COPT Defense Properties Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Real Estate Joint Ventures

Real Estate Joint Ventures

12 Months Ended

Dec. 31, 2017

Equity Method Investments and Joint Ventures [Abstract]

Consolidated Real Estate Joint Ventures

We consolidate the real estate joint ventures described below because of our: (1) power to direct the matters that most significantly impact their activities, including development, leasing and management of the properties constructed by the VIEs; and (2) right to receive returns on our fundings and, in many cases, the obligation to fund the activities of the ventures to the extent that third-party financing is not obtained, both of which could be potentially significant to the VIEs.

The table below sets forth information pertaining to our investments in consolidated real estate joint ventures as of December 31, 2017 (dollars in thousands):



		Nominal
		Ownership		December 31, 2017				(1)
	Date	% as of		Total		Encumbered		Total
	Acquired	12/31/2017	Nature of Activity	Assets		Assets		Liabilities
LW Redstone Company, LLC	3/23/2010	85%	Development and operation of real estate (2)	$	158,891	$	75,569	$	51,180
M Square Associates, LLC	6/26/2007	50%	Development and operation of real estate (3)	73,116		45,384		45,745
Stevens Investors, LLC	8/11/2015	95%	Development of real estate (4)	71,976		—		19,905
				$	303,983	$	120,953	$	116,830

(1) Excludes amounts eliminated in consolidation.

(2) This joint venture’s properties are in Huntsville, Alabama.

(3) This joint venture’s properties are in College Park, Maryland.

(4) This joint venture’s property is in Washington, DC.

In January 2016, our partner in Stevens Investors, LLC contributed to the joint venture, for a value of $22.6 million, interests in contracts controlling land to be developed (including a purchase agreement and a ground lease). Our partner subsequently received cash distributions from the joint venture that we funded of $6.7 million in 2017 and $13.4 million in 2016.

With regard to our consolidated joint ventures:

•

For LW Redstone, LLC, we anticipate funding certain infrastructure costs (up to a maximum of $76.0 million excluding accrued interest thereon) due to be reimbursed by the City of Huntsville as discussed further in Note 8. As of December 31, 2017, we had advanced $37.8 million to the City to fund such costs. We also expect to fund additional development and construction costs through equity contributions to the extent that third party financing is not obtained. Our partner was credited with a $9.0 million capital account upon formation and is not required to make any future equity contributions. While net cash flow distributions to the partners vary depending on the source of the funds distributed, cash flows are generally distributed as follows:


•	cumulative preferred returns on capital invested to fund the project’s infrastructure costs on a pro rata basis to us and our partner;


•	cumulative preferred returns on our capital invested to fund the project’s vertical construction;


•	return of our invested capital;


•	return of our partner’s capital;


•	any remaining residual 85% to us and 15% to our partner.

Our partner has the right to require us to acquire its interest for fair value beginning in March 2020; accordingly, we classify the fair value of our partner’s interest as redeemable noncontrolling interests in the mezzanine section of our consolidated balance sheets. We have the right to purchase our partner’s interest at fair value upon the earlier of five years following the project’s achievement of a construction commencement threshold of 4.4 million square feet or March 2040; the project had achieved 674,000 square feet of construction commencement through December 31, 2017;

•

For M Square Associates, LLC, net cash flows of this entity will be distributed to the partners as follows: (1) member loans and accrued interest; (2) our preferred return and capital contributions used to fund infrastructure costs; (3) the partners’ preferred returns and capital contributions used to fund all other costs, including the base land value credit, in proportion to the accrued returns and capital accounts; and (4) residual amounts distributed 50% to each member.

•

For Stevens Investors, LLC, net cash flows of this entity will be distributed to the partners as follows: (1) member loans and accrued interest; (2) pro rata return of the partners’ capital; (3) pro rata return of the partners’ respective unpaid preferred returns; and (4) varying splits of 85% to 60% to us and the balance to our partners as we reach specified return hurdles. Our partners have the right to require us to acquire some or all of their interests for fair value for a defined period of time following the construction completion and stabilization (as defined in the operating agreement) of the joint venture’s office property; accordingly, we classify the fair value of our partners’ interest as redeemable noncontrolling interests in the mezzanine section of our consolidated balance sheets. Our partners have the right to receive some or all of the consideration for the acquisition of their interests in the form of common units in COPLP.

We disclose the activity of our redeemable noncontrolling interests in Note 12.

The ventures discussed above include only ones in which parties other than COPLP and COPT own interests. Our commitments and contingencies pertaining to our real estate joint ventures are disclosed in Note 19.

Unconsolidated Real Estate Joint Venture

As described further in Note 5, on July 21, 2016, we sold a 50% interest in six triple-net leased, single-tenant data center properties in Virginia by contributing them into GI-COPT, a newly-formed joint venture. We account for our 50% interest in the joint venture using the equity method of accounting. We had an investment balance in GI-COPT of $25.1 million as of December 31, 2017 and $25.5 million as of December 31, 2016. Our balance was lower than our share of the joint venture’s equity by $16.7 million as of December 31, 2017 and $18.1 million as of December 31, 2016 due to a difference between our cost basis and our share of the underlying equity in the net assets upon formation of the joint venture. In 2016 and 2017, we amortized this basis difference into equity in income from unconsolidated entities based on the lives of the underlying assets. In connection with our adoption of guidance pertaining to the accounting for partial sales of nonfinancial assets using the full retrospective method, effective January 1, 2018, we will retrospectively restate each reporting period presented to: fully recognize in 2016 the difference between our cost basis and our share of the underlying equity in the net assets upon formation of the joint venture; and remove the amortization of this basis difference into equity in income from consolidated entities that we recognized in 2016 and 2017.

Under the terms of the joint venture agreement, we and our partner receive returns in proportion to our investments in the joint venture.