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COMMITMENTS AND CONTINGENCIES | 6 Months Ended
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Jun. 30, 2015
COMMITMENTS AND CONTINGENCIES. |
COMMITMENTS AND CONTINGENCIES | 13. COMMITMENTS AND CONTINGENCIES Loan Commitments—Commitments to extend credit are agreements to lend to a customer provided the terms established in the contract are met. Our outstanding loan commitments and approvals to fund loans were $20,384,000 at June 30, 2015, the majority of which were for prime-based loans to be originated by our subsidiary engaged in SBA 7(a) Program loans, the government guaranteed portion of which is intended to be sold. Commitments generally have fixed expiration dates. Since some commitments are expected to expire without being drawn upon, total commitment amounts do not necessarily represent future cash requirements. General—In connection with the ownership and operation of real estate properties, we have certain obligations for the payment of tenant improvement allowances and lease commissions in connection with new leases and renewals. CIM Commercial had a total of $23,883,000 in future obligations under leases to fund tenant improvements and other future construction obligations at June 30, 2015. Employment Agreements—We have employment agreements with two of our executive officers. Under certain circumstances, as defined within the agreements, the agreements provide for (1) severance compensation or change in control payments to the executive officer in an amount equal to 2.99 times the average of the last three years' annual compensation paid to the executive officer and (2) death and disability payments in an amount equal to two times and one time, respectively, the annual salary paid to the executive officer. In addition, to the extent the executive is employed by us on January 1, 2016 and such executive is not entitled to any disability, death or severance payments, the executive would receive share awards as a retention bonus which would vest immediately upon grant. In aggregate, the executive officers would receive 105,000 share awards. We recorded compensation expense of $316,000 and $315,000 for the three months ended June 30, 2015 and 2014, respectively, related to these share awards; for the six months ended June 30, 2015 and 2014, such compensation expense was $632,000 and $315,000, respectively. At June 30, 2015, there was $631,000 of total unrecognized compensation expense relating to these share awards that will be recognized during 2015. Litigation—At December 31, 2014, we recorded a liability of $4,475,000 at one of our multifamily investments. The $4,475,000 liability, together with an additional tax abatement reimbursement related to the period from January 1, 2015 to March 11, 2015, was settled in February 2015 for a total of $4,721,000. Prior to our acquisition of the property, the former owners of the property enrolled the property in a property tax abatement program under Section 421-a of the New York Real Property Tax Law. At the time we acquired the property, the property was being used for corporate housing. This use continued from the time of acquisition and terminated in March 2015. The New York State Attorney General's office recently determined that the use of the property for corporate housing was inconsistent with the tax abatement program. In cooperation with the New York State Attorney General, we refunded the tax abatements received during the period we owned the property while it was being used for corporate housing. Our agreement with the New York State Attorney General does not affect the ability of the property to receive tax abatements in the future. We are not currently involved in any other material pending or threatened legal proceeding nor, to our knowledge, is any material legal proceeding currently threatened against us, other than routine litigation arising in the ordinary course of business. In the normal course of business, we are periodically a party to certain legal actions and proceedings involving matters that are generally incidental to our business. While the outcome of these legal actions and proceedings cannot be predicted with certainty, in management's opinion, the resolution of these legal proceedings and actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. SBA Related—If the SBA establishes that a loss on an SBA guaranteed loan is attributable to significant technical deficiencies in the manner in which the loan was originated, funded or serviced under the SBA 7(a) Program, the SBA may seek recovery of the principal loss related to the deficiency from us. With respect to the guaranteed portion of SBA loans that have been sold, the SBA will first honor its guarantee and then seek compensation from us in the event that a loss is deemed to be attributable to technical deficiencies. Based on historical experience, we do not expect that this contingency is probable to be asserted. However, if asserted, it could have a material adverse effect on our consolidated financial position, results of operations or cash flows. Environmental Matters—In connection with the ownership and operation of real estate properties, we may be potentially liable for costs and damages related to environmental matters, including asbestos-containing materials. We have not been notified by any governmental authority of any noncompliance, liability, or other claim in connection with any of the properties, and we are not aware of any other environmental condition with respect to any of the properties that management believes will have a material adverse effect on our consolidated financial position, results of operations or cash flows. Rent Expense—The ground lease for a property provides for current annual rent of $503,000, payable quarterly, inclusive of an increase on June 1, 2015, and increases every five years thereafter based on the greater of 15% or 50% of the increase in the Consumer Price Index during a five-year adjustment period. In addition, commencing on June 1, 2040 and June 1, 2065, the rent payable during the balance of the lease term shall be increased by an amount equal to 10% of the rent payable during the immediately preceding lease year. The lease term is through May 31, 2089. If the landlord decides to sell the leased property, we have the right of first refusal. Rent expense under this lease, which includes straight line rent and amortization of acquired below-market ground lease, was $438,000 for each of the three months ended June 30, 2015 and 2014, and $876,000 for each of the six months ended June 30, 2015 and 2014. We record rent expense on a straight line basis. Straight line rent liability of $11,625,000 and $11,038,000 is included in other liabilities in the accompanying consolidated balance sheets as of June 30, 2015 and December 31, 2014, respectively. We lease office space in Dallas, Texas under a lease which expires in May 2018. We recorded rent expense of $72,000 and $49,000 for the three months ended June 30, 2015 and 2014, respectively, and $130,000 and $65,000 for the six months ended June 30, 2015 and the period from the Acquisition Date through June 30, 2014, respectively, which is included in discontinued operations. Scheduled future noncancelable minimum lease payments at June 30, 2015 are as follows:
Years Ending December 31, |  | (in thousands) |
2015 (Six months ending December 31, 2015) |  | $ | 361 |
2016 |  |  | 743 |
2017 |  |  | 749 |
2018 |  |  | 607 |
2019 |  |  | 503 |
Thereafter |  |  | 128,528 |
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|  | $ | 131,491 |
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