FOREST CITY ENTERPRISES INC - FORM 10-Q - November 3, 2014

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________
Form 10-Q
_____________________________________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                 to                 
Commission file number 1-4372 
_____________________________________________________________
FOREST CITY ENTERPRISES, INC.
(Exact name of registrant as specified in its charter) 
_____________________________________________________________
Ohio
(State or other jurisdiction of
incorporation or organization)
 
 
 
34-0863886
(I.R.S. Employer
Identification No.)
 
 
 
 
 
Terminal Tower
Suite 1100
 
50 Public Square
Cleveland, Ohio
 
44113
(Address of principal executive offices)
 
(Zip Code)
216-621-6060
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
_____________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding, including unvested restricted stock, of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Outstanding at October 29, 2014
Class A Common Stock, $.33 1/3 par value
181,757,129 shares
Class B Common Stock, $.33 1/3 par value
19,216,218 shares


Forest City Enterprises, Inc. and Subsidiaries
Table of Contents
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certifications
 


i

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Forest City Enterprises, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
 
September 30, 2014
 
 
(Unaudited)
December 31, 2013
 
(in thousands)
Assets
 
 
Real Estate
 
 
Completed rental properties
$
7,161,037

$
7,307,233

Projects under construction and development
634,969

535,479

Land inventory
113,892

128,688

Total Real Estate
7,909,898

7,971,400

Less accumulated depreciation
(1,567,874
)
(1,469,328
)
Real Estate, net – (variable interest entities $404.3 million and $656.8 million, respectively)
6,342,024

6,502,072

Cash and equivalents – (variable interest entities $14.6 million and $18.8 million, respectively)
181,656

280,206

Restricted cash – (variable interest entities $7.8 million and $154.5 million, respectively)
241,391

347,534

Notes and accounts receivable, net
442,624

455,561

Investments in and advances to unconsolidated entities
605,008

447,165

Other assets – (variable interest entities $26.4 million and $55.5 million, respectively)
396,227

415,316

Development project held for sale – (variable interest entities of $0 and $504.2 million, respectively)
—

504,171

Total Assets
$
8,208,930

$
8,952,025

Liabilities and Equity
 
 
Liabilities
 
 
Mortgage debt and notes payable, nonrecourse – (variable interest entities $233.5 million and $323.7 million, respectively)
$
4,016,396

$
4,351,506

Revolving credit facility
—

—

Convertible senior debt
700,000

700,000

Accounts payable, accrued expenses and other liabilities – (variable interest entities $64.1 million and $89.0 million, respectively)
798,266

831,920

Cash distributions and losses in excess of investments in unconsolidated entities
278,168

256,843

Deferred income taxes
451,752

485,894

Mortgage debt, nonrecourse, on development project held for sale – (variable interest entities of $0 and $228.0 million, respectively)
—

228,000

Total Liabilities
6,244,582

6,854,163

Redeemable Noncontrolling Interest
186,834

171,743

Commitments and Contingencies
—

—

Equity
 
 
Shareholders’ Equity
 
 
Preferred stock – without par value; 13,600,000 shares authorized; no shares issued
—

—

Common stock – $.33 1/3 par value
 
 
Class A, 371,000,000 shares authorized, 180,794,078 and 178,498,770 shares issued and 179,695,113 and 177,556,917 shares outstanding, respectively
60,265

59,500

Class B, convertible, 56,000,000 shares authorized, 19,220,506 and 20,173,558 shares issued and outstanding, respectively; 26,257,961 issuable
6,407

6,725

Total common stock
66,672

66,225

Additional paid-in capital
1,095,814

1,095,748

Retained earnings
494,007

570,793

Less treasury stock, at cost; 1,098,965 and 941,853 Class A shares, respectively
(18,950
)
(15,978
)
Shareholders’ equity before accumulated other comprehensive loss
1,637,543

1,716,788

Accumulated other comprehensive loss
(61,308
)
(76,582
)
Total Shareholders’ Equity
1,576,235

1,640,206

Noncontrolling interest
201,279

285,913

Total Equity
1,777,514

1,926,119

Total Liabilities and Equity
$
8,208,930

$
8,952,025


The accompanying notes are an integral part of these consolidated financial statements.
2
Forest City Enterprises, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
2013
 
2014
2013
 
(in thousands, except per share data)
Revenues
 
 
 
 
 
Rental
$
132,536

$
151,855

 
$
391,019

$
449,583

Tenant recoveries
30,082

37,890

 
89,146

121,881

Service and management fees
12,150

14,040

 
36,053

42,448

Parking and other
13,604

13,637

 
38,272

40,470

Arena
25,039

25,277

 
84,968

76,270

Land sales
15,123

22,523

 
50,367

56,992

Military Housing
6,209

11,471

 
24,092

36,930

Total revenues
234,743

276,693

 
713,917

824,574

Expenses
 
 
 
 
 
Property operating and management
92,347

107,140

 
283,075

332,498

Real estate taxes
19,691

20,825

 
59,445

65,434

Ground rent
2,411

1,181

 
6,465

5,184

Arena operating
17,105

16,286

 
55,399

56,596

Cost of land sales
2,879

14,186

 
17,081

31,718

Military Housing operating
1,958

7,890

 
10,216

22,814

Corporate general and administrative
13,763

13,994

 
35,383

38,531

 
150,154

181,502

 
467,064

552,775

Depreciation and amortization
55,511

88,232

 
169,838

236,488

Write-offs of abandoned development projects and demolition costs
456

3,459

 
1,389

17,012

Impairment of real estate
966

—

 
130,795

1,175

Net (gain) loss on land held for divestiture activity
—

8,925

 
—

(3,383
)
Total expenses
207,087

282,118

 
769,086

804,067

Operating income (loss)
27,656

(5,425
)
 
(55,169
)
20,507

 
 
 
 
 
 
Interest expense
(59,312
)
(82,253
)
 
(178,917
)
(246,832
)
Amortization of mortgage procurement costs
(2,074
)
(2,300
)
 
(5,967
)
(7,567
)
Gain (loss) on extinguishment of debt
(49
)
23,666

 
(927
)
18,718

Interest and other income
10,096

14,957

 
33,974

37,382

Net loss on disposition of partial interest in development project
—

—

 
(19,590
)
—

Net gain (loss) on disposition of full or partial interest in rental properties
(146
)
386,559

 
(613
)
386,559

Earnings (loss) before income taxes
(23,829
)
335,204

 
(227,209
)
208,767

Income tax expense (benefit)
 
 
 
 
 
Current
3,493

36,865

 
8,992

(3,265
)
Deferred
(3,858
)
108,090

 
(52,373
)
121,085

 
(365
)
144,955

 
(43,381
)
117,820

Net gain on change in control of interests
—

—

 
2,759

2,762

Earnings from unconsolidated entities, gross of tax
 
 
 
 
 
Equity in earnings
19,346

43,924

 
80,543

56,680

Net gain on land held for divestiture activity
—

79

 
—

2,590

 
19,346

44,003

 
80,543

59,270

Earnings (loss) from continuing operations
(4,118
)
234,252

 
(100,526
)
152,979

Discontinued operations, net of tax
 
 
 
 
 
Operating earnings (loss) from rental properties
—

(706
)
 
(1,844
)
1,674

Impairment of real estate
—

(4,206
)
 
—

(4,206
)
Gain on disposition of rental properties
—

10,583

 
14,856

25,761

 
—

5,671

 
13,012

23,229

Net earnings (loss)
(4,118
)
239,923

 
(87,514
)
176,208

Noncontrolling interests
 
 
 
 
 
Loss from continuing operations attributable to noncontrolling interests, gross of tax
4,804

2,068

 
10,778

17,151

Earnings from discontinued operations attributable to noncontrolling interests
—

(135
)
 
(50
)
(6,034
)
 
4,804

1,933

 
10,728

11,117

Net earnings (loss) attributable to Forest City Enterprises, Inc.
686

241,856

 
(76,786
)
187,325

Preferred dividends
—

—

 
—

(185
)
Net earnings (loss) attributable to common shareholders
$
686

$
241,856

 
$
(76,786
)
$
187,140

 
 
 
 
 
 
Basic earnings (loss) per common share
 
 
 
 
 
Earnings (loss) from continuing operations attributable to common shareholders
$
—

$
1.16

 
$
(0.45
)
$
0.86

Earnings from discontinued operations attributable to common shareholders
—

0.03

 
0.06

0.09

Net earnings (loss) attributable to common shareholders
$
—

$
1.19

 
$
(0.39
)
$
0.95

Diluted earnings (loss) per common share
 
 
 
 
 
Earnings (loss) from continuing operations attributable to common shareholders
$
—

$
1.03

 
$
(0.45
)
$
0.80

Earnings from discontinued operations attributable to common shareholders
—

0.03

 
0.06

0.08

Net earnings (loss) attributable to common shareholders
$
—

$
1.06

 
$
(0.39
)
$
0.88


The accompanying notes are an integral part of these consolidated financial statements.
3
Forest City Enterprises, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)

 
Three Months Ended September 30,
 
2014
2013
 
(in thousands)
Net earnings (loss)
$
(4,118
)
$
239,923

Other comprehensive income (loss), net of tax:
 
 
Unrealized net gains on investment securities (net of tax of $0 and $(297), respectively)
—

468

Foreign currency translation adjustments (net of tax of $64 and $0, respectively)
(102
)
—

Unrealized net gains on interest rate derivative contracts (net of tax of $(4,587) and $(2,594), respectively)
7,265

4,103

Total other comprehensive income, net of tax
7,163

4,571

Comprehensive income
3,045

244,494

Comprehensive loss attributable to noncontrolling interest
4,779

1,926

Total comprehensive income attributable to Forest City Enterprises, Inc.
$
7,824

$
246,420

 
 
 
 
Nine Months Ended September 30,
 
2014
2013
 
(in thousands)
Net earnings (loss)
$
(87,514
)
$
176,208

Other comprehensive income (loss), net of tax:
 
 
Unrealized net gains on investment securities (net of tax of $0 and $(430), respectively)
—

678

Foreign currency translation adjustments (net of tax of $(30) and $73, respectively)
48

(116
)
Unrealized net gains on interest rate derivative contracts (net of tax of $(9,647) and $(15,653), respectively)
15,272

24,736

Total other comprehensive income, net of tax
15,320

25,298

Comprehensive income (loss)
(72,194
)
201,506

Comprehensive loss attributable to noncontrolling interest
10,682

11,089

Total comprehensive income (loss) attributable to Forest City Enterprises, Inc.
$
(61,512
)
$
212,595


The accompanying notes are an integral part of these consolidated financial statements.
4

Forest City Enterprises, Inc. and Subsidiaries
Consolidated Statements of Equity
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
Preferred Stock
Common Stock
Additional
 
 
 
Other
 
 
 
Series A
Class A
Class B
Paid-In
Retained
Treasury Stock
Comprehensive
Noncontrolling
 
 
Shares
Amount
Shares
Amount
Shares
Amount
Capital
Earnings
Shares
Amount
(Loss) Income
Interest
Total
 
(in thousands)
Balances at January 31, 2013
211

$
10,552

163,729

$
54,576

20,235

$
6,745

$
932,045

$
576,285

7

$
(108
)
$
(103,203
)
$
261,679

$
1,738,571

Net loss, net of $16,847 attributable to redeemable noncontrolling interest
 
 
 
 
 
 
 
(5,307
)
 
 
 
(48,636
)
(53,943
)
Other comprehensive income, net of tax
 
 
 
 
 
 
 
 
 
 
26,621

34

26,655

Purchase of treasury stock
 
 
 
 
 
 
 
 
180

(3,167
)
 
 
(3,167
)
Conversion of Class B to Class A shares
 
 
62

20

(62
)
(20
)
 
 
 
 
 
 
—

Issuance of Class A shares in exchange for Series A preferred stock
(110
)
(5,489
)
363

121

 
 
5,368

 
 
 
 
 
—

Redemption of Series A preferred stock
(101
)
(5,063
)
 
 
 
 
 
 
 
 
 
 
(5,063
)
Proceeds from settlement of equity call hedge related to issuance of preferred stock
 
 
 
 
 
 
23,099

 
765

(12,868
)
 
 
10,231

Issuance of Class A shares in exchange for Puttable Equity-Linked Senior Notes due 2014
 
 
13,679

4,559

 
 
189,786

 
 
 
 
 
194,345

Restricted stock vested
 
 
600

202

 
 
(202
)
 
 
 
 
 
—

Exercise of stock options
 
 
66

22

 
 
966

 
(10
)
165

 
 
1,153

Preferred stock dividends
 
 
 
 
 
 
 
(185
)
 
 
 
 
(185
)
Stock-based compensation
 
 
 
 
 
 
16,197

 
 
 
 
 
16,197

Excess income tax deficiency from stock-based compensation
 
 
 
 
 
 
(133
)
 
 
 
 
 
(133
)
Redeemable noncontrolling interest adjustment
 
 
 
 
 
 
50,546

 
 
 
 
 
50,546

Acquisition of partners’ noncontrolling interest in consolidated subsidiaries
 
 
 
 
 
 
(95,924
)
 
 
 
 
(2,763
)
(98,687
)
Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
80,339

80,339

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
(36,400
)
(36,400
)
Change to equity method of accounting for subsidiaries
 
 
 
 
 
 
 
 
 
 
 
5,660

5,660

Adjustment due to change in ownership of consolidated subsidiaries
 
 
 
 
 
 
(26,000
)
 
 
 
 
26,000

—

Balances at December 31, 2013
—

$
—

178,499

$
59,500

20,173

$
6,725

$
1,095,748

$
570,793

942

$
(15,978
)
$
(76,582
)
$
285,913

$
1,926,119

Net loss, net of $13,299 attributable to redeemable noncontrolling interest
 
 
 
 
 
 
 
(76,786
)
 
 
 
2,571

(74,215
)
Other comprehensive income, net of tax
 
 
 
 
 
 
 
 
 
 
15,274

46

15,320

Purchase of treasury stock
 
 
 
 
 
 
 
 
205

(3,800
)
 
 
(3,800
)
Conversion of Class B to Class A shares
 
 
953

318

(953
)
(318
)
 
 
 
 
 
 
—

Restricted stock vested
 
 
669

223

 
 
(223
)
 
 
 
 
 
—

Exercise of stock options
 
 


 
 
(245
)
 
(48
)
828

 
 
583

Stock-based compensation
 
 
 
 
 
 
14,840

 
 
 
 
 
14,840

Excess income tax deficiency from stock-based compensation
 
 
 
 
 
 
(149
)
 
 
 
 
 
(149
)
Exchange of Class A Common Units for Class A shares
 
 
673

224

 
 
34,134

 
 
 
 
(34,358
)
—

Redeemable noncontrolling interest adjustment
 
 
 
 
 
 
(28,390
)
 
 
 
 
 
(28,390
)
Acquisition of partners’ noncontrolling interest in consolidated subsidiaries
 
 
 
 
 
 
(28,151
)
 
 
 
 
(66,406
)
(94,557
)
Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
34,249

34,249

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
(8,992
)
(8,992
)
Adjustment due to change in ownership of consolidated subsidiaries
 
 
 
 
 
 
8,250

 
 
 
 
(11,744
)
(3,494
)
Balances at September 30, 2014 (Unaudited)
—

$
—

180,794

$
60,265

19,220

$
6,407

$
1,095,814

$
494,007

1,099

$
(18,950
)
$
(61,308
)
$
201,279

$
1,777,514


The accompanying notes are an integral part of these consolidated financial statements.
5
Forest City Enterprises, Inc. and Subsidiaires
Consolidated Statements of Cash Flows
(Unaudited)

 
Nine Months Ended September 30,
 
2014
2013
 
(in thousands)
Net earnings (loss)
$
(87,514
)
$
176,208

Depreciation and amortization
169,838

236,488

Amortization of mortgage procurement costs
5,967

7,567

Impairment of real estate
130,795

1,175

Write-offs of abandoned development projects
283

14,858

(Gain) loss on extinguishment of debt
927

(18,718
)
Net gain on land held for divestiture activity
—

(3,383
)
Net loss on disposition of partial interest in development project
19,590

—

Net (gain) loss on disposition of partial interest in rental properties
613

(386,559
)
Net gain on change in control of interests
(2,759
)
(2,762
)
Deferred income tax expense (benefit)
(52,373
)
121,085

Earnings from unconsolidated entities
(80,543
)
(59,270
)
Stock-based compensation expense
10,730

8,432

Amortization and mark-to-market adjustments of derivative instruments
4,984

9,872

Cash distributions from operations of unconsolidated entities
59,217

53,027

Non-cash operating expenses and deferred taxes included in discontinued operations
9,883

22,717

Gain on disposition of rental properties included in discontinued operations
(28,100
)
(43,931
)
Decrease in land inventory
9,203

7,266

Increase in notes and accounts receivable
(2,065
)
(1,003
)
Decrease in other assets
7,562

17,613

Decrease in accounts payable, accrued expenses and other liabilities
(15,009
)
(25,960
)
Net cash provided by operating activities
161,229

134,722

Cash Flows from Investing Activities
 
 
Capital expenditures
(315,170
)
(345,395
)
Payment of lease procurement costs
(7,212
)
(8,260
)
Decrease (increase) in notes receivable
10,580

(21,917
)
Decrease in restricted cash used for investing purposes
106,165

20,156

Proceeds from disposition of full or partial interest in rental properties or development project
236,908

496,515

Contributions to investments in and advances to unconsolidated entities
(112,613
)
(30,383
)
Distributions from investments in and advances to unconsolidated entities
120,294

73,910

Net cash provided by investing activities
38,952

184,626

Cash Flows from Financing Activities
 
 
Proceeds from nonrecourse mortgage debt and notes payable
507,788

497,646

Principal payments on nonrecourse mortgage debt and notes payable
(733,937
)
(710,705
)
Borrowings on revolving credit facility
832,325

507,194

Payments on revolving credit facility
(832,325
)
(507,194
)
Proceeds from issuance of Convertible Senior Notes due 2020, net of issuance costs
—

291,250

Redemption of Senior Notes due 2015
—

(53,253
)
Redemption of Senior Notes due 2017
—

(132,144
)
Make-whole premium and inducements related to exchange of Senior Notes due 2014 for Class A common stock
—

(5,490
)
Transaction costs related to exchange of Senior Notes due 2014 for Class A common stock
—

(2,300
)
Payments of deferred financing costs
(10,751
)
(11,317
)
Change in book overdrafts
—

3,161

Purchase of treasury stock
(3,800
)
(3,226
)
Redemption of Series A preferred stock
—

(5,063
)
Proceeds from equity call hedge related to the issuance of Series A preferred stock
—

10,231

Exercise of stock options
583

8,027

Dividends paid to preferred shareholders
—

(185
)
Acquisitions of noncontrolling interests
(83,871
)
(101,467
)
Contributions from noncontrolling interests
34,249

53,186

Distributions to noncontrolling interests
(8,992
)
(30,145
)
Net cash used in financing activities
(298,731
)
(191,794
)
Net increase (decrease) in cash and equivalents
(98,550
)
127,554

Cash and equivalents at beginning of period
280,206

293,557

Cash and equivalents at end of period
$
181,656

$
421,111



The accompanying notes are an integral part of these consolidated financial statements.
6
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)


A. Accounting Policies
Change in Year-End
The Company changed its year-end to December 31 from January 31, effective December 31, 2013. As a result, the financial results for the three and nine months ended September 30, 2013 are presented to allow for comparison between periods. The Company believes the change was useful to its financial statement users to allow for increased comparability of its performance to its peers.
Basis of Presentation
The interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the consolidated financial statements and related notes included in the Company’s annual report on Form 10-KT for the 11 months ended December 31, 2013, as amended on Form 10-KT/A on March 26, 2014. The results of interim periods are not necessarily indicative of results for the full year or any subsequent period. In management’s opinion, all adjustments (consisting solely of normal recurring matters) necessary for a fair statement of financial position, results of operations and cash flows at the dates and for the periods presented have been included.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires the Company to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related notes. Some of the critical estimates include, but are not limited to, determination of the primary beneficiary of variable interest entities (“VIEs”), estimates of useful lives for long-lived assets, reserves for collection on accounts and notes receivable and other investments, the fair value estimate of redeemable noncontrolling interest, impairment of real estate and other-than-temporary impairments on equity method investments. As a result of the nature of estimates, actual results could differ.
In April 2013, management approved a plan to demolish Ten MetroTech Center, an office building in Brooklyn, New York, to clear the land for redevelopment or sale. Accordingly, the original useful life, estimated to expire in 2042, was adjusted to expire at the demolition date in October 2013, which resulted in $25,421,000 and $44,397,000 of accelerated depreciation expense recognized in the Consolidated Statements of Operations during the three and nine months ended September 30, 2013.
Reclassifications
During the nine months ended September 30, 2014, the Company established several new financial statement line items within the Revenue and Expense sections of the Consolidated Statement of Operations to provide the financial statement user additional details of the components of total revenues and total expenses. Accordingly, comparable amounts for the three and nine months ended September 30, 2013 have been reclassified.
The new financial statement lines discussed above and a brief description of their components not previously disclosed include the following:
Rental - Tenant rental revenues and overage rents from operating properties, lease termination income and the adjustment to recognize minimum rents using the straight-line method.
Tenant recoveries - Recoveries from commercial tenants for common area maintenance, real estate taxes, insurance and other commercial property operating expenses.
Service and management fees - Management, leasing, finance, development and other service fee revenue.
Parking and other - Revenues derived from monthly and transient tenant parking and other revenue.
Land sales - Sales of land to residential, commercial and industrial customers, primarily at the Company’s Stapleton project, and sales of commercial and residential outlots adjacent to the Company’s operating property portfolio.
Property operating and management - Expenses incurred at the operating property level and general business unit expenses including non-capitalizable development costs and management and service company expenses.
Ground rent - Expenses related to ground leases, including participation payments under the ground lease. Participation payments are triggered by defined events within the respective lease agreements and may include refinancings, sales or other capital transactions. Also includes the adjustment to recognize ground rent expenses using the straight-line method.
Cost of land sales - Cost of land associated with land sales.
Corporate general and administrative - Expenses related to the Company’s Corporate segment.

