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Organization, Properties, Basis of Presentation, Financial Instruments and Recent Accounting Standards | 9 Months Ended
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Sep. 30, 2023
Organization, Properties, Basis of Presentation, Financial Instruments and Recent Accounting Standards |
Organization, Properties, Basis of Presentation, Financial Instruments and Recent Accounting Standards | 1.  Organization, Properties, Basis of Presentation, Financial Instruments and Recent Accounting Standards ​ Organization ​ Franklin Street Properties Corp. (“FSP Corp.” or the “Company”) holds, directly and indirectly, 100% of the interest in FSP Investments LLC, FSP Property Management LLC, FSP Holdings LLC and FSP Protective TRS Corp. FSP Property Management LLC provides asset management and property management services. The Company also has a non-controlling common stock interest in the corporation that is the sole member of FSP Monument Circle LLC, which corporation was organized to operate as a real estate investment trust (“Monument Circle” or the “Sponsored REIT”). ​ As of September 30, 2023, the Company owned and operated a portfolio of real estate consisting of 19 operating properties, and the Sponsored REIT, which was consolidated effective January 1, 2023. The Company may pursue, on a selective basis, the sale of its properties in order to take advantage of the value creation and demand for its properties, for geographic, property specific reasons or for other general corporate purposes. ​ Properties ​ The following table summarizes the Company’s number of owned and consolidated properties and rentable square feet of real estate. ​
​ | ​ | ​ | ​ | ​ | ​
​ | ​ | As of September 30, |
​ |  | 2023 |  | 2022 |
Owned and Consolidated Properties: | ​ | ​ | ​ | ​ | ​
Number of properties (1) |  | 20 |  | 22 | ​
Rentable square feet |  | 6,206,460 |  | 6,433,954 | ​
​ (1) Includes three properties that were classified as assets held for sale as of September 30, 2023. ​ Basis of Presentation ​ The unaudited consolidated financial statements of the Company include all of the accounts of the Company and its majority-owned and controlled subsidiaries. All significant intercompany balances and transactions have been eliminated. These financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2022, as filed with the Securities and Exchange Commission. ​ The accompanying interim financial statements are unaudited; however, the financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring matters) necessary for a fair presentation of the financial statements for these interim periods have been included. Operating results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023 or for any other period. ​ Management is in discussions with lenders to extend or refinance the Company’s debt, a portion of which matures within one year after the date that these financial statements are issued as more fully described in Note 3 below. Management has considered whether there is substantial doubt about the Company's ability to continue as a going concern within one year of the issuance date of these interim financial statements due to the fact of the uncertainty regarding the maturities of this debt as set forth in Accounting Standards Codification (ASC) 205-40, “Presentation of Financial Statements - Going Concern.” As described in Note 1 below, the Company has concluded that management’s plans to dispose of assets and extend and/or refinance the Company’s debt are probable of being achieved and alleviate substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result from an adverse outcome of this uncertainty. ​ Financial Instruments ​ As disclosed in Note 4, the Company’s derivatives were recorded at fair value using Level 2 inputs prior to their termination on February 8, 2023. The Company estimates that the carrying values of cash and cash equivalents, restricted cash, receivables, prepaid expenses, accounts payable and accrued expenses, accrued compensation, and tenant security deposits approximate their fair values based on their short-term maturity and the bank note and term loans payable approximate their fair values as they bear interest at variable interest rates or at rates that are at market for similar investments. ​ Cash, Cash Equ ivalents and Restricted Cash ​ The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statement of cash flows. ​
​ | ​ | ​ | ​ | ​ | ​ | ​
​ |  | September 30, |  | September 30,
(in thousands) | ​ | 2023 | ​ | 2022
Cash and cash equivalents (1) | ​ | $ | 13,043 | ​ | $ | 6,367
Restricted cash | ​ |  | — | ​ |  | 2,350
Total cash, cash equivalents and restricted cash | ​ | $ | 13,043 | ​ | $ | 8,717
| (1) | Includes $2,445 at September 30, 2023, pertaining to Monument Circle, which the Company is unable to utilize for its own operational purposes.
