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, 2012

Equity Method Investments and Joint Ventures [Abstract]

During the periods included herein, we had an investment in one unconsolidated real estate joint venture accounted for using the equity method of accounting. Information pertaining to this joint venture investment is set forth below (dollars in thousands):



Investment Balance at (1)						Date		Nature of	Maximum Exposure
December 31, 2012			December 31, 2011			Acquired	Ownership	Activity	to Loss (2)
$	(6,420	)	$	(6,071	)	9/29/2005	20%	Operates 16 Buildings	$	—

(1) 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 at December 31, 2012 and $5.2 million at December 31, 2011 due to our deferral of gain on the contribution by us of real estate into the joint venture upon its formation and our discontinuance of the equity method effective October 2012, as discussed below. A difference will continue to exist to the extent the nature of our continuing involvement in the joint venture remains the same.

(2) Derived from the sum of our investment balance and maximum additional unilateral capital contributions or loans required from us. Not reported above are additional amounts that we and our partner are required to fund when needed by this joint venture; these funding requirements are proportional to our respective ownership percentages. Also not reported above are additional unilateral contributions or loans from us, the amounts of which are uncertain, that we would be required to make if certain contingent events occur (see Note 20).

Net cash flows of the joint venture are distributed to the partners in proportion to their respective ownership interests. We did not recognized fees from the joint venture for property management, construction and leasing services we provided in 2012, 2011 and 2010.

The following table sets forth condensed balance sheets for this unconsolidated real estate joint venture (in thousands):



	December 31,
	2012			2011
Properties, net	$	58,460		$	59,792
Other assets	4,376			3,529
Total assets	$	62,836		$	63,321

Liabilities (primarily debt)	$	72,693		$	67,710
Owners’ equity	(9,857		)	(4,389		)
Total liabilities and owners’ equity	$	62,836		$	63,321

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



	For the Years Ended December 31,
	2012			2011			2010
Revenues	$	7,316		$	7,577		$	8,405
Property operating expenses	(2,829		)	(3,673		)	(3,600		)
Interest expense	(7,672		)	(3,913		)	(3,937		)
Depreciation and amortization expense	(2,283		)	(2,463		)	(3,154		)
Net loss	$	(5,468	)	$	(2,472	)	$	(2,286	)

We historically accounted for the investment in our one unconsolidated real estate joint venture using the equity method of accounting primarily because: (1) we share 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 has the right to receive benefits and absorb losses that could be significant to the VIE through its proportionately larger investment. We deferred gain in a prior period on our initial contribution of property to the joint venture due to certain guarantees described in Note 20, 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 mortgage debt encumbering all of the joint venture’s properties notified us of the debt’s default, initiated foreclosure proceedings and terminated our property management responsibilities; accordingly, we discontinued our application of the equity method to this investment effective in October 2012 due to our having neither the obligation nor intent to support the joint venture.

The table below sets forth information pertaining to our investments in consolidated real estate joint ventures at December 31, 2012 (dollars in thousands):



		Nominal
		Ownership		December 31, 2012				(1)
	Date	% at		Total		Encumbered		Total
	Acquired	12/31/2012	Nature of Activity	Assets		Assets		Liabilities
LW Redstone Company, LLC	3/23/2010	85%	Developing business park (2)	$	76,295	$	16,809	$	12,990
M Square Associates, LLC	6/26/2007	50%	Operating two buildings and developing others (3)	60,798		47,360		43,149
Arundel Preserve #5, LLC	7/2/2007	50%	Operating one building (4)	39,581		36,811		17,722
COPT-FD Indian Head, LLC	10/23/2006	75%	Holding land parcel (5)	6,436		—		16
MOR Forbes 2 LLC	12/24/2002	50%	Operating one building (6)	3,879		—		96
				$	186,989	$	100,980	$	73,973

(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 Suburban Maryland region).

(4) This joint venture’s property is in Hanover, Maryland (in the Baltimore/Washington Corridor).

(5) This joint venture’s property is in Charles County, Maryland. In 2012, the joint venture exercised its option under a development agreement to require Charles County to repurchase the land parcel at its original acquisition cost. Under the terms of the agreement with Charles County, the repurchase is expected to occur by August 2014.

(6) This joint venture’s property is in Lanham, Maryland (in the Suburban Maryland region).

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) that we expect will be reimbursed by the City of Huntsville; as of December 31, 2012, we had advanced $33.3 million to the City to fund such costs (included in prepaid expenses and other assets on our consolidated balance sheet). 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 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.

•

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 Arundel Preserve #5, LLC, net cash flows will be distributed to the partners as follows: (1) member loans and accrued interest; (2) preferred returns in proportion to the partners' respective capital accounts; (3) repayment of any building operating reserves funded by us; and (4) residual cash flows in proportion to the partners' respective ownership interests.


•	For COPT-FD Indian Head, LLC, net cash flows will be distributed to the partners in proportion to their respective ownership interests.


•	For MOR Forbes 2 LLC, net cash flows will be distributed to the partners in proportion to their respective ownership interests.

We consolidate these real estate joint ventures 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 20.