7
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

In addition, The Nets operating segment information as of December 31, 2013 and for the three and nine months ended September 30, 2013 has been reclassified and aggregated with the Corporate Activities operating segment disclosures to conform to the current year presentation. Certain other prior year amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year’s presentation.
Variable Interest Entities
As of September 30, 2014, the Company determined it was the primary beneficiary of 23 VIEs representing 19 properties, which are consolidated. The creditors of the consolidated VIEs do not have recourse to the Company’s general credit. As of September 30, 2014, the Company owns variable interests in 62 VIEs for which it is not the primary beneficiary, which are accounted for as equity method investments. The maximum exposure to loss as a result of the ownership of these unconsolidated VIEs is limited to the Company’s applicable investment balances, which approximates $258,000,000 at September 30, 2014.
During the three months ended June 30, 2014, the Company entered into a joint venture with Greenland Atlantic Yards, LLC, a subsidiary of Shanghai-based Greenland Holding Group Company Limited (“Greenland”), to execute on the remaining development rights of Pacific Park Brooklyn, a 22 acre mixed-use project in Brooklyn, New York. Following the transaction, the Company determined it was no longer the primary beneficiary of the Pacific Park Brooklyn project, which historically was a VIE. The impact of the deconsolidation to the December 31, 2013 Consolidated Balance Sheet and parenthetical disclosures were decreases of $504,171,000 to development project held for sale, $1,141,000 to cash and equivalents, $99,784,000 to restricted cash, $2,571,000 to other assets, $228,000,000 to mortgage debt, nonrecourse of development project held for sale and $20,428,000 to accounts payable, accrued expenses and other liabilities and an increase to investments in and advances to unconsolidated entities of $156,071,000 to the September 30, 2014 Consolidated Balance Sheet.
During the three months ended September 30, 2014, the Company acquired the remaining noncontrolling interest of Arizona State Retirement System in the under construction B2 BKLYN, an apartment building in Brooklyn, New York. Following the transaction, the Company determined that B2 BKLYN was no longer a VIE. The impact of the removal of the entity from VIE status to the parenthetical disclosures on the December 31, 2013 Consolidated Balance Sheet were decreases of $104,408,000 to real estate, net, $1,306,000 to cash and equivalents, $46,801,000 to restricted cash, $3,110,000 to other assets, $56,605,000 to mortgage debt and notes payable, nonrecourse and $7,656,000 to accounts payable, accrued expenses and other liabilities.
Noncontrolling Interest
In connection with the closing of a joint venture with Greenland, the Company became obligated to purchase certain noncontrolling interests of the fully consolidated entity that contributed the development project into the joint venture. See Note M – Net Loss on Disposition of Partial Interest in Development Project for detailed information on the joint venture. In addition, the Company acquired certain other partners’ noncontrolling interest in Shops at Wiregrass, a regional mall in Tampa, Florida, Waterfront Station, a mixed-use development project in Washington, D.C., and B2 BKLYN, during the nine months ended September 30, 2014. The fair value of consideration exchanged or accrued related to all noncontrolling interest acquisitions in excess of the book value was $28,151,000, resulting in a decrease in additional paid-in-capital as reflected in the Consolidated Statements of Equity.
New Accounting Guidance
The following accounting pronouncements were adopted during the nine months ended September 30, 2014:
In July 2013, the Financial Accounting Standards Board (“FASB”) issued an amendment to the accounting guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or tax credit carryforward exists. This guidance, which clarifies whether the unrecognized tax benefit should be recorded as a liability or reduction of the related deferred tax asset, is effective for fiscal years and interim reporting periods within those years, beginning after December 15, 2013. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The adoption of this guidance on January 1, 2014 did not have a material impact on the Company’s consolidated financial statements.
In April 2014, the FASB issued an amendment to the accounting guidance for reporting discontinued operations and disclosures of disposals of components of an entity. This guidance changes the requirements for reporting discontinued operations and the criteria for determining which disposals can be presented as discontinued operations. This guidance is effective for annual reporting periods beginning on or after December 15, 2014 and interim reporting periods within that annual period. Early adoption is permitted. This guidance was early adopted effective April 1, 2014. The adoption of this guidance is expected to substantially reduce the number of property disposals that qualify for discontinued operations as compared to historical results.

8
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

The following new accounting pronouncements will be adopted on their respective effective dates:
In August 2014, the FASB issued an amendment to the accounting guidance on disclosure of uncertainties about an entity’s ability to continue as a going concern. This guidance requires management to assess the Company’s ability to continue as a going concern and to provide disclosures under certain circumstances. This guidance is effective for annual reporting periods ending after December 15, 2016 and interim reporting periods thereafter. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on the Company’s consolidated financial statements.
In May 2014, the FASB issued an amendment to the accounting guidance for revenue from contracts with customers. The core principle of this guidance is an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance defines steps an entity should apply to achieve the core principle. This guidance is effective for annual reporting periods beginning after December 15, 2016 and interim reporting periods within that annual period and allows for both retrospective and modified retrospective methods of adoption. Early adoption is not permitted. The Company is currently in the process of determining the method of adoption and evaluating the impact of adopting this guidance on the Company’s consolidated financial statements.
Related Party Transactions
The Company and certain of its affiliates entered into a Master Contribution and Sale Agreement (the “Master Contribution Agreement”) with Bruce C. Ratner (“Mr. Ratner”), an Executive Vice President and Director of the Company, and certain entities and individuals affiliated with Mr. Ratner (the “BCR Entities”) in August 2006 to purchase their interests in a total of 30 retail, office and residential operating properties and service companies in the Greater New York City metropolitan area. The Company issued Class A Common Units (“Units”) in a jointly-owned, limited liability company in exchange for their interests. The Company accounted for the issuance of the Units in exchange for the noncontrolling interests under the purchase method of accounting. The Units may be exchanged for one of the following forms of consideration at the Company’s sole discretion: (i) an equal number of shares of the Company’s Class A common stock or, (ii) cash based on a formula using the average closing price of the Class A common stock at the time of conversion or, (iii) a combination of cash and shares of the Company’s Class A common stock. The Company has no rights to redeem or repurchase the Units. Pursuant to the Master Contribution Agreement, certain projects under development would remain owned jointly until each individual project was completed and achieved “stabilization.” Upon stabilization, each project would be valued and the Company, in its discretion, would choose among various ownership options for the project.
In June 2014, one of the BCR Entities exchanged 673,565 of the Units. The Company issued 673,565 shares of its Class A common stock for the exchanged Units. The Company accounted for the exchange as a purchase of noncontrolling interests, resulting in a reduction of noncontrolling interests of $34,358,000, an increase to Class A common stock of $224,000 and a combined increase to additional paid-in capital of $34,134,000, accounting for the fair value of common stock issued and the difference between the fair value of consideration exchanged and the noncontrolling interest balance. At September 30, 2014 and December 31, 2013, 2,973,190 and 3,646,755 Units, respectively, were outstanding.
Pursuant to the terms of the Master Contribution Agreement, on January 2, 2014, the Company caused certain of its affiliates to acquire the BCR Entities’ interests in 8 Spruce Street, an apartment community in Manhattan, New York, DKLB BKLN, an apartment community in Brooklyn, New York, and East River Plaza, a specialty retail center in Manhattan, New York, for $14,286,000. Prior to the transaction, the Company accounted for the three projects using the equity method of accounting and will continue to account for the projects as equity method investments as the partners continue to have joint control.
As a result of the March 2014 disposal of Quartermaster Plaza, a specialty retail center in Philadelphia, Pennsylvania, the Company accrued $1,646,000 during the nine months ended September 30, 2014, related to a tax indemnity payment due to the BCR Entities, of which $1,235,000 was paid as of September 30, 2014.

9
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

Accumulated Other Comprehensive Loss
The following table summarizes the components of accumulated other comprehensive income (loss) (“accumulated OCI”):
 
September 30, 2014
December 31, 2013
 
(in thousands)
Unrealized losses on foreign currency translation
$
111

$
189

Unrealized losses on interest rate contracts (1) 
100,140

125,059

 
100,251

125,248

Income tax benefit
(38,840
)
(48,517
)
Noncontrolling interest
(103
)
(149
)
Accumulated Other Comprehensive Loss
$
61,308

$
76,582

(1)
Included in the amounts as of September 30, 2014 and December 31, 2013 are $78,293 and $97,360, respectively, of unrealized loss on an interest rate swap associated with New York Times office building on its nonrecourse mortgage debt with a notional amount of $640,000. This swap effectively fixes the mortgage at an all-in lender interest rate of 6.40% and expires in September 2017.
The following table summarizes the changes, net of tax and noncontrolling interest, of accumulated OCI by component:
 
Securities
Foreign Currency Translation
Interest Rate Contracts
Total
 
(in thousands)
Nine Months Ended September 30, 2014
 
 
 
 
Balance, January 1, 2014
$
—

$
(116
)
$
(76,466
)
$
(76,582
)
OCI before reclassifications
—

48

11,773

11,821

Loss reclassified from accumulated OCI
—

—

3,453

3,453

Total other comprehensive income
—

48

15,226

15,274

Balance, September 30, 2014
$
—

$
(68
)
$
(61,240
)
$
(61,308
)
Nine Months Ended September 30, 2013
 
 
 
 
Balance, January 1, 2013
$
(226
)
$
—

$
(107,588
)
$
(107,814
)
OCI before reclassifications
678

(116
)
21,118

21,680

Loss reclassified from accumulated OCI
—

—

3,590

3,590

Total other comprehensive income
678

(116
)
24,708

25,270

Balance, September 30, 2013
$
452

$
(116
)
$
(82,880
)
$
(82,544
)
The following table summarizes losses reclassified from accumulated OCI and their location on the Consolidated Statements of Operations:
Accumulated OCI Components
Loss Reclassified from Accumulated OCI
 
Location on Consolidated Statements of Operations
 
(in thousands)
 
 
Nine Months Ended September 30, 2014
 
 
 
Interest rate contracts
$
1,956

 
Interest expense
Interest rate contracts
3,666

 
Discontinued operations
Interest rate contracts
44

 
Equity in earnings
 
5,666

 
Total before income tax and noncontrolling interest
 
(2,187
)
 
Income tax benefit
 
(26
)
 
Noncontrolling interest
 
$
3,453

 
Loss reclassified from accumulated OCI
Nine Months Ended September 30, 2013
 
 
 
Interest rate contracts
$
5,788

 
Interest expense
Interest rate contracts
88

 
Equity in earnings
 
5,876

 
Total before income tax and noncontrolling interest
 
(2,274
)
 
Income tax benefit
 
(12
)
 
Noncontrolling interest
 
$
3,590

 
Loss reclassified from accumulated OCI

10
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

Supplemental Non-Cash Disclosures
The following table represents a summary of non-cash transactions including, but not limited to, dispositions of operating properties whereby the nonrecourse mortgage debt is assumed by the buyer, exchange of Units or senior debt for Class A common stock, conversion of Series A preferred stock to Class A common stock, changes in consolidation methods due to the occurrence of triggering events including, but not limited to, disposition of a partial interest in rental properties or development projects or acquisition of a partner’s interest, change in construction payables, change in the fair market value of redeemable noncontrolling interest and capitalization of stock-based compensation granted to employees directly involved with the development and construction of real estate.
 
Nine Months Ended September 30,
 
2014
2013
 
(in thousands)
Investing Activities
 
 
Decrease in projects under construction and development
$
351,905

$
20,919

Decrease in completed rental properties
136,008

853,875

(Increase) decrease in restricted cash
(20
)
4,326

Increase in notes and accounts receivable
(2,728
)
—

Increase in investments in and advances to affiliates
(122,663
)
(34,885
)
Total effect on investing activities
$
362,502

$
844,235

Financing Activities
 
 
Increase in accounts payable, accrued expenses and other liabilities
$
10,683

$
—

Decrease in nonrecourse mortgage debt and notes payable
(342,960
)
(868,342
)
Decrease in convertible senior debt
—

(218,675
)
Decrease in preferred stock
—

(5,489
)
Increase in Class A common stock
225

4,681

Increase in additional paid-in capital
34,741

179,617

Increase in treasury stock
—

(12,868
)
Increase in redeemable noncontrolling interest
28,390

9,939

(Decrease) increase in noncontrolling interest
(73,535
)
32,059

Total effect on financing activities
$
(342,456
)
$
(879,078
)

B. Mortgage Debt and Notes Payable, Nonrecourse
The following table summarizes the mortgage debt and notes payable, nonrecourse maturities as of September 30, 2014:
Years Ending December 31,
 
 
(in thousands)
2014
$
150,918

2015
434,791

2016
97,015

2017
1,123,937

2018
274,608

Thereafter
1,935,127

Total
$
4,016,396



11
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

C. Revolving Credit Facility
The Company’s Fourth Amended and Restated Credit Agreement and Fourth Amended and Restated Guaranty of Payment of Debt, as amended to the date hereof (collectively, the “Credit Facility”), provides total available borrowings of $500,000,000, subject to certain reserve commitments to be established, as applicable, on certain dates to be used to retire convertible senior debt that becomes due during the term of the agreement. The Credit Facility matures on February 21, 2016 and provides for one, 12-month extension option, subject to certain conditions. Borrowings bear interest at London Interbank Offered Rate (“LIBOR”) plus 3.50%. Up to $100,000,000 of the available borrowings may be used, in the aggregate, for letters of credit and/or surety bonds. The Credit Facility has restrictive covenants, including a prohibition on certain consolidations and mergers, limitations on the amount of debt, guarantees and property liens and restrictions on the pledging of ownership interests in subsidiaries. The Company may repurchase up to $100,000,000 of Class A common stock and declare or pay dividends in an amount not to exceed $24,000,000 in the aggregate in any four quarter period to Class A or B common shareholders, subject to certain conditions. The Credit Facility contains development limitations and financial covenants, including the maintenance of minimum liquidity, debt yield, debt service and cash flow coverage ratios, and specified levels of shareholders’ equity (all as specified in the Credit Facility). At September 30, 2014, the Company was in compliance with all of these financial covenants.
The following table summarizes available credit on the Credit Facility:
 
September 30, 2014
December 31, 2013
 
(in thousands)
Maximum borrowings
$
500,000

$
500,000

Less outstanding balances:
 
 
Borrowings
—

—

Letters of credit
86,858

59,760

Surety bonds
—

—

Available credit
$
413,142

$
440,240


D. Convertible Senior Debt
The following table summarizes the Company’s convertible senior debt:
 
September 30, 2014
December 31, 2013
 
(in thousands)
5.000% Notes due 2016
$
50,000

$
50,000

4.250% Notes due 2018
350,000

350,000

3.625% Notes due 2020
300,000

300,000

Total
$
700,000

$
700,000

As of September 30, 2014, all of the Company’s outstanding senior notes are convertible into Class A common stock based on conversion prices ranging from $13.91 to $24.21 per Class A common share.
All of the senior debt are unsecured senior obligations and rank equally with all existing and future unsecured indebtedness; however, they are effectively subordinated to the Credit Facility and all existing and future secured indebtedness and other liabilities of the Company’s subsidiaries to the extent of the value of the collateral securing that other debt.


12
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

E. Derivative Instruments and Hedging Activities
Risk Management Objective of Using Derivatives
The Company maintains an interest rate risk management strategy using derivative instruments to minimize significant unplanned impact on earnings and cash flows that may be caused by interest rate volatility. The strategy includes the use of interest rate swaps and option contracts having indices related to the pricing of specific liabilities. The Company enters into interest rate swaps to convert floating-rate debt to fixed-rate long-term debt, and vice-versa, depending on market conditions, or forward starting swaps to hedge the changes in benchmark interest rates on forecasted financings. Interest rate swap agreements are generally for periods of one to ten years. Option products used are primarily interest rate caps for periods of one to three years. The use of option products is consistent with the Company’s risk management objective to reduce or eliminate exposure to variability in future cash flows primarily attributable to changes in benchmark rates relating to forecasted financings, and the variability in cash flows attributable to increases relating to interest payments on its floating-rate debt.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage exposure to interest rate movements. The Company primarily uses interest rate caps and swaps as part of its interest rate risk management strategy. Interest rate caps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an upfront premium. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in accumulated OCI and is subsequently reclassified into earnings during the period the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value is recognized directly in earnings. Ineffectiveness was insignificant during the three months ended September 30, 2014. During the nine months ended September 30, 2014, the Company recorded $3,667,000 as an increase to interest expense primarily related to ineffectiveness from a missed forecasted transaction arising from the early reclassification of OCI related to debt associated with an entity that was disposed of during the nine months ended September 30, 2014. During the three and nine months ended September 30, 2013, the Company recorded $2,963,000 as an increase to interest expense related to ineffectiveness arising primarily from the early reclassification of OCI related to debt associated with entities that were included in the partial disposition of real estate. The hedged debt for these entities was deconsolidated and is now accounted for under the equity method of accounting. As of September 30, 2014, the Company expects it will reclassify amounts recorded in accumulated OCI into earnings as an increase in interest expense of approximately $24,576,000, net of tax, within the next twelve months. However, the actual amount reclassified could vary due to future changes in fair value of these derivatives.
Fair Value Hedges of Interest Rate Risk
The Company enters into total rate of return swaps (“TRS”) on various tax-exempt fixed-rate borrowings. The TRS convert borrowings from a fixed rate to a variable rate. In exchange for a fixed rate, the TRS requires the payment of a variable interest rate, generally equivalent to the Securities Industry and Financial Markets Association (“SIFMA”) rate (0.04% at September 30, 2014) plus a spread. Additionally, the Company has guaranteed the fair value of the underlying borrowings. Fluctuation in the value of the TRS is offset by the fluctuation in the value of the underlying borrowings, resulting in minimal financial impact. At September 30, 2014, the aggregate notional amount of TRS that are designated as fair value hedging instruments is $358,755,000. The underlying TRS borrowings are subject to a fair value adjustment.
Nondesignated Hedges of Interest Rate Risk
The Company uses derivative contracts to hedge certain interest rate risk, even though the contracts do not qualify for, or the Company has elected not to apply, hedge accounting. In these situations, the derivative is recorded at its fair value with changes reflected in earnings.

13
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

In instances where the Company enters into separate derivative instruments effectively hedging the same debt for consecutive annual periods, the duplicate amount of notional is excluded from the following disclosure to provide information that enables the financial statement user to understand the Company’s volume of derivative activity. The following table presents the fair values and location in the Consolidated Balance Sheets of all derivative instruments:
 
Fair Value of Derivative Instruments
 
September 30, 2014
 
Asset Derivatives
(included in Other Assets)
 
Liability Derivatives
(included in Accounts Payable, Accrued Expenses and Other Liabilities)
 
Current
Notional
Fair Value
 
Current
Notional
Fair Value
 
(in thousands)
Derivatives Designated as Hedging Instruments
 
 
 
 
 
Interest rate caps
$
330,000

$
208

 
$
—

$
—

Interest rate swaps
—

—

 
870,995

79,406

TRS
130,970

5,226

 
227,785

11,816

Total
$
460,970

$
5,434

 
$
1,098,780

$
91,222

Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
Interest rate caps
$
266,925

$
50

 
$
—

$
—

TRS
76,482

623

 
38,987

15,467

Total
$
343,407

$
673

 
$
38,987

$
15,467

 
 
 
 
 
 
 
December 31, 2013
Derivatives Designated as Hedging Instruments
 
 
 
 
 
Interest rate swaps
$
—

$
—

 
$
961,359

$
97,858

TRS
18,970

903

 
339,785

9,772

Total
$
18,970

$
903

 
$
1,301,144

$
107,630

Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
Interest rate caps
$
447,532

$
155

 
$
—

$
—

TRS
—

—

 
39,052

15,477

Total
$
447,532

$
155

 
$
39,052

$
15,477


14
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

The following table presents the impact of gains and losses related to derivative instruments designated as cash flow hedges included in the accumulated OCI section of the Consolidated Balance Sheets and in equity in earnings and interest expense in the Consolidated Statements of Operations:
 
 
 
Gain (Loss) Reclassified from Accumulated OCI
Derivatives Designated as
Cash Flow Hedging Instruments
Gain (Loss)
Recognized
in OCI
(Effective Portion)
 
Location on Consolidated Statements
of Operations
Effective
Amount
Ineffective
Amount
 
(in thousands)
Three Months Ended September 30, 2014
 
 
 
 
 
Interest rate caps and interest rate swaps
$
11,243

 
Interest expense
$
(594
)
$
(1
)
Interest rate swaps
—

 
Equity in earnings
(14
)
—

Total
$
11,243

 
 
$
(608
)
$
(1
)
Nine Months Ended September 30, 2014
 
 
 
 
 
Interest rate caps and interest rate swaps
$
19,253

 
Interest expense
$
(1,955
)
$
(1
)
Interest rate swap
—

 
Discontinued operations
—

(3,666
)
Interest rate swaps
—

 
Equity in earnings
(44
)
—

Total
$
19,253

 
 
$
(1,999
)
$
(3,667
)
Three Months Ended September 30, 2013
 
 
 
 
 
Interest rate swaps
$
2,817

 
Interest expense
$
(902
)
$
(2,963
)
Interest rate caps, interest rate swaps and Treasury options
—

 
Equity in earnings
(15
)
—

Total
$
2,817

 
 
$
(917
)
$
(2,963
)
Nine Months Ended September 30, 2013
 
 
 
 
 
Interest rate swaps
$
34,506

 
Interest expense
$
(2,825
)
$
(2,963
)
Interest rate caps, interest rate swaps and Treasury options
—

 
Equity in earnings
(93
)
5

Total
$
34,506

 
 
$
(2,918
)
$
(2,958
)
The following table presents the impact of gains and losses related to derivatives instruments not designated as cash flow hedges in the Consolidated Statements of Operations:
 
Net Gain (Loss) Recognized
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
2013
 
2014
2013
 
(in thousands)
Derivatives Designated as Fair Value Hedging Instruments
 
 
 
 
 
TRS (1) 
$
68

$
2,996

 
$
2,279

$
3,100

Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
Interest rate caps and interest rate swaps
$
62

$
—

 
$
(41
)
$
(239
)
TRS
(42
)
(1,807
)
 
633

(3,532
)
Total
$
20

$
(1,807
)
 
$
592

$
(3,771
)
(1)
The net gain (loss) recognized in interest expense from the change in fair value of the underlying TRS borrowings was $(68) and $(2,279) for the three and nine months ended September 30, 2014, respectively, and $(2,996) and $(3,100) for the three and nine months ended September 30, 2013, respectively, offsetting the gain (loss) recognized on the TRS.