​ Restricted cash consists of escrows arising from property sales. Cash held in escrow is paid based on the terms of the closing agreements for the sale. ​ Variable Interest Entities (VIEs) ​ The Company determines whether an entity is a VIE and, if so, whether it should be consolidated by utilizing judgments and estimates that are inherently subjective. The determination of whether an entity in which the Company holds a, direct or indirect, variable interest is a VIE is based on several factors, including whether the entity’s total equity investment at risk upon inception is sufficient to finance the entity’s activities without additional subordinated financial support. The Company makes judgments regarding the sufficiency of the equity at risk based first on a qualitative analysis, and then a quantitative analysis, if necessary. ​ The Company analyzes any investments in VIEs to determine if the Company is the primary beneficiary. In evaluating whether the Company is the primary beneficiary, the Company evaluates its direct and indirect economic interests in the entity. Determining which reporting entity, if any, is the primary beneficiary of a VIE is primarily a qualitative approach focused on identifying which reporting entity has both (1) the power to direct the activities of a VIE that most significantly impact such entity’s economic performance and (2) the obligation to absorb losses or the right to receive benefits from such entity that could potentially be significant to such entity. Performance of that analysis requires the exercise of judgment. ​ The Company considers a variety of factors in identifying the entity that holds the power to direct matters that most significantly impact the VIE’s economic performance including, but not limited to, the ability to direct a proposed sale of the property or merger of the company. In addition, the Company considers the rights of other investors to participate in those decisions, to replace the manager and to amend the corporate charter. The Company determines whether it is the primary beneficiary of a VIE at the time it becomes involved with a VIE and considers that conclusion upon a reconsideration event. ​ As of January 1, 2023, the Company’s relationship with the Sponsored REIT was considered a VIE and the Company became the primary beneficiary. Upon this reconsideration event, the entity is included within the Company’s consolidated financial statements and all intercompany accounts and transactions have been eliminated in consolidation. A gain on consolidation of approximately $0.4 million was recognized in the three months ended March 31, 2023. Cash and cash equivalents of $3 million held by Monument Circle was included in the Company’s cash and cash equivalents upon consolidation and is reflected as “Consolidation of Sponsored REIT” in the consolidated statement of cash flows. The cash and cash equivalents held by Monument Circle are unable to be utilized for the Company’s operational purposes. The creditors of Monument Circle’s trade payables do not have any recourse against the Company. ​ The consolidation value of Monument Circle was allocated to real estate investments and leases, including lease origination costs. Lease origination costs represent the value associated with acquiring an in-place lease (i.e. the market cost to execute a similar lease, including leasing commission, legal, vacancy, and other related costs). The value assigned to building approximates the replacement cost; the value assigned to land approximates its appraised value; and the value assigned to leases approximate their fair value. Other assets and liabilities are recorded at their historical costs, which approximates fair value. ​ The Company assessed the fair value of the acquired real estate leases based on estimated cash flow projections that utilize appropriate discount rates and available market information. Such inputs are Level 3 in the fair value hierarchy. ​ The following table summarizes the estimated fair value of the assets acquired at the date of consolidation, January 1, 2023: ​
​ | ​ | ​
(in thousands) | ​ | ​
​ | ​ | ​
Real estate assets | $ | 19,695
Value of acquired real estate leases | ​ | 305
Total | $ | 20,000
​ The following is quantitative information about significant unobservable inputs in the Company’s Level 3 measurement of the assets acquired in the consolidation of Monument Circle and were measured at fair value on a nonrecurring basis at January 1, 2023: ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ |  | Fair Value (1) at |  | ​ |  | Significant |  | Range | ​ | Weighted
Description | ​ | January 1, 2023 | ​ | Valuation Technique | ​ | Unobservable Input | ​ | Min | ​ | Max |  | Average (2)
​ | ​ | ​ | (in thousands) | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ |  | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Monument Circle Consolidation | ​ | $ | 20,000 |  | Discounted Cash Flows | ​ | Exit Cap Rate |  | 7.50 | % | ​ | 7.50 | % | ​ | 7.50 | %
​ | ​ | ​ | ​ | ​ | ​ | ​ | Discount Rate | ​ | 9.50 | % | ​ | 9.50 | % | ​ | 9.50 | %
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
(1) Classified within Level 3 of the fair value hierarchy. | ​
(2) Unobservable inputs were weighted based on the fair value of the related instrument. | ​
​ Prior to January 1, 2023, the Company’s relationship with the Sponsored REIT was considered a VIE in which the Company was not the primary beneficiary. The Company’s maximum exposure to losses associated with this VIE was limited to the principal amount outstanding under the loan from the Company to the Sponsored REIT secured by a mortgage on real estate owned by the Sponsored REIT (the “Sponsored REIT Loan”) net of the allowance for credit loss, the related accrued interest receivable and an exit fee receivable, which were in aggregate approximately $22.1 million at December 31, 2022. The accrued interest and exit fee receivables are included in prepaid expenses and other assets in the consolidated balance sheet and were approximately $2.3 million at December 31, 2022. The relationships and investments related to the Sponsored REIT are summarized in Note 2. ​ Liquidity and Management’s Plan ​ When preparing financial statements for each annual and interim reporting period, management evaluates whether there are conditions or events that, when considered in the