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Mack-Cali Realty 10-Q 2012

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.1
form10qcorp.htm
 
 

 

UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION 
WASHINGTON, D.C. 20549 
 
FORM 10-Q 
 
(Mark One) 
SECURITIES EXCHANGE ACT OF 1934  

 
For the quarterly period ended September 30, 2012
 
or 
 
[  ]           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE >
SECURITIES EXCHANGE ACT OF 1934 

   
For the transition period from
                                                           to

   
Commission File Number:
1-13274

     
 
Mack-Cali Realty Corporation
 
(Exact name of registrant as specified in its charter)

Maryland
 
 22-3305147
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     

     
343 Thornall Street, Edison, New Jersey
 
08837-2206
(Address of principal executive offices)
 
(Zip Code)

     
 
(732) 590-1000
 
(Registrant’s telephone number, including area code)

 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days.  YES X NO ___

 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes X   No ___

 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
 
Large accelerated filer  x                                                                                                           Accelerated filer  ¨
 
Non-accelerated filer  ¨ (Do not check if a smaller reporting company)                                                                                                                                Smaller reporting company  ¨

 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES___  NO X 
 

As of October 23, 2012, there were 87,437,247 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.
 

  

 
 

 

MACK-CALI REALTY CORPORATION 
 
FORM 10-Q 
 
 
Part I
Financial Information
 
Page
       
 
Item 1.
Financial Statements (unaudited):
 
       
   
Consolidated Balance Sheets as of September 30, 2012 
 
   
   and December 31, 2011
4
       
   
Consolidated Statements of Operations for the three and nine months 
 
   
   ended September 30, 2012 and 2011
5
       
   
Consolidated Statement of Changes in Equity for the nine months 
 
   
   ended September 30, 2012
6
       
   
Consolidated Statements of Cash Flows for the nine months 
 
   
   ended September 30, 2012 and 2011
7
       
   
Notes to Consolidated Financial Statements
8-37
       
 
Item 2.
Management’s Discussion and Analysis of Financial Condition 
 
   
   and Results of Operations
38-58
       
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
58
       
 
Item 4.
Controls and Procedures
59
       
Part II
Other Information
   
       
 
Item 1.
Legal Proceedings
60
       
 
Item 1A.
Risk Factors
60
       
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
60
       
 
Item 3.
Defaults Upon Senior Securities
60
       
 
Item 4.
Mine Safety Disclosure
60
       
 
Item 5.
Other Information
60
       
 
Item 6.
Exhibits
60
       
Signatures
   
61
       
Exhibit Index
   
62-78

 
2

 

 
 
 
MACK-CALI REALTY CORPORATION 
 
Part I – Financial Information
 
 
 
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, 2011. 
 
The results of operations for the three and nine month periods ended September 30, 2012 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) 

           
           
   
September 30,
   
December 31,
ASSETS
 
2012
   
2011
Rental property
         
Land and leasehold interests
$
765,742
 
$
 773,026
Buildings and improvements
 
3,995,933
   
 4,001,943
Tenant improvements
 
483,955
   
 500,336
Furniture, fixtures and equipment
 
2,994
   
 4,465
   
5,248,624
   
 5,279,770
Less – accumulated depreciation and amortization
 
(1,455,420)
   
 (1,409,163)
   
3,793,204
   
 3,870,607
Rental property held for sale, net
 
18,404
   
 -
Net investment in rental property
 
3,811,608
   
 3,870,607
Cash and cash equivalents
 
21,543
   
 20,496
Investments in unconsolidated joint ventures
 
65,559
   
 32,015
Unbilled rents receivable, net
 
136,689
   
 134,301
Deferred charges and other assets, net
 
206,434
   
 210,470
Restricted cash
 
19,717
   
 20,716
Accounts receivable, net of allowance for doubtful accounts
         
of $2,948 and $2,697
 
8,023
   
 7,154
           
Total assets
$
4,269,573
 
$
 4,295,759
           
LIABILITIES AND EQUITY
         
Senior unsecured notes
$
1,198,314
 
$
 1,119,267
Revolving credit facility
 
67,000
   
 55,500
Mortgages, loans payable and other obligations
 
704,940
   
 739,448
Dividends and distributions payable
 
45,000
   
 44,999
Accounts payable, accrued expenses and other liabilities
 
106,377
   
 100,480
Rents received in advance and security deposits
 
50,546
   
 53,019
Accrued interest payable
 
19,168
   
 29,046
Total liabilities
 
2,191,345
   
 2,141,759
Commitments and contingencies
         
           
Equity:
         
Mack-Cali Realty Corporation stockholders’ equity:
         
Common stock, $0.01 par value, 190,000,000 shares authorized,
         
87,821,885 and 87,799,479 shares outstanding
 
878
   
 878
Additional paid-in capital
 
2,538,729
   
 2,536,184
Dividends in excess of net earnings
 
(715,903)
   
 (647,498)
Total Mack-Cali Realty Corporation stockholders’ equity
 
1,823,704
   
 1,889,564
           
Noncontrolling interests in subsidiaries:
         
Operating Partnership
 
252,869
   
 262,499
Consolidated joint ventures
 
1,655
   
 1,937
Total noncontrolling interests in subsidiaries
 
254,524
   
 264,436
           
Total equity
 
2,078,228
   
 2,154,000
           
Total liabilities and equity
$
4,269,573
 
$
 4,295,759
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.