15
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

Credit-risk-related Contingent Features
The principal credit risk of the Company’s interest rate risk management strategy is the potential inability of a counterparty to cover its obligations. If a counterparty fails to fulfill its obligation, the risk of loss approximates the fair value of the derivative. To mitigate this exposure, the Company generally purchases derivative financial instruments from the financial institution that issues the related debt, from financial institutions with which the Company has other lending relationships, or from financial institutions with a minimum credit rating of AA at the time of the transaction.
Agreements with derivative counterparties contain provisions under which the counterparty could terminate the derivative obligations if the Company defaults on its obligations under the Credit Facility and designated conditions are fulfilled. In instances where the Company’s subsidiaries have derivative obligations secured by a mortgage, the derivative obligations could be terminated if the indebtedness between the two parties is terminated, either by loan payoff or default of the indebtedness. In addition, certain derivative contracts provide that if the Company’s credit rating falls below certain levels, it may trigger additional collateral to be posted with the counterparty up to the full amount of the liability position of the derivative contracts. The majority of derivative instruments are held at the property level and do not contain credit-risk related contingent features, such as a credit rating downgrade. Also, certain subsidiaries have agreements containing provisions whereby the subsidiaries must maintain certain minimum financial ratios.
The following table presents information about collateral posted for derivatives in liability positions as of September 30, 2014:
 
Collateral Information
 
Notional Amount
Fair Value Prior to Nonperformance Risk
Nonperformance Risk
Collateral Posted
Nature of Collateral
Credit Risk Contingent Feature
 
(in thousands)
 
 
Property Specific Swaps
$
670,995

$
83,580

$
(4,340
)
$
—

Mortgage liens
None
TRS
266,772

27,206

77

52,015

Restricted cash, securities, notes receivable, letters of credit
None
Corporate Aggregate Swaps
200,000

166

—

170

Restricted cash
Credit rating
Totals
$
1,137,767

$
110,952

$
(4,263
)
$
52,185

 
 

F. Fair Value Measurements
Fair Value Measurements on a Recurring Basis
The Company’s financial assets consist of interest rate caps, interest rate swaps and TRS with positive fair values included in other assets. The Company’s financial liabilities consist of interest rate swaps and TRS with negative fair values included in accounts payable, accrued expenses and other liabilities and borrowings subject to TRS included in mortgage debt and notes payable, nonrecourse (see Note E – Derivative Instruments and Hedging Activities).
The Company records the redeemable noncontrolling interest related to Brooklyn Arena, LLC at redemption value, which approximates fair value. In the event the book value of the redeemable noncontrolling interest, which represents initial cost, adjusted for contributions, distributions and the allocation of profits or losses, is in excess of estimated fair value, the Company records the redeemable noncontrolling interest at book value.
As of December 31, 2013, the fair value of the redeemable noncontrolling interest was incorrectly recorded and presented at less than the book value. Management evaluated the impact of the error and determined that the previously issued financial statements were not materially misstated. Additionally, management determined the impact of correcting the presentation of the redeemable noncontrolling interest is not material to the current period financial statements. Accordingly, at March 31, 2014, the Company corrected the carrying value of the redeemable noncontrolling interest by recording an adjustment of $28,390,000 to increase the redeemable noncontrolling interest. Such amount should have been reflected at December 31, 2013.

16
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

The following table presents information about financial assets and liabilities and redeemable noncontrolling interest measured at fair value on a recurring basis, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value:
 
September 30, 2014
 
Level 1
Level 2
Level 3
Total
 
(in thousands)
Interest rate caps
$
—

$
258

$
—

$
258

Interest rate swaps (liabilities)
—

(1,113
)
(78,293
)
(79,406
)
TRS (assets)
—

—

5,849

5,849

TRS (liabilities)
—

—

(27,283
)
(27,283
)
Fair value adjustment to the borrowings subject to TRS
—

—

6,590

6,590

Redeemable noncontrolling interest (1) 
—

—

(186,834
)
(186,834
)
Total
$
—

$
(855
)
$
(279,971
)
$
(280,826
)
 
 
 
 
 
 
December 31, 2013
 
(in thousands)
Interest rate caps
$
—

$
155

$
—

$
155

Interest rate swaps (liabilities)
—

(498
)
(97,360
)
(97,858
)
TRS (assets)
—

—

903

903

TRS (liabilities)
—

—

(25,249
)
(25,249
)
Fair value adjustment to the borrowings subject to TRS
—

—

8,869

8,869

Redeemable noncontrolling interest
—

—

(171,743
)
(171,743
)
Total
$
—

$
(343
)
$
(284,580
)
$
(284,923
)
(1)
As of September 30, 2014, the redeemable noncontrolling interest is recorded at book value.
The following table presents a reconciliation of all financial assets and liabilities and redeemable noncontrolling interest measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
 
Redeemable
Noncontrolling
Interest
 
Interest Rate
Swaps
 
Net
TRS
Fair value
adjustment
to the borrowings
subject to TRS
Total TRS
Related
 
Total
 
(in thousands)
Nine Months Ended September 30, 2014
 
 
 
 
 
 
 
 
 
Balance, January 1, 2014
$
(171,743
)
 
$
(97,360
)
 
$
(24,346
)
$
8,869

$
(15,477
)
 
$
(284,580
)
Loss attributable to redeemable noncontrolling interest
13,299

 
—

 
—

—

—

 
13,299

Total realized and unrealized gains (losses):
 
 
 
 
 
 
 
 
 
Included in earnings
—

 
—

 
2,912

(2,279
)
633

 
633

Included in other comprehensive income
—

 
19,067

 
—

—

—

 
19,067

Included in additional paid-in capital
(28,390
)
 
—

 
—

—

—

 
(28,390
)
Balance, September 30, 2014
$
(186,834
)
 
$
(78,293
)
 
$
(21,434
)
$
6,590

$
(14,844
)
 
$
(279,971
)
Nine Months Ended September 30, 2013
 
 
 
 
 
 
 
 
 
Balance, January 1, 2013
$
(240,790
)
 
$
(131,634
)
 
$
(6,108
)
$
9,890

$
3,782

 
$
(368,642
)
Loss attributable to redeemable noncontrolling interest
15,705

 
—

 
—

—

—

 
15,705

Total realized and unrealized gains (losses):
 
 
 
 
 
 
 
 
 
Included in earnings
—

 
—

 
(432
)
(3,100
)
(3,532
)
 
(3,532
)
Included in other comprehensive income
—

 
26,447

 
—

—

—

 
26,447

Included in additional paid-in capital
(9,939
)
 
—

 
—

—

—

 
(9,939
)
Balance, September 30, 2013
$
(235,024
)
 
$
(105,187
)
 
$
(6,540
)
$
6,790

$
250

 
$
(339,961
)

17
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

The following table presents quantitative information about the significant unobservable inputs used to estimate the fair value of financial instruments measured on a recurring basis as of September 30, 2014:
 
Quantitative Information about Level 3 Fair Value Measurements
 
Fair Value September 30, 2014
Valuation
Technique
Unobservable
Input
Input Values
 
(in thousands)
 
 
 
Credit valuation adjustment of interest rate swap
$
4,251

Potential future exposure
Credit spread
4.00%
TRS
$
(21,434
)
Third party bond pricing
Bond valuation
79.59 - 108.57
Fair value adjustment to the borrowings subject to TRS
$
6,590

Third party bond pricing
Bond valuation
79.59 - 108.57
Third party service providers involved in fair value measurements are evaluated for competency and qualifications. Fair value measurements, including unobservable inputs, are evaluated based on current transactions and experience in the real estate and capital markets.
The impact of changes in unobservable inputs used to determine the fair market value of the credit valuation adjustment, TRS and fair value adjustment to the borrowings subject to TRS are not deemed to be significant.
Fair Value of Other Financial Instruments
The carrying amount of notes and accounts receivable, excluding the Stapleton advances, and accounts payable, accrued expenses and other liabilities approximates fair value based upon the short-term nature of the instruments. The carrying amount of the Stapleton advances approximates fair value since the interest rates on these advances approximates current market rates. The Company estimates the fair value of its debt instruments by discounting future cash payments at interest rates that the Company believes approximate the current market. Estimated fair value is based upon market prices of public debt, available industry financing data, current treasury rates, recent financing transactions and loan to value ratios. The fair value of the Company’s debt instruments is classified as Level 3 in the fair value hierarchy.
The following table summarizes the fair value of nonrecourse mortgage debt and notes payable (exclusive of the fair value of derivatives), revolving credit facility, convertible senior debt and nonrecourse mortgage debt of development property held for sale:
 
September 30, 2014
 
December 31, 2013
 
Carrying Value
Fair Value
 
Carrying Value
Fair Value
 
(in thousands)
Fixed Rate Debt
$
2,892,316

$
3,241,230

 
$
3,281,337

$
3,488,406

Variable Rate Debt
1,824,080

1,820,368

 
1,998,169

1,954,136

Total
$
4,716,396

$
5,061,598

 
$
5,279,506

$
5,442,542

Impairment of real estate and unconsolidated entities is also subject to fair value measurements (see Note J – Impairment of Real Estate and Impairment of Unconsolidated Entities).

G. Capital Stock
On April 16, 2013, the Company entered into separate, privately negotiated exchange agreements with certain holders of its Puttable Equity-Linked Senior Notes due 2014 (“2014 Senior Notes”) to exchange such notes for Class A common stock. The noteholders exchanged $138,853,000 in aggregate principal amount of 2014 Senior Notes for a total of 9,549,721 shares of Class A common stock and a cash payment of $4,860,000 for additional exchange consideration, accrued interest and in lieu of fractional shares.
On May 31, 2013, pursuant to the terms of the Indenture governing the 2014 Senior Notes, the Company issued a put termination notice to the noteholders. Pursuant to the Indenture, following the put termination notice, holders of the 2014 Senior Notes were permitted to put such notes to the Company through June 20, 2013. As of July 12, 2013, the last settlement date for noteholders to put the 2014 Senior Notes to the Company, $60,033,000 aggregate principal amount of the 2014 Senior Notes were put, for which noteholders received 4,128,806 shares of Class A common stock and cash payments totaling $1,088,000 for interest payable to October 15, 2013 and in lieu of fractional shares.
From January 31, 2013 to March 14, 2013, 109,768 shares of Series A preferred stock were converted by holders into 362,990 shares of Class A common stock in accordance with the original terms of the Series A preferred stock. On March 15, 2013, the Company redeemed the remaining 101,270 shares of Series A preferred stock for approximately $5,100,000, the aggregate amount of liquidation preference plus the dividend that was due and payable on March 15, 2013.

18
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

On March 13, 2013, the Company settled an equity call hedge transaction that was entered into in connection with the original issuance of the Series A preferred stock. As a result, the Company received 765,134 shares of Class A common stock valued at $16.82 per share for a total of $12,868,000 and cash payments of $10,231,000. In accordance with accounting guidance on equity hedge transactions, amounts received upon settlement of equity call hedge transactions in which the Company has the choice of net share settlement or net cash settlement are reflected as an increase to additional paid-in capital.

H. Stock-Based Compensation
During the nine months ended September 30, 2014, the Company granted 233,914 stock options, 602,602 shares of restricted stock and 309,750 performance shares under the Company’s 1994 Stock Plan. The stock options had a grant-date fair value of $11.60, which was computed using the Black-Scholes option-pricing model using the following assumptions: expected term of 5.5 years, expected volatility of 71.5%, risk-free interest rate of 1.91%, and expected dividend yield of 0%. The exercise price of the options is $18.73, the closing price of the underlying Class A common stock on the date of grant. The restricted stock had a grant-date fair value of $18.73 per share, the closing price of the Class A common stock on the date of grant. The performance shares had a grant-date fair value of $18.23 per share, which was computed using a Monte Carlo simulation.
At September 30, 2014, $3,578,000 of unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 30 months, $19,662,000 of unrecognized compensation cost related to restricted stock is expected to be recognized over a weighted-average period of 31 months, and $9,596,000 of unrecognized compensation cost related to performance shares is expected to be recognized over a weighted-average period of 30 months.
The amount of stock-based compensation costs and related deferred income tax benefit recognized in the financial statements are as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
2013
 
2014
2013
 
(in thousands)
Stock option costs
$
698

$
674

 
$
2,677

$
2,574

Restricted stock costs
2,833

2,722

 
9,136

8,737

Performance share costs
1,087

736

 
3,027

1,811

Total stock-based compensation costs
4,618

4,132

 
14,840

13,122

Less amount capitalized into qualifying real estate projects
(1,490
)
(1,591
)
 
(4,110
)
(4,690
)
Amount charged to operating expenses
3,128

2,541

 
10,730

8,432

Depreciation expense on capitalized stock-based compensation
139

241

 
586

710

Total stock-based compensation expense
$
3,267

$
2,782

 
$
11,316

$
9,142

Deferred income tax benefit
$
1,214

$
1,009

 
$
4,235

$
3,342

The amount of grant-date fair value expensed immediately for awards granted to retirement-eligible grantees during the nine months ended September 30, 2014 and 2013 was $1,358,000 and $973,000, respectively.
In connection with the vesting of restricted stock during the nine months ended September 30, 2014 and 2013, the Company repurchased 205,568 shares and 183,375 shares, respectively, of Class A common stock to satisfy the employees’ related minimum statutory tax withholding requirements. These shares were placed in treasury with an aggregate cost basis of $3,800,000 and $3,226,000, respectively.

I. Write-Offs of Abandoned Development Projects and Demolition Costs
On a quarterly basis, the Company reviews each project under development to determine whether it is probable that the project will be developed. If management determines the project will not be developed, its project costs and other related expenses are written off as an abandoned development project cost. The Company abandons projects under development for a number of reasons, including, but not limited to, changes in local market conditions, increases in construction or financing costs or third party challenges related to entitlements or public financing. The Company recorded write-offs of abandoned development projects and demolition costs of $456,000 and $1,389,000 during the three and nine months ended September 30, 2014, respectively, and $3,459,000 and $17,012,000 during the three and nine months ended September 30, 2013, respectively. Non-capitalizable demolition costs of $456,000 and $1,106,000 for the three and nine months ended September 30, 2014, respectively, and $155,000 for both the three and nine months ended September 30, 2013 are included in write-offs of abandoned development projects and demolition costs.


19
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

J. Impairment of Real Estate and Impairment of Unconsolidated Entities
Impairment of Real Estate
The Company reviews its real estate for impairment whenever events or changes indicate its carrying value may not be recoverable. In order to determine whether the carrying costs are recoverable from estimated future undiscounted cash flows, the Company uses various assumptions including future estimated net operating income, estimated holding periods, risk of foreclosure and estimated cash proceeds upon the disposition of the asset. If the carrying costs are not recoverable, the Company records an impairment charge to reduce the carrying value to estimated fair value. The assumptions used to estimate fair value are Level 2 or 3 inputs. The Company’s assumptions are based on current information. If the conditions deteriorate or if the Company’s plans regarding its assets change, additional impairment charges may occur in future periods.
The impairments recorded during the three and nine months ended September 30, 2014 and 2013 represent write-downs to estimated fair value due to a change in events, such as a change in strategy for certain assets, bona fide third-party purchase offers or changes in certain assumptions, including estimated holding periods and current market conditions and the impact of these assumptions to the properties’ estimated future cash flows.
The following table summarizes the Company’s impairment of real estate included in continuing operations:
 
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
 
2014
2013
2014
2013
 
 
(in thousands)
Avenue at Tower City Center (Specialty Retail Center)
Cleveland, Ohio
$
—

$
—

$
72,473

$
—

Office Buildings:
 
 
 
 
 
Terminal Tower
Cleveland, Ohio
—

—

42,208

—

Post Office Plaza
Cleveland, Ohio
—

—

14,378

—

Other
966

—

1,736

1,175

 
 
$
966

$
—

$
130,795

$
1,175

The Company continues to execute its strategy of focusing on core products located in core markets. In executing this strategy, the Company began serious negotiations for the sale of several operating assets in Cleveland, Ohio during the three months ended June 30, 2014. At June 30, 2014, discussions with a potential purchaser were at various stages for each of the assets and remained subject to further negotiation and applicable due diligence periods. Based on the advanced status of the discussions, the Company reviewed and adjusted the estimated holding periods of each applicable asset and in each case increased the likelihood of a near term sale. As a result, the estimated probability weighted undiscounted cash flows no longer exceed the carrying value of certain assets, requiring the Company to adjust the carrying value of those assets as noted in the above table, to their estimated fair value. During the three months ended September 30, 2014, the negotiations with the potential buyer ceased, as mutually agreeable terms could not be reached.
During the three and nine months ended September 30, 2013, the Company recorded an impairment of $6,870,000 related to an investment in a triple net lease property in Kansas City, Missouri, which is included in discontinued operations. This impairment represents a write-down to estimated fair value due to a bona fide third-party purchase offer.
The following table presents quantitative information about the significant unobservable inputs used to determine the fair value of the impairment of real estate (including discontinued operations) for the nine months ended September 30, 2014 and 2013:
 
Quantitative Information about Level 3 Fair Value Measurements
 
Fair Value of Real Estate
Valuation
Technique
Unobservable
Input
Range
of Input Values
 
(in thousands)
 
 
 
September 30, 2014
 
 
 
 
Impairment of real estate
$
44,200

Discounted Cash Flows
Market Capitalization Rate
8.0% - 10.0%
 
 
 
Discount Rate
10.5% - 12.0%
Impairment of real estate
$
38,750

Indicative Bids
Indicative Bids
N/A (1)
September 30, 2013
 
 
 
 
Impairment of real estate
$
8,029

Indicative Bids
Indicative Bids
N/A (1)
(1)
This fair value measurement was derived from bona fide purchase offers from third party prospective buyers, subject to the Company’s corroboration for reasonableness.

20
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

Impairment of Unconsolidated Entities
The Company reviews its portfolio of unconsolidated entities for other-than-temporary impairments whenever events or changes indicate its carrying value in the investments may be in excess of fair value. An equity method investment’s value is impaired if management’s estimate of its fair value is less than the carrying value and the difference is deemed to be other-than-temporary. In estimating fair value, assumptions that may be used include comparable sale prices, market discount rates, market capitalization rates and estimated future discounted cash flows specific to the geographic region and property type, all of which are considered Level 3 inputs. For recently opened properties, assumptions also include the timing of initial property lease up. In the event initial property lease up assumptions differ from actual results, estimated future discounted cash flows may vary, resulting in impairment charges in future periods. There were no impairments of unconsolidated entities recorded during the three and nine months ended September 30, 2014 and 2013.

K. Net Gain (Loss) on Land Held for Divestiture Activity
On January 31, 2012, the Board of Directors of the Company approved a strategic decision by senior management to reposition portions of the Land Development Group and focus on core rental properties in core markets.
The Company disposed of the land held for divestiture through December 31, 2013 and recorded the activity for consolidated land projects and those accounted for on the equity method of accounting on separate financial statement line items in the Consolidated Statements of Operations.
The following table summarizes the net gain (loss) on land held for divestiture activity of consolidated entities:
 
Three Months Ended September 30, 2013
 
Nine Months Ended September 30, 2013
 
(in thousands)
Sales of land held for divestiture
$
75

 
$
11,981

Cost of sales of land held for divestiture
—

 
(1,744
)
Gain on extinguishment of debt of land held for divestiture
—

 
2,146

Net gain on closed transactions of land held for divestiture
75

 
12,383

Bad debt expense
(9,000
)
 
(9,000
)
Net gain (loss) on land held for divestiture activity
$
(8,925
)
 
$
3,383

The Company had a note receivable (the “Note”) collateralized by a 1,000 acre land parcel in North Carolina that was in default at September 30, 2013. Negotiations were ongoing to cure the default; however, the Company had no assurance the payee had the intent to pay the Note in full. Accordingly, the Company established a reserve on the Note to reflect the estimated fair value of the underlying collateral of approximately $4,100,000. As a result, bad debt expense of $9,000,000 ($8,300,000, net of noncontrolling interest and $4,980,000, after tax) was recorded during the three and nine months ended September 30, 2013. On December 31, 2013, the Company received the underlying collateral in a deed in lieu transaction in full satisfaction of the Note.
The Company recorded net gains on land held for divestiture activity of unconsolidated entities of $79,000 and $2,590,000 during the three and nine months ended September 30, 2013, respectively.

L. Gain (Loss) on Extinguishment of Debt
For the three and nine months ended September 30, 2014, the Company recorded $49,000 and $927,000, respectively, as loss on extinguishment of debt. For the three and nine months ended September 30, 2013, the Company recorded $23,666,000 and $18,718,000, respectively, as gain on extinguishment of debt. The amounts for 2013 primarily relate to a $24,669,000 gain on the extinguishment of nonrecourse debt at Ten MetroTech Center partially offset by a $4,762,000 loss on the exchange of the 2014 Senior Notes for Class A common stock.


