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, 2014

Equity Method Investments and Joint Ventures [Abstract]

Consolidated Real Estate Joint Ventures

The table below sets forth information pertaining to our investments in consolidated real estate joint ventures as of December 31, 2014 (dollars in thousands):



		Nominal
		Ownership		December 31, 2014				(1)
	Date	% as of		Total		Encumbered		Total
	Acquired	12/31/2014	Nature of Activity	Assets		Assets		Liabilities
LW Redstone Company, LLC	3/23/2010	85%	Operates four buildings and developing others (2)	$	143,534	$	66,620	$	41,659
M Square Associates, LLC	6/26/2007	50%	Operates two buildings and developing others (3)	59,414		48,856		39,077
				$	202,948	$	115,476	$	80,736

(1) Excludes amounts eliminated in consolidation.

(2) This joint venture’s property is in Huntsville, Alabama.

(3) This joint venture’s properties are in College Park, Maryland (in the Baltimore/Washington Corridor).

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 9; as of December 31, 2014, we had advanced $49.1 million to the City to fund such costs (included in investing receivables on our consolidated balance sheets, and including accrued interest thereon). 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 sheet. We disclose the activity for this redeemable noncontrolling interest in Note 13. 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 561,000 square feet of construction commencement through December 31, 2014; and

•

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.

The ventures discussed above include only ones in which parties other than COPLP and COPT own interests.

During the periods included herein, we also owned investments in the following consolidated real estate joint ventures:


•	Arundel Preserve #5, LLC, a joint venture owning property in Hanover, Maryland (in the Baltimore/Washington Corridor) and in which we had a 50% nominal ownership interest. On September 17, 2013, we acquired our partner’s noncontrolling interest, along with incremental additional land value in the venture, in exchange for 221,501 common units in COPLP valued at $5.2 million;


•	MOR Forbes 2 LLC, a joint venture owning property in Lanham, Maryland (in the Baltimore/Washington Corridor) and in which we had a 50% nominal ownership interest. On December 11, 2013, the joint venture sold the property, after which the proceeds were distributed to the partners and there was substantially no remaining business operations or property; and


•	COPT-FD Indian Head, LLC, a joint venture owning property in Charles County, Maryland (in our “Other” region). On August 7, 2014, the joint venture’s property was repurchased by Charles County under the terms of a development agreement for $6.4 million, after which the proceeds were distributed to the partners and there was no remaining business operations or assets.

We consolidate the real estate joint ventures described above because we have: (1) the power to direct the matters that most significantly impact the activities of the joint ventures, including development, leasing and management of the properties constructed by the VIEs; and (2) the 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.

Our commitments and contingencies pertaining to our real estate joint ventures are disclosed in Note 23.

Unconsolidated Real Estate Joint Venture

During the periods included herein, we had a 20% ownership interest in an unconsolidated real estate joint venture that operated 16 operating properties, and in which we had a negative investment balance of $6.4 million as of December 31, 2012. We historically accounted for the investment in the joint venture using the equity method of accounting primarily because: (1) we shared with our partner the power to direct the matters that most significantly impact the activities of the joint venture, including the management and operations of the properties and disposal rights with respect to such properties; and (2) our partner had the right to receive benefits and absorb losses that could be significant to the VIE through its proportionately larger investment. We deferred the gain on our initial contribution of property to the joint venture in a prior period due to certain guarantees described in Note 23, and we subsequently recognized losses in excess of our investment due to such guarantees and our intent to support the joint venture. During the fourth quarter of 2012, the holder of the mortgage debt encumbering all of the joint venture’s properties notified us of the debt’s default, initiated foreclosure proceedings and terminated responsibility that we carried for management of the properties; accordingly, we discontinued recognition of losses on this investment under the equity method effective in October 2012 due to our having neither the obligation nor intent to support the joint venture. The carrying amount of our investment in this joint venture was lower than our share of the equity in the joint venture by $4.5 million as of December 31, 2012 due to our deferral of the gain on our contribution of the real estate into the joint venture upon its formation and our discontinuance of loss recognition under the equity method effective October 2012.

On December 6, 2013, the holder of the mortgage debt foreclosed on the properties. As a result, title to the properties was transferred to the mortgage lender and the joint venture was relieved of the debt obligation. The joint venture still had $5.6 million in nonrecourse mezzanine debt as of December 31, 2014; however, the joint venture no longer holds any property or other assets and has ceased all business operations. We continue to be subject to standard nonrecourse loan guarantees relating to this joint venture that are described further in Note 23; however, we assessed the nature of these guarantees and determined that the likelihood of us incurring any liability from these guarantees was remote. Therefore, we recognized a gain on the substantive disposition of our investment in the joint venture in 2013 of $6.3 million, which is included in the line entitled “gain on sales of real estate, net of income taxes” on our consolidated statements of operations.

Under the terms of the agreements governing the joint venture, net cash flows were to be distributed to the partners in proportion to their respective ownership interests. We did not recognize fees from the joint venture for property management, construction and leasing services we provided in 2012.

The following table sets forth the condensed statements of operations for this unconsolidated real estate joint venture (in thousands):



	For the Years Ended December 31,
	2013			2012
Revenues	$	6,519		$	7,316
Property operating expenses	(2,818		)	(2,829		)
Interest expense	(10,463		)	(7,672		)
Depreciation and amortization expense	(2,067		)	(2,283		)
Gain on early extinguishment of debt	23,013			—
Net income (loss)	$	14,184		$	(5,468	)