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Variable Interest Entities, Contingent Liabilities and Consolidated Joint Ventures | 3 Months Ended
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Mar. 31, 2016
Variable Interest Entities, Contingent Liabilities and Consolidated Joint Ventures |
Variable Interest Entities, Contingent Liabilities and Consolidated Joint Ventures | Note 6 — Variable Interest Entities, Contingent Liabilities and Consolidated Joint Ventures Variable Interest Entities — Ground Leases In June 2014, the Company purchased land for $6,510,000 in Sandy Springs, Georgia, improved with a 196 unit apartment complex, and in March 2015, the Company purchased land for $9,300,000 in Lakemoor, Illinois, improved with a 496 unit apartment complex. With each purchase, the Company simultaneously entered into a triple net ground lease with the owner/operator of the applicable complex. The Company determined that it has a variable interest through its ground leases and the owner/operators are VIEs because their equity investment at risk is insufficient to finance its activities without additional subordinated financial support; this assessment did not change as a result of the adoption of ASU 2015-02 (see Note 2). Simultaneously with the closing of each acquisition, the owner/operator obtained a mortgage from a third party ($16,230,000 for Sandy Springs and $43,824,000 for Lakemoor) which, together with the Company’s purchase of the land, provided substantially all of the aggregate funds to acquire the complex. The Company provided its land as collateral for the respective owner/operator’s mortgage loans; accordingly, each land position is subordinated to the applicable mortgage. Other than as described above, no other financial support has been provided by the Company. The Company further determined that for each acquisition it is not the primary beneficiary because the Company does not have the power to direct the activities that most significantly impact the owner/operator’s economic performance, such as management, operational budgets and other rights, including leasing of the units, and therefore, does not consolidate the VIEs for financial statement purposes. Accordingly, the Company accounts for these investments as land and the revenues from the ground leases as Rental income, net. Such rental income amounted to $428,000 and $252,000 for the three months ended March 31, 2016 and 2015, respectively. The following is a summary of the Company’s variable interests in identified VIEs, in which it is not the primary beneficiary, and the aggregate carrying amount and maximum exposure to loss as of March 31, 2016 (amounts in thousands):
Property |  | Type of Exposure |  | Carrying Amount and Maximum Exposure to Loss |
River Crossing Apartments, Sandy Springs, Georgia |  | Land |  | $ | 6,528 |
|  | Unbilled rent receivable |  | 3 |
The Meadows Apartments, Lakemoor, Illinois |  | Land |  | 9,592 |
|  | Unbilled rent receivable |  | 12 |
Total |  |  |  | $ | 16,135 |
Pursuant to the terms of the ground lease for the property in Sandy Springs, Georgia, the owner/operator is obligated to make certain unit renovations as and when units become vacant. Cash reserves totaling $1,894,000 were received by the Company in conjunction with the purchase of the property in June 2014 to cover such renovation work and other reserve requirements. Through the year ended December 31, 2015, an additional $121,000 of reserves was received by the Company and an additional $67,000 was received during the three months ended March 31, 2016. These cash reserves are held by the Company and disbursed once the renovations have been completed. Through the year ended December 31, 2015, the Company disbursed approximately $941,000 and for the three months ended March 31, 2016 the Company disbursed approximately $110,000 for renovation costs to the owner/operator. The cash reserve balance at March 31, 2016 and December 31, 2015 was $1,031,000 and $1,074,000, respectively, and is classified as Restricted cash on the consolidated balance sheets. Variable Interest Entity — Consolidated Joint Ventures A joint venture in which the Company has a 95% equity interest and a senior preferred equity interest, acquired a property located in Joppa, Maryland. The Company had historically determined that this joint venture was a VIE. As a result of the adoption of ASU 2015-02, the Company re-assessed its evaluation and determined this venture is still a VIE as the Company’s voting rights are not proportional to its economic interests and substantially all of the joint venture’s activities are conducted on behalf of the Company. With respect to the six other consolidated joint ventures in which the Company has between an 85% to 95% interest, the Company had historically determined that such ventures were not VIEs. As a result of the adoption of ASU 2015-02, the Company re-assessed its evaluation of these investments and determined such ventures are VIEs because the non-controlling interests do not have substantive kick-out or participating rights. In each of these seven joint ventures, the Company has determined it is the primary beneficiary of the VIE as it has the power to direct the activities that most significantly impact each joint venture’s performance including management, approval of expenditures, and the obligation to absorb the losses or rights to receive benefits. Accordingly, the Company has continued to consolidate the operations of these joint ventures for financial statement purposes. The joint ventures’ creditors do not have recourse to the assets of the Company other than those held by these joint ventures. The following is a summary of the consolidated VIEs’ carrying amounts and classification in the Company’s consolidated balance sheets, none of which are restricted (amounts in thousands):
|  | March 31, |  | December 31, |
|  | 2016 |  | 2015 |
Land |  | $ | 18,400 |  | $ | 18,400 |
Buildings and improvements, net of depreciation of $2,343 and $2,076, respectively |  | 34,258 |  | 34,287 |
Cash |  | 1,588 |  | 1,960 |
Unbilled rent receivable |  | 358 |  | 330 |
Unamortized intangible lease assets, net |  | 1,894 |  | 1,996 |
Escrow, deposits and other assets and receivables |  | 1,016 |  | 752 |
Mortgages payable, net of deferred financing costs of $464 and $438, respectively |  | 26,693 |  | 25,926 |
Accrued expenses and other liabilities |  | 1,308 |  | 793 |
Unamortized intangible lease liabilities, net |  | 2,341 |  | 2,392 |
Accumulated other comprehensive loss |  | (280 | ) | (126 | )
Non-controlling interests in consolidated joint ventures |  | 1,834 |  | 1,931 |
MCB Real Estate, LLC and its affiliates (“MCB”) are the Company’s joint venture partner in five consolidated joint ventures. At March 31, 2016, the Company has aggregate equity investments of approximately $18,064,000 in such ventures. A joint venture with MCB, in which the Company has a net equity investment of $2,763,000, owns a property formerly operated as a Pathmark supermarket in Philadelphia, Pennsylvania. In July 2015, this tenant filed for Chapter 11 bankruptcy protection, rejected the lease, and in late September 2015, vacated the property. This tenant accounted for approximately 1.3% of the Company’s rental income for the three months ended March 31, 2015. At March 31, 2016, the mortgage debt on such property is $4,485,000. The Company has determined that no impairment charge is required currently with respect to this property. Distributions by Consolidated Joint Ventures Distributions to each joint venture partner are determined pursuant to the applicable operating agreement and may not be pro rata to the equity interest each partner has in the applicable venture.

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