21
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

M. Net Loss on Disposition of Partial Interest in Development Project
On June 30, 2014, the Company entered into a joint venture with Greenland Atlantic Yards, LLC, a subsidiary of Shanghai-based Greenland Holding Group Company Limited (“Greenland”), to develop Pacific Park Brooklyn, a 22 acre mixed-use project in Brooklyn, New York. The joint venture will execute on the remaining development rights of the entire project, including the infrastructure and vertical construction of the residential units, but excludes Barclays Center arena and the under-construction B2 BKLYN apartment community. Under the joint venture, Greenland acquired 70% of the project and will co-develop the project with the Company, along with sharing in the entire project costs going forward in proportion to ownership interests. For its 70% equity interest, Greenland invested cash and assumed 70% of the nonrecourse mortgage debt on the project. As of September 30, 2014, the Company had received $203,923,000 of cash, net of transaction costs, related to the disposition. The transaction resulted in a net loss on disposition of partial interest in development project of $19,590,000 ($16,211,000, net of noncontrolling interests) during the nine months ended September 30, 2014. Upon closing, the Company determined it was not the primary beneficiary of the joint venture. As a result, the Company deconsolidated the Pacific Park Brooklyn development project and accounts for the joint venture on the equity method of accounting.

N. Net Gain (Loss) on Disposition of Full or Partial Interest in Rental Properties
The net gain (loss) on disposition of full or partial interest in rental properties is comprised of the following:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
2013
 
2014
2013
 
(in thousands)
Stapleton - 3055 Roslyn (Office Building)
$
(146
)
$
—

 
$
(146
)
$
—

QIC Joint Venture
—

381,627

 
(467
)
381,627

New York Retail Joint Venture
—

4,932

 
—

4,932

 
$
(146
)
$
386,559

 
$
(613
)
$
386,559

As discussed in Note A – Accounting Policies, the Company adopted new discontinued operations accounting guidance effective April 1, 2014. As a result, the sale of Stapleton - 3055 Roslyn, a fully consolidated office building in Denver, Colorado, during the three months ended September 30, 2014 did not qualify for discontinued operations. The loss on the sale of this property is included in net gain (loss) on disposition of full or partial interest in rental properties for the three and nine months ended September 30, 2014. Prior to the three months ended September 30, 2014, full disposals of consolidated real estate assets qualified for and were recorded as discontinued operations and accordingly, were excluded from this financial statement line item.
QIC Joint Venture
In September 2013, the Company entered into joint venture agreements with outside partners, affiliated entities of QIC, one of the largest institutional investment managers in Australia. The outside partners invested in and received 49% of the Company’s equity interests in seven regional retail malls.
For its 49% equity interests, the outside partner invested cash and assumed debt of $448,900,000, representing 49% of the nonrecourse mortgage debt on the seven properties. As of September 30, 2013, the Company received approximately $412,300,000 of proceeds, net of transaction costs, of which approximately $188,200,000 represented cash, with the remainder being in the form of a loan. Based on the amount of cash received, the outside partners’ minimum initial investment requirement was met and the transaction qualified for full gain recognition. As such, the Company recognized a net gain on disposition of partial interest in rental properties of $381,627,000 during the three and nine months ended September 30, 2013. The seven properties are adequately capitalized and do not contain the characteristics of a VIE. Based on this and the substantive participating rights held by the outside partners with regards to the properties, the Company concluded it appropriate to deconsolidate the entities and account for them under the equity method of accounting. During the three months ended September 30, 2013 and prior to admitting the outside party into the joint ventures, the Company acquired noncontrolling interests in two of the regional retail malls for approximately $92,400,000, which has been reflected in the Consolidated Statement of Equity.

22
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

New York Retail Joint Venture
In March 2011, the Company entered into joint venture agreements with an outside partner, an affiliated entity of Madison International Realty LLC. The outside partner invested in and received a 49% equity interest in 15 mature retail properties located in the Greater New York City metropolitan area.
For its 49% equity interests, the outside partner invested cash and assumed debt of $244,952,000, representing 49% of the nonrecourse mortgage debt on the 15 properties. As of January 31, 2012, the Company received proceeds of $178,286,000, primarily in the form of a loan. Based on the net amount of cash received, the outside partner’s minimum initial investment requirement of 20% was not met. Since the transaction did not qualify for full gain recognition, the installment method of gain recognition was applied and a net gain on disposition of partial interest in rental properties of $9,561,000 was recorded during the year ended January 31, 2012. As of January 31, 2013, the remaining gain of $114,465,000 continued to be deferred and was included in accounts payable, accrued expenses and other liabilities.
During the three months ended September 30, 2013, the Company used distribution proceeds from the joint ventures to pay down a portion of the loan, which increases the net cash received for purposes of measuring whether full gain recognition is appropriate. However, the outside partner’s investment requirement was still not met and the installment method of gain recognition was continued to be applied, resulting in an additional net gain on disposition of partial interest in rental properties of $4,932,000 during the three and nine months ended September 30, 2013. The remaining $109,533,000 of gain, which continued to be deferred at September 30, 2013, was recognized during the three months ended December 31, 2013.

O. Income Taxes
Income tax expense (benefit) was $(365,000) and $144,955,000 for the three months ended September 30, 2014 and 2013, respectively, and $(43,381,000) and $117,820,000 for the nine months ended September 30, 2014 and 2013, respectively. The difference in recorded income tax expense/benefit versus income tax expense/benefit computed at the statutory federal income tax rate is primarily attributable to state income taxes, changes in state net operating losses, additional general business credits, changes to valuation allowances associated with certain deferred tax assets, and various permanent differences between pre-tax GAAP income and taxable income.
At December 31, 2013, the Company had federal net operating loss carryforwards for tax purposes of $150,758,000 expiring in the years ending December 31, 2028 through 2033, a charitable contribution deduction carryforward of $18,125,000 expiring in the years ending December 31, 2014 through 2017, general business credit carryovers of $21,680,000 expiring in the years ending December 31, 2018 through 2033, and an alternative minimum tax (“AMT”) credit carryforward of $28,570,000 available until used to reduce federal tax to the AMT amount.
The Company considers a variety of tax-deferral strategies, including tax deferred exchanges, when evaluating its future tax position. The Company has a full valuation allowance against the deferred tax asset associated with its charitable contributions. The Company has a valuation allowance against its general business credits, other than those general business credits which are eligible to be utilized to reduce future AMT liabilities. The Company has a valuation allowance against certain of its state net operating losses and state bonus depreciation deferred assets. These valuation allowances exist because management believes it is more likely than not that the Company will not realize these benefits.
The Company applies the “with-and-without” methodology for recognizing excess tax benefits from the deduction of stock-based compensation. The net operating loss available for the tax return, as is noted in the paragraph above, is greater than the net operating loss available for the tax provision due to excess deductions from stock-based compensation reported on the return, as well as the impact of adjustments to the net operating loss under accounting guidance on accounting for uncertainty in income taxes. As of December 31, 2013, the Company has not recorded a net deferred tax asset of approximately $18,064,000 from excess stock-based compensation deductions taken on the tax return for which a benefit has not yet been recognized in the Company’s tax provision.


23
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

P. Discontinued Operations and Gain on Disposition of Rental Properties
See Note A – Accounting Policies for discussion of adoption of new discontinued operations accounting guidance during the nine months ended September 30, 2014.
The following table summarizes the rental properties included in discontinued operations:
Property
Location
Square Feet/ Number of Units
Period Disposed
Three Months Ended 9/30/14
Nine Months Ended 9/30/14
Three Months Ended 9/30/13
Nine Months Ended 9/30/13
Commercial Group:
 
 
 
 
 
 
 
Promenade Bolingbrook
Bolingbrook, Illinois
771,000 square feet
Q2-2014 (1)
—
Yes
Yes
Yes
Quartermaster Plaza
Philadelphia, Pennsylvania
456,000 square feet
Q1-2014
—
Yes
Yes
Yes
Mesa del Sol - 5600 University SE
Albuquerque, New Mexico
87,000 square feet
Q1-2014
—
Yes
Yes
Yes
Orchard Town Center
Westminster, Colorado
603,000 square feet
Q4-2013
—
—
Yes
Yes
Colorado Studios
Denver, Colorado
75,000 square feet
Q3-2013
—
—
Yes
Yes
Higbee Building
Cleveland, Ohio
815,000 square feet
Q3-2013
—
—
Yes
Yes
Sheraton Station Square
Pittsburgh, Pennsylvania
399 rooms
Q3-2013
—
—
Yes
Yes
Two triple net lease properties
Various
138,000 square feet
Various (2)
—
—
Yes
Yes
Residential Group:
 
 
 
 
 
 
 
Millender Center
Detroit, Michigan
339 units
Q1-2013
—
—
—
Yes
(1)
Classified as held for sale as of March 31, 2014.
(2)
Includes one triple net lease property disposed of during Q4-2013 and one triple net lease property disposed of during Q1-2013.
The following table summarizes the operating results related to discontinued operations:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
2013
 
2014
2013
 
(in thousands)
Revenues
$
—

$
11,997

 
$
7,034

$
58,423

Expenses
 
 
 
 
 
Operating expenses
—

6,593

 
3,026

32,689

Depreciation and amortization
—

3,048

 
987

11,523

Impairment of real estate
—

6,870

 
—

6,870

 
—

16,511

 
4,013

51,082

 
 
 
 
 
 
Interest expense
—

(3,436
)
 
(5,538
)
(11,266
)
Amortization of mortgage procurement costs
—

(122
)
 
(41
)
(483
)
Loss on extinguishment of debt
—

—

 
(448
)
(40
)
Interest and other income
—

37

 
—

263

Gain on disposition of rental properties
—

22,460

 
28,100

43,931

Earnings before income taxes
—

14,425

 
25,094

39,746

Income tax expense
—

8,754

 
12,082

16,517

Earnings from discontinued operations
—

5,671

 
13,012

23,229

Noncontrolling interest
 
 
 
 
 
Gain on disposition of rental properties
—

125

 
58

5,960

Operating earnings (loss) from rental properties
—

10

 
(8
)
74

 
—

135

 
50

6,034

Earnings from discontinued operations attributable to Forest City Enterprises, Inc.
$
—

$
5,536

 
$
12,962

$
17,195


24
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

The following table summarizes the pre-tax gain on disposition of rental properties:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
2013
 
2014
2013
 
(in thousands)
Quartermaster Plaza (Specialty Retail Center)
$
—

$
—

 
$
26,373

$
—

Promenade Bolingbrook (Regional Mall)
—

—

 
1,276

—

Office Buildings:
 
 
 
 
 
Mesa del Sol - 5600 University SE
—

—

 
451

—

Higbee Building
—

2,922

 
—

2,922

Colorado Studios
—

1,239

 
—

1,239

Sheraton Station Square (Hotel)
—

18,096

 
—

18,096

Millender Center (Apartment Community)
—

—

 
—

21,660

Other
—

203

 
—

14

 
$
—

$
22,460

 
$
28,100

$
43,931

Gain on Disposition of Unconsolidated Entities
Gains and losses on the disposition of investments accounted for on the equity method are included in equity in earnings and are summarized in the following table:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
2013
 
2014
2013
 
 
(in thousands)
Mall at Stonecrest (Regional Mall)
Atlanta, Georgia
$
7,952

$
—

 
$
7,952

$
—

Liberty Center (Office Building)
Pittsburgh, Pennsylvania
1,237

1,540

 
1,237

1,540

Westin Convention Center (Hotel)
Pittsburgh, Pennsylvania
—

32,741

 
—

32,741

Specialty Retail Centers:
 
 
 
 
 
 
Golden Gate
Mayfield Heights, Ohio
—

—

 
16,440

—

Plaza at Robinson Town Center
Pittsburgh, Pennsylvania
—

—

 
—

(1,510
)
Apartment Communities:
 
 
 
 
 
 
Westwood Reserve
Tampa, Florida
—

—

 
8,904

—

Legacy Crossroads
Cary, North Carolina
—

—

 
6,216

—

Colonial Grand
Tampa, Florida
—

—

 
4,904

—

Legacy Arboretum
Charlotte, North Carolina
—

—

 
3,257

—

Barrington Place
Raleigh, North Carolina
—

—

 
1,515

—

Other
—

—

 
(350
)
—

 
$
9,189

$
34,281

 
$
50,075

$
32,771



25
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

Q. Earnings Per Share
The Company’s restricted stock is considered a participating security pursuant to the two-class method for computing basic earnings per share (“EPS”). The Class A Common Units (“Units”), which are reflected as noncontrolling interests in the Consolidated Balance Sheets, are considered convertible participating securities as they are entitled to participate in any dividends paid to the Company’s common shareholders. The Units are included in the computation of basic EPS using the two-class method and are included in the computation of diluted EPS using the if-converted method. The Class A common stock issuable in connection with a put or conversion of the 2014 Senior Notes, 2016 Senior Notes, 2018 Senior Notes, 2020 Senior Notes and Series A preferred stock is included in the computation of diluted EPS using the if-converted method. The loss from continuing operations attributable to Forest City Enterprises, Inc. for the nine months ended September 30, 2014 was allocated solely to holders of common stock as the participating security holders do not share in the losses.
The reconciliation of the basic and diluted EPS computations is shown in the following table:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
2013
 
2014
2013
Numerators (in thousands)
 
 
 
 
 
Earnings (loss) from continuing operations attributable to Forest City Enterprises, Inc.
$
686

$
236,320

 
$
(89,748
)
$
170,130

Preferred dividends
—

—

 
—

(185
)
Undistributed earnings allocated to participating securities
(17
)
(6,759
)
 
—

(5,021
)
Earnings (loss) from continuing operations attributable to common shareholders ‑ Basic
$
669

$
229,561

 
$
(89,748
)
$
164,924

Undistributed earnings allocated to participating securities
17

6,759

 
—

5,021

Interest on convertible debt
—

4,005

 
—

10,946

Earnings (loss) from continuing operations attributable to common shareholders ‑ Diluted
$
686

$
240,325

 
$
(89,748
)
$
180,891

Net earnings (loss) attributable to Forest City Enterprises, Inc.
$
686

$
241,856

 
$
(76,786
)
$
187,325

Preferred dividends
—

—

 
—

(185
)
Undistributed earnings allocated to participating securities
(17
)
(6,917
)
 
—

(5,530
)
Net earnings (loss) attributable to common shareholders ‑ Basic
$
669

$
234,939

 
$
(76,786
)
$
181,610

Undistributed earnings allocated to participating securities
17

6,917

 
—

5,530

Interest on convertible debt
—

4,005

 
—

10,946

Net earnings (loss) attributable to common shareholders ‑ Diluted
$
686

$
245,861

 
$
(76,786
)
$
198,086

Denominators
 
 
 
 
 
Weighted average shares outstanding ‑ Basic
198,893,584

197,442,451

 
198,328,900

190,919,579

Effect of stock options, restricted stock and performance shares
1,758,916

1,804,200

 
—

1,684,332

Effect of convertible debt
—

29,877,940

 
—

29,813,775

Effect of convertible Class A Common Units
2,973,190

3,646,755

 
—

3,646,755

Weighted average shares outstanding ‑ Diluted (1) 
203,625,690

232,771,346

 
198,328,900

226,064,441

Earnings Per Share
 
 
 
 
 
Earnings (loss) from continuing operations attributable to common shareholders ‑ Basic
$
—

$
1.16

 
$
(0.45
)
$
0.86

Earnings (loss) from continuing operations attributable to common shareholders ‑ Diluted
$
—

$
1.03

 
$
(0.45
)
$
0.80

Net earnings (loss) attributable to common shareholders ‑ Basic
$
—

$
1.19

 
$
(0.39
)
$
0.95

Net earnings (loss) attributable to common shareholders ‑ Diluted
$
—

$
1.06

 
$
(0.39
)
$
0.88

(1)
Convertible securities of 32,138,215 for the three months ended September 30, 2014 were not included in the computation of diluted EPS because their effect is anti-dilutive under the if-converted method. Incremental shares from dilutive options, restricted stock, performance shares and convertible securities aggregating 37,238,228 for the nine months ended September 30, 2014 were not included in the computation of diluted EPS because their effect is anti-dilutive due to the loss from continuing operations. Weighted-average shares issuable upon the conversion of preferred stock of 185,199 for the nine months ended September 30, 2013 were not included in the computation of diluted EPS because their effect is anti-dilutive under the if-converted method. Weighted-average options, restricted stock and performance shares of 3,240,497 and 3,470,348 for the three and nine months ended September 30, 2014, respectively, and 3,455,487 and 3,514,529 for the three and nine months ended September 30, 2013, respectively, were not included in the computation of diluted EPS because their effect is anti-dilutive under the treasury stock method.


26
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

R. Segment Information
The following tables summarize financial data for the Company’s reportable operating segments. All amounts are presented in thousands.
 
September 30, 2014
December 31, 2013
 
 
 
 
 
 
 
Identifiable Assets
 
 
 
 
 
 
Commercial Group
$
4,099,605

$
5,120,360

 
 
 
 
 
 
Residential Group
2,789,605

2,468,708

 
 
 
 
 
 
Arena
969,020

984,937

 
 
 
 
 
 
Land Development Group
267,392

260,070

 
 
 
 
 
 
Corporate Activities
83,308

117,950

 
 
 
 
 
 
 
$
8,208,930

$
8,952,025

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
Nine Months Ended September 30,
Three Months Ended September 30,
Nine Months Ended September 30,
 
2014
2013
2014
2013
2014
2013
2014
2013
 
Revenues
Operating Expenses
Commercial Group
$
129,345

$
160,965

$
383,221

$
511,767

$
70,224

$
85,986

$
224,929

$
283,313

Residential Group
63,303

69,423

190,525

196,704

43,704

50,081

127,046

145,105

Arena
25,039

25,277

84,968

76,270

17,105

16,286

55,399

56,596

Land Development Group
17,056

21,028

55,203

39,833

5,358

15,155

24,307

29,230

Corporate Activities
—

—

—

—

13,763

13,994

35,383

38,531

 
$
234,743

$
276,693

$
713,917

$
824,574

$
150,154

$
181,502

$
467,064

$
552,775

 
 
 
 
 
 
 
 
 
 
Depreciation and Amortization
Interest Expense
Commercial Group
$
29,304

$
62,961

$
91,756

$
162,748

$
31,093

$
49,465

$
97,938

$
148,893

Residential Group
16,608

15,748

49,660

45,769

8,030

8,241

23,032

24,957

Arena
8,793

8,699

25,999

25,073

10,895

9,492

30,101

27,767

Land Development Group
88

99

269

528

(287
)
97

(572
)
(341
)
Corporate Activities
718

725

2,154

2,370

9,581

14,958

28,418

45,556

 
$
55,511

$
88,232

$
169,838

$
236,488

$
59,312

$
82,253

$
178,917

$
246,832

 
 
 
 
 
 
 
 
 
 
Interest and Other Income
Capital Expenditures
Commercial Group
$
1,579

$
4,989

$
5,585

$
9,059

$
17,655

$
35,051

$
98,033

$
143,675

Residential Group
5,101

6,110

18,145

18,371

62,795

58,074

207,644

155,774

Arena
—

—

—

—

2,890

11,752

9,442

44,665

Land Development Group
3,384

3,793

10,091

9,725

20

—

36

829

Corporate Activities
32

65

153

227

—

—

15

452

 
$
10,096

$
14,957

$
33,974

$
37,382

$
83,360

$
104,877

$
315,170

$
345,395

The Company uses Funds From Operations (“FFO”) to report its operating results. FFO is a non-GAAP measure as defined by the National Association of Real Estate Investment Trusts (“NAREIT”) and is a measure of performance used by publicly traded Real Estate Investment Trusts (“REITs”). Although the Company is not a REIT, management believes it is important to publish this measure to allow for easier comparison of its performance to its peers. FFO is defined by NAREIT as net earnings excluding the following items at the Company’s proportional share: i) gain (loss) on disposition of rental properties, divisions and other investments (net of tax); ii) non-cash charges for real estate depreciation and amortization; iii) impairment of depreciable real estate (net of tax); iv) extraordinary items (net of tax); and v) cumulative or retrospective effect of change in accounting principle (net of tax).
The Company believes that, although its business has many facets such as development, acquisitions, disposals, and property management, the core of its business is the recurring operations of its portfolio of real estate assets. The Company’s Chief Executive Officer, the chief operating decision maker, uses FFO, as presented, to assess performance of the Company’s real estate assets by reportable operating segment because it provides information on the financial performance of the core real estate portfolio operations. FFO measures the profitability of a real estate segment’s operations of collecting rent, paying operating expenses and servicing its debt.

