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, 2020

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 developed 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, 2020 (dollars in thousands):


		Nominal Ownership %		December 31, 2020 (1)
	Date Acquired			Total Assets		Encumbered Assets		Total Liabilities
Entity			Location
LW Redstone Company, LLC	3/23/2010	85%	Huntsville, Alabama	$	403,448	$	92,590	$	100,334
Stevens Investors, LLC	8/11/2015	95%	Washington, D.C.	161,735		158,286		88,028
M Square Associates, LLC	6/26/2007	50%	College Park, Maryland	100,258		62,446		55,227
				$	665,441	$	313,322	$	243,589

(1)Excludes amounts eliminated in consolidation.

Each of these joint ventures are engaged in the development and operation of real estate. With regard to these joint ventures:

•for LW Redstone Company, 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. We had advanced $61.0 million to the City through December 31, 2020 to fund such costs. We also expect to fund additional development costs through equity contributions to the extent that third party financing is not obtained. Our partner was credited with a $9.0 million in invested capital upon formation and is not required to make, nor has it made, additional equity contributions. In March 2020, the LW Redstone Company, LLC joint venture agreement was amended to change the distribution terms to allow the venture to distribute financing proceeds to satisfy our partner’s cumulative preferred return and to provide our partner a priority preferred return on its invested capital. While net cash flow distributions to the partners vary depending on the source of the funds distributed, cash flows are generally distributed to the partners as follows: (1) cumulative preferred returns of 13.5% on our partner’s invested capital; (2) cumulative preferred returns of 13.5% on our invested capital; (3) return of our invested capital; (4) return of our partner’s invested capital; and (5) 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; 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 acquire 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 approximately 1.6 million square feet of construction commencement

through December 31, 2020. Our partner has the right to receive some or all of the consideration for the acquisition of its interests in the form of common units in COPLP;

•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 property’s development completion (expected to occur in 2021) 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. We and our partners each have the right to acquire each other’s interests at fair value upon the second anniversary of the property’s stabilization date (as defined in the operating agreement). 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; and

•for M Square Associates, LLC, net cash flows of this entity are 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.

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.

Unconsolidated Real Estate Joint Ventures

The table below sets forth information pertaining to our investments in unconsolidated real estate joint ventures accounted for using the equity method of accounting (dollars in thousands):



	Date Acquired	Nominal Ownership %	Number of Properties	Carrying Value of Investment (1)
Entity				December 31, 2020		December 31, 2019
B RE COPT DC JV II LLC (2)	10/30/2020	10%	8	$	15,988	$	—
BREIT COPT DC JV LLC	6/20/2019	10%	9	13,315		14,133
GI-COPT DC Partnership LLC	7/21/2016	50%	N/A	—		37,816
			17	$	29,303	$	51,949

(1)Included in the line entitled “investment in unconsolidated real estate joint ventures” on our consolidated balance sheets.

(2)As of December 31, 2020, our investment in B RE COPT was $7.4 million lower than our share of the joint venture’s equity due to a difference between our cost basis and our share of B RE COPT’s underlying equity in the net assets acquired from GI-COPT.

These joint ventures operate triple-net leased, single-tenant data center shell properties in Northern Virginia. With regard to these joint ventures:

•B RE COPT was formed in 2020, when, as described further in Note 4, we sold a 90% interest in two properties and retained a 10% interest in the properties through B RE COPT;

•on December 22, 2020, we sold, through a series of transactions, 80% of our 50% interests in LLCs holding six properties and associated mortgage debt that we owned through GI-COPT DC Partnership LLC (“GI-COPT”). We received $60 million in proceeds and a 10% retained interest in the LLCs through B RE COPT, and recognized a gain of $29.4 million on the sale of these interests. GI-COPT was dissolved upon completion of these transactions; and

•BREIT-COPT was formed in 2019, when, as described further in Note 4, we sold a 90% interest in nine properties and retained a 10% interest in the properties through the joint venture;

We concluded that B RE COPT and BREIT-COPT are variable interest entities. Under the terms of the joint venture agreements, we and our partners receive returns in proportion to our investments, and our maximum exposure to losses is limited to our investments, subject to certain indemnification obligations with respect to nonrecourse debt secured by the properties. The nature of our involvement in the activities of the joint venture does not give us power over decisions that significantly affect its economic performance.