NOTE 7—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 two owner/operators (which are affiliated with one another) are VIEs because their equity investment at risk is insufficient to finance their 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 $3,357,000, $3,702,000 and $2,361,000 during 2018, 2017 and 2016, respectively. Included in these amounts is rental income of $800,000, $1,125,000 and $1,399,000 during 2018, 2017 and 2016, respectively, from two previously held VIE properties located in Lakemoor, Illinois and Sandy Springs, Georgia, which were sold in September 2018 and June 2016, respectively (see Note 5).

The following chart details the Company’s VIEs through its ground leases and the aggregate carrying amount and maximum exposure to loss as of December 31, 2018 (dollars in thousands):

Land

# Units

Owner/

Carrying

Contract

Operator

Amount

Purchase

Apartment

Mortgage from

Type of

and Maximum

Description of Property(a)

Date Acquired

Price

Complex

Third Party(b)

Exposure

Exposure to Loss

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

24,426

690

106,855

24,437

(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 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. No other financial support has been provided by the Company to the owner/operator.

Restricted cash on the consolidated balance sheets is comprised of cash reserve balances for these two properties totaling $1,106,000 and $443,000 at December 31, 2018 and 2017, respectively. The balance at December 31, 2018 is comprised of: (i) a $750,000 deposit from the owner/operator of the Beachwood, Ohio property, pursuant to a lease amendment, and was disbursed in January 2019 and (ii) $356,000, representing cash reserves for the Wheaton, Illinois property. Pursuant to the terms of the ground lease, 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.

Variable Interest Entities—Consolidated Joint Ventures

With respect to the five consolidated joint ventures in which the Company holds between an 90% to 95% interest, the Company has determined that such ventures are VIEs because the non-controlling interests do not hold substantive kick-out or participating rights.

In each of these 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 consolidated 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):


	December 31,
	2018		2017 (a)
Land	$	14,722	$	17,844
Buildings and improvements, net of accumulated depreciation of $4,119 and $3,811, respectively		27,642		31,789
Cash		1,020		1,145
Unbilled rent receivable		1,211		1,011
Unamortized intangible lease assets, net		890		1,241
Escrow, deposits and other assets and receivables		810		948
Mortgages payable, net of unamortized deferred financing costs of $391 and $442, respectively		26,850		32,252
Accrued expenses and other liabilities		761		870
Unamortized intangible lease liabilities, net		1,694		2,015
Accumulated other comprehensive income (loss)		31		(1)
Non-controlling interests in consolidated joint ventures		1,449		1,742

(a)

Includes a consolidated joint venture, in which the Company held an 85% interest, located in Fort Bend, Texas which was sold in January 2018 (see Note 5).

At December 31, 2018 and 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 aggregate equity investments of approximately $9,891,000 and $9,705,000, respectively.

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.