27
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

The reconciliations of net earnings (loss) to FFO by segment are shown in the following tables. All amounts are presented in thousands.
Three Months Ended September 30, 2014
Commercial
Group
Residential
Group
Arena
Land
Development
Group
Corporate
Activities
Total
Net earnings (loss) attributable to Forest City Enterprises, Inc.
$
12,190

$
5,512

$
(5,575
)
$
13,171

$
(24,612
)
$
686

Depreciation and amortization – Real Estate Groups
41,725

24,175

4,986

41

—

70,927

Net loss on disposition of full or partial interests in rental properties
173

—

—

—

—

173

Gain on disposition of unconsolidated entities
(9,189
)
—

—

—

—

(9,189
)
Income tax expense on non-FFO:
 
 
 
 
 
 
Gain on disposition of rental properties
—

—

—

—

3,310

3,310

FFO
$
44,899

$
29,687

$
(589
)
$
13,212

$
(21,302
)
$
65,907

 
 
 
 
 
 
 
Three Months Ended September 30, 2013
Commercial
Group
Residential
Group
Arena
Land
Development
Group
Corporate
Activities
Total
Net earnings (loss) attributable to Forest City Enterprises, Inc.
$
427,001

$
3,857

$
(5,092
)
$
(376
)
$
(183,534
)
$
241,856

Depreciation and amortization – Real Estate Groups
72,451

22,099

4,956

47

—

99,553

Net gain on disposition of partial interests in rental properties
(386,559
)
—

—

—

—

(386,559
)
Gain on disposition of unconsolidated entities
(34,281
)
—

—

—

—

(34,281
)
Discontinued operations:
 
 
 
 
 
 
Depreciation and amortization – Real Estate Groups
3,039

5

—

—

—

3,044

Gain on disposition of rental properties
(22,132
)
(203
)
—

—

—

(22,335
)
Impairment of consolidated depreciable real estate
6,870

—

—

—

—

6,870

Income tax expense (benefit) on non-FFO:
 
 
 
 
 
 
Gain on disposition of rental properties
—

—

—

—

172,926

172,926

Impairment of depreciable real estate
—

—

—

—

(2,668
)
(2,668
)
FFO
$
66,389

$
25,758

$
(136
)
$
(329
)
$
(13,276
)
$
78,406

 
 
 
 
 
 
 
Nine Months Ended September 30, 2014
Commercial
Group
Residential
Group
Arena
Land
Development
Group
Corporate
Activities
Total
Net earnings (loss) attributable to Forest City Enterprises, Inc.
$
(111,414
)
$
48,613

$
(13,378
)
$
36,257

$
(36,864
)
$
(76,786
)
Depreciation and amortization – Real Estate Groups
130,198

71,367

14,927

116

—

216,608

Net loss on disposition of full or partial interests in rental properties
640

—

—

—

—

640

Gain on disposition of unconsolidated entities
(25,279
)
(24,796
)
—

—

—

(50,075
)
Impairment of consolidated depreciable real estate
129,059

—

—

—

—

129,059

Discontinued operations:
 
 
 
 
 
 
Depreciation and amortization – Real Estate Groups
986

—

—

—

—

986

Gain on disposition of rental properties
(28,042
)
—

—

—

—

(28,042
)
Income tax expense (benefit) on non-FFO:
 
 
 
 
 
 
Gain on disposition of rental properties
—

—

—

—

32,028

32,028

Impairment of depreciable real estate
—

—

—

—

(50,053
)
(50,053
)
FFO
$
96,148

$
95,184

$
1,549

$
36,373

$
(54,889
)
$
174,365

 
 
 
 
 
 
 
Nine Months Ended September 30, 2013
Commercial
Group
Residential
Group
Arena
Land
Development
Group
Corporate
Activities
Total
Net earnings (loss) attributable to common shareholders
$
380,743

$
25,055

$
(18,135
)
$
28,366

$
(228,889
)
$
187,140

Preferred dividends
—

—

—

—

185

185

Net earnings (loss) attributable to Forest City Enterprises, Inc.
$
380,743

$
25,055

$
(18,135
)
$
28,366

$
(228,704
)
$
187,325

Depreciation and amortization – Real Estate Groups
190,059

68,083

14,505

428

—

273,075

Net gain on disposition of partial interests in rental properties
(386,559
)
—

—

—

—

(386,559
)
Gain on disposition of unconsolidated entities
(32,771
)
—

—

—

—

(32,771
)
Impairment of consolidated depreciable real estate
—

1,175

—

—

—

1,175

Discontinued operations:
 
 
 
 
 
 
Depreciation and amortization – Real Estate Groups
11,372

176

—

—

—

11,548

Gain on disposition of rental properties
(21,943
)
(16,028
)
—

—

—

(37,971
)
Impairment of consolidated depreciable real estate
6,870

—

—

—

—

6,870

Income tax expense (benefit) on non-FFO:
 
 
 
 
 
 
Gain on disposition of rental properties
—

—

—

—

178,398

178,398

Impairment of depreciable real estate
—

—

—

—

(3,124
)
(3,124
)
FFO
$
147,771

$
78,461

$
(3,630
)
$
28,794

$
(53,430
)
$
197,966



28

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) of Forest City Enterprises, Inc. and subsidiaries should be read in conjunction with the financial statements and the footnotes thereto contained in the annual report on Form 10-KT for the 11 months ended December 31, 2013, as amended on Form 10-KT/A on March 26, 2014.

RESULTS OF OPERATIONS
Corporate Description
We principally engage in the ownership, development, management and acquisition of commercial and residential real estate and land throughout the United States. We operate through three strategic business units and have five reportable operating segments. The three strategic business units, which represent four reportable operating segments, are the Commercial Group, Residential Group and Land Development Group (collectively, the “Real Estate Groups”). The Commercial Group, our largest strategic business unit, owns, develops, acquires and operates regional malls, specialty/urban retail centers, office and life science buildings and mixed-use projects. Additionally, it operates Barclays Center, a sports and entertainment arena located in Brooklyn, New York, which is reported as a separate reportable operating segment (“Arena”). The Residential Group owns, develops, acquires and operates residential rental properties, including upscale and middle-market apartments and adaptive re-use developments. The Residential Group also owns interests in entities that develop and manage military family housing. The Land Development Group acquires and sells both land and developed lots to residential, commercial and industrial customers at its Stapleton project in Denver, Colorado.
Corporate Activities is the other reportable operating segment, which includes our equity method investment in The Nets, a member of the National Basketball Association (“NBA”).
We have approximately $8.2 billion of consolidated assets in 24 states and the District of Columbia at September 30, 2014. Our core markets include Boston, Chicago, Dallas, Denver, Los Angeles, Philadelphia and the greater metropolitan areas of New York City, San Francisco and Washington D.C. We have offices in Albuquerque, Boston, Dallas, Denver, Los Angeles, New York City, San Francisco, Washington, D.C. and our corporate headquarters in Cleveland, Ohio.
Significant milestones during the third quarter of 2014 include:
•
Commenced construction of Blossom Plaza, a 237 unit apartment community in Los Angeles, California, and The Yards - Arris, a 327 apartment community in Washington, D.C. These two assets were contributed into our strategic capital partnership with Arizona State Retirement System during the three months ended September 30, 2014;
•
The disposition of Stapleton - 3055 Roslyn, an office building in Denver, Colorado, and Mall at Stonecrest, an unconsolidated regional mall in Atlanta, Georgia, generating cash liquidity of $4,197,000;
•
Began the phased opening of 3700M, a 381 unit apartment community in Dallas, Texas; and
•
Closed $123,050,000 of nonrecourse mortgage financing transactions, related to Blossom Plaza and The Yards - Arris.
In addition, subsequent to September 30, 2014, we achieved the following significant milestones:
•
Began phased openings of:
◦
2175 Market Street, an 88 unit apartment community in San Francisco, California; and
◦
Winchester Lofts, a 158 unit apartment community in New Haven, Connecticut.


29

Net Operating Income
We define Net Operating Income (“NOI”) as revenues (excluding straight-line rent adjustments) less operating expenses (including depreciation and amortization for non-real estate groups) plus interest income, equity in earnings (loss) of unconsolidated entities (excluding gain (loss) on disposition, gain (loss) on land held for divestiture activity, impairment, interest expense, gain (loss) on extinguishment of debt and depreciation and amortization of unconsolidated entities). We believe NOI provides additional information about our core business operations and, along with earnings, helps explain our business and operating results. A reconciliation between NOI and Earnings (Loss) Before Income Taxes, the most comparable financial measure calculated in accordance with accounting principles generally accepted in the United States of America (“GAAP”), is presented below. Although NOI is not presented in accordance with GAAP, investors can use this non‑GAAP measure as supplementary information to evaluate our business. NOI is not intended to be a performance measure that should be regarded as an alternative to, or more meaningful than, our GAAP measures and may not be directly comparable to similarly-titled measures reported by other companies.
Reconciliation of Earnings (Loss) Before Income Taxes (GAAP) to Net Operating Income (non-GAAP) (in thousands):
 
Nine Months Ended September 30,
 
2014
 
2013
Earnings (loss) before income taxes (GAAP)
 
$
(227,209
)
 
 
$
208,767

Earnings from unconsolidated entities
$
80,543

 
 
$
59,270

 
Net gain on land held for divestiture of unconsolidated entities
—

 
 
(2,590
)
 
Gain on disposition of unconsolidated entities
(50,075
)
 
 
(32,771
)
 
Depreciation and amortization of unconsolidated entities
66,901

 
 
56,166

 
Interest expense of unconsolidated entities
81,763

 
 
73,723

 
Gain on extinguishment of debt of unconsolidated entities
(16
)
 
 
(761
)
 
Total NOI from unconsolidated entities
$
179,116

179,116

 
$
153,037

153,037

Interest expense
 
178,917

 
 
246,832

(Gain) loss on extinguishment of debt
 
927

 
 
(18,718
)
Net gain on land held for divestiture activity
 
—

 
 
(3,383
)
Net loss on disposition of partial interest in development project
 
19,590

 
 
—

Net (gain) loss on disposition of full or partial interest in rental properties
 
613

 
 
(386,559
)
Impairment of consolidated real estate
 
130,795

 
 
1,175

Depreciation and amortization—Real Estate Groups
 
166,354

 
 
232,809

Amortization of mortgage procurement costs
 
5,967

 
 
7,567

Straight-line rent adjustment
 
(2,675
)
 
 
(10,301
)
Net operating income (Non-GAAP)
 
$
452,395

 
 
$
431,226


Comparable NOI
In addition to NOI, we use comparable NOI as a metric to evaluate performance of our multi-family, office and retail properties. This measure provides a same-store comparison of operating results of all stabilized properties that are open and operating in both periods presented. Write-offs of abandoned development projects, non-capitalizable development costs and unallocated management and service company overhead, net of tax credit income, are not directly attributable to an operating property and are considered non-comparable NOI. In addition, certain income and expense items at the property level, such as lease termination income, real estate tax assessments or rebates and participation payments as a result of refinancing transactions and NOI impacts of changes in ownership percentages, are removed from comparable NOI and are included in non-comparable NOI. Other properties and activities such as Arena, hotels, subsidized senior housing, military housing, corporate activities and land are not evaluated on a same-store basis and the NOI from these properties and activities is considered non-comparable NOI.
Comparable NOI is an operating statistic defined as NOI from stabilized properties opened and operated in all periods presented net of noncontrolling interests. Comparable NOI is useful because it measures the performance of the same properties on a period-to-period basis and is used to assess operating performance and resource allocation of the operating properties within our strategic business units. While property dispositions, acquisitions or other factors can impact net earnings in the short term, we believe comparable NOI gives a more consistent view of the overall performance of our operating portfolio from quarter-to-quarter and year-to-year.
For the nine months ended September 30, 2014, comparable NOI increased 0.5% for retail, 4.9% for office and 4.7% for residential compared with the same period in the prior year.

30

The following is a reconciliation of comparable NOI to total NOI.
 
Net Operating Income (in thousands)
 
Nine Months Ended September 30, 2014
 
Nine Months Ended September 30, 2013
Full Consolidation
Comparable
Non-Comparable
Total
 
Comparable
Non-Comparable
Total
 
 
 
 
 
 
 
 
Retail
$
106,974

$
22,917

$
129,891

 
$
106,427

$
55,635

$
162,062

Office
175,058

(814
)
174,244

 
166,961

6,382

173,343

Apartments
121,413

1,654

123,067

 
116,122

(176
)
115,946

Arena
—

29,478

29,478

 
—

19,674

19,674

Subsidized Senior Housing
—

10,971

10,971

 
—

10,654

10,654

Military Housing
—

15,578

15,578

 
—

16,339

16,339

Hotels
—

—

—

 
—

1,693

1,693

Land Sales
—

488

488

 
—

9,444

9,444

Write-offs of abandoned development projects and demolition costs
—

(1,389
)
(1,389
)
 
—

(17,012
)
(17,012
)
Other
—

(31,288
)
(31,288
)
 
—

(37,987
)
(37,987
)
 
 
 
 
 
 
 
 
Total Rental Properties
$
403,445

$
47,595

$
451,040

 
$
389,510

$
64,646

$
454,156

 
 
 
 
 
 
 
 
Land Development Group
$
—

$
41,100

$
41,100

 
$
—

$
19,872

$
19,872

Corporate Activities
$
—

$
(39,745
)
$
(39,745
)
 
$
—

$
(42,802
)
$
(42,802
)
 
 
 
 
 
 
 
 
Grand Total
$
403,445

$
48,950

$
452,395

 
$
389,510

$
41,716

$
431,226

 
Nine Months Ended September 30,
 
 
 
Comparable NOI (net of Noncontrolling Interests (“NCI”))
2014
2013
 
% Change
 
 
(in thousands)
 
 
 
Retail Comparable NOI
$
106,974

$
106,427

 
 
 
NOI attributable to NCI
—

—

 
 
 
Subtotal Retail
106,974

106,427

 
0.5
%
 
 
 
 
 
 
 
Office Comparable NOI
175,058

166,961

 
 
 
NOI attributable to NCI
(6,892
)
(6,714
)
 
 
 
Subtotal Office
168,166

160,247

 
4.9
%
 
 
 
 
 
 
 
Apartments Comparable NOI
121,413

116,122

 
 
 
NOI attributable to NCI
(1,121
)
(1,273
)
 
 
 
Subtotal Apartments
120,292

114,849

 
4.7
%
 
 
 
 
 
 
 
Grand Total Comparable NOI (net of NCI)
$
395,432

$
381,523

 
3.6
%
 


31

Net Operating Income by Product Type
Full Consolidation (in thousands)
Nine Months Ended September 30, 2014
 
Nine Months Ended September 30, 2013
NOI by Product Type
$
495,339

 
NOI by Product Type
$
498,733

Hotels
—

 
Hotels
1,693

Non-outlot land sale
—

 
Non-outlot land sale
8,927

Arena
29,478

 
Arena
19,674

Corporate Activities
(39,745
)
 
Corporate Activities
(42,802
)
Write-offs of abandoned development projects and demolition costs
(1,389
)
 
Write-offs of abandoned development projects and demolition costs
(17,012
)
Other (3) 
(31,288
)
 
Other (3) 
(37,987
)
Grand Total NOI
$
452,395

 
Grand Total NOI
$
431,226

 
 
 
 
 
(1) Includes commercial and residential outlot land sales.
(2) Includes limited-distribution subsidized senior housing.
(3) Includes non-capitalizable development costs and unallocated management and service company overhead, net of tax credit income.
 

32

FFO
We believe that Funds From Operations (“FFO”), along with net earnings, provides additional information about our core operations. While property dispositions, acquisitions or other factors can affect net earnings in the short-term, we believe FFO presents a more consistent view of the overall financial performance of our business from period-to-period since the core of our business is the recurring operations of our portfolio of real estate assets. FFO is used by the chief operating decision maker and management to assess performance and resource allocations by strategic business unit and on a consolidated basis.
The majority of our peers in the publicly traded real estate industry are Real Estate Investment Trusts (“REITs”) and report operations using FFO as defined by the National Association of Real Estate Investment Trusts (“NAREIT”). Although we are not a REIT, management believes it is important to publish this measure to allow for easier comparison of our performance to our peers. The major difference between us and our REIT peers is that we are a taxable entity and any taxable income we generate could result in payment of federal or state income taxes. Our REIT peers typically do not pay federal or state income taxes, but distribute a significant portion of their taxable income to shareholders. Due to our effective tax management policies, historically we have not been a significant payer of income taxes. This has allowed us to retain our internally generated cash flows but has also resulted in large expenses for deferred taxes as required by GAAP.
FFO is defined by NAREIT as net earnings excluding the following items at our proportional share: i) gain (loss) on disposition of rental properties, divisions and other investments (net of tax); ii) non-cash charges for real estate depreciation and amortization; iii) impairment of depreciable real estate (net of tax); iv) extraordinary items (net of tax); and v) cumulative or retrospective effect of change in accounting principle (net of tax).
The table below reconciles net earnings (loss), the most comparable GAAP measure, to FFO, a non-GAAP measure.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
2013
 
2014
2013
 
(in thousands)
Net earnings (loss) attributable to Forest City Enterprises, Inc.
$
686

$
241,856

 
$
(76,786
)
$
187,325

Depreciation and Amortization—Real Estate Groups (1) 
70,927

102,597

 
217,594

284,623

Impairment of depreciable rental properties
—

6,870

 
129,059

8,045

Gain on disposition of full or partial interests in rental properties
(9,016
)
(443,175
)
 
(77,477
)
(457,301
)
Income tax expense (benefit) adjustment — current and deferred (2):
 
 
 
 
 
Gain on disposition of full or partial interests in rental properties
3,310

172,926

 
32,028

178,398

Impairment of depreciable rental properties
—

(2,668
)
 
(50,053
)
(3,124
)
FFO
$
65,907

$
78,406

 
$
174,365

$
197,966

 
 
 
 
 
 
FFO Per Share - Diluted
 
 
 
 
 
Numerator (in thousands):
 
 
 
 
 
FFO
$
65,907

$
78,406

 
$
174,365

$
197,966

If-Converted Method (adjustments for interest, net of tax):
 
 
 
 
 
3.625% Notes due 2014
—

22

 
—

1,645

5.000% Notes due 2016
382

382

 
1,147

1,147

4.250% Notes due 2018
2,277

2,277

 
6,830

6,830

3.625% Notes due 2020
1,664

1,324

 
4,993

1,324

FFO for per share data
$
70,230

$
82,411

 
$
187,335

$
208,912

Denominator:
 
 
 
 
 
Weighted average shares outstanding—Basic
198,893,584

197,442,451

 
198,328,900

190,919,579

Effect of stock options, restricted stock and performance shares
1,758,916

1,804,200

 
1,741,929

1,684,332

Effect of convertible preferred stock
—

—

 
—

185,199

Effect of convertible debt
32,138,215

29,877,940

 
32,138,215

29,813,775

Effect of convertible Class A Common Units
2,973,190

3,646,755

 
3,358,084

3,646,755

Weighted average shares outstanding - Diluted
235,763,905

232,771,346

 
235,567,128

226,249,640

FFO Per Share
$
0.30

$
0.35

 
$
0.80

$
0.92


33

(1)
The following table provides detail of depreciation and amortization:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
2013
 
2014
2013
 
(in thousands)
Full Consolidation
$
55,511

$
88,232

 
$
169,838

$
236,488

Non-Real Estate
(1,217
)
(1,119
)
 
(3,484
)
(3,679
)
Real Estate Groups Full Consolidation
54,294

87,113

 
166,354

232,809

Real Estate Groups related to noncontrolling interest
(4,888
)
(4,821
)
 
(14,250
)
(13,620
)
Real Estate Groups Unconsolidated
21,521

17,261

 
64,504

53,886

Real Estate Groups Discontinued Operations
—

3,044

 
986

11,548

Real Estate Groups at our proportional share
$
70,927

$
102,597

 
$
217,594

$
284,623

(2)
The following table provides detail of income tax expense (benefit):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
2013
 
2014
2013
 
(in thousands)
Income tax expense (benefit) on FFO
 
 
 
 
 
Operating Earnings:
 
 
 
 
 
Current taxes
$
(6,922
)
$
(25,054
)
 
$
(13,504
)
$
(70,431
)
Deferred taxes
3,247

8,505

 
230

29,494

Total income tax expense (benefit) on FFO
(3,675
)
(16,549
)
 
(13,274
)
(40,937
)
 
 
 
 
 
 
Income tax expense (benefit) on non-FFO
 
 
 
 
 
Disposition of full or partial interests in rental properties:
 
 
 
 
 
Current taxes
$
10,415

$
70,902

 
$
26,171

$
79,882

Deferred taxes
(7,105
)
102,024

 
5,857

98,516

Disposition of full or partial interests in rental properties
3,310

172,926

 
32,028

178,398

 
 
 
 
 
 
Impairment of depreciable rental properties
 
 
 
 
 
Deferred taxes
$
—

$
(2,668
)
 
$
(50,053
)
$
(3,124
)
Total income tax expense (benefit) on non-FFO
3,310

170,258

 
(18,025
)
175,274

Grand Total
$
(365
)
$
153,709

 
$
(31,299
)
$
134,337


Operating FFO
In addition to reporting FFO, we report Operating FFO as an additional measure of our operating performance. We believe it is appropriate to adjust FFO for significant items driven by transactional activity and factors relating to the financial and real estate markets, rather than factors specific to the on-going operating performance of our properties. We use Operating FFO as an indicator of continuing operating results in planning and executing our business strategy. Operating FFO should not be considered to be an alternative to net earnings computed under GAAP as an indicator of our operating performance and may not be directly comparable to similarly titled measures used by other companies.
We define Operating FFO as FFO adjusted to exclude: i) activity related to our land held for divestiture (including impairment charges); ii) impairment of non-depreciable real estate; iii) write-offs of abandoned development projects; iv) income recognized on state and federal historic and other tax credits; v) gains or losses from extinguishment of debt; vi) change in fair market value of nondesignated hedges; vii) gains or losses on change in control of interests; viii) the adjustment to recognize rental revenues and rental expense using the straight-line method; ix) participation payments to ground lessors on refinancing of our properties; x) other transactional items; xi) the Nets pre-tax FFO; and xii) income taxes on FFO.

