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BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES | 3 Months Ended
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Mar. 31, 2021
Accounting Policies [Abstract] |
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION We conduct a majority of our business activities through our consolidated operating partnership, Centerspace, LP (f/k/a IRET Properties), a North Dakota limited partnership (the “Operating Partnership”), as well as through a number of other consolidated subsidiary entities. The accompanying condensed consolidated financial statements include our accounts and the accounts of all our subsidiaries in which we maintain a controlling interest, including the Operating Partnership. All intercompany balances and transactions are eliminated in consolidation. The condensed consolidated financial statements also reflect the Operating Partnership’s ownership of certain joint venture entities in which the Operating Partnership has a general partner or controlling interest. These entities are consolidated into our operations, with noncontrolling interests reflecting the noncontrolling partners’ share of ownership, income, and expenses. SIGNIFICANT RISKS AND UNCERTAINTIES The COVID-19 pandemic is a source of significant risk and uncertainty that could have an adverse impact on our business. The COVID-19 pandemic has adversely impacted the global economy and financial markets, and multifamily residents and commercial tenants have experienced financial hardship or closures. The COVID-19 pandemic has not had a material adverse impact on our financial condition, results of operations, and cash flows for the three months ended March 31, 2021; however, we continue to monitor the impact of the COVID-19 pandemic on all aspects of our business and cannot predict the impact it may have on our financial condition, results of operations, and cash flows in the future. UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Our interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain disclosures accompanying annual consolidated financial statements prepared in accordance with GAAP are omitted. The year-end balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by GAAP. In the opinion of management, all adjustments, consisting solely of normal recurring adjustments necessary for the fair presentation of our financial position, results of operations, and cash flows for the interim periods, have been included. The current period’s results of operations are not necessarily indicative of results which ultimately may be achieved for the year. The interim condensed consolidated financial statements and accompanying notes thereto should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on February 22, 2021. USE OF ESTIMATES The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECENT ACCOUNTING PRONOUNCEMENTS The following table provides a brief description of recent accounting standards updates (“ASUs”).
Standard | Description | Date of Adoption | Effect on the Financial Statements or Other Significant Matters
ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting | This ASU contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. | This ASU is optional and may be elected over time. | We are currently evaluating the practical expedients and the impact they may have on our condensed consolidated financial statements.
ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40) - Accounting for Convertible Instruments and Contracts in an Entity's Own Equity | This ASU simplifies accounting for convertible instruments and removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception. This ASU also simplifies the diluted earnings per share calculation in certain areas and provides updated disclosure requirements. | This ASU is effective for annual reporting periods beginning after December 15, 2021. Early adoption is permitted. | We are currently evaluating the ASU and the impact it may have on our condensed consolidated financial statements.
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH As of March 31, 2021, restricted cash consisted primarily of escrows held by lenders for real estate taxes, insurance, and capital additions. LEASES As a lessor, we primarily lease multifamily apartment homes which qualify as operating leases with terms that are generally one year or less. Rental revenues are recognized in accordance with ASC 842, Leases, using a method that represents a straight-line basis over the term of the lease. Rental income represents approximately 98.2% of our total revenues and includes gross market rent less adjustments for concessions, vacancy loss, and bad debt. Other property revenues represent the remaining 1.8% of our total revenues and are primarily driven by other fee income, which is typically recognized when earned, at a point in time. Some of our apartment communities have commercial spaces available for lease. Lease terms for these spaces typically range from three to fifteen years. The leases for commercial spaces generally include options to extend the lease for additional terms. Beginning in April 2020, we offered multifamily residents suffering from financial hardship related to the COVID-19 pandemic the option to apply for a rent deferral. We elected to account for these accommodations as enforceable rights and obligations existed without evaluating if such a right or obligation existed under the lease agreement, as allowed by the FASB Q&A released on April 10, 2020 related to lease modification guidance under ASC 842. The accommodations were recognized as variable lease payments. As of March 31, 2021 and December 31, 2020, approximately $57,000 and $99,600 remained outstanding under the rent deferral agreements offered to multifamily residents, respectively. We also abated rent, common area maintenance, and real estate taxes for commercial tenants that experienced government-mandated interruptions or closures of their businesses. The accommodations were recognized as variable lease payments, as allowed by the FASB Q&A released on April 10, 2020. During the three months ended March 31, 2021, we recognized a reduction in revenue of $47,000 due to the abatement of amounts due from our commercial tenants. Many of our leases contain non-lease components for utility reimbursement from our residents and common area maintenance from our commercial tenants. We have elected the practical expedient to combine lease and non-lease components for all asset classes. The combined components are included in lease income and are accounted for under ASC 842. The aggregate amount of future scheduled lease income on our commercial operating leases, excluding any variable lease income and non-lease components, as of March 31, 2021, was as follows:
|  | (in thousands)
2021 (remainder) |  | $ | 1,650 |
2022 |  | 2,209 |
2023 |  | 2,205 |
2024 |  | 2,194 |
2025 |  | 2,159 |
Thereafter |  | 2,302 |
Total scheduled lease income - commercial operating leases |  | $ | 12,719 |
REVENUES Revenue is recognized in accordance with the transfer of goods and services to customers at an amount that reflects the consideration to which the company expects to be entitled for those goods and services. Revenue streams that are included in revenues from contracts with customers include: •O ther property revenue: We recognize revenue for rental related income not included as a component of a lease, such as application fees, as earned. •Gains or losses on sales of real estate: A gain or loss is recognized when the criteria for derecognition of an asset are met, including when (1) a contract exists and (2) the buyer obtained control of the nonfinancial asset that was sold. The following table presents the disaggregation of revenue streams for the three months ended March 31, 2021 and 2020:
|  |  | (in thousands)
|  |  | Three Months Ended March 31, |  |
Revenue Stream | Applicable Standard |  | 2021 | 2020 |  |  |
Fixed lease income - operating leases | Leases |  | $ | 43,840 |  | $ | 41,934 |  |  |  |
Variable lease income - operating leases | Leases |  | 1,969 |  | 1,780 |  |  |  |
Other property revenue | Revenue from contracts with customers |  | 839 |  | 692 |  |  |  |
Total revenue |  |  | $ | 46,648 |  | $ | 44,406 |  |  |  |
IMPAIRMENT OF LONG-LIVED ASSETS We evaluate our long-lived assets, including investments in real estate, for impairment indicators at least quarterly. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions, expected holding period of each property, and legal and environmental concerns. If indicators exist, we compare the expected future undiscounted cash flows for the property against the carrying amount of that property. If the sum of the estimated undiscounted cash flows is less than the carrying amount, an impairment loss is recorded for the difference between the estimated fair value and the carrying amount. If our anticipated holding period for properties, the estimated fair value of properties, or other factors change based on market conditions or otherwise, our evaluation of impairment charges may be different and such differences could be material to our consolidated financial statements. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates, and capital requirements that could differ materially from actual results. Reducing planned property holding periods may increase the likelihood of recording impairment losses. During the three months ended March 31, 2021 and 2020, we recorded no impairment charges. MORTGAGE LOANS RECEIVABLE AND NOTES RECEIVABLE In March 2020, in connection with our acquisition of Ironwood, an apartment community in New Hope, Minnesota, we acquired a tax increment financing note receivable (“TIF”) with a principal balance of $6.6 million at March 31, 2021 and December 31, 2020, which appears within other assets in our condensed consolidated balance sheets. The note bears an interest rate of 4.5% with payments due in February and August of each year. In December 2019, we originated a $29.9 million construction loan and a $15.3 million mezzanine loan for the development of a multifamily development located in Minneapolis, Minnesota. In conjunction with the loans, we received a guaranty for the substantial completion of the project improvements from an investment grade guarantor. The construction and mezzanine loans bear interest at 4.5% and 11.5%, respectively. As of March 31, 2021, we had funded the full $29.9 million of the construction loan and $112,000 of the mezzanine loan, which appears within mortgage loans receivable in our condensed consolidated balance sheets. As of December 31, 2020, we had funded $24.7 million of the construction loan. The loans are secured by mortgages and mature on December 31, 2023, and the agreement provides us with an option to purchase the development. The loans represent an investment in an unconsolidated variable interest entity. We are not the primary beneficiary of the variable interest entity (“VIE”) as we do not have the power to direct the activities which most significantly impact the entity’s economic performance nor do we have significant influence over the entity. VARIABLE INTEREST ENTITIES We have determined that our Operating Partnership and each of our less-than-wholly owned real estate partnerships are VIEs, as the limited partners or the functional equivalent of limited partners lack substantive kick-out rights and substantive participating rights. We are the primary beneficiary of the VIEs, and the VIEs are required to be consolidated on our balance sheet because we have a controlling financial interest in the VIEs and have both the power to direct the activities of the VIEs that most significantly impact the economic performance of the VIEs as well as the obligation to absorb losses or the right to receive benefits from the VIEs that could potentially be significant to the VIEs. Because our Operating Partnership is a VIE, all of our assets and liabilities are held through a VIE. During the three months ended March 31, 2020, we acquired the 47.4% noncontrolling interests in the real estate partnership that owns 71 France for $12.2 million. MARKETABLE SECURITIES Marketable securities consisted of equity securities. We report equity securities at fair value based on quoted market prices (Level 1 inputs). Any unrealized gains or losses are included in interest and other income on the consolidated statements of operations. As of March 31, 2021 and December 31, 2020 we had no marketable securities. During the three months ended March 31, 2020, we had a realized loss of $1.2 million arising from the disposal of such securities which appears in interest and other income (loss) in the Condensed Consolidated Statements of Operations.

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