Investment in Real Estate

Real estate held for investment

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



	March 31, 2018		December 31, 2017
Land	$	1,302,907	$	1,302,907
Building and improvements	4,476,124		4,480,993
Tenant improvements	425,624		411,706
Furniture and fixtures	8,371		8,608
Property under development	286,367		219,227
Investment in real estate, at cost⁽¹⁾	$	6,499,393	$	6,423,441

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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, legal and other related costs.

The Company had no acquisitions during the three months ended March 31, 2018.

Dispositions

The following table summarizes the properties sold during the three months ended March 31, 2018. These properties were non-strategic assets to the Company’s portfolio and were classified as held for sale as of December 31, 2017:



Property	Month of Disposition	Square Feet	Sales Price⁽¹⁾ (in millions)
2600 Campus Drive (building 6 of Peninsula Office Park)	January 2018	63,050	$	22.5
Embarcadero Place	January 2018	197,402	136.0
2180 Sand Hill	March 2018	45,613	82.5
Total dispositions		306,065	$	241.0

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

These dispositions met the criteria in ASC 610 for recognizing gains of $37.7 million for the three months ended March 31, 2018, which is included in the gains on sale of real estate line item in the Consolidated Statements of Operations.

Held for Sale

In December 2017, the Company entered into an agreement to sell its 9300 Wilshire property for $13.8 million (before certain credits, prorations and closing costs). As of December 31, 2017 and March 31, 2018, the Company determined that this property met the criteria to be classified as held for sale. 9300 Wilshire was subsequently sold on April 10, 2018, which resulted in a gain.

As of December 31, 2017, the Company had 4 properties that met the criteria to be classified as held for sale.

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



	March 31, 2018		December 31, 2017
ASSETS
Investment in real estate, net	$	8,775	$	204,895
Accounts receivable, net	28		85
Straight-line rent receivables, net	420		2,234
Deferred leasing costs and lease intangible assets, net	2,394		4,063
Prepaid expenses and other assets, net	87		58
Assets associated with real estate held for sale	$	11,704	$	211,335

LIABILITIES
Accounts payable and accrued liabilities	$	393	$	782
Lease intangible liabilities, net	—		95
Security deposits and prepaid rent	237		1,339
Liabilities associated with real estate held for sale	$	630	$	2,216

Impairment of Long-Lived Assets

No impairment indicators have been noted and the Company recorded no impairment charges for the three months ended March 31, 2018.