34

The table below reconciles FFO to Operating FFO.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
2013
 
2014
2013
 
(in thousands)
FFO
$
65,907

$
78,406

 
$
174,365

$
197,966

Net (gain) loss on land held for divestiture activity
—

8,126

 
—

(11,281
)
Impairment of non-depreciable real estate
966

—

 
1,736

—

Write-offs of abandoned development projects and demolition costs
456

3,459

 
1,389

17,012

Tax credit income
(3,515
)
(7,948
)
 
(12,942
)
(19,356
)
(Gain) loss on extinguishment of debt
(300
)
(23,616
)
 
1,322

(19,443
)
Change in fair market value of nondesignated hedges
55

4,771

 
3,046

6,496

Net gain on change in control of interests
—

—

 
(2,759
)
(2,762
)
Straight-line rent adjustments
779

(4,459
)
 
(2,596
)
(10,992
)
Participation payments
—

1,431

 
1,469

2,801

Non-outlot land sales
—

—

 
—

(8,927
)
Net loss on disposition of partial interest in development project
—

—

 
16,211

—

Nets Pre-tax FFO
947

(770
)
 
2,361

2,128

Income tax benefit on FFO
(3,675
)
(16,549
)
 
(13,274
)
(40,937
)
Operating FFO
$
61,620

$
42,851

 
$
170,328

$
112,705

 
 
 
 
 
 
Operating FFO Per Share - Diluted
 
 
 
 
 
Numerator (in thousands):
 
 
 
 
 
Operating FFO
$
61,620

$
42,851

 
$
170,328

$
112,705

If-Converted Method (adjustments for interest, pre-tax):
 
 
 
 
 
3.625% Notes due 2014
—

37

 
—

2,687

5.000% Notes due 2016
625

625

 
1,875

1,875

4.250% Notes due 2018
3,719

—

 
11,156

—

3.625% Notes due 2020
2,719

—

 
8,156

—

Operating FFO for per share data
$
68,683

$
43,513

 
$
191,515

$
117,267

 
 
 
 
 
 
Denominator:
 
 
 
 
 
Weighted average shares outstanding - Diluted (1) 
235,763,905

206,764,752

 
235,567,128

206,778,087

Operating FFO Per Share
$
0.29

$
0.21

 
$
0.81

$
0.57

(1)
For the three and nine months ended September 30, 2013, weighted-average shares issuable upon the conversion of convertible debt of 26,006,594 and 19,471,553, respectively, were not included in the computation of diluted Operating FFO per share because their effect is anti-dilutive under the if-converted method. As a result, adjustments to Operating FFO are not required for interest expense of $5,881,000 and $13,319,000 for the three and nine months ended September 30, 2013, respectively, related to these securities.


35

Commercial Group
Comparable leased occupancy is 92.1% and 92.9% for retail and office, respectively, as of September 30, 2014 compared with 91.6% and 92.5%, respectively, as of September 30, 2013. Leased occupancy percentage is calculated by dividing the sum of the total tenant occupied space under the lease and vacant space under lease by total gross leasable area (“GLA”). Retail and office occupancy as of September 30, 2014 and 2013 represents leased occupancy at the end of the quarter. Occupancy data includes leases with original terms of one year or less. Comparable occupancy relates to stabilized properties opened and operated in both the three months ended September 30, 2014 and 2013.
We monitor retail and office leases expiring in the short to mid-term. Management’s plan to obtain lease renewals for expiring retail and office leases includes signing of lease extensions, if available, and active marketing for available or soon to be available space to new or existing tenants in the normal course of business.
Retail Centers
The following tables represent those new leases and GLA signed and rent per square foot (“SF”) on the same space in which there was a former tenant and existing tenant renewals.
Regional Malls
Calendar Quarter
Number
of Leases
Signed
 
GLA
Signed
 
Contractual
Rent Per SF (1)
 
Expired Rent 
Per SF (1)
 
Cash Basis %
Change over
Prior Rent
 
Q4 2013
24

 
79,493

 
$
59.29

 
$
49.53

 
19.7
%
 
Q1 2014
32

 
114,132

 
$
52.60

 
$
42.93

 
22.5
%
 
Q2 2014
60

 
152,130

 
$
82.45

 
$
63.13

 
30.6
%
 
Q3 2014
45

 
128,871

 
$
50.33

 
$
41.58

 
21.0
%
 
Total
161

 
474,626

 
$
62.97

 
$
50.20

 
25.4
%
 
 
 
 
 
 
 
 
 
 
 
 
Specialty Retail Centers
Calendar Quarter
Number
of Leases
Signed
 
GLA
Signed
 
Contractual
Rent Per SF (1)
 
Expired Rent 
Per SF (1)
 
Cash Basis %
Change over
Prior Rent
 
Q4 2013
3

 
4,905

 
$
31.46

 
$
30.24

 
4.0
 %
 
Q1 2014
2

 
8,994

 
$
34.14

 
$
35.37

 
(3.5
)%
 
Q2 2014
18

 
120,433

 
$
50.68

 
$
44.01

 
15.2
 %
 
Q3 2014
4

 
9,169

 
$
32.40

 
$
30.36

 
6.7
 %
 
Total
27

 
143,501

 
$
47.75

 
$
42.08

 
13.5
 %
 
 
 
 
 
 
 
 
 
 
 
 
Office Buildings
The following table represent those new leases and GLA signed on the same space in which there was a former tenant and existing tenant renewals along with all other new leases signed within the rolling 12-month period.
 
Same-Space Leases
 
Other New Leases
 
 
Calendar Quarter
Number
of Leases
Signed
GLA
Signed
Contractual
Rent Per
SF (1)
Expired 
Rent Per
SF (1)
Cash Basis 
% Change
over Prior
Rent
 
Number
of Leases
Signed
GLA
Signed
Contractual
Rent Per
SF (1)
 
Total GLA
Signed
Q4 2013
27

120,088

$
18.74

$
17.63

6.3
 %
 
5

15,468

$
18.50

 
135,556

Q1 2014
19

190,669

$
47.26

$
43.21

9.4
 %
 
4

11,324

$
20.82

 
201,993

Q2 2014
20

189,441

$
26.64

$
23.89

11.5
 %
 
5

40,891

$
24.94

 
230,332

Q3 2014
14

136,474

$
55.11

$
55.63

(0.9
)%
 
3

21,513

$
21.18

 
157,987

Total
80

636,672

$
37.73

$
35.56

6.1
 %
 
17

89,196

$
22.39

 
725,868

 
 
 
 
 
 
 
 
 
 
 
 
(1)
Retail and Office contractual rent per square foot includes base rent and fixed additional charges for common area maintenance and real estate taxes as of rental commencement. Retail contractual rent per square foot also includes fixed additional marketing/promotional charges. For all expiring leases, contractual rent per square foot includes any applicable escalations.


36

Residential Group
Comparable economic occupancy for the Residential Group is 95.0% and 94.8% for the nine months ended September 30, 2014 and 2013, respectively. Economic residential occupancy is calculated by dividing gross potential rent (“GPR”) less vacancy by GPR. GPR is calculated based on actual rents per lease agreements for occupied apartment units and at market rents for vacant apartment units. Market rental rates are determined using a variety of factors which include availability of specific apartment unit types (one bedroom, two bedroom, etc.), seasonality factors and rents offered by competitive properties for similar apartment types in the same geographic market. Comparable economic occupancy relates to stabilized properties that operated in both the nine months ended September 30, 2014 and 2013.
The following tables present leasing information of our Apartment Communities. Prior period amounts may differ from data as reported in previous quarters since the properties that qualify as comparable change from period to period.
Quarterly Comparison
 
Leasable Units at Pro-Rata %(3)
 
Monthly Average Residential Rental Rates (2)
 
Economic Residential Occupancy
Comparable Apartment
 
Three Months Ended September 30,
 
 
Three Months Ended September 30,
 
Communities (1)
 
2014
2013
% Change
 
2014
2013
% Change
Core Markets
8,628

 
$
1,854

$
1,790

3.6
%
 
95.7
%
95.3
%
0.4
%
Non-Core Markets
8,550

 
$
973

$
950

2.4
%
 
95.0
%
94.3
%
0.7
%
Total Comparable Apartments
17,178

 
$
1,416

$
1,372

3.2
%
 
95.5
%
94.9
%
0.6
%
 
 
 
 
 
 
 
 
 
 
Year-to-Date Comparison
 
Leasable Units at Pro-Rata %(3)
 
Monthly Average Residential Rental Rates (2)
 
Economic Residential Occupancy
Comparable Apartment
 
Nine Months Ended September 30,
 
 
Nine Months Ended September 30,
 
Communities (1)
 
2014
2013
% Change
 
2014
2013
% Change
Core Markets
8,190

 
$
1,840

$
1,774

3.7
%
 
95.5
%
95.1
%
0.4
%
Non-Core Markets
8,550

 
$
965

$
942

2.4
%
 
94.1
%
94.1
%
—

Total Comparable Apartments
16,740

 
$
1,393

$
1,349

3.3
%
 
95.0
%
94.8
%
0.2
%
 
 
 
 
 
 
 
 
 
 
Sequential Comparison
 
Leasable Units at Pro-Rata %(3)
 
Monthly Average Residential Rental Rates (2)
 
Economic Residential Occupancy
Comparable Apartment
 
Three Months Ended
 
 
Three Months Ended
 
Communities (1)
 
September 30, 2014
June 30, 2014
% Change
 
September 30, 2014
June 30, 2014
% Change
Core Markets
8,709

 
$
1,866

$
1,843

1.2
%
 
95.7
%
95.8
%
(0.1
)%
Non-Core Markets
8,550

 
$
973

$
965

0.8
%
 
95.0
%
94.1
%
0.9
%
Total Comparable Apartments
17,259

 
$
1,424

$
1,408

1.1
%
 
95.5
%
95.2
%
0.3
%
 
 
 
 
 
 
 
 
 
 
(1)
Includes stabilized apartment communities completely opened and operated in the periods presented. These apartment communities include units leased at affordable apartment rates which provide a discount from average market rental rates. For the three months ended September 30, 2014, 18.7% of leasable units in core markets and 3.8% of leasable units in non-core markets were deemed affordable housing units. Excludes all military and limited-distribution subsidized senior housing units.
(2)
Represents GPR less concessions.
(3)
Leasable units at pro-rata represent our share of comparable leasable units at the apartment community.


37

Segment Operating Results
The following tables present revenues, operating expenses, interest expense and equity in earnings by segment for the three months ended September 30, 2014 compared with the three months ended September 30, 2013. Other results of operations are discussed on a consolidated basis. All amounts in the following tables are presented in thousands.
 
Commercial Group
Residential Group
Arena
Land Development Group
Total
Revenues for the three months ended September 30, 2013
$
160,965

$
69,423

$
25,277

$
21,028

$
276,693

Increase (decrease) due to:
 
 
 
 
 
Comparable portfolio
6,981

1,046

—

—

8,027

Non-comparable properties (1) 
215

2,598

(238
)
—

2,575

Change in accounting method due to partial sale or acquisition
(31,460
)
1,238

—

—

(30,222
)
Recently disposed properties
(157
)
—

—

—

(157
)
Land sales
(1,163
)
(1,701
)
—

(4,536
)
(7,400
)
Military housing
—

(5,262
)
—

—

(5,262
)
Other
(6,036
)
(4,039
)
—

564

(9,511
)
Revenues for the three months ended September 30, 2014
$
129,345

$
63,303

$
25,039

$
17,056

$
234,743

 
Corporate Activities
Commercial Group
Residential Group
Arena
Land Development Group
Total
Operating expenses for the three months ended September 30, 2013
$
13,994

$
85,986

$
50,081

$
16,286

$
15,155

$
181,502

Increase (decrease) due to:
 
 
 
 
 
 
Comparable portfolio
—

435

2,193

—

—

2,628

Non-comparable properties (1) 
—

(72
)
1,234

819

—

1,981

Change in accounting method due to partial sale or acquisition
—

(10,853
)
602

—

—

(10,251
)
Recently disposed properties
—

37

—

—

—

37

Land cost of sales
—

(581
)
(1,669
)
—

(9,057
)
(11,307
)
Military housing
—

—

(5,932
)
—

—

(5,932
)
Development, management, Corporate and other expenses
(231
)
(4,728
)
(2,805
)
—

(740
)
(8,504
)
Operating expenses for the three months ended September 30, 2014
$
13,763

$
70,224

$
43,704

$
17,105

$
5,358

$
150,154

 
Corporate Activities
Commercial Group
Residential Group
Arena
Land Development Group
Total
Interest expense for the three months ended September 30, 2013
$
14,958

$
49,465

$
8,241

$
9,492

$
97

$
82,253

Increase (decrease) due to:
 
 
 
 
 
 
Comparable portfolio
—

(2,233
)
(997
)
—

—

(3,230
)
Non-comparable properties (1) 
—

117

624

1,403

—

2,144

Change in accounting method due to partial sale or acquisition
—

(14,250
)
360

—

—

(13,890
)
Recently disposed properties
—

(61
)
—

—

—

(61
)
Capitalized interest
—

(1,955
)
1,888

—

9

(58
)
Mark-to-market adjustments on non-designated swaps
(68
)
(14
)
(1,678
)
—

(145
)
(1,905
)
Corporate borrowings
(5,309
)
—

—

—

—

(5,309
)
Other
—

24

(408
)
—

(248
)
(632
)
Interest expense for the three months ended September 30, 2014
$
9,581

$
31,093

$
8,030

$
10,895

$
(287
)
$
59,312

 
Corporate Activities
Commercial Group
Residential Group
Arena
Land Development Group
Total
Equity in earnings (loss) for the three months ended September 30, 2013
$
1,080

$
38,019

$
5,331

$
—

$
(506
)
$
43,924

Increase (decrease) due to:
 
 
 
 
 
 
Comparable portfolio
—

(442
)
1,619

—

—

1,177

Recently disposed equity method properties
—

(242
)
(192
)
—

—

(434
)
Recently opened equity method properties
—

—

(1,357
)
—

—

(1,357
)
Change in accounting method due to partial sale or acquisition
—

2,194

(697
)
—

—

1,497

Current year gain on disposition
—

9,189

—

—

—

9,189

Prior year gain on disposition
—

(34,281
)
—

—

—

(34,281
)
Military housing
—

—

(159
)
—

—

(159
)
Subsidized senior housing
—

—

593

—

—

593

Other
(2,027
)
838

439

—

(53
)
(803
)
Equity in earnings (loss) for the three months ended September 30, 2014
$
(947
)
$
15,275

$
5,577

$
—

$
(559
)
$
19,346


38

(1)
The following table presents the increases (decreases) in revenues, operating expenses and interest expense for Commercial and Residential properties in lease-up and other consolidated non-comparable properties:
 
 
Three Months Ended September 30, 2014 vs. 2013
Property
Quarter Opened
Revenues
Operating Expenses
Interest Expense
Commercial:
 
 
 
 
Properties in lease-up:
 
 
 
 
The Yards - Boilermaker Shops
Q4-12
$
47

$
83

$
12

The Yards - Lumbershed
Q3-13
284

47

109

Non-comparable property:
 
 
 
 
Ballston Common Mall
(116
)
(202
)
(4
)
Total Commercial
$
215

$
(72
)
$
117

Residential:
 
 
 
 
Properties in lease-up:
 
 
 
 
1111 Stratford
Q3-13/Q1-14
$
470

$
446

$
112

Aster Conservatory Green
Q3-13/14
941

332

200

The Continental
Q1-13
501

(298
)
6

The Yards - Twelve12
Q2-14
293

413

307

Non-comparable property:
 
 
 
 
Heritage
393

341

(1
)
Total Residential
$
2,598

$
1,234

$
624

Commercial Group:
The decreases in revenues, operating expenses, interest expense and increase to equity in earnings related to the change in accounting method are due to the change from full consolidation method of accounting to equity method upon the formation of new joint ventures with outside partners in seven of our consolidated regional retail malls in 2013.
Ballston Common Mall is classified as a non-comparable property due to its upcoming planned renovation project.
Residential Group:
The increases in revenues, operating expenses and interest expense and decrease to equity in earnings related to the change in accounting method are due to the change from equity method to full consolidation of accounting for 91 Sidney, an apartment community in Cambridge, Massachusetts, upon acquisition of our partner’s remaining ownership interest during the three months ended March 31, 2014. The decreases in revenues and operating expenses for other are primarily due to third party management fees and the expenditures associated with third party management and consulting fee arrangements.
Heritage is classified as a non-comparable property due to its recently completed renovation project resulting in a significant number of units being off-line.
Corporate Activities:
The decrease in interest expense is due to the redemptions of our Senior Notes due 2017 and 2034 and the exchanges of our Senior Notes due 2014 for Class A common stock, which is partially offset by the issuance of our Senior Notes due 2020 during 2013.

39

The following tables present revenues, operating expenses, interest expense and equity in earnings by segment for the nine months ended September 30, 2014 compared with the nine months ended September 30, 2013. Other results of operations are discussed on a consolidated basis. All amounts in the following tables are presented in thousands.
 
Commercial Group
Residential Group
Arena
Land Development Group
Total
Revenues for the nine months ended September 30, 2013
$
511,767

$
196,704

$
76,270

$
39,833

$
824,574

Increase (decrease) due to:
 
 
 
 
 
Comparable portfolio
9,098

3,464

—

—

12,562

Non-comparable properties (1) 
5,808

4,772

8,698

—

19,278

Change in accounting method due to partial sale or acquisition
(112,069
)
9,383

—

—

(102,686
)
Recently disposed properties
(58
)
—

—

—

(58
)
Land sales
(19,585
)
(1,551
)
—

14,511

(6,625
)
Military housing
—

(12,838
)
—

—

(12,838
)
Other
(11,740
)
(9,409
)
—

859

(20,290
)
Revenues for the nine months ended September 30, 2014
$
383,221

$
190,525

$
84,968

$
55,203

$
713,917

 
Corporate Activities
Commercial Group
Residential Group
Arena
Land Development Group
Total
Operating expenses for the nine months ended September 30, 2013
$
38,531

$
283,313

$
145,105

$
56,596

$
29,230

$
552,775

Increase (decrease) due to:
 
 
 
 
 
 
Comparable portfolio
—

2,850

690

—

—

3,540

Non-comparable properties (1) 
—

(304
)
3,302

(1,197
)
—

1,801

Change in accounting method due to partial sale or acquisition
—

(38,383
)
4,936

—

—

(33,447
)
Recently disposed properties
—

58

—

—

—

58

Land cost of sales
—

(10,415
)
(1,652
)
—

(2,570
)
(14,637
)
Military housing
—

—

(12,598
)
—

—

(12,598
)
Development, management, Corporate and other expenses
(3,148
)
(12,190
)
(12,737
)
—

(2,353
)
(30,428
)
Operating expenses for the nine months ended September 30, 2014
$
35,383

$
224,929

$
127,046

$
55,399

$
24,307

$
467,064

 
Corporate Activities
Commercial Group
Residential Group
Arena
Land Development Group
Total
Interest expense for the nine months ended September 30, 2013
$
45,556

$
148,893

$
24,957

$
27,767

$
(341
)
$
246,832

Increase (decrease) due to:
 
 
 
 
 
 
Comparable portfolio
—

(8,545
)
(2,344
)
—

—

(10,889
)
Non-comparable properties (1) 
—

6

946

2,334

—

3,286

Change in accounting method due to partial sale or acquisition
—

(41,871
)
5,156

—

—

(36,715
)
Recently disposed properties
—

(66
)
—

—

—

(66
)
Capitalized interest
—

(597
)
(329
)
—

(28
)
(954
)
Mark-to-market adjustments on non-designated swaps
(222
)
(33
)
(4,323
)
—

(145
)
(4,723
)
Corporate borrowings
(16,916
)
—

—

—

—

(16,916
)
Other
—

151

(1,031
)
—

(58
)
(938
)
Interest expense for the nine months ended September 30, 2014
$
28,418

$
97,938

$
23,032

$
30,101

$
(572
)
$
178,917

 
Corporate Activities
Commercial Group
Residential Group
Arena
Land Development Group
Total
Equity in earnings (loss) for the nine months ended September 30, 2013
$
(2,128
)
$
46,740

$
12,765

$
—

$
(697
)
$
56,680

Increase (decrease) due to:
 
 
 
 
 
 
Comparable portfolio
—

(1,847
)
3,081

—

—

1,234

Recently disposed equity method properties
—

(1,762
)
(471
)
—

—

(2,233
)
Recently opened equity method properties
—

—

(2,330
)
—

—

(2,330
)
Change in accounting method due to partial sale or acquisition
—

5,247

2,252

—

—

7,499

Current year gain on disposition
—

25,279

24,796

—

—

50,075

Prior year gain on disposition
—

(32,771
)
—

—

—

(32,771
)
Military housing
—

—

(572
)
—

—

(572
)
Subsidized senior housing
—

—

321

—

—

321

Other
(233
)
2,367

(128
)
—

634

2,640

Equity in earnings (loss) for the nine months ended September 30, 2014
$
(2,361
)
$
43,253

$
39,714

$
—

$
(63
)
$
80,543


40

(1)
The following table presents the increases (decreases) in revenues, operating expenses and interest expense for Commercial and Residential properties in lease-up and other consolidated non-comparable properties:
 
 
Nine Months Ended September 30, 2014 vs. 2013
Property
Quarter Opened
Revenues
Operating Expenses
Interest Expense
Commercial:
 
 
 
 
Properties in lease-up:
 
 
 
 
The Yards - Boilermaker Shops
Q4-12
$
249

$
106

$
36

The Yards - Lumbershed
Q3-13
925

335

288

Westchester’s Ridge Hill
Q2-11/12
5,025

(901
)
40

Non-comparable property:
 
 
 
 
Ballston Common Mall
(391
)
156

(358
)
Total Commercial
$
5,808

$
(304
)
$
6

Residential:
 
 
 
 
Properties in lease-up:
 
 
 
 
1111 Stratford
Q3-13/Q1-14
$
844

$
1,079

$
318

Aster Conservatory Green
Q3-13/14
1,792

980

365

The Continental
Q1-13
1,884

136

274

The Yards - Twelve12
Q2-14
309

613

340

Non-comparable property:
 
 
 
 
Heritage
(57
)
494

(351
)
Total Residential
$
4,772

$
3,302

$
946

Commercial Group:
The decreases in revenues, operating expenses and interest expense and increase to equity in earnings related to the change in accounting method are due to the change from full consolidation method of accounting to equity method upon the formation of new joint ventures with an outside partner in seven of our consolidated regional retail malls in 2013. The decreases in revenues and operating expenses for other are primarily due to a decrease in tenant reimbursable expenses at several properties in the Greater New York City metropolitan area and third party management fees and the expenditures associated with third party management and consulting fee arrangements. Additionally, the decrease in operating expenses for other is due to less development costs being expensed in 2014 compared with 2013 due to the increased amount of projects under active development. The decrease in interest expense for the comparable portfolio is primarily due to the paydown of several nonrecourse mortgage notes.
Ballston Common Mall is classified as a non-comparable property due to its upcoming planned renovation project.
Residential Group:
The increases in revenues, operating expenses, interest expense and equity in earnings related to the change in accounting method are due to the change from equity method to full consolidation of accounting for Uptown Apartments, an apartment community in Oakland, California (Q2-2013), and 91 Sidney (Q1-2014) upon acquisition of our partners’ remaining ownership interests. The decreases in revenues and operating expenses for other are primarily due to third party management fees and the expenditures associated with third party management and consulting fee arrangements.
Heritage is classified as a non-comparable property due to its recently completed renovation project resulting in a significant number of units being off-line.
Corporate Activities:
The decrease in operating expenses expenses is primarily due to a partial recovery of a legal settlement paid in a prior period, which was subsequently recovered in 2014. The decrease in interest expense is due to the redemptions of our Senior Notes due 2015, 2017 and 2034 and the exchanges of our Senior Notes due 2014 for Class A common stock, which is partially offset by the issuance of our Senior Notes due 2020 during 2013.


