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Agreements and Transactions with Related Parties | 9 Months Ended
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Sep. 30, 2014
Agreements and Transactions with Related Parties |
Agreements and Transactions with Related Parties | Note 14 — Agreements and Transactions with Related Parties Management Agreement The Company, ARLP and Arbor Realty SR, Inc. have a management agreement with ACM, pursuant to which ACM provides certain services and the Company pays ACM a base management fee and under certain circumstances, an annual incentive fee. The base management fee is an arrangement whereby the Company reimburses ACM for its actual costs incurred in managing the Company’s business based on the parties’ agreement in advance on an annual budget with subsequent quarterly true-ups to actual costs. All origination fees on investments are retained by the Company. The incentive fee is measured on an annual basis and is calculated as (1) 25% of the amount by which (a) the Company’s funds from operations per share, adjusted for certain gains and losses including gains from the retirement and restructuring of debt and 60% of any loan loss reserve recoveries (spread over a three year period), exceeds (b) the product of (x) 9.5% per annum or the Ten Year U.S. Treasury Rate plus 3.5%, whichever is greater, and (y) the greater of $10.00 or the weighted average of book value of the net assets contributed by ACM to ARLP per ARLP partnership unit, the offering price per share of the Company’s common equity in the private offering on July 1, 2003 and subsequent offerings and the issue price per ARLP partnership unit for subsequent contributions to ARLP, multiplied by (2) the weighted average of the Company’s outstanding shares. The minimum return, or incentive fee hurdle to be reached before an incentive fee is earned, is a percentage applied on a per share basis to the greater of $10.00 or the average gross proceeds per share. In addition, 60% of any loan loss and other reserve recoveries are eligible to be included in the incentive fee calculation, which recoveries are spread over a three year period. The management agreement also allows the Company to consider, from time to time, the payment of additional “success-based” fees to ACM for accomplishing certain specified corporate objectives; has a termination fee of $10.0 million; and is renewable automatically for successive one-year terms, unless terminated with six months prior written notice. If the Company terminates or elects not to renew the management agreement without cause, it is required to pay the termination fee of $10.0 million. The following table sets forth the Company’s base management fees and incentive fees for the periods indicated:
|  | Three Months Ended September 30, |  | Nine Months Ended September 30, |
Management Fees: |  | 2014 |  | 2013 |  | 2014 |  | 2013 |
Base (1) |  | $ | 2,450,000 |  | $ | 2,800,000 |  | $ | 7,400,000 |  | $ | 8,400,000 |
Incentive (2) |  | — |  | — |  | — |  | — |
Total management fee |  | $ | 2,450,000 |  | $ | 2,800,000 |  | $ | 7,400,000 |  | $ | 8,400,000 |
| (1) |  | At September 30, 2014 and 2013, $2.0 million and $2.5 million, respectively, of base management fees were included in due to related party.
| (2) |  | During the third quarter of 2014, the Company recognized a $19.0 million prepaid incentive management fee related to the recognition of deferred revenue. See below for further details.
Beginning January 1, 2014, the Company directly compensates its chief executive officer $1.0 million in annual base compensation as an employee. As such, this compensation will be recorded as employee compensation and benefits, which was previously recorded as part of the base management fee prior to 2014. For the three and nine months ended September 30, 2014 and 2013, no success-based payments were made. In 2007, ACM received an incentive fee installment totaling $19.0 million which was recorded as a prepaid management fee related to the incentive fee on $77.1 million of deferred revenue recognized on the transfer of control of the 450 West 33 rd Street property, which is one of the Company’s equity affiliates. The $77.1 million gain was deferred as a result of guarantying a portion of the property’s indebtedness. In July 2014, the existing debt on the property was refinanced and the Company’s portion of the guarantee was terminated, resulting in the recognition of the deferred gain and $19.0 million prepaid incentive management fee. Other Related Party Transactions Due from related party was approximately $0.6 million and $0.1 million at September 30, 2014 and December 31, 2013, respectively, and consisted primarily of escrows held by ACM and its affiliates related to real estate transactions. Due to related party was $2.0 million at September 30, 2014 and consisted primarily of base management fees due to ACM, of which $0.6 million will be remitted by the Company in the following quarter. At December 31, 2013, due to related party was $2.8 million and consisted primarily of base management fees due to ACM that were remitted by the Company in the following quarter. During the quarter ended September 30, 2014, the Company invested $0.1 million for a 5% interest in a joint venture that owns two multifamily properties. The joint venture consists of a consortium of investors consisting of certain officers of the Company, including Mr. Ivan Kaufman, and other related parties, who together own an interest of approximately 95%. In August 2014, the Company originated two bridge loans totaling $5.0 million with an interest rate of 5.5% over one-month LIBOR and a maturity date of August 2015. Interest income recorded from these loans totaled less than $0.1 million for both the three and nine months ended September 30, 2014. In July 2014, the Company originated a $30.4 million bridge loan for an office property owned by a consortium of investors including Mr. Ivan Kaufman and his