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Variable Interest Entities, Contingent Liabilities and Consolidated Joint Ventures | 6 Months Ended
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Jun. 30, 2019
Variable Interest Entities, Contingent Liabilities and Consolidated Joint Ventures |
Variable Interest Entities, Contingent Liabilities and Consolidated Joint Ventures | 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 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 $486,000 and $971,000 for the three and six months ended June 30, 2019, respectively, and $941,000 and $1,947,000 for the three and six months ended June 30, 2018, respectively. Included in the amounts for the three and six months ended June 30, 2018 is rental income of $260,000 and $585,000, respectively, from a previously held VIE property in Lakemoor, Illinois, which the Company sold in September 2018. 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, 2019 (dollars in thousands):
|  |  |  |  |  |  |  |  | Owner/ |  |  |  | Carrying
|  |  |  | Land |  |  |  | Operator |  |  |  | Amount and
|  |  |  | Contract |  | # Units in |  | Mortgage |  |  |  | Maximum
|  |  |  | Purchase |  | Apartment |  | from |  | Type of |  | Exposure to
Description of Property(a) |  | Date Acquired |  | Price |  | Complex |  | Third Party(b) |  | Exposure |  | 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.
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 $337,000 and $356,000 at June 30, 2019 and December 31, 2018, respectively, and is classified as Restricted cash on the consolidated balance sheets. The Restricted cash balance at December 31, 2018 also included, pursuant to a lease amendment, an escrow deposit of $750,000 from the owner/operator of the Beachwood, Ohio property and was paid in January 2019. Variable Interest Entity – Consolidated Joint Ventures The Company has determined that the four consolidated joint ventures in which it holds between a 90% to 95% interest are VIEs because the non-controlling interests do not hold substantive kick-out or participating rights. The Company has determined it is the primary beneficiary of these VIEs 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 VIEs for financial statement purposes. The VIEs’ 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, |  | December 31,
|  | 2019 |  | 2018 (a)
Land |  | $ | 12,158 |  | $ | 14,722
Buildings and improvements, net of accumulated depreciation of $3,886 and $4,119, respectively |  |  | 24,602 |  |  | 27,642
Cash |  |  | 1,177 |  |  | 1,020
Unbilled rent receivable |  |  | 1,248 |  |  | 1,211
Unamortized intangible lease assets, net |  |  | 810 |  |  | 890
Escrow, deposits and other assets and receivables |  |  | 546 |  |  | 810
Mortgages payable, net of unamortized deferred financing costs of $344 and $391, respectively |  |  | 24,605 |  |  | 26,850
Accrued expenses and other liabilities |  |  | 485 |  |  | 761
Unamortized intangible lease liabilities, net |  |  | 630 |  |  | 1,694
Accumulated other comprehensive (loss) income |  |  | (66) |  |  | 31
Non-controlling interests in consolidated joint ventures |  |  | 1,229 |  |  | 1,449
(a)Includes a consolidated joint venture, in which the Company held a 90% interest located in Clemmons, North Carolina which was sold in June 2019 (see Note 6). MCB Real Estate, LLC and its affiliates (‘‘MCB’’) are the Company’s joint venture partner in three and four consolidated joint ventures at June 30, 2019 and December 31, 2018, respectively, in which the Company has aggregate equity investments of approximately $7,833,000 and $9,891,000, 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.

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