41

Depreciation and Amortization
Depreciation and amortization expense was $55,511,000 and $169,838,000 for the three and nine months ended September 30, 2014, respectively, and $88,232,000 and $236,488,000 for the three and nine months ended September 30, 2013, respectively. The decreases for the three and nine months ended September 30, 2014 compared with the same periods in the prior year are primarily attributable to accelerated depreciation expense of $25,421,000 and $44,397,000 related to Ten MetroTech Center, an office building in Brooklyn, New York, during the three and nine months ended September 30, 2013, respectively, and the change from full consolidation method of accounting to equity method upon the formation of new joint ventures with an outside partner in seven regional retail malls in 2013. These decreases were partially offset by the change from equity method of accounting to full consolidation method upon the acquisition of our partners’ interests in two apartment communities.
Amortization of Mortgage Procurement Costs
Amortization of mortgage procurement costs was $2,074,000 and $5,967,000 for the three and nine months ended September 30, 2014, respectively, and $2,300,000 and $7,567,000 for the three and nine months ended September 30, 2013, respectively. The decreases for the three and nine months ended September 30, 2014 compared with the same periods in the prior year are primarily attributable to the change from full consolidation method of accounting to equity method upon the formation of new joint ventures with an outside partner in seven regional retail malls in 2013 and the paydown of several nonrecourse mortgage notes.
Gain (Loss) on Extinguishment of Debt
See Note L – Gain (Loss) on Extinguishment of Debt in the Notes to Consolidated Financial Statements in Item 1 of this Form 10‑Q for detailed information.
Interest and Other Income
Interest and other income was $10,096,000 and $33,974,000 for the three and nine months ended September 30, 2014, respectively, and $14,957,000 and $37,382,000 for the three and nine months ended September 30, 2013, respectively. The decreases for the three and nine months ended September 30, 2014 compared with the same periods in the prior year are primarily related to decreases in the income recognition on the allocation of state and federal historic preservation tax credits, Brownfield tax credits and new market tax credits.
Discontinued Operations
See Note P – Discontinued Operations and Gain on Disposition of Rental Properties in the Notes to Consolidated Financial Statements in Item 1 of this Form 10-Q for detailed information.

Net Earnings (Loss) Attributable to Forest City Enterprises, Inc. – Net earnings attributable to Forest City Enterprises, Inc. for the three months ended September 30, 2014 was $686,000 versus $241,856,000 for the three months ended September 30, 2013. Although we have substantial recurring revenue sources, significant transactions often create substantial variances in operating results between periods. The variance to the prior year period is primarily attributable to the following fluctuations, which are pre-tax and net of noncontrolling interests:
Asset Dispositions - $(426,495,000)
•
$(434,159,000) related to 2013 gains on disposition of full or partial interest in rental properties and unconsolidated investments exceeding 2014 gains;
•
$8,126,000 related to the net loss on land held for divestiture activities for fully consolidated land projects and land projects accounted for under the equity method of accounting in 2013;
•
$(4,925,000) related to a combined fluctuation in revenues, operating expenses and interest expense at properties in which we disposed of our full or partial interest during 2013 and 2014; and
•
$4,463,000 related to increased sales in our Land Development Group in 2014 compared with 2013, primarily at our Stapleton project.
Financing Transactions - $(15,532,000)
•
$(23,316,000) related to decreased gains on extinguishment of debt in 2014 compared with 2013;
•
$5,309,000 related to a decrease in interest expense on our corporate debt due to the redemptions of our Senior Notes due 2017 and 2034, which were partially offset by the issuance of our Senior Notes due 2020 during 2013; and
•
$2,475,000 related to the change in fair market value of certain derivatives not qualifying for hedge accounting between the comparable periods, which was marked to market through interest expense.

42

Non-Cash Transactions - $40,479,000
•
$31,572,000 related to a decrease in depreciation and amortization expense in 2014 compared with 2013 primarily due to accelerated depreciation expense at Ten MetroTech Center in 2013, the change from full consolidation method of accounting to equity method upon the formation of new joint ventures with an outside partner in seven regional retail malls in 2013 and the disposition of several rental properties during 2013 and 2014;
•
$5,904,000 related to decreased impairment of real estate (including discontinued operations) in 2014 compared with 2013; and
•
$3,003,000 related to decreased write-offs of abandoned development projects in 2014 compared with 2013.
Operations - $7,230,000
•
$10,822,000 related to a combined fluctuation in revenues, operating expenses and interest expense at properties in our comparable portfolio in 2014 compared with 2013; and
•
$(3,592,000) related to a decrease in the income recognition on the allocation of state and federal historic preservation tax credits, Brownfield tax credits and new market tax credits in 2014 compared with 2013.
Income Taxes
•
$154,074,000 due to decreased income tax expense attributable to both continuing and discontinued operations primarily related to the fluctuations in pre-tax earnings, including gains included in discontinued operations. These fluctuations are primarily due to the various transactions discussed herein.
Net loss attributable to Forest City Enterprises, Inc. for the nine months ended September 30, 2014 was $(76,786,000) versus net earnings of $187,325,000 for the nine months ended September 30, 2013. The variance to the prior year period is primarily attributable to the following fluctuations, which are pre-tax and net of noncontrolling interests:
Asset Dispositions - $(434,694,000)
•
$(379,824,000) related to 2013 gains on disposition of full or partial interest in rental properties and unconsolidated investments exceeding 2014 gains;
•
$(34,476,000) related to a combined fluctuation in revenues, operating expenses and interest expense at properties in which we disposed of our full or partial interest during 2013 and 2014;
•
$17,121,000 related to increased sales in our Land Development Group in 2014 compared with 2013, primarily at our Stapleton project;
•
$(16,211,000) related to the net loss on partial disposition in Pacific Park Brooklyn, related to the formation of a new joint venture with Greenland in 2014;
•
$(11,281,000) related to the net gain on land held for divestiture activities for fully consolidated land projects and land projects accounted for under the equity method of accounting in 2013; and
•
$(10,023,000) related to decreased commercial outlot land sales in 2014 compared with 2013.
Financing Transactions - $1,343,000
•
$(20,765,000) related to decreased gains on extinguishment of debt in 2014 compared with 2013;
•
$16,916,000 related to a decrease in interest expense on our corporate debt due to the redemptions of our Senior Notes due 2015, 2017 and 2034 and the exchanges of our Senior Notes due 2014 for Class A common stock, which were partially offset by the issuance of our Senior Notes due 2020 during 2013; and
•
$5,192,000 related to the change in fair market value of certain derivatives not qualifying for hedge accounting between the comparable periods, which was marked to market through interest expense.
Non-Cash Transactions - $(39,903,000)
•
$(122,750,000) related to increased impairment of real estate (including discontinued operations) in 2014 compared with 2013;
•
$67,224,000 related to a decrease in depreciation and amortization expense in 2014 compared with 2013 primarily due to accelerated depreciation expense at Ten MetroTech Center in 2013, the change from full consolidation method of accounting to equity method upon the formation of new joint ventures with an outside partner in seven regional retail malls in 2013 and the disposition of several rental properties during 2013 and 2014. These decreases were partially offset by the change from equity method of accounting to full consolidation method upon the acquisition of our partners’ interest in two apartment communities; and
•
$15,623,000 related to decreased write-offs of abandoned development projects in 2014 compared with 2013.

43

Operations - $31,432,000
•
$22,268,000 related to a combined fluctuation in revenues, operating expenses and interest expense at properties in our comparable portfolio in 2014 compared with 2013;
•
$5,433,000 related to a combined fluctuation in revenues, operating expenses and interest expense at properties that are in lease-up as of September 30, 2014;
•
$5,137,000 related to a combined fluctuation in revenues, operating expenses and interest expense at Barclays Center in 2014 compared with 2013;
•
$(4,554,000) related to a decrease in the income recognition on the allocation of state and federal historic preservation tax credits, Brownfield tax credits and new market tax credits in 2014 compared with 2013; and
•
$3,148,000 related to a decrease in Corporate general and administrative expenses, primarily due to a partial recovery of a legal settlement paid in a prior period, which was subsequently recovered in 2014.
Income Taxes
•
$165,636,000 due to decreased income tax expense attributable to both continuing and discontinued operations primarily related to the fluctuations in pre-tax earnings, including gains included in discontinued operations. These fluctuations are primarily due to the various transactions discussed herein.

FINANCIAL CONDITION AND LIQUIDITY
Multi-family rental properties continue to perform well throughout the majority of the United States. Other types of commercial real estate are improving to varying degrees depending on product type and geographic market. Access to bank credit and capital have continued to improve with banks and permanent lenders originating new loans for real estate projects, particularly as their existing portfolio loans get paid off. Originations of new loans for commercial mortgage backed securities have continued to improve as well. Although underwriting standards have begun to loosen, lenders continue favoring high quality operating assets in strong markets. While banks continue to originate construction loans for multifamily projects, construction loans for office or retail projects remain difficult to obtain, unless the project has substantial pre-leasing in place or higher than historical equity commitments from the developer.
Our principal sources of funds are cash provided by operations including land sales, our revolving credit facility, nonrecourse mortgage debt and notes payable, dispositions of operating properties or development projects through sales or equity joint ventures, proceeds from the issuance of senior notes, common or preferred equity and other financing arrangements. We have consistently disposed of assets in an effort to recycle capital and reposition our portfolio. Over the last ten years, we have generated cash proceeds from sales and/or disposition of partial interests in rental properties averaging in excess of $100,000,000 per year. Given the diversity of our portfolio by market and product type, we believe the market for property dispositions will continue to be available. The current market should allow us to continue our ongoing strategy to recycle capital and reposition the portfolio through asset sales or equity joint ventures.
Our strategic plan drives our capital strategy and business focus on core products located in core markets. In order to achieve our strategic goals, we evaluate each individual asset in our operating and development portfolio to identify those having the best opportunity to provide capital through full or partial sale in conjunction with our strategy of focusing on core products located in core markets. This process may result in reductions to estimated holding periods and the total estimated undiscounted cash flows used for impairment calculations on our individual consolidated real estate assets. In some cases, this may result in estimated undiscounted cash flows being less than the carrying value of the consolidated asset and necessitating an impairment charge to write down the asset to its estimated fair value.
In addition, our capital strategy includes potentially entering into equity joint ventures to provide capital through the sales of partial interests of operating properties or reduce our equity requirements and development risk on development opportunities. Entering into joint ventures could result in us granting joint control or losing control of the asset and, accordingly, the asset would no longer be consolidated. Upon deconsolidation, our investment balance in the joint venture would be compared to estimated fair value and recorded at the lesser of fair value or book value. Additionally, evaluation for other than temporary impairment on a quarterly basis would be required. This could result in future impairments, some of which could be significant, that would not otherwise be required if the real estate asset remained consolidated.

44

On June 30, 2014, we entered into a joint venture with Greenland Atlantic Yards, LLC, a subsidiary of Shanghai-based Greenland Holding Group Company Limited (“Greenland”), to develop Pacific Park Brooklyn, a 22 acre mixed-use project in Brooklyn, New York. Under the joint venture, Greenland acquired 70% of the project and will co-develop the project with us, along with sharing in the entire project costs going forward in proportion to ownership interests. As of September 30, 2014, we had received $203,923,000 of cash, net of transaction costs, related to the transaction. The joint venture will execute on the remaining development rights, including the infrastructure and vertical construction of the residential units, but excludes Barclays Center and the under construction B2 BKLYN apartment community. Consistent with the approved master plan, the joint venture will develop the remaining portion of Phase I and all of Phase II of the project, including the permanent rail yard. The remaining portion of Phase I that will be developed by the joint venture is comprised of seven buildings totaling approximately 3.1 million square feet. Phase II consists of seven buildings totaling approximately 3.3 million square feet.
On June 27, 2014, just prior to the closing of the joint venture with Greenland, the City of New York and State of New York entities revised certain project requirements with the goal of accelerating the construction of affordable housing. We are now obligated to start construction of one multi-family building consisting entirely of affordable rental units by December 31, 2014 and a second building consisting entirely of affordable rental units by June 30, 2015. Each construction obligation carries liquidated damage penalties of up to $5,000,000, payable to a city housing trust fund, if not commenced by such dates. In addition, affordable units are required to constitute 35% of all units for which construction has commenced until 1,050 affordable units have been started, after which the percentage drops to 25%. Failure to meet this requirement will prevent the joint venture from seeking new building permits, as well as give the State the right to seek injunctive relief. Also, temporary certificates of occupancy (“TCOs”) for a total of 2,250 affordable housing units are required to be issued by May 31, 2025 and a $2,000 per month penalty will be imposed for those affordable units which have not received TCOs by such date, until issued.
In order to construct the seven buildings in Phase II, substantial additional costs for rail yard and infrastructure improvements, including a platform over the new permanent rail yard, will be required. Our agreement with the Metropolitan Transit Authority (“MTA”) requires collateral to be posted and for the construction of the permanent rail yard to be substantially complete by December 2017. We had previously posted $86,000,000 of collateral with the MTA, which was returned upon the closing of the joint venture on June 30, 2014. At closing, the joint venture has provided the $86,000,000 collateral to the MTA, of which our portion was 30%, or approximately $26,000,000. The joint venture is accounted for on the equity method of accounting, resulting in the deconsolidation of the Pacific Park Brooklyn development project. The closing of this joint venture allows us to accelerate the delivery of needed affordable housing while significantly reducing our future equity requirements for the full build-out of this project, thereby reducing our development risk and improving our future liquidity.
In December 2013, upon signing of the definitive agreement with Greenland for the sale of the Pacific Park Brooklyn development project, we determined it was likely the sale transaction would close. As a result, we classified the assets and liabilities as held for sale on our December 31, 2013 consolidated balance sheet and recorded the asset at estimated fair value less estimated costs to sell, resulting in an impairment of $289,864,000 ($242,417,000, net of noncontrolling interest) during the 11 months ended December 31, 2013. Upon closing of the transaction, an additional $19,590,000 ($16,211,000, net of noncontrolling interests) was recognized primarily due to estimated costs required to complete our obligations prior to closing were higher than originally estimated. The original estimate as of December 31, 2013 was based on the most current available information.
We continue to implement our strategic plan, including focusing on core products located in core markets. During the three months ended June 30, 2014, we began serious discussions with a potential buyer for certain Cleveland operating assets including Post Office Plaza and Skylight Office Tower, office buildings, the Avenue at Tower City Parking facility (“TC Parking”) and a 50% interest in the Avenue at Tower City Center (“Avenue”), a specialty retail center. Based on the advanced status of the discussions, we determined a triggering event had occurred and reviewed and adjusted the estimated holding periods of each applicable asset and in each case, increased the likelihood of a near term sale. As a result, the estimated probability weighted undiscounted cash flows no longer exceed the carrying value of Post Office Plaza and Avenue resulting in a combined impairment of $86,851,000 being recorded during the three months ended June 30, 2014 on these two assets.
During the three months ended September 30, 2014, the negotiations with the potential buyer for the sale of these Cleveland operating assets ceased, as mutually agreeable terms could not be reached. We intend to continue to market these assets but cannot give assurance we will close on these sales on terms favorable to us or at all.

45

During the three months ended September 30, 2014, we began discussions with several interested parties for the potential sale of our ownership interests in The Nets. Through those discussions, certain parties have also expressed interest in acquiring a portion of our ownership interests in Barclays Center. Our ownership interest in The Nets and Barclays Center is through Nets Sports & Entertainment (“NS&E”). NS&E owns 20% of The Nets and 55% of Barclays Center. We own approximately 62% of NS&E, with the remaining 38% of NS&E being owned by several minority partners. In the event of a sale of NS&E’s ownership interests, NS&E would be entitled to remaining cash proceeds after assumption of our proportionate share of debt, which approximates $42,000,000 related to The Nets and $349,000,000 related to the Barclays Center and repayment of certain funding requirement made by the majority partner in The Nets on behalf of NS&E of approximately $25,000,000. We have also made certain loans to the minority members of NS&E which are required to be repaid to us prior to the minority partners of NS&E being able to participate in the distributable cash flow from any sale. At September 30, 2014, approximately $216,000,000 of priority member loans and related accrued interest remain outstanding. Any remaining cash flows after satisfaction of the priority member loans would be distributed in accordance with the legal ownership of NS&E (approximately 62% to us and 38% to the minority partners). We do not have an agreement in place and cannot give assurance we will close on the sale of a portion or all of our ownership interests in The Nets or Barclays Center on terms favorable to us or at all.
B2 BKLYN is an apartment building under construction in Brooklyn, New York adjacent to the Brooklyn Arena at the Pacific Park Brooklyn project. In 2013, we contributed the land and development opportunity into our $400,000,000 residential development fund with Arizona State Retirement System (“ASRS”) and retained a 25% ownership. We decided to use modular construction to build this 32 story, 363 unit apartment building.
High rise modular construction has not previously been done at the heights of B2 BKLYN. The project has encountered, and may continue to encounter, delays and increased costs in the fabrication and assembly of the modular units. In April 2014, based on internal estimates and the pace of construction, the anticipated completion of this project was determined to be delayed until the fourth quarter of 2015. However, as a result of recent actions taken by Skanska USA (the” Construction Manager”), that date may not be achievable. We had a $117,000,000 fixed price contract with the Construction Manager to construct the apartment building. On August 27, 2014, the Construction Manager ceased construction and on September 23, 2014, terminated the contract. In response, on September 30, 2014, we issued a notice of default and intent to terminate the same contract due to the Construction Manager’s termination of the contract among other defaults, which notice expires on November 7, 2014. Additionally, lawsuits to enforce their respective rights under the governing documents have been filed by the construction manager and us.
On September 30, 2014, we bought out ASRS’s equity interest in B2 BKLYN for $40,500,000. Since this asset was a consolidated asset prior to acquisition, there was no adjustment to the historical asset basis, as the cash payment was recorded as a reduction of noncontrolling interest with the difference between the cash and the noncontrolling interest balance being recorded as a decrease to additional paid-in capital. This action allows the fund to pursue other development opportunities rather than utilizing the majority of the capital of the fund to pursue the completion of B2 BKLYN. In addition, since we now own 100%, we unilaterally make decisions regarding the asset, its construction and the litigation associated with it.
Subsequent to the construction stoppage, we received a notice of default on the nonrecourse mortgage secured by B2 BKLYN. We have since entered into a short term forbearance agreement while a longer term agreement is negotiated. The short term agreement expires by or no later than November 5, 2014 and in the event we are unable to complete the negotiation of a longer term agreement, or cure the default, we may be required to repay the current outstanding balance of $45,000,000 currently secured by, amongst other things, $37,500,000 of restricted bond proceeds included in restricted cash and an equity letter of credit of $9,300,000. In addition, we may be required to fund the apartment building until the uncertainties regarding its construction are resolved.
Based on the recent events, including the ceasing of construction and litigation related to the construction of B2 BKLYN, we are investigating and evaluating alternatives to restart and complete the construction. We are in the very early stages of the litigation with the Construction Manager. Based on current information available, we have updated our impairment analysis using a probability weighted approach factoring in the scenarios currently being evaluated to complete B2 BKLYN. Currently, our analysis indicates the future probability weighted estimated undiscounted cash flows would be sufficient to recover the carrying value of the asset. Significant estimates were used in the determination of these estimated future undiscounted cash flows. Based on the uncertainty caused by the recent events and the significant estimates used in the calculation, we will continue to review our impairment calculations as additional information becomes available. Changes to the estimates made and future clarity to the various scenarios being evaluated are expected to cause fluctuations to our estimated probability weighted undiscounted cash flows. If we determine future estimated probability weighted undiscounted cash flows no longer exceed the carrying value of the asset, then the asset would be recorded at its estimated fair value, resulting in a future impairment, which would likely be material.
We have approximately $155,000,000 capitalized on the Consolidated Balance Sheet related to B2 BKLYN at September 30, 2014, consisting of land, building and capitalized interest. Based on the most current information available, total project costs could increase up to an amount ranging from $215,000,000 to $265,000,000. Significant estimates were used to develop the range of project costs and are expected to change as future clarity to the various construction scenarios used continue to develop. As litigation and negotiations continue, it is reasonably possible that construction costs will increase to a point where the capitalized cost is not recoverable from future undiscounted cash flows, resulting in an impairment of the asset.

