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RELATED PARTY TRANSACTIONS AND FEES
 12 Months Ended
Dec. 31, 2014
RELATED PARTY TRANSACTIONS AND FEES  
RELATED PARTY TRANSACTIONS AND FEES

NOTE 7.     RELATED PARTY TRANSACTIONS AND FEES

 

We apply ASC Topic 805, “Business Combinations”, to evaluate business relationships. Related parties are persons or entities who have one or more of the following characteristics, which include entities for which investments in their equity securities would be required, trust for the benefit of persons including principal owners of the entities and members of their immediate families, management personnel of the entity and members of their immediate families and other parties with which the entity may  deal if one party controls or can significantly influence the decision making  of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests, or affiliates of the entity.

 

The Company has historically engaged in and may continue to engage in certain business transactions with related parties, including but not limited to asset acquisition and dispositions. Transactions involving related parties cannot be presumed to be carried out on an arm’s length basis due to the absence of free market forces that naturally exist in business dealings between two or more unrelated entities. Related party transactions may not always be favorable to our business and may include terms, conditions and agreements that are not necessarily beneficial to or in our best interest.

 

Effective since April 30, 2011, Pillar, the sole shareholder of which is Realty Advisors, LLC, a Nevada limited liability company, the sole member of which is RAI, a Nevada corporation, the sole shareholder of which is MRHI, a Nevada corporation, the sole shareholder of which is a trust known as the May Trust, became the Company’s external Advisor and Cash Manager.  Pillar’s duties include, but are not limited to, locating, evaluating and recommending real estate and real estate-related investment opportunities. Pillar also arranges, for the Company’s benefit, debt and equity financing with third party lenders and investors. Pillar also serves as an Advisor and Cash Manager to TCI and IOT.  As the contractual advisor, Pillar is compensated by ARL under an Advisory Agreement that is more fully described in Part III, Item 10. “Directors, Executive Officers and Corporate Governance – The Advisor”.  ARL has no employees. Employees of Pillar render services to ARL in accordance with the terms of the Advisory Agreement.

 

Effective since January 1, 2011, Regis Realty Prime, LLC, dba Regis Property Management, LLC (“Regis”), the sole member of which is Realty Advisors, LLC, manages our commercial and hotel properties, and provides brokerage services.  Regis receives property management fees and leasing commissions in accordance with the terms of its property-level management agreement.  Regis is also entitled to receive real estate brokerage commissions in accordance with the terms of a non-exclusive brokerage agreement.  See Part III, Item 10. “Directors, Executive Officers and Corporate Governance – Property Management and Real Estate Brokerage”.   Regis Hotel I, LLC, managed the Company’s hotel investments.  ARL engages third-party companies to lease and manage its apartment properties. 

 

 

Below is a description of the related party transactions and fees between Pillar and Regis:

 

Fees, expenses, and revenue paid to and/or received from our advisor:

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

 

2013

 

 

2012

 

 

 

 

  (dollars in thousands)

 

Fees:

 

 

 

 

 

 

 

 

 

 

 

Advisory

 

$

8,943

 

 

$

10,166

 

 

$

10,182

 

 

Construction advisory

 

 

-

 

 

 

-

 

 

 

181

 

 

Mortgage brokerage and equity refinancing

 

 

1,152

 

 

 

1,878

 

 

 

1,881

 

 

Net income

 

 

3,669

 

 

 

4,089

 

 

 

180

 

 

Property acquisition and sales

 

 

177

 

 

 

-

 

 

 

20

 

 

 

 

$

13,941

 

 

$

16,133

 

 

$

12,444

 

Other Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost reimbursements

 

$

3,449

 

 

$

3,466

 

 

$

3,359

 

 

Interest paid (received)

 

 

(1,043

)

 

 

431

 

 

 

495

 

 

 

 

$

2,406

 

 

$

3,897

 

 

$

3,854

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental

 

$

701

 

 

$

670

 

 

$

587

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fees paid to Regis and related parties:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

 

 

2013

 

 

 

2012

 

 

 

 

 

  (dollars in thousands)

 

Fees:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property acquisition

 

$

348

 

 

$

-

 

 

$

71

 

 

Property management, construction manaement and leasing commissions

 

 

583

 

 

 

474

 

 

 

2,189

 

 

Real estate brokerage

 

 

2,848

 

 

 

4,081

 

 

 

2,321

 

 

 

 

$

3,779

 

 

$

4,555

 

 

$

4,581

 

 

The Company received rental revenue of $0.7 million in 2013, $0.6 million in 2012, and $0.4 million in 2011 from Pillar and its related parties for properties owned by the Company.

