Investment in Real Estate

Real estate held for investment

The following table summarizes the Company’s investment in real estate, at cost as of:



	September 30, 2017		December 31, 2016
Land	$	1,369,320	$	1,221,450
Building and improvements	4,526,416		4,217,232
Tenant improvements	389,284		361,108
Furniture and fixtures	8,217		4,264
Property under development	265,661		295,239
Investment in real estate, at cost⁽¹⁾	$	6,558,898	$	6,099,293

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(1)	Excludes balances related to properties that have been classified as held for sale.

Acquisitions

The Company’s acquisitions are accounted for using the acquisition method. The results of operations for each of these acquisitions are included in the Company’s Consolidated Statements of Operations from the date of acquisition.

The Company evaluates each acquisition to determine if the integrated set of assets and activities acquired meet the definition of a business and need to be accounted for as a business combination in accordance with ASC 805, Business Combinations. An integrated set of assets and activities would fail to qualify as a business if either (i) substantially all of the fair value of the gross assets acquired is concentrated in either a single identifiable asset or a group of similar identifiable assets or (ii) the integrated set of assets and activities is lacking, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs (i.e., revenue generated before and after the transaction). An acquired process is considered substantive if (i) the process includes an organized workforce (or includes an acquired contract that provides access to an organized workforce) that is skilled, knowledgeable and experienced in performing the process, (ii) the process cannot be replaced without significant cost, effort, or delay or (iii) the process is considered unique or scarce.

The Company assesses fair value based on Level 2 and Level 3 inputs within the fair value framework, which includes estimated cash flow projections that utilize appropriate discount, capitalization rates, renewal probability and available market information, which includes market rental rate and market rent growth rates. Estimates of future cash flows are based on a number of factors, including historical operating results, known and anticipated trends and market and economic conditions.

The fair value of tangible assets of an acquired property considers the value of the property as if it were vacant. The fair value of acquired “above- and below-” market leases are based on the estimated cash flow projections utilizing discount rates that reflect the risks associated with the leases acquired. The amount recorded is based on the present value of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the extended below-market term for any leases with below-market renewal options. Other intangible assets acquired include amounts for in-place lease values that are based on the Company’s evaluation of the specific characteristics of each tenant’s lease. Factors considered include estimates of carrying costs during hypothetical expected lease-up periods, market conditions and costs to execute similar leases. In estimating carrying costs, the Company includes estimates of lost rents at market rates during the hypothetical expected lease-up periods, which are dependent on local market conditions. In estimating costs to execute similar leases, the Company considers leasing commissions and legal and other related costs.

The following table summarizes the information on the acquisitions completed during the nine months ended September 30, 2017:

Property

Submarket

Segment

Date of Acquisition

Square Feet (unaudited)

Purchase Price⁽¹⁾(in millions)

Sunset Las Palmas Studios⁽²⁾

Hollywood

Media and Entertainment

5/1/2017

369,000

200.0

11601 Wilshire land⁽³⁾

West Los Angeles

Office

6/15/2017

N/A

50.0

6666 Santa Monica⁽⁴⁾

Hollywood

Media and Entertainment

6/29/2017

4,150

3.2

Total acquisitions

373,150

253.2

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(1)	Represents purchase price before certain credits, prorations and closing costs.

(2)

The property consists of stages, production office and support space on 15 acres near Sunset Gower Studios and Sunset Bronson Studios. The purchase price above does not include equipment purchased by the Company for $2.8 million, which was transacted separately from the studio acquisition. In April 2017, the Company drew $150.0 million under the unsecured revolving credit facility to fund the acquisition.


(3)	On July 1, 2016 the Company purchased a partial interest in land held as a tenancy in common in conjunction with its acquisition of the 11601 Wilshire property. The land interest held as a tenancy in common was accounted for as an equity method investment. On June 15, 2017, the Company purchased the remaining interest, which was fair valued and allocated to land and building.


(4)	This parcel is adjacent to the Sunset Las Palmas Studios property.

The Company’s acquisitions did not meet the definition of a business and were therefore accounted for as asset acquisitions. In accordance with asset acquisitions, the purchase price includes capitalized acquisition costs. The following table represents the Company’s final aggregate purchase price accounting, as of the respective acquisition dates, for each of the Company’s acquisitions completed in the nine months ended September 30, 2017:



	Sunset Las Palmas Studios⁽¹⁾		11601 Wilshire land		6666 Santa Monica		Total
Investment in real estate	$	202,723	$	50,034	$	3,091	$	255,848
Deferred leasing costs and in-place lease intangibles⁽²⁾	1,741		—		145		1,886
Total assets assumed	$	204,464	$	50,034	$	3,236	$	257,734

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(1)	The purchase price allocation includes equipment purchased by the Company of $2.8 million.


(2)	Represents weighted-average amortization period of 1.21 years.

Dispositions

The following table summarizes the properties sold during the nine months ended September 30, 2017. These properties were non-strategic assets to the Company’s portfolio:



Property	Date of Disposition	Square Feet (unaudited)	Sales Price⁽¹⁾ (in millions)
222 Kearny Street	2/14/2017	148,797	$	51.8
3402 Pico Boulevard	3/21/2017	50,687	35.0
Total dispositions		199,484	$	86.8

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(1)	Represents gross sales price before certain credits, prorations and closing costs.

The dispositions of these properties resulted in a $16.9 million gain for the nine months ended September 30, 2017. This amount is included in gains on sale of real estate in the Consolidated Statements of Operations. There were no dispositions during the three months ended September 30, 2017.

Held for Sale

The Company had four properties classified as held for sale as of December 31, 2016. Two properties were disposed of during the first quarter of 2017. The Company entered into an agreement on September 14, 2017 to sell its ownership interest in the consolidated joint venture that owns Pinnacle I and Pinnacle II to certain affiliates of Blackstone for $350.0 million, before credits, prorations and closing costs, including the assumption of $216.0 million of secured notes payable. The sale of Pinnacle I and Pinnacle II is expected to close in the fourth quarter of 2017.

The following table summarizes the components of assets and liabilities associated with real estate held for sale as of:



	September 30, 2017		December 31, 2016
ASSETS
Investment in real estate, net	$	302,992	$	371,422
Accounts receivable, net	11		357
Straight-line rent receivables, net	5,220		5,949
Deferred leasing costs and lease intangible assets, net	13,204		17,798
Prepaid expenses and other assets, net	10		959
Assets associated with real estate held for sale	$	321,437	$	396,485

LIABILITIES
Notes payable, net	$	214,818	$	214,687
Accounts payable and accrued liabilities	3,229		6,517
Lease intangible liabilities, net	5,316		6,588
Security deposits and prepaid rent	669		2,643
Liabilities associated with real estate held for sale	$	224,032	$	230,435

Impairment of Long-Lived Assets

No impairment indicators have been noted and the Company recorded no impairment charges for the nine months ended September 30, 2017.