46

Our principal uses of funds are the financing of our real estate operating and development projects, capital expenditures for our existing operating portfolio, and principal and interest payments on our nonrecourse mortgage debt and notes payable, revolving credit facility and senior notes.
Our primary capital strategy seeks to isolate the operating and financial risk at the property level to maximize returns and reduce risk on and of our equity capital. As such, substantially all of our operating and development properties are separately encumbered with nonrecourse mortgage debt or notes payable, which provides protection by allowing the lender to commence foreclosure proceedings on the single collateralized asset in the event of a default. We do not cross-collateralize our mortgage debt and notes payable outside of a single identifiable project. We operate as a C-corporation and retain substantially all of our internally generated cash flows. This cash flow, together with refinancing and property sale proceeds, has historically provided us with the necessary liquidity to take advantage of investment opportunities. The economic downturn and its impact on the lending and capital markets reduced our ability to finance development and acquisition opportunities and also modified the required rates of return to make new investment opportunities appealing. As a result of these market changes, we have established limitations on entering into new development activities.
We continue to make progress on certain other pre-development projects, primarily multifamily projects located in core markets. The cash required to fund our equity in projects under construction and development plus cash necessary to extend or pay down our 2014 debt maturities is anticipated to exceed our cash from operations. As a result, we intend to extend maturing debt or repay it with net proceeds from property sales, equity joint ventures, borrowings on our revolving credit facility or future debt or equity financing.
During the nine months ended September 30, 2014, we completed the following transactions which generated cash liquidity and reduced future development equity requirements and development risk:
•
We generated cash liquidity of $47,451,000 through the sale of 818 Mission Street and Bulletin Building, unconsolidated office buildings in San Francisco, California, Golden Gate, an unconsolidated specialty retail center in Mayfield Heights, Ohio, and five unconsolidated apartment communities in North Carolina and Florida; and
•
We generated net cash proceeds of $34,065,000 through the sale of Promenade Bolingbrook, a regional mall in Bolingbrook, Illinois, Quartermaster Plaza, a specialty retail center in Philadelphia, Pennsylvania, and Stapleton - 3055 Roslyn and Mesa del Sol - 5600 University SE, office buildings in Denver, Colorado and Albuquerque, New Mexico, respectively; and
•
We contributed The Yards - Arris and Blossom Plaza, two apartment communities, into our residential strategic capital partnership with ASRS during the three months ended September 30, 2014. These transactions continue to reduce our future equity requirements and development risk relative to our development pipeline.
We continue to explore various options to strengthen our balance sheet and enhance our liquidity, but can give no assurance that we can accomplish any of these other options on terms favorable to us or at all. If we cannot enhance our liquidity, it could adversely impact our growth and result in further curtailment of development activities.
During the three months ended June 30, 2014, we obtained a three-year $350,000,000 bridge financing for Westchester’s Ridge Hill, a regional mall in Yonkers, New York. This financing, of which $330,000,000 was drawn at closing, along with available cash was used to repay the $465,000,000 nonrecourse mortgage loan scheduled to mature in August 2014. The regional mall continues to experience a slower than anticipated lease-up period. As such, we monitor future estimated undiscounted cash flows in order to determine if the carrying value of the real estate ($863,691,000 at September 30, 2014) is recoverable over the remaining life of the asset. Additionally, if we were to enter into a joint venture or similar transaction, which would result in us granting joint control or losing control of the asset, we would be required to deconsolidate the asset. We currently view this core asset as a long-term hold but we continuously monitor the likelihood of sale or possible sale in calculating the estimated probability weighted cash flows. If we determine future estimated probability weighted undiscounted cash flows no longer exceed the carrying value of the asset then the asset would be recorded at its estimated fair value, resulting in an future impairment, which would likely be material.
As of September 30, 2014, we had $150,918,000 of nonrecourse mortgage financings with scheduled maturities during the year ending December 31, 2014, of which $7,507,000 represents regularly scheduled amortization payments. We are currently in negotiations to refinance and/or extend the remaining nonrecourse debt scheduled to mature during the year ended December 31, 2014. We cannot give assurance as to the ultimate result of these negotiations. As with all nonrecourse mortgages, if we are unable to negotiate an extension or otherwise refinance the mortgage, we could go into default and the lender could commence foreclosure proceedings on the single collateralized asset, which would likely result in a loss of the asset.
As of September 30, 2014, we had three nonrecourse mortgages greater than five percent of our total nonrecourse mortgage debt and notes payable. The mortgages, encumbering the New York Times office building, Barclay’s Center, and Westchester’s Ridge Hill, have outstanding balances of $640,000,000, $403,459,000 and $330,000,000, respectively, at September 30, 2014.
As of September 30, 2014, our share of nonrecourse mortgage debt and notes payable recorded on our unconsolidated subsidiaries amounted to $2,448,233,000, of which $25,830,000 ($6,907,000 represents scheduled principal payments) was scheduled to mature during the year ending December 31, 2014. Negotiations are ongoing on the remaining 2014 maturities, but we cannot give assurance we will obtain these financings on favorable terms or at all.

47

Financial Covenants
Our revolving credit facility contains certain restrictive financial covenants. A summary of the key financial covenants as defined in the agreement, all of which we are compliant with at September 30, 2014, follows:
 
Requirement
As of
 
Per Agreement
September 30, 2014
 
(dollars in thousands)
Credit Facility Financial Covenants
 
 
Debt Service Coverage Ratio
1.45x

1.72
x
Debt Yield Ratio
>9.25%

11.80
%
Cash Flow Coverage Ratio
3.00x

6.36
x
Total Development Ratio
<17%

7.18
%
Minimum Consolidated Shareholders’ Equity, as defined
$
2,320,175

$
3,755,092

Revolving Credit Facility
See Note C – Revolving Credit Facility in the Notes to Consolidated Financial Statements in Item 1 of this Form 10-Q for detailed information.
Convertible Senior Debt
See Note D – Convertible Senior Debt in the Notes to Consolidated Financial Statements in Item 1 of this Form 10-Q for detailed information.
Nonrecourse Debt Financings
We use taxable and tax-exempt nonrecourse debt for our real estate projects. Substantially all of our operating and development properties are separately encumbered with nonrecourse mortgage debt, which in some limited circumstances is supplemented by nonrecourse notes payable (collectively “nonrecourse debt”). For real estate projects financed with tax-exempt debt, we generally utilize variable-rate debt. For construction loans, we generally pursue variable-rate financings with maturities ranging from two to five years. For those real estate projects financed with taxable debt, we generally seek long-term, fixed-rate financing for those operating projects whose loans mature or are projected to open and achieve stabilized operations.
We are actively working to refinance and/or extend the maturities of the nonrecourse debt that is coming due in the next 24 months. During the nine months ended September 30, 2014, we completed the following financings:
Purpose of Financing
Amount
 
(in thousands)
Refinancing
$
474,000

Construction and development projects
123,050

Loan extensions
44,743

 
$
641,793


Cash Flows
Operating Activities
Net cash provided by operating activities was $161,229,000 and $134,722,000 for the nine months ended September 30, 2014 and 2013, respectively. The net increase in cash provided by operating activities of $26,507,000 is primarily the result of increased cash received from the operations of unconsolidated subsidiaries and decreased payments of accounts payable, accrued expenses and other liabilities offset by changes in operating assets between the comparable periods.

48

Investing Activities
Net cash provided by investing activities was $38,952,000 and $184,626,000 for the nine months ended September 30, 2014 and 2013, respectively, and consisted of the following:
 
Nine Months Ended September 30,
 
2014
2013
 
(in thousands)
Capital expenditures:
 
 
Construction and development costs:
 
 
Pacific Park Brooklyn (1) 
$
(36,234
)
$
(33,917
)
B2 BKLYN
(33,512
)
(24,537
)
The Yards - Twelve12, an apartment community in Washington, D.C.
(32,178
)
(26,790
)
Winchester Lofts, an apartment community in New Haven, Connecticut
(21,563
)
(1,006
)
2175 Market Street, an apartment community in San Francisco, California
(19,024
)
(4,349
)
The Yards - Arris
(16,382
)
(2,736
)
Aster Conservatory Green, an apartment community in Denver, Colorado
(13,279
)
(19,673
)
Barclays Center
(7,861
)
(44,665
)
Westchester’s Ridge Hill
(6,149
)
(19,599
)
Other
(74,445
)
(97,752
)
Total construction and development costs (2) 
(260,627
)
(275,024
)
Acquisitions:
 
 
Partner’s interest in 91 Sidney
(19,988
)
—

Building at Antelope Valley Mall in Palmdale, California
—

(8,514
)
Operating properties:
 
 
Commercial Segment
(12,211
)
(13,094
)
Residential Segment
(10,191
)
(14,592
)
Arena
(1,582
)
—

Other
(51
)
(1,280
)
Total operating properties
(24,035
)
(28,966
)
Tenant improvements:
 
 
Commercial Segment
(10,520
)
(32,891
)
Total capital expenditures
$
(315,170
)
$
(345,395
)
Payment of lease procurement costs (3) 
(7,212
)
(8,260
)
Decrease (increase) in notes receivable
10,580

(21,917
)
Decrease (increase) in restricted cash used for investing purposes:
 
 
Pacific Park Brooklyn (1) 
$
96,183

$
5,555

The Yards - Twelve12
30,085

23,059

Collateral released for interest rate swap on Consolidated-Carolina, an apartment community in Richmond, Virginia
4,265

—

Barclays Center
619

4,869

Collateral posted for a TRS on our Stapleton project in Denver, Colorado
(12,500
)
—

Uptown Apartments, an apartment community in Oakland, California
(9,522
)
(30,342
)
One MetroTech Center, an office building in Brooklyn, New York
(4,936
)
(11,793
)
Two MetroTech Center, an office building in Brooklyn, New York
(1,568
)
4,518

One Pierrepont Plaza, an office building in Brooklyn, New York
(114
)
2,710

Collateral released due to disposition of partial interests in seven regional retail malls
—

6,133

Avenue at Tower City Center, a specialty retail center in Cleveland, Ohio
—

5,969

Sheraton Station Square, a hotel in Pittsburgh, Pennsylvania
—

3,490

Other
3,653

5,988

Total decrease in restricted cash used for investing purposes
$
106,165

$
20,156

Proceeds from disposition of full or partial interest in rental properties or development project:
 
 
Disposition of partial interest in Pacific Park Brooklyn
$
203,923

$
—

Quartermaster Plaza
23,045

—

Mesa del Sol - 5600 University SE
4,247

—

Stapleton - 3055 Roslyn
4,197

—

Promenade Bolingbrook
1,342

—

Disposition of partial interests in seven regional retail malls
—

412,275

Higbee Building, an office building in Cleveland, Ohio
—

37,285

Millender Center, an apartment community in Detroit, Michigan
—

21,388

Sheraton Station Square, a hotel in Pittsburgh, Pennsylvania
—

16,318

Colorado Studios, an office building in Denver, Colorado
—

2,681

Other
154

6,568

Total proceeds from disposition of full or partial interest in rental properties or development project
$
236,908

$
496,515


49

Investing Activities (continued)
 
Nine Months Ended September 30,
 
2014
2013
 
(in thousands)
Change in investments in and advances to unconsolidated entities—(contributions to) or distributions from investment:
 
 
Acquisitions:
 
 
Partners' interests in East River Plaza, a specialty retail center, and 8 Spruce Street and DKLB BKLN, apartment communities, all located in the New York metropolitan area
$
(14,286
)
$
—

Macy’s building at Ballston Common Mall, a regional mall in Arlington, Virginia
—

(8,074
)
Dispositions:
 
 
Barrington Place, Legacy Arboretum and Legacy Crossroads, apartment communities in North Carolina
17,532

—

818 Mission Street and Bulletin Building, office buildings in San Francisco, California
11,733

—

Colonial Grand and Westwood Reserve, apartment communities in Tampa, Florida
10,612

—

Liberty Center and Westin Convention Center, an office building and hotel in Pittsburgh, Pennsylvania
—

26,677

Plaza at Robinson Town Center, a specialty retail center in Pittsburgh, Pennsylvania
—

8,500

Residential projects:
 
 
Pacific Park Brooklyn joint venture (1) 
(78,570
)
—

Glendora Gardens, a senior housing apartment community in Glendora, California, refinancing proceeds
6,755

—

Bayside Village, an apartment community in San Francisco, California, primarily refinancing proceeds
4,567

 
Commercial projects:
 
 
Regional retail mall joint venture, primarily to fund rehabilitation and expansion projects
(17,269
)
—

300 Massachusetts Ave, an office building under construction in Cambridge, Massachusetts
(2,488
)
(13,358
)
Victoria Gardens, a regional mall in Rancho Cucamonga, California, primarily refinancing proceeds
37,357

—

Atlantic Terminal, a specialty retail center in Brooklyn, New York, refinancing proceeds
14,751

—

40 Landsdowne Street, an office building in Cambridge, Massachusetts, primarily refinancing proceeds
9,279

—

Harlem Center, Atlantic Center, Court Street, Gun Hill Road and Bruckner Boulevard, five specialty retail centers in the New York metropolitan area, refinancing proceeds
—

31,482

Jackson Building, an office building in Cambridge, Massachusetts, primarily refinancing proceeds
—

4,898

Other
7,708

(6,598
)
Total change in investments in and advances to unconsolidated entities
7,681

43,527

Net cash provided by investing activities
$
38,952

$
184,626

(1)
Pacific Park Brooklyn changed from the full consolidation method of accounting to equity method during the six months ended June 30, 2014. Capital expenditures and changes in restricted cash represent activity prior to the change to equity method of accounting while changes in investments in and advances to unconsolidated entities represent activity subsequent to the change to equity method of accounting.
(2)
We capitalized internal costs related to projects under construction and development of $32,733 and $30,547, including compensation related costs of $26,559 and $25,129, for the nine months ended September 30, 2014 and 2013, respectively. Total capitalized internal costs represent approximately 10.4% and 8.8% of total capital expenditures for the nine months ended September 30, 2014 and 2013, respectively.
(3)
We capitalized internal costs related to leasing activities of $1,648 and $3,220, including compensation related costs of $1,385 and $2,569, for the nine months ended September 30, 2014 and 2013, respectively.
Financing Activities
Net cash used in financing activities was $(298,731,000) and $(191,794,000) for the nine months ended September 30, 2014 and 2013. As previously discussed, we have been executing on our strategy to deleverage the balance sheet. We raised a significant amount of cash during the nine months ended September 30, 2014 from the disposition of our partial interest in a development project, which was used to repay the outstanding revolving credit facility balance and to pay down nonrecourse mortgage debt.
We reported cash used in financing activities for the nine months ended September 30, 2013 primarily due to the paydown of nonrecourse mortgage debt and the redemption of our Senior Notes.

LEGAL PROCEEDINGS
We are involved in various claims and lawsuits incidental to our business, and management and legal counsel believe these claims and lawsuits will not have a material adverse effect on our consolidated financial statements.
NEW ACCOUNTING GUIDANCE
See the “New Accounting Guidance” section of Note A – Accounting Policies in the Notes to Consolidated Financial Statements in Item 1 of this Form 10-Q for detailed information.

50

INFORMATION RELATED TO FORWARD-LOOKING STATEMENTS
This Form 10-Q, together with other statements and information publicly disseminated by us, contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements reflect management’s current views with respect to financial results related to future events and are based on assumptions and expectations that may not be realized and are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events and actual results, financial or otherwise, may differ from the results discussed in the forward-looking statements. Risk factors discussed in Item 1A of our Form 10-KT for the 11 months ended December 31, 2013 and other factors that might cause differences, some of which could be material, include, but are not limited to, the impact of current lending and capital market conditions on our liquidity, ability to finance or refinance projects and repay our debt, the impact of the current economic environment on the ownership, development and management of our commercial real estate portfolio, general real estate investment and development risks, using modular construction as a new construction methodology and investing in a facility to produce modular units, vacancies in our properties, further downturns in the housing market, competition, illiquidity of real estate investments, bankruptcy or defaults of tenants, anchor store consolidations or closings, international activities, the impact of terrorist acts, risks of owning and operating an arena, risks associated with an investment in a professional sports team, our substantial debt leverage and the ability to obtain and service debt, the impact of restrictions imposed by our credit facility and senior debt, exposure to hedging agreements, the level and volatility of interest rates, the continued availability of tax-exempt government financing, the impact of credit rating downgrades, effects of uninsured or underinsured losses, effects of a downgrade or failure of our insurance carriers, environmental liabilities, conflicts of interest, risks associated with the sale of tax credits, risks associated with developing and managing properties in partnership with others, the ability to maintain effective internal controls, compliance with governmental regulations, increased legislative and regulatory scrutiny of the financial services industry, changes in federal, state or local tax laws, volatility in the market price of our publicly traded securities, inflation risks, litigation risks, cybersecurity risks and cyber incidents, as well as other risks listed from time to time in our reports filed with the Securities and Exchange Commission. We have no obligation to revise or update any forward-looking statements, other than imposed by law, as a result of future events or new information. Readers are cautioned not to place undue reliance on such forward-looking statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our market risk includes the inability to obtain construction loans, refinance existing construction loans into long-term fixed-rate nonrecourse financing, refinance existing nonrecourse financing at maturity, obtain renewals or replacement of credit enhancement devices, such as letters of credit, or otherwise obtain funds by selling real estate assets or by raising equity. We also have interest-rate exposure on our current variable-rate debt portfolio. During the construction period, we have historically used variable-rate debt to finance developmental projects. At September 30, 2014, our outstanding variable-rate debt, including borrowings under our revolving credit facility, consisted of $1,241,090,000 of taxable debt and $582,990,000 of tax-exempt debt. Upon opening and achieving stabilized operations, we have historically obtained long-term fixed-rate financing for our rental properties. If we are unable to obtain long-term fixed-rate financing, we would pursue extending maturities with existing lenders. Additionally, we are exposed to interest rate risk upon maturity of our long-term fixed-rate financings.
Interest Rate Exposure
At September 30, 2014, the composition of nonrecourse debt was as follows:
 
Operating
Properties
Development
Projects
Total
 
Total
Weighted
Average Rate
 
(dollars in thousands)
 
 
Fixed Rate
$
2,133,762

$
58,554

$
2,192,316

 
5.57
%
Variable Rate
 
 
 
 
 
Taxable
1,199,845

41,245

1,241,090

 
5.20
%
Tax-Exempt
520,057

62,933

582,990

 
1.48
%
 
$
3,853,664

$
162,732

$
4,016,396

 
4.86
%
Total gross commitment from lenders
$
357,790

 
 
 

51

To mitigate short-term variable interest rate risk, we have purchased interest rate hedges for our variable-rate debt as follows:
Taxable (Priced off of LIBOR Index)
 
Caps
 
Swaps
 
Notional
Average Base
 
Notional
Average Base
Period Covered
Amount
Rate
 
Amount
Rate
 
(dollars in thousands)
10/01/14 - 01/01/15
$
412,934

2.25%
 
$
870,995

4.18%
01/01/15 - 01/01/16
550,000

2.00%
 
669,154

5.38%
01/01/16 - 01/01/17
350,000

2.00%
 
669,154

5.38%
01/01/17 - 01/01/18
—

—%
 
669,154

5.38%
01/01/18 - 05/08/24
—

—%
 
29,072

2.77%
Tax-Exempt (Priced off of Securities Industry and Financial Markets Association (“SIFMA”) Index)
 
Caps
 
Notional
Average Base
Period Covered
Amount
Rate
 
(dollars in thousands)
10/01/14 - 01/01/15
$
169,705

5.68%
01/01/15 - 01/01/16
70,405

5.90%
01/01/16 - 01/01/17
70,405

5.90%
01/01/17 - 08/15/17
28,400

6.00%
The tax-exempt caps generally were purchased in conjunction with lender hedging requirements that require the borrower to protect against significant fluctuations in interest rates. Except for those requirements, we generally do not hedge tax-exempt debt due to its historically low interest rates.
Sensitivity Analysis to Changes in Interest Rates
Including the effect of the protection provided by the interest rate swaps, caps and long-term contracts in place as of September 30, 2014, a 100 basis point increase in taxable interest rates (including properties accounted for under the equity method, corporate debt and the effect of interest rate floors) would increase the annual pre-tax interest cost for the next 12 months of our variable-rate debt by approximately $5,998,000 at September 30, 2014. Although tax-exempt rates generally move in an amount smaller than corresponding changes in taxable interest rates, a 100 basis point increase in tax-exempt rates (including properties accounted for under the equity method) would increase the annual pre-tax interest cost for the next 12 months of our tax-exempt variable-rate debt by approximately $7,878,000 at September 30, 2014. This analysis includes a portion of our taxable and tax-exempt variable-rate debt related to construction loans for which the interest expense is capitalized.
We enter into total rate of return swaps (“TRS”) on various tax-exempt fixed-rate borrowings. The TRS convert borrowings from a fixed rate to a variable rate. In exchange for a fixed rate, the TRS requires the payment of a variable interest rate, generally equivalent to the SIFMA rate (0.04% at September 30, 2014) plus a spread. Additionally, we have guaranteed the fair value of the underlying borrowings. Fluctuation in the value of the TRS is offset by the fluctuation in the value of the underlying borrowings, resulting in minimal financial impact. At September 30, 2014, the aggregate notional amount of TRS that are designated as fair value hedging instruments is $358,755,000. The underlying TRS borrowings are subject to a fair value adjustment. In addition, we have TRS with a notional amount of $115,469,000 that is not designated as fair value hedging instruments, but is subject to interest rate risk.
We estimate the fair value of our hedging instruments based on interest rate market and bond pricing models. At September 30, 2014 and December 31, 2013, we recorded interest rate caps at fair value of $258,000 and $155,000, respectively, in other assets. We also recorded TRS with positive fