Note 6 — Variable Interest Entities, Contingent Liabilities and Consolidated Joint Ventures

Variable Interest Entities — Ground Leases

The Company determined that with respect to the properties identified in the table below, it has a variable interest through its ground leases and the three owner/operators (which are affiliated with one another) are VIEs because their equity investment at risk is insufficient to finance its activities without additional subordinated financial support. The Company further determined that it is not the primary beneficiary of any of these VIEs because the Company has shared power over certain activities that most significantly impact the owner/operator’s economic performance (i.e., shared rights on the sale of the property) and therefore, does not consolidate these 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 $917,000 and $1,804,000 for the three and six months ended June 30, 2017, respectively, and $434,000 and $862,000 for the three and six months ended June 30, 2016, respectively. Included in these amounts, for the three and six months ended June 30, 2016, is rental income for a similarly structured transaction for a property located in Sandy Springs, Georgia, amounting to $157,000 and $308,000, respectively, which the Company sold in June 2016 (see Note 5).

The following chart details the VIEs through the Company’s ground leases and the aggregate carrying amount and maximum exposure to loss as of June 30, 2017 (dollars in thousands):

Description of Property(a)	Date Acquired	Land Contract Purchase Price		# Units in Apartment Complex	Owner/ Operator Mortgage from Third Party(b)		Type of Exposure	Carrying Amount and Maximum Exposure to Loss
The Meadows Apartments, Lakemoor, Illinois	March 24, 2015	$	9,300	496	$	43,824	Land	$	9,592
The Briarbrook Village Apartments, Wheaton, Illinois	August 2, 2016	10,530		342	39,411		Land	10,536
The Vue Apartments, Beachwood, Ohio	August 16, 2016	13,896		348	67,444		Land	13,901

Totals		$	33,726	1,186	$	150,679		$	34,029

(a)

Simultaneously with each purchase, the Company entered into a triple net ground lease with affiliates of Strategic Properties of North America, the owner/operators of these properties.

(b)

Simultaneously with the closing of each acquisition, the owner/operator obtained a mortgage from a third party 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 to the owner/operator.

Pursuant to the terms of the ground lease for the Wheaton, Illinois property, the owner/operator is obligated to make certain unit renovations as and when units become vacant. Cash reserves to cover such renovation work, received by the Company in conjunction with the purchase of the property, are disbursed when the unit renovations are completed. The related cash reserve balance for this property was $527,000 and $643,000 at June 30, 2017 and December 31, 2016, respectively, and is included in Restricted cash on the consolidated balance sheets.

Variable Interest Entity — Consolidated Joint Ventures

With respect to the six consolidated joint ventures in which the Company holds between an 85% to 95% interest, the Company has determined such ventures are VIEs because the non-controlling interests do not hold substantive kick-out or participating rights.

In each of these six 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 consolidates 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):

	June 30, 2017			December 31, 2016
Land	$	17,844		$	17,844
Buildings and improvements, net of accumulated depreciation of $3,261 and $2,732, respectively	32,286			32,535
Cash	1,115			1,796
Unbilled rent receivable	832			775
Unamortized intangible lease assets, net	1,401			1,595
Escrow, deposits and other assets and receivables	715			1,355
Mortgages payable, net of unamortized deferred financing costs of $488 and $539, respectively	32,694			33,121
Accrued expenses and other liabilities	801			893
Unamortized intangible lease liabilities, net	2,107			2,200
Accumulated other comprehensive loss	(56		)	(70		)
Non-controlling interests in consolidated joint ventures	1,710			1,794

At June 30, 2017, MCB Real Estate, LLC and its affiliates (‘‘MCB’’) are the Company’s joint venture partner in four consolidated joint ventures in which the Company has an aggregate equity investment of approximately $9,726,000. The Company’s equity investment in its two other consolidated joint ventures is approximately $7,211,000.

A joint venture with MCB, in which the Company has a net equity investment of $2,815,000, owns a vacant property formerly operated as a Pathmark supermarket in Philadelphia, Pennsylvania. At June 30, 2017, the mortgage debt on, and the net book value of, such property is $4,337,000 and $7,083,000, respectively. In 2015, this tenant filed for Chapter 11 bankruptcy protection, rejected the lease and vacated the property. Real estate expenses for this property were $48,000 and $118,000 for the three and six months ended June 30, 2017, respectively, and $58,000 and $172,000 for the three and six months ended June 30, 2016, respectively. Mortgage interest for this property was $43,000 and $85,000 for the three and six months ended June 30, 2017, respectively, and $44,000 and $87,000 for the three and six months ended June 30, 2016, respectively. The Company has determined that no impairment charge is required currently with respect to this property.

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.