aggregate, raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued as set forth in Accounting Standards Codification (ASC) 205-40, “Presentation of Financial Statements - Going Concern.” In making its assessment, management considered the Company’s financial condition and liquidity sources. ​ As of September 30, 2023 and November 7, 2023, the Company had aggregate outstanding indebtedness under two unsecured loans, the BofA Revolver and the BMO Term Loan (as defined in Note 3), totaling approximately $195 million and $205 million, respectively, maturing within 12 months of the date of issuance of the financial statements, and expects to have sufficient financial resources available to satisfy the obligations when due. Subsequent to September 30, 2023, on October 26, 2023, the Company closed on the disposition of one property resulting in net proceeds of approximately $46.7 million. As of the date of these interim financial statements, the Company is holding such net proceeds in cash and cash equivalents. As of September 30, 2023, the Company had entered into agreements to effect the sale of two properties held for sale that are scheduled to close during the fourth quarter of 2023, which two dispositions would result in aggregate net proceeds of approximately $96.5 million. As of November 7, 2023, the Company had cash and cash equivalents of approximately $73.5 million, which when combined with the aggregate net proceeds of approximately $96.5 million from the above-described two dispositions scheduled to close during the fourth quarter of 2023, will be sufficient to repay approximately $170.0 million of the approximately $205.0 million of indebtedness maturing on October 1, 2024. ​ The Company is also actively working on the potential disposition of additional properties that are not classified as assets held for sale as of September 30, 2023. As of September 30, 2023, the Company had entered into an agreement to effect the sale of a property that is scheduled to close during the fourth quarter of 2023, which would result in net proceeds of approximately $43.6 million. The Company intends to use net proceeds from dispositions primarily for the repayment of debt. ​ Management is also actively engaged in discussions with the Company’s lenders to extend and/or refinance the BofA Revolver and the BMO Term Loan prior to maturity. The Company believes that it will be able to extend and/or refinance the BofA Revolver and the BMO Term Loan prior to their scheduled October 1, 2024 maturity dates. However, there can be no assurance that the Company will be able to obtain extensions and/or refinancings in a timely manner, or on acceptable terms, if at all, or generate the cash necessary to pay off the BofA Revolver and the BMO Term Loan through asset sales prior to their October 1, 2024 maturity dates. The failure to obtain extensions and/or refinancings, or otherwise to repay the BofA Revolver and the BMO Term Loan, when due, could lead to events of default, which would have a material adverse effect on the Company’s financial condition. ​ The Company has concluded that management’s plans to dispose of assets and extend and/or refinance the BofA Revolver and the BMO Term Loan are probable of being achieved and alleviate substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result from an adverse outcome of this uncertainty. ​ As of September 30, 2023, the Company also has the Series A Notes (as defined in Note 3) in the aggregate principal amount of $116 million outstanding that are scheduled to mature on December 20, 2024, which is beyond 12 months of the date of issuance of the financial statements in this Quarterly Report on Form 10-Q and therefore have been excluded from management’s associated going concern assessment and analysis. ​ Recent Accounting Standards ​ In October 2023, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative (“ASU 2023-06”). ASU 2023-06 adds interim and annual disclosure requirements to GAAP at the request of the Securities and Exchange Commission. The guidance in ASU 2023-06 is required to be applied prospectively and the GAAP requirements will be effective when the removal of the related SEC disclosure requirements is effective. If the SEC does not act to remove its related requirement by June 30, 2027, any related FASB amendments will be removed from the Accounting Standards Codification and will not be effective. The Company does not anticipate that the adoption of ASU 2023-06 will have a material impact on the consolidated financial statements. ​ In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. The Company does not anticipate that the adoption of ASU 2020-04 will have a material impact on the consolidated financial statements.

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- Definition The entire disclosure for the organization, consolidation and basis of presentation of financial statements disclosure, and significant accounting policies of the reporting entity. May be provided in more than one note to the financial statements, as long as users are provided with an understanding of (1) the significant judgments and assumptions made by an enterprise in determining whether it must consolidate a VIE and/or disclose information about its involvement with a VIE, (2) the nature of restrictions on a consolidated VIE's assets reported by an enterprise in its statement of financial position, including the carrying amounts of such assets, (3) the nature of, and changes in, the risks associated with an enterprise's involvement with the VIE, and (4) how an enterprise's involvement with the VIE affects the enterprise's financial position, financial performance, and cash flows. Describes procedure if disclosures are provided in more than one note to the financial statements. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 235 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//235/tableOfContent Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 275 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//275/tableOfContent Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 810 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//810/tableOfContent Reference 4: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 205 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//205/tableOfContent + Details
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