 
4

 

  
 
MACK-CALI REALTY CORPORATION AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF OPERATIONS> (in thousands, except per share amounts) (unaudited)
                         
     
Three Months Ended
   
Nine Months Ended
     
September 30,
   
September 30,
REVENUES
   
2012
   
2011
   
2012
   
2011
Base rents
 
$
146,424
 
$
 148,268
 
$
443,709
 
$
 443,971
Escalations and recoveries from tenants
   
21,925
   
 21,323
   
62,862
   
 72,251
Construction services
   
1,169
   
 2,359
   
9,235
   
 8,984
Real estate services
   
1,285
   
 1,353
   
3,606
   
 3,737
Other income
   
2,409
   
 2,134
   
15,242
   
 9,875
Total revenues
   
173,212
   
 175,437
   
534,654
   
 538,818
                         
EXPENSES
                       
Real estate taxes
   
22,258
   
 14,261
   
70,061
   
 63,189
Utilities
   
17,859
   
 19,845
   
48,405
   
 56,244
Operating services
   
27,643
   
 27,604
   
82,092
   
 86,217
Direct construction costs
   
979
   
 2,290
   
8,594
   
 8,656
General and administrative
   
12,638
   
 8,675
   
35,343
   
 26,507
Depreciation and amortization
   
47,829
   
 48,082
   
143,642
   
 143,635
Total expenses
   
129,206
   
 120,757
   
388,137
   
 384,448
Operating income
   
44,006
   
 54,680
   
146,517
   
 154,370
                         
OTHER (EXPENSE) INCOME
                       
Interest expense
   
(30,510)
   
 (31,041)
   
(92,784)
   
 (92,849)
Interest and other investment income
   
7
   
 9
   
27
   
 29
Equity in earnings (loss) of unconsolidated joint ventures
   
2,418
   
 539
   
4,751
   
 1,174
Loss from early extinguishment of debt
   
 -
   
 -
   
(4,415)
   
 -
Total other (expense) income
   
(28,085)
   
 (30,493)
   
(92,421)
   
 (91,646)
Income from continuing operations
   
15,921
   
 24,187
   
54,096
   
 62,724
Discontinued operations:
                       
Income (loss) from discontinued operations
   
243
   
 (104)
   
368
   
 225
Realized gains (losses) and unrealized losses
                       
on disposition of rental property, net
   
12
   
-
   
2,390
   
 -
Total discontinued operations, net
   
255
   
 (104)
   
2,758
   
 225
Net income
   
16,176
   
 24,083
   
56,854
   
 62,949
Noncontrolling interest in consolidated joint ventures
   
85
   
 96
   
256
   
 308
Noncontrolling interest in Operating Partnership
   
(1,949)
   
 (3,028)
   
(6,624)
   
 (8,001)
Noncontrolling interest in discontinued operations
   
(31)
   
 13
   
(337)
   
 (30)
Preferred stock dividends
   
 -
   
 (664)
   
 -
   
 (1,664)
Net income available to common shareholders
 
$
14,281
 
$
 20,500
 
$
50,149
 
$
 53,562
                         
Basic earnings per common share:
                       
Income from continuing operations
 
$
0.16
 
$
 0.24
 
$
0.54
 
$
 0.63
Discontinued operations
   
 -
   
 -
   
0.03
   
 -
Net income available to common shareholders
 
$
0.16
 
$
 0.24
 
$
0.57
 
$
 0.63
                         
Diluted earnings per common share:
                       
Income from continuing operations
 
$
0.16
 
$
 0.24
 
$
0.54
 
$
 0.62
Discontinued operations
   
 -
   
 -
   
0.03
   
 -
Net income available to common shareholders
 
$
0.16
 
$
 0.24
 
$
0.57
 
$
 0.62
                         
Basic weighted average shares outstanding
   
87,826
   
 87,019
   
87,814
   
 85,649
                         
Diluted weighted average shares outstanding
   
100,075
   
 99,917
   
100,071
   
 98,631
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
  

 
5

 

 
MACK-CALI REALTY CORPORATION AND SUBSIDIARIES 
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY >(in thousands) (unaudited) 

                                 
                                 
       
Additional
   
Dividends in
   
Noncontrolling
     
 
Common Stock
   
Paid-In
   
Excess of
   
Interests
   
Total
 
Shares
   
Par Value
   
Capital
   
Net Earnings
   
in Subsidiaries
   
Equity
Balance at January 1, 2012
 87,800
 
$
 878
 
$
 2,536,184
 
$
 (647,498)
 
$
 264,436
 
$
 2,154,000
Net income
 -
   
 -
   
 -
   
 50,149
   
 6,705
   
 56,854
Common stock dividends
 -
   
 -
   
 -
   
 (118,554)
   
 -
   
 (118,554)
Common unit distributions
 -
   
 -
   
 -
   
 -
   
 (16,444)
   
 (16,444)
Decrease in noncontrolling interest
 -
   
 -
   
 -
   
 -
   
 (26)
   
 (26)
Redemption of common units
                               
  for common stock
 20
   
 -
   
 429
   
 -
   
 (429)
   
 -
Shares issued under Dividend
                               
  Reinvestment and Stock
                               
  Purchase Plan
 7
   
 -
   
 186
   
 -
   
 -
   
 186
Cancellation of shares
 (5)
   
 -
   
 (126)
   
 -
   
 -
   
 (126)
Stock compensation
 -
   
 -
   
 2,338
   
 -
   
 -
   
 2,338
Rebalancing of ownership percentage
                               
  between parent and subsidiaries
 -
   
 -
   
 (282)
   
 -
   
 282
   
 -
Balance at September 30, 2012
87,822
 
$
878
 
$
2,538,729
 
$
(715,903)
 
$
254,524
 
$
2,078,228
 
 
The accompanying notes are an integral part of these consolidated financial statements.
  