affiliates, who together own an interest of approximately 24% in the borrowing entity. The loan has an interest rate of LIBOR plus 7.90% and a maturity date of January 2016. Interest income recorded from this loan totaled approximately $0.5 million for both the three and nine months ended September 30, 2014. In March 2014, the Company originated a bridge loan to a third party borrower for a portfolio of properties with an unpaid principal balance of $70.1 million, of which, $15.0 million was financed with junior loan participations to ACM. The loan has a weighted average interest rate of 6.38% and a maturity date of March 2016. In May 2014, the junior loan participations to ACM were paid off. The participations had a weighted average interest rate of 7.20% and a maturity date of March 2016. Interest income recorded from this loan totaled approximately $1.2 million and $2.6 million for the three and nine months ended September 30, 2014, respectively. The Company had two loans totaling $22.4 million, which were secured by a property purchased in 2011 by a third party borrower from ACM. In the first quarter 2014, ACM purchased the property from the prior borrower subject to the Company’s loans. In connection with this purchase, ACM paid down the loans by $2.3 million and the Company restructured its remaining debt outstanding into a first mortgage of $14.6 million with a maturity date of March 2015 and a second mortgage of $5.1 million with a maturity date of April 2015, both with an interest rate of LIBOR plus 4.80%. Interest income recorded from these loans totaled approximately $0.2 million and $0.4 million for the three months ended September 30, 2014 and 2013, respectively, and approximately $0.8 million and $1.1 million for the nine months ended September 30, 2014 and 2013, respectively. In October 2013, the Company purchased, at par, a $3.0 million mezzanine loan from ACM who originated the loan in September 2013 to a third party entity. The loan had a fixed interest rate of 13.00% and a maturity date of October 2018 and was paid off in the third quarter of 2014. Interest income recorded from this loan was approximately $0.1 million and $0.3 million for the three and nine months ended September 30, 2014, respectively. In June 2013, the Company’s board of directors formed a Special Committee consisting of independent directors in connection with the exploration and evaluation of a potential transaction with the Company’s manager involving the acquisition of the manager’s Fannie Mae, DUS, FHA and CMBS platforms, as well as the internalization of the management of its current business. There were preliminary discussions between the Special Committee and representatives of the Company’s manager regarding a potential transaction during the second and third quarter of 2013. In connection therewith, the Special Committee engaged legal, financial and accounting advisors resulting in approximately $1.4 million of advisory fees for the year ended December 31, 2013. In late June of 2014, preliminary discussions regarding a possible transaction resumed but the Company cannot provide any assurance whether any transaction between the Company and its manager will occur, or if a transaction did occur, any information on the timing, terms or form of any such transaction, including the amount or type of consideration (including the issuance of common stock) or related financing. No advisory fees or other related fees were incurred during the nine months ended September 30, 2014. In April 2013, the Company originated six bridge loans totaling $53.0 million for a portfolio of multifamily properties owned by a consortium of investors including Mr. Ivan Kaufman and his affiliates and Mr. Fred Weber, the Company’s executive vice president of structured finance, who together own an interest of approximately 19% in the borrowing entity. The loans had an interest rate of one-month LIBOR plus 7.25% and a maturity date of April 2015, which were paid off in the fourth quarter of 2013. In November 2013, the Company originated a new bridge loan for $2.0 million with an interest rate of one-month LIBOR plus 5.50%, which was paid off in the second quarter of 2014. Interest income recorded from these loans totaled approximately $0.1 million for the nine months ended September 30, 2014, and approximately $1.0 million and $2.0 million for the three and nine months ended September 30, 2013, respectively. In April 2013, the Company also purchased, at par, a $6.4 million bridge loan from ACM who originated the loan in March 2013 to a third party entity that acquired the property from an entity owned by Mr. Ivan Kaufman and his affiliates and Mr. Fred Weber, who together also provided a $1.1 million preferred equity contribution to the overall transaction. Mr. Ivan Kaufman also provided a $1.0 million personal guaranty on the bridge loan. The bridge loan bore interest at a rate of one-month LIBOR plus 5.00% for the first year then one-month LIBOR plus 6.00% thereafter and had a maturity date of March 2015 with three one year extension options, and was paid off in the second quarter of 2014. Interest income recorded from this loan totaled approximately $0.1 million for the three months ended September 30, 2013 and approximately $0.2 million and $0.1 million for the nine months ended September 30, 2014 and 2013, respectively. In January 2013, the Company originated a $7.5 million bridge loan for a multifamily property in Charlotte, North Carolina. William C. Green, who serves on the Company’s Board of Directors, holds a 6.6% partnership interest in the borrowing entity and is the chief financial officer of an affiliated entity that is a partner in, and the management company for, the borrowing entity. Mr. Green also provided a $0.4 million personal guaranty on the bridge loan. The loan bore interest at a rate of one-month LIBOR plus 6.00%, had a maturity date of January 2015, and was paid off in the second quarter of 2014. Interest income recorded