 

As of December 31, 2014, the Company had notes and interest receivables, net of allowances, of $73.9 million and $5.8 million, respectively, due from UHF, a related party.  See Part 2, Item 8. Note 3. “Notes and Interest Receivable”.  During the current period, the Company recognized interest income of $13.0 million, originated $5.4 million, received principal payments of $21.9 million and received interest payments of $24.8 million from these related party notes receivables.

 

As of December 31, 2014, the Company had notes and interest receivables of $21.0 million and $1.0 million, respectively, due from FBH, a related party.  See Part 2, Item 8. Note 3. “Notes and Interest Receivable”.  During the current period, the Company recognized interest income of $1.0 million and originated $21.0 million from these related party notes receivables.

 

On January 1, 2012, the Company’s subsidiary, TCI, entered into a development agreement with UHF, a non-profit corporation that provides management services for the development of residential apartment projects in the future.   This development agreement was terminated December 31, 2013.  The Company has also invested in surplus cash notes receivables from UHF and has sold several residential apartment properties to UHF in prior years.  Due to this ongoing relationship and the significant investment in the performance of the collateral secured under the notes receivable, UHF has been determined to be a related party.

 

The Company is part of a tax sharing and compensating agreement with respect to federal income taxes between ARL, TCI and IOT and their subsidiaries that was entered into in July of 2009.  That agreement continued until August 31, 2012, at which time a new tax sharing and compensating agreement was entered into by ARL, TCI, IOT and MRHI for the remainder of 2012 and subsequent years.  The expense (benefit) in each year was calculated based on the amount of losses absorbed by taxable income multiplied by the maximum statutory tax rate of 35%.

 

The following table reconciles the beginning and ending balances of the related party payable due to Pillar as of December 31, 2014 (dollars in thousands):

 

 

 

Pillar

 

Related party receivable, December 31, 2013

 

$

14,086

 

Cash transfers

 

 

59,372

 

Advisory fees

 

 

(8,943

)

Net income fee

 

 

(3,669

)

Cost reimbursements

 

 

(3,449

)

Interest income

 

 

1,043

 

Notes receivable purchased

 

 

(26,290

)

Fees and commissions

 

 

(4,526

)

Expenses paid by Advisor

 

 

(6,957

)

Financing (mortgage payments)

 

 

(3

)

Sales/purchases transactions

 

 

750

 

Tax sharing

 

 

-

 

Related party receivable, December 31, 2014

 

$

21,414

 

 

Below are transactions that involve a related party:

 

In December 2010, various commercial and land holdings were sold to FRE Real Estate, Inc., a related party. During the first three months of 2011, many of these transactions were rescinded as of the original transaction date and were subsequently sold to related parties under the same ownership as FRE Real Estate, Inc. As of December 31, 2014, one commercial building, Thermalloy, remains in FRE Real Estate, Inc.  The Company did not recognize or record the sale in accordance with ASC 360-20 due to TCI’s continuing involvement, which included the potential payment of cash shortfalls, future obligations under the existing mortgage and guaranty, the buyer’s inadequate initial investment and the Company’s questionable recovery of investment cost.  The Company determined that no sale had occurred for financial reporting purposes and therefore the asset remained on the books and continued to record operating expenses and depreciation as a period cost until a sale occurred that met the requirements of ASC 360-20. 

 

As of December 31, 2014, there remain one apartment complex, one commercial building and 110 acres of land that TCI has sold to a related party and have deferred the recognition of the sale.  These are treated as “subject to sales contract” on the Consolidated Balance Sheets. These properties were sold to a related party in order to help facilitate an appropriate debt or organizational restructure and may or may not be transferred back to the seller upon resolution. These properties have mortgages that are secured by the property and many have corporate guarantees. According to the loan documents, the maker is currently in default on these mortgages primarily due to lack of payment and is actively involved in discussions with every lender in order to settle or cure the default situation. We have reviewed each asset and taken impairment to the extent we feel the value of the property was less than our current basis.  The Company did not recognize or record the sale in accordance with ASC 360-20 due to our continuing involvement, which included the potential payment of cash shortfalls, future obligations under the existing mortgage and guaranty, the buyer’s inadequate initial investment and the Company’s questionable recovery of investment cost.  The Company determined that no sale had occurred for financial reporting purposes and therefore the asset remained on the books and continued to record operating expenses and depreciation as a period cost until a sale occurred that met the requirements of ASC 360-20.  The buyers received no compensation for the facilitation of the bankruptcy or debt restructuring.

 

Sales to our subsidiary, TCI, have been reflected, in prior years, at the fair value sale price.   Upon discussion with the SEC and in review of the guidance pursuant to ASC 250-10-45-22 to 24, we have adjusted those assets, in the prior year, to reflect a basis equal to ARL’s cost basis in the asset at the time of the sale.  The related party payables from TCI were reduced for the lower asset price.  The Company reflected the original cost basis in consolidation, therefore no change in the financial statements were necessary to reflect this change.