annual 12 percent compound return on the Member’s Capital Contributions, as
defined in the operating agreement and secondly, 50 percent to JPM and Gale
Jefferson. One Jefferson has a construction loan in an amount not to
exceed $21 million (with a balance of $13.5 million at September 30, 2009),
bearing interest at a rate of LIBOR plus 160 basis points and maturing on
October 24, 2010 with a one-year extension option.
The
Company performs management, leasing and other services for Gale Jefferson and
recognized $0 and $76,000 in income (net of $123,000 and $2.6 million in direct
costs) for such services for the three months ended September 30, 2009 and 2008,
respectively and $188,000 and $250,000 in income (net of $587,000 and $8.3
million in direct costs) for the nine months ended September 30, 2009 and 2008,
respectively. 21
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 September 30, 2009
and December 31, 2008. (dollars in
thousands)
22
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 September 30, 2009 and 2008: (dollars in
thousands)
23
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
nine months ended September 30, 2009 and 2008: (dollars in
thousands)
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||