from this loan totaled approximately $0.1 million for the three months ended September 30, 2013 and approximately $0.2 million and $0.4 million for the nine months ended September 30, 2014 and 2013. In December 2011, the Company completed a restructuring of a $67.6 million preferred equity investment on the Lexford Portfolio (“Lexford”), which is a portfolio of multi-family assets. The Company, along with a consortium of independent outside investors, made an additional preferred equity investment of $25.0 million in Lexford of which the Company held a $10.5 million interest, and Mr. Fred Weber held a $0.5 million interest, which was paid down to $22.5 million in the third quarter of 2013, and then paid off in the fourth quarter of 2013. The original preferred equity investment now bears a fixed rate of interest of 2.36%, revised from an original rate of LIBOR plus 5.00% (the loan was paying a modified rate of LIBOR plus 1.65% at the time of the new investment). The original preferred equity investment matures in June 2020. Interest income recorded from the additional preferred equity investment totaled approximately $0.3 million and $0.9 million for the three and nine months ended September 30, 2013, respectively. The additional preferred equity investment had a fixed interest rate of 12% and a maturity date in June 2020. The Company, along with the same outside investors, also made a $0.1 million equity investment into Lexford, of which the Company held a $44,000 noncontrolling interest, and does not have the power to control the significant activities of the entity. During the fourth quarter of 2011, the Company recorded losses from the entity against the equity investment, reducing the balance to zero. In addition, under the terms of the restructuring, Lexford’s first mortgage lender required a change of property manager for the underlying assets. The new management company is an affiliate of Mr. Ivan Kaufman, the Company’s chairman and chief executive officer, and has a contract with the new entity for 7.5 years and is entitled to 4.75% of gross revenues of the underlying properties, along with the potential to share in the proceeds of a sale or refinancing of the debt should the management company remain engaged by the new entity at the time of such capital event. In the first quarter of 2012, Mr. Fred Weber invested $250,000 in the new management company and owns a 23.5% ownership interest. Mr. Ivan Kaufman and his affiliates own a 53.9% ownership interest. The Company has provided limited (“bad boy”) guarantees for certain debt controlled by Lexford. The bad boy guarantees may become a liability for the Company upon standard “bad” acts such as fraud or a material misrepresentation by Lexford or the Company. At September 30, 2014, this debt had an aggregate outstanding balance of $750.4 million and is scheduled to mature between 2017 and 2023. Interest income recorded from loans originated in 2012 or prior years with the Company’s affiliates totaled $0.2 million and $1.2 million for the three months ended September 30, 2014 and 2013, respectively, and $1.3 million and $3.7 million for the nine months ended September 30, 2014 and 2013, respectively. The Company is dependent upon its manager, ACM, with whom it has a conflict of interest, to provide services to the Company that are vital to its operations. The Company’s chairman, chief executive officer and president, Mr. Ivan Kaufman, is also the chief executive officer and president of ACM, and, the Company’s chief financial officer and treasurer, Mr. Paul Elenio, is the chief financial officer of ACM. In addition, Mr. Kaufman and his affiliated entities (“the Kaufman Entities”) together beneficially own approximately 92% of the outstanding membership interests of ACM and certain of the Company’s employees and directors also hold an ownership interest in ACM. Furthermore, one of the Company’s former directors is general counsel to ACM and another of the Company’s directors also serves as the trustee of one of the Kaufman Entities that holds a majority of the outstanding membership interests in ACM and co-trustee of another Kaufman Entity that owns an equity interest in ACM. ACM currently holds approximately 5.3 million of the Company’s common shares, representing approximately 11% of the voting power of the Company’s outstanding stock as of September 30, 2014. The Company’s Board of Directors approved a resolution under the Company’s charter allowing Ivan Kaufman and ACM, (which Mr. Kaufman has a controlling equity interest in), to own more than the 5% ownership interest limit of the Company’s common stock stated in the Company’s charter as amended.

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- Definition The entire disclosure for related party transactions. Examples of related party transactions include transactions between (a) a parent company and its subsidiary; (b) subsidiaries of a common parent; (c) and entity and its principal owners; and (d) affiliates. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 850 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=6457730&loc=d3e39622-107864 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 850 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6457730&loc=d3e39603-107864 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 850 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6457730&loc=d3e39549-107864 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 04 -Paragraph b -Article 3A Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(k)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 08 -Paragraph k -Article 4 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 850 -SubTopic 10 -Section 50 -Paragraph 6 -URI http://asc.fasb.org/extlink&oid=6457730&loc=d3e39691-107864 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 850 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=6457730&loc=d3e39678-107864 + Details
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