 

 
6

 

 
MACK-CALI REALTY CORPORATION AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF CASH FLOWS> (in thousands) (unaudited)
             
     
           Nine Months Ended
     
             September 30,
CASH FLOWS FROM OPERATING ACTIVITIES
   
2012
   
2011
Net income
 
$
56,854
 
$
 62,949 
Adjustments to reconcile net income to net cash provided by
           
Operating activities:
           
Depreciation and amortization, including related intangible assets
   
143,605
   
 143,202 
Depreciation and amortization on discontinued operations
   
441
   
 1,279 
Amortization of stock compensation
   
2,338
   
 2,393 
Amortization of deferred financing costs and debt discount
   
1,945
   
 1,752 
Write off of unamortized discount on senior unsecured notes
   
370
   
 -
Equity in earnings of unconsolidated joint venture, net
   
(4,751)
   
 (1,174)
Distributions of cumulative earnings from unconsolidated
           
   joint ventures
   
2,680
   
 2,482
Realized gains and unrealized losses on disposition
           
   of rental property, net
   
(2,390)
   
 -
Changes in operating assets and liabilities:
           
Increase in unbilled rents receivable, net
   
(2,438)
   
 (4,927)
Increase in deferred charges and other assets, net
   
(22,521)
   
 (31,238)
(Increase) decrease in accounts receivable, net
   
(909)
   
 3,779 
Increase in accounts payable, accrued expenses
           
   and other liabilities
   
8,056
   
 5,928 
Decrease in rents received in advance and security deposits
   
(2,472)
   
 (5,653)
Decrease in accrued interest payable
   
(7,733)
   
 (10,163)
             
Net cash provided by operating activities
 
$
173,075
 
$
 170,609 
             
CASH FLOWS FROM INVESTING ACTIVITIES
           
Rental property additions and improvements
 
$
(59,105)
 
$
 (52,259)
Development of rental property
   
(16,301)
   
 (12,971)
Proceeds from the sale of rental property
   
4,023
   
 -
Investment in unconsolidated joint ventures
   
(32,477)
   
 (334)
Distributions in excess of cumulative earnings from
           
unconsolidated joint ventures
   
1,028
   
 1,280 
Decrease (increase) in restricted cash
   
906
   
 (2,321)
             
Net cash used in investing activities
 
$
(101,926)
 
$
 (66,605)
             
CASH FLOW FROM FINANCING ACTIVITIES
           
Borrowings from revolving credit facility
 
$
420,026
 
$
 219,000 
Repayment of revolving credit facility
   
(408,526)
   
 (420,000)
Proceeds from senior unsecured notes
   
299,403
   
 -
Repayment of senior unsecured notes
   
(221,019)
   
 -
Proceeds from offering of common stock
   
 -
   
 227,374 
Repayment of mortgages, loans payable and other obligations
   
(22,424)
   
 (6,382)
Payment of financing costs
   
(2,635)
   
 (14)
Proceeds from stock options exercised
   
 -
   
 3,048 
Payment of dividends and distributions
   
(134,927)
   
 (133,027)
             
Net cash used in financing activities
 
$
(70,102)
 
$
 (110,001)
             
Net increase (decrease) in cash and cash equivalents
 
$
1,047
 
$
 (5,997)
Cash and cash equivalents, beginning of period
   
20,496
   
 21,851 
             
Cash and cash equivalents, end of period
 
$
21,543
 
$
 15,854 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
  
 
 
 
 
7

 
 
 
 
 
MACK-CALI REALTY CORPORATION AND SUBSIDIARIES

1.     ORGANIZATION AND BASIS OF PRESENTATION
 
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, 2012, the Company owned or had interests in 276 properties plus developable land (collectively, the “Properties”).  The Properties aggregate approximately 32.2 million square feet, which are comprised of 264 buildings, primarily office and office/flex buildings totaling approximately 31.8 million square feet (which include eight buildings, primarily office buildings aggregating approximately 1.2 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, one 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, 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 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.  Certain reclassifications have been made to prior period amounts in order to conform with current period presentation.
  
 
2.     SIGNIFICANT ACCOUNTING POLICIES
 
Rental  
Property
Rental properties are stated at cost less accumulated depreciation and amortization.  Costs directly related to the acquisition, development and construction of rental properties are capitalized. Pursuant to the Company’s adoption of ASC 805, Business Combinations, effective January 1, 2009, acquisition-related costs are expensed as incurred.  Capitalized development and construction costs include pre-construction costs essential to the development of the property, development and construction costs, interest, property taxes, insurance, salaries and other project costs incurred during the period of development. Capitalized development and construction salaries and related costs approximated $765,000, and $969,000 for the three months ended September 30, 2012 and 2011, respectively, and $2,738,000 and $2,849,000 for the nine months ended September 30, 2012 and 2011, respectively.  Included in total rental property is construction, tenant improvement and development in-progress of $46,794,000 and $37,069,000 as of September 30, 2012 and December 31, 2011, respectively.  Ordinary repairs and maintenance are expensed as incurred; major replacements and betterments, which improve or extend the life of the asset, are capitalized and depreciated over their estimated useful lives.  Fully-depreciated assets are removed from the accounts.  
 
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, primarily based on a percentage of the relative square footage of each portion, and capitalizes only those costs associated with the portion under construction. 
 
 
 
8

 
 
 
Properties are depreciated using the straight-line method over the estimated useful lives of the assets.  The estimated useful lives are as follows: 

   
Leasehold interests
Remaining lease term
Buildings and improvements
5 to 40 years
Tenant improvements
The shorter of the term of the
 
related lease or useful life
Furniture, fixtures and equipment
5 to 10 years
 
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 initially 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. 
 
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. 
 
 
 
9

 
 
 
On a periodic basis, management assesses whether there are any indicators that the value of the Company’s rental properties held for use may be impaired.  In addition to identifying any specific circumstances which may affect a property or properties, management considers other criteria for determining which properties may require assessment for potential impairment.  The criteria considered by management include reviewing low leased percentages, significant near-term lease expirations, recently acquired properties, current and historical operating and/or cash flow losses, near-term mortgage debt maturities or other factors that might impact the Company’s intent and ability to hold the property.  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.  These assumptions are generally based on management’s experience in its local real estate markets and the effects of current market conditions.  The assumptions 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, and actual losses or impairment may be realized in the future. 
  
Rental Property 
 
Held for Sale and 
 
Discontinued 
 
Operations
When assets are identified by management as held for sale, the Company discontinues depreciating the assets and estimates the sales price, net of selling costs, of such assets.  If, in management’s opinion, the estimated net sales price of the assets which have been identified as held for sale is less than the net book value of the assets, a valuation allowance is established.  Properties identified as held for sale and/or disposed of are presented in discontinued operations for all periods presented.  See Note 7: Discontinued Operations. 
 
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 
Joint Ventures
The Company accounts for its investments in unconsolidated joint ventures under the equity method of accounting.  The Company applies the equity method by initially recording these investments at cost, as Investments in Unconsolidated Joint Ventures, subsequently adjusted for equity in earnings and cash contributions and distributions. 
 
 
ASC 810, Consolidation, 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, the consideration of whether an entity is a VIE 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 entity’s 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.  
 
 
 
10

 
 
 
 
On January 1, 2010, the Company adopted the updated provisions of ASC 810, which amends FIN 46(R) to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity.  Additionally, ASC 810 amends FIN 46(R) to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity, which was based on determining which enterprise absorbs the majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both.  ASC 810 amends certain guidance in Interpretation 46(R) for determining whether an entity is a variable interest entity.  Also, ASC 810 amends FIN 46(R) to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity.  The enhanced disclosures are required for any enterprise that holds a variable interest in a variable interest entity.  The adoption of this guidance did not have a material impact to these financial statements.  See Note 4: Investments in Unconsolidated Joint Ventures for disclosures regarding the Company’s unconsolidated joint ventures.  
 
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, and actual losses or impairment may be realized in the future.  See Note 4: Investments in Unconsolidated Joint Ventures. 
  
Cash and Cash 
Equivalents
All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. 
 
  
Deferred 
Financing Costs
Costs incurred in obtaining financing are capitalized and amortized over the term of the related indebtedness. Amortization of such costs is included in interest expense and was $673,000 and $584,000 for the three months ended September 30, 2012 and 2011, respectively, and $1,945,000 and $1,752,000 for the nine months ended September 30, 2012 and 2011, respectively.  If a financing obligation is extinguished early, any unamortized deferred financing costs are written off and included in gains (loss) on early extinguishment of debt.  Such unamortized costs which were written off amounted to zero for the three months ended September 30, 2012 and 2011 and $370,000 and zero for the nine months ended September 30, 2012 and 2011, respectively. 
 
 
Deferred 
Leasing Costs
Costs incurred in connection with leases are capitalized and amortized on a straight-line basis over the terms of the related leases and included in depreciation and amortization.  Unamortized deferred leasing costs are charged to amortization expense upon early termination of the lease. Certain employees of the Company are compensated for providing leasing services to the Properties.  The portion of such compensation, which is capitalized and amortized, approximated $1,156,000 and $1,099,000 for the three months ended September 30, 2012 and 2011, respectively, and $3,312,000 and $3,135,000 for the nine months ended September 30, 2012 and 2011, respectively.  
 
 
 
 
 
11

 
 
 
Derivative  
Instruments
The Company measures derivative instruments, including certain derivative instruments embedded in other contracts, at fair value and records them as an asset or liability, depending on the Company’s rights or obligations under the applicable derivative contract.  For derivatives designated and qualifying as fair value hedges, the changes in the fair value of both the derivative instrument and the hedged item are recorded in earnings.  For derivatives designated as cash flow hedges, the effective portions of the derivative are reported in other comprehensive income (“OCI”) and are subsequently reclassified into earnings when the 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. 
  
Revenue 
Recognition
Base rental revenue is recognized on a straight-line basis over the terms of the respective leases.  Unbilled rents receivable represents the cumulative amount by which straight-line rental revenue exceeds rents currently billed in accordance with the lease agreements.  Above-market and below-market lease values for acquired properties are initially 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 terms of the lease for above-market leases and the remaining initial terms plus the terms of any below-market fixed-rate renewal options for below-market leases.  The capitalized above-market lease values for acquired properties are amortized as a reduction of base rental revenue over the remaining terms 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.  Escalations and recoveries from tenants are received from tenants for certain costs as provided in the lease agreements.  These costs generally include real estate taxes, utilities, insurance, common area maintenance and other recoverable costs.  See Note 14: Tenant Leases.  Construction services revenue includes fees earned and reimbursements received by the Company for providing construction management and general contractor services to clients.  Construction services revenue is recognized on the percentage of completion method.  Using this method, profits are recorded on the basis of estimates of the overall profit and percentage of completion of individual contracts.  A portion of the estimated profits is accrued based upon estimates of the percentage of completion of the construction contract.  This revenue recognition method involves inherent risks relating to profit and cost estimates.  Real estate services revenue includes property management, facilities management, leasing commission fees and other services, and payroll and related costs reimbursed from clients.  Other income includes income from parking spaces leased to tenants, income from tenants for additional services arranged for by the Company and income from tenants for early lease terminations. 
 
Allowance for
 
Doubtful Accounts
Management periodically performs a detailed review of amounts due from tenants to determine if accounts receivable balances are impaired based on factors affecting the collectability of those balances.  Management’s estimate of the allowance for doubtful accounts requires management to exercise significant judgment about the timing, frequency and severity of collection losses, which affects the allowance and net income. 
 
  
Income and 
Other Taxes
The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”).  As a REIT, the Company generally will not be subject to corporate federal income tax (including alternative minimum tax) on net income that it currently distributes to its shareholders, provided that the Company satisfies certain organizational and operational requirements including the requirement to distribute at least 90 percent of its REIT taxable income to its shareholders.  The Company has elected to treat certain of its corporate subsidiaries as taxable REIT subsidiaries (each a “TRS”).  In general, a TRS of the Company may perform additional services for tenants of the Company and generally may engage in any real estate or non-real estate related business (except for the operation or management of health care facilities or lodging facilities or the providing to any person, under a franchise, license or otherwise, rights to any brand name under which any lodging facility or health care facility is operated).  A TRS is subject to corporate federal income tax.  If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate tax rates.  The Company is subject to certain state and local taxes. 
 
 
 
 
 
12

 
 
 
Pursuant to the amended provisions related to uncertain tax provisions of ASC 740, Income Taxes, 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. 
 
In the normal course of business, the Company or one of its subsidiaries is subject to examination by federal, state and local jurisdictions in which it operates, where applicable.  As of September 30, 2012, the tax years that remain subject to examination by the major tax jurisdictions under the statute of limitations are generally from the year 2007 forward. 
 
Earnings 
 
Per Share
The Company presents both basic and diluted earnings per share (“EPS”).  Basic EPS excludes dilution and is computed by dividing net income available to common shareholders by the weighted average number of shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, where such exercise or conversion would result in a lower EPS amount. 
 
Dividends and 
 
Distributions 
Payable
The dividends and distributions payable at September 30, 2012 represents dividends payable to common shareholders (87,822,569 shares) and distributions payable to noncontrolling interest common unitholders of the Operating Partnership (12,177,122 common units) for all such holders of record as of October 3, 2012 with respect to the third quarter 2012.  The third quarter 2012 common stock dividends and common unit distributions of $0.45 per common share and unit were approved by the Board of Directors on September 12, 2012.  The common stock dividends and common unit distributions payable were paid on October 12, 2012. 
 
 
The dividends and distributions payable at December 31, 2011 represents dividends payable to common shareholders (87,800,047 shares) and distributions payable to noncontrolling interest common unitholders of the Operating Partnership (12,197,122 common units) for all such holders of record as of January 5, 2012 with respect to the fourth quarter 2011.  The fourth quarter 2011 common stock dividends and common unit distributions of $0.45 per common share and unit were approved by the Board of Directors on December 6, 2011.  The common stock dividends and common unit distributions payable were paid on January 13, 2012. 
  

 
13

 

 
Costs Incurred 
 
For Stock 
 
Issuances
Costs incurred in connection with the Company’s stock issuances are reflected as a reduction of additional paid-in capital. 
 
Stock  
 
Compensation
The Company accounts for stock options and restricted stock awards granted prior to 2002 using the intrinsic value method prescribed in the previously existing accounting guidance on accounting for stock issued to employees.  Under this guidance, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company’s stock at the date of grant over the exercise price of the option granted.  Compensation cost for stock options is recognized ratably over the vesting period.  The Company’s policy is to grant options with an exercise price equal to the quoted closing market price of the Company’s stock on the business day preceding the grant date.  Accordingly, no compensation cost has been recognized under the Company’s stock option plans for the granting of stock options made prior to 2002.  Restricted stock awards granted prior to 2002 are valued at the vesting dates of such awards with compensation cost for such awards recognized ratably over the vesting period. 
 
 
In 2002, the Company adopted the provisions of ASC 718, Compensation-Stock Compensation.  In 2006, the Company adopted the amended 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 restricted stock expense of $579,000 and $690,000 for the three months ended September 30, 2012 and 2011, respectively, and $1,971,000 and $2,070,000 for the nine months ended September 30, 2012 and 2011, respectively. 
 
Other  
Comprehensive 
Income
Other comprehensive income (loss) includes items that are recorded in equity, such as unrealized holding gains or losses on marketable securities available for sale.
  
  
3.     RECENT TRANSACTIONS>
 
Roseland Transaction 
On October 23, 2012, the Company acquired the real estate development and management businesses (the “Roseland Business”) of Roseland Partners, L.L.C. (“Roseland Partners”), a premier multi-family residential community developer and manager based in Short Hills, New Jersey, and the Roseland Partners’ interests, principally in the form of unconsolidated joint venture interests, in various entities which, directly or indirectly, own or have rights with respect to various residential and/or commercial properties or vacant land (collectively, the “Roseland Assets”), pursuant to a membership interest and asset purchase agreement dated as of October 8, 2012 (“Roseland Agreement”) with Roseland Partners and, for the limited purposes stated in the Roseland Agreement, the following principals of the Roseland Partners (“Roseland Principals”): Marshall B. Tycher, Bradford R. Klatt and Carl Goldberg (the “Roseland Transaction”).
 
The Roseland Assets consist primarily of interests in: six operating multi-family properties totaling 1,769 apartments, one condo-residential property totaling four units and four commercial properties totaling approximately 212,000 square feet; 13 in-process development projects, which include nine multi-family properties totaling 2,149 apartments, two garages totaling 1,591 parking spaces and two retail properties totaling approximately 35,400 square feet; and interests or options in land parcels which may support approximately 5,980 apartments, approximately 736,000 square feet of commercial space, and a 321-key hotel. The locations of the properties extend from New Jersey to Massachusetts. The majority of the properties are located in New Jersey, in particular, at its flagship development at Port Imperial in Weehawken and West New York, in addition to the Jersey City Waterfront and other urban in-fill and transit-oriented locations. 
 
 
 
14

 
 
 
The Roseland Assets and Roseland Business were acquired by the Company for aggregate consideration of up to approximately $134.6 million, subject to adjustment, consisting of: 
 
·  
approximately $115 million in cash (the “Roseland Cash Amount”);  
·  
approximately $4.0 million of assumed debt; and 
·  
up to an additional $15.6 million in cash (in the aggregate) that may be paid to Roseland Partners pursuant to certain earn-outs, which are based upon the achievement of certain operational milestones of the Roseland Assets and Roseland Business, including the completion of certain properties under construction, finalization of project financing and commencement of construction on certain properties, and achievement of other goals, during the three years following the closing date (the “Earn-Out Period”).  
 
The Roseland Cash Amount and related closing costs were financed by the Company primarily through borrowings under its unsecured revolving credit facility and available cash.  The purchase price is subject to a working capital adjustment and further adjustment upon the failure to achieve a certain level of fee revenue, during the 33-month period following the closing date, from certain management agreements, development services agreements and consulting agreements acquired as part of the Roseland Assets and Roseland Business.  Also, at the closing, approximately $34 million in cash from the Roseland Cash Amount was deposited in escrow to secure certain of the indemnification obligations of Roseland Partners and the Roseland Principals under the terms of the Roseland Agreement. 
 
During the Earn-Out Period, each of the Roseland Principals will serve as co-presidents of Roseland Management Services, L.P., a newly formed wholly owned subsidiary of the Company (“Roseland Management”), pursuant to employment agreements executed at closing.  Mitchell E. Hersh, President and Chief Executive Officer of the Company, also is assuming the role of Chairman and Chief Executive of Roseland Management. 
 
The Roseland Agreement contains customary representations and warranties, covenants and indemnification obligations of the parties thereto as set forth therein.  For the three and nine months ended September 30, 2012, included in general and administrative expense was approximately $3.8 million and $6.3 million, respectively, for transaction costs related to the Roseland Transaction.
 
Property Sales 
On July 25, 2012, the Company sold its 47,700 square foot office property located at 95 Chestnut Ridge Road in Montvale, New Jersey for net sales proceeds of approximately $4.0 million (with approximately no gain from the sale).  The Company had recognized a valuation allowance of $0.5 million on this property at March 31, 2012.
 
 
 
4.     INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES
 
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, material misrepresentations, and 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”), which owns 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.  The venture owns undeveloped land currently used as a parking facility. 
 
SOUTH PIER AT HARBORSIDE – HOTEL 
The Company has a joint venture with Hyatt Corporation (“Hyatt”) which owns a 350-room hotel on the South Pier at Harborside Financial Center, Jersey City, New Jersey.  The Company owns a 50 percent interest in the venture.   
 
The venture has a mortgage loan with a balance as of September 30, 2012 of $64.3 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, 2012 of $5.1 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 $5.1 million letter of credit in support of this loan, half of which is indemnified by Hyatt.   
 
 
 
15

 
 
 
RED BANK CORPORATE PLAZA  
The Company has a joint venture with The PRC Group, which owns 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.   
 
The venture had a $20.3 million loan with a commercial bank collateralized by the office property, which bore interest at a rate of the London Interbank Offered Rate (“LIBOR”) plus 125 basis points and was scheduled to mature in May 2011.  In May 2011, the venture paid the lender $1.7 million and refinanced the remainder of the loan.  The new loan, with a balance of $17.5 million at September 30, 2012, bears interest at a rate of LIBOR plus 300 basis points and matures on May 17, 2016.  LIBOR was 0.21 percent at September 30, 2012.  The loan includes contingent guarantees for a portion of the principal by the Company based on certain conditions.  On September 22, 2011, the interest rate on 75 percent of the loan was fixed at 3.99375 percent effective from October 17, 2011 through maturity.   
 
The Company performs management, leasing, and other services for the property owned by the joint venture and recognized $25,000 and $24,000 in fees for such services in the three months ended September 30, 2012 and 2011, respectively, and $75,000 and $72,000 for the nine months ended September 30, 2012 and 2011, respectively. 
 
MACK-GREEN-GALE LLC/GRAMERCY AGREEMENT 
On May 9, 2006, the Company entered into a joint venture, Mack-Green-Gale LLC and subsidiaries (“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: 
 
(i)  
   99 percent of Mack-Green’s share of the profits and losses from 10 specific OPLP Properties allocable to the Company and one percent allocable to SL Green; 
 
      (ii)
  one percent of Mack-Green’s share of the profits and losses from eight specific OPLP Properties and its minor interest in four office properties allocable to the Company and 99 percent allocable to SL Green; and 
      (iii)  50 percent of all other profits and losses allocable to the Company and 50 percent allocable to SL Green.  
 
Substantially all of the OPLP Properties were encumbered by mortgage loans with an aggregate outstanding principal balance of $276.3 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, 2009, 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 points 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 was scheduled to terminate 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.  Under the direction of Gramercy, 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.  On November 5, 2010, the Portfolio Entities that owned the remaining four unconsolidated Portfolio Properties provided estimates of the properties’ fair market values to Gramercy, pursuant to the Gramercy Agreement. 
 
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 not subject to the Gramercy Agreement, as its 100-percent ownership and rights regarding these entities were unchanged in the transaction.  The OPLP does not consolidate the Portfolio Entities subject to the Gramercy Agreement, as the Gramercy Agreement is considered a reconsideration event under the provisions of ASC 810, 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. 
 
On March 31, 2010, the venture sold one of its unconsolidated Portfolio Properties subject to the Gramercy Agreement, 1280 Wall Street West, a 121,314 square foot office property, located in Lyndhurst, New Jersey, for approximately $13.9 million, which was primarily used to pay down mortgage loans pursuant to the Gramercy Agreement. 
 
On December 17, 2010, the venture repaid the $26.8 million allocated loan amount of one of the unconsolidated Portfolio Properties which was subject to the Gramercy Agreement, One Grande Commons, a 198,376 square foot office property, located in Bridgewater, New Jersey.  Concurrent with the repayment, the venture placed $11 million mortgage financing on the property obtained from a bank.  As a result of the repayment of the existing mortgage loan, the venture, which is consolidated by the Company, obtained a controlling interest and is consolidating the office property. 
 
The Company performed management, leasing, and construction services for properties which had been owned by the unconsolidated joint ventures and recognized $117,000 and $108,000 in income for such services in the three months ended September 30, 2012 and 2011, respectively, and $354,000 and $382,000 in income for the nine months ended September 30, 2012 and 2011, respectively.  
 
 
 
17

 
 
 
On October 18, 2012, the Portfolio Entities transferred the deeds of the four remaining Portfolio Properties to Gramercy in satisfaction of their obligations. 
 
On September 8, 2006, the Company entered into a joint venture to form M-C Vreeland, LLC (“M-C Vreeland”), for the sole purpose of acquiring 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 Participation Rights (see Note 16: Noncontrolling Interests in Subsidiaries – Participation Rights).  
 
The office property at 12 Vreeland is a 139,750 square foot office building.  The property had a fully-amortizing mortgage loan, the balance of which was fully satisfied at maturity on July 1, 2012. 
 
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 
In October 2006, the Company entered into a joint venture with affiliates of Vornado Realty LP (“Vornado”) and JP Morgan Chase Bank (“JPM”) to acquire and redevelop the Filenes property located in the Downtown Crossing district of Boston, Massachusetts (the “Filenes Property”).  The venture was organized 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, aggregating 1.2 million square feet.  The Company, through subsidiaries, separately holds approximately a 15 percent indirect ownership interest in each of the units.  The project is subject to governmental approvals. 
 
The venture acquired the Filenes Property on January 29, 2007, for approximately $100 million. 
 
Distributions will generally be in proportion to its members’ respective ownership interests and, depending upon the development unit, promotes will be available to specified partners after the achievement of certain internal rates of return ranging from 10 to 15 percent. 
 
The joint venture has suspended its plans for the development of the Filenes Property.  The venture recorded an impairment charge of approximately $69.5 million on its development project in 2008. 
 
On May 15, 2012, the Company and JPM granted Vornado an option to purchase their interest for $45 million, subject to certain conditions, through May 16, 2013. 
 
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”) for the sole purpose of acquiring an 8.33 percent indirect interest in One Jefferson Road LLC (“One Jefferson”), which developed and placed in service a 100,010 square foot office property at One Jefferson Road, Parsippany, New Jersey, (“the Jefferson Property”).  The property has been fully leased to a single tenant starting in 2010 through August 2025. 
 
The operating agreement of M-C Jefferson provides, among other things, for the Participation Rights (see Note 16: Noncontrolling Interests in Subsidiaries – Participation Rights).  The operating agreements of Gale Jefferson, L.L.C. (“Gale Jefferson”), which is owned 33.33 percent by M-C Jefferson and 66.67 percent by the Hampshire Generational Fund, L.L.C. (“Hampshire”) 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. 
 
 
 
18

 
 
 
One Jefferson had a loan in the amount of $21 million, bearing interest at a rate of LIBOR plus 160 basis points, which was repaid on October 24, 2011.  On October 24, 2011, One Jefferson obtained a new loan in the amount of $20.2 million, which bears interest at a rate of one-month LIBOR plus 160 basis points and matures on October 24, 2013.    
 
The Company performs management, leasing, and other services for Gale Jefferson and recognized $48,000 and $39,000 in income for such services in the three months ended September 30, 2012 and 2011, respectively, and $144,000 and $118,000 in income for the nine months ended September 30, 2012 and 2011, respectively.   
 
STAMFORD SM LLC 
On February 17, 2012, the Company entered into a joint venture to form Stamford SM L.L.C. (“Stamford SM”) which acquired a senior mezzanine loan (the “Mezz Loan”) position in the capital stack of a 1.7 million square foot class A portfolio in Stamford, Connecticut for $40 million.  The Mezz Loan has a face value of $50 million and is secured by the equity interests in a premier seven-building portfolio containing 1.67 million square feet of class A office space and 106 residential rental units totaling 70,500 square feet, all located in the Stamford Central Business District.  The interest-only Mezz Loan has a carrying value of $41.6 million as of September 30, 2012.  The Mezz Loan is subject to an agreement, which provides subject to certain conditions, that principal proceeds above $47 million are paid to another party.  The Mezz Loan bears interest at LIBOR plus 325 basis points and matures in August 2013 with a one-year extension option, subject to certain conditions.
 
The operating agreement of Stamford SM provides, among other things, distributions of net available cash in accordance with its members’ respective ownership percentages.  The Company owns an 80 percent interest in the venture.  The Company and the 20 percent member share equally in decision-making on all major decisions involving the operations of the joint venture. 
 
 
 

 
19

 

 
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, 2012 and December 31, 2011: (dollars in thousands) 

                                                     
                                                     
   
September 30, 2012
   
Plaza
VIII & IX
Associates
   
Harborside
South Pier
   
Red Bank
Corporate
Plaza
   
Gramercy
Agreement
   
12
Vreeland
   
Boston-
Downtown
Crossing
   
Gale
Jefferson
   
Stamford
SM LLC
   
Combined
Total
Assets:
                                                   
Rental property, net
$
7,875
 
$
 56,265
 
$
22,353
 
$
 38,267
 
$
14,046
   
 -
   
 -
   
 -
 
$
138,806
Loan receivable
 
 -
   
 -
   
 -
   
 -
   
 -
   
 -
   
 -
 
$
41,610
   
41,610
Other assets
 
1,478
   
 14,623
   
3,301
   
 5,680
   
1,356
 
$
46,198
 
$
2,673
   
227
   
75,536
Total assets
$
9,353
 
$
 70,888
 
$
25,654
 
$
43,947
 
$
15,402
 
$
46,198
 
$
2,673
 
$
41,837
 
$
255,952
Liabilities and partners'/members' capital (deficit):
                                                   
Mortgages, loans payable
                                                   
  and other obligations
 
 -
 
$
 69,405
 
$
17,542
 
$
 50,978
   
-
   
 -
   
 -
   
 -
 
$
137,925
Other liabilities
$
530
   
 5,814
   
309
   
 935
 
$
725
   
 -
   
 -
   
 -
   
8,313
Partners’/members’
                                                   
  capital (deficit)
 
8,823
   
 (4,331)
   
7,803
   
 (7,966)
   
14,677
 
$
46,198
 
$
2,673
 
$
41,837
   
109,714
Total liabilities and
                                                   
  partners’/members’
                                                   
  capital (deficit)
$
9,353
 
$
 70,888
 
$
25,654
 
$
 43,947
 
$
15,402
 
$
46,198
 
$
2,673
 
$
41,837
 
$
255,952
Company’s investments
                                                   
  in unconsolidated
                                                   
  joint ventures, net
$
4,334
 
$
 (960)
 
$
3,804
   
 -
 
$
10,837
 
$
13,006
 
$
1,068
 
$
33,470
 
$
65,559
                                                     
                                                     
   
December 31, 2011
   
Plaza
VIII & IX
Associates
   
Harborside
South Pier
   
Red Bank
Corporate
Plaza
   
Gramercy
Agreement
   
12
Vreeland
   
Boston-
Downtown
Crossing
   
Gale
Jefferson
   
Stamford
SM LLC
   
Combined
Total
Assets:
                                                   
Rental property, net
$
 8,335
 
$
 59,733
 
$
 22,903
 
$
 39,276
 
$
 13,122
   
 -
   
 -
   
 -
 
$
 143,369
Other assets
 
 933
   
 12,840
   
 2,909
   
 5,669
   
 521
 
$
 46,121
 
$
 2,927
   
 -
   
 71,920
Total assets
$
 9,268
 
$
 72,573
 
$
 25,812
 
$
 44,945
 
$
 13,643
 
$
 46,121
 
$
 2,927
   
 -
 
$
 215,289
Liabilities and partners'/members' capital (deficit):
                                                   
Mortgages, loans payable
                                                   
  and other obligations
 
 -
 
$
 70,690
 
$
 18,100
 
$
 50,978
 
$
 1,207
   
 -
   
 -
   
 -
 
$
 140,975
Other liabilities
$
 531
   
 4,982
   
 117
   
 1,086
   
 168
   
 -
   
 -
   
 -
   
 6,884
Partners’/members’
                                                   
  capital (deficit)
 
 8,737
   
 (3,099)
   
 7,595
   
 (7,119)
   
 12,268
 
$
 46,121
 
$
 2,927
   
 -
   
 67,430
Total liabilities and
                                                   
  partners’/members’
                                                   
  capital (deficit)
$
 9,268
 
$
 72,573
 
$
 25,812
 
$
 44,945
 
$
 13,643
 
$
 46,121
 
$
 2,927
   
 -
 
$
 215,289
Company’s investments
                                                   
  in unconsolidated
                                                   
  joint ventures, net
$
 4,291
 
$
 (343)
 
$
 3,676
   
 -
 
$
 10,233
 
$
 13,005
 
$
 1,153
   
 -
 
$
 32,015
 
 
 
 
 
 
 
20

 

 
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 September 30, 2012 and 2011:  (dollars in thousands)

                                                       
 
Three Months Ended September 30, 2012
   
Plaza
VIII & IX
Associates
   
Harborside
South Pier
   
Red Bank
Corporate
Plaza
   
Gramercy
Agreement
   
12
Vreeland
   
Boston-
Downtown
Crossing
   
Gale
Jefferson
   
Stamford
SM LLC
   
Combined
Total
Total revenues
$
259
 
$
 12,214
 
$
851
 
$
 1,742
 
$
1,012
   
 -
 
$
68
 
$
1,165
 
$
17,311
Operating and other
 
(62)
   
 (7,600)
   
(247)
   
 (942)
   
(291)
 
$
(21)
   
 -
   
 (6)
   
(9,169)
Depreciation and amortization
 
(154)
   
 (1,366)
   
(228)
   
 (596)
   
(153)
   
 -
   
 -
   
 -
   
(2,497)
Interest expense
 
 -
   
 (1,089)
   
(188)
   
 (389)
   
(9)
   
 -
   
 -
   
 -
   
(1,675)
                                                     
Net income
$
43
 
$
 2,159
 
$
188
 
$
 (185)
 
$
559
 
$
(21)
 
$
68
 
$
1,159
 
$
3,970
Company’s equity in earnings
                                                   
  (loss) of unconsolidated
                                                   
  joint ventures
$
21
 
$
 1,080
 
$
94
   
 -
 
$
279
 
$
(6)
 
$
23
 
$
927
 
$
2,418
                                                       
                                                       
                                                       
 
Three Months Ended September 30, 2011
   
Plaza
VIII & IX
Associates
   
Harborside
South Pier
   
Red Bank
Corporate
Plaza
   
Gramercy
Agreement
   
12
Vreeland
   
Boston-
Downtown
Crossing
   
Gale
Jefferson
   
Stamford
SM LLC
   
Combined
Total
Total revenues
$
 272
 
$
 9,558
 
$
 832
 
$
 1,340
 
$
 663
   
 -
 
$
 75
   
 -
 
$
 12,740
Operating and other
 
 (58)
   
 (6,296)
   
 (231)
   
 (968)
   
 (93)
 
$
 (362)
   
 -
   
 -
   
 (8,008)
Depreciation and amortization
 
 (154)
   
 (1,415)
   
 (226)
   
 (449)
   
 (261)
   
 -
   
 -
   
 -
   
 (2,505)
Interest expense
 
 -
   
 (1,112)
   
 (167)
   
 (384)
   
 (41)
   
 -
   
 -
   
 -
   
 (1,704)
                                                     
Net income
$
 60
 
$
 735
 
$
 208
 
$
 (461)
 
$
 268
 
$
 (362)
 
$
 75
   
 -
 
$
 523
Company’s equity in earnings
                                                   
  (loss) of unconsolidated
                                                   
  joint ventures
$
 31
 
$
 361
 
$
 104
   
 -
 
$
 134
 
$
 (115)
 
$
 24
   
 -
 
$
 539
 
 
 
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 nine months ended September 30, 2012 and 2011: (dollars in thousands)

                                                       
 
Nine Months Ended September 30, 2012
   
Plaza
VIII & IX
Associates
   
Harborside
South Pier
   
Red Bank
Corporate
Plaza
   
Gramercy
Agreement
   
12
Vreeland
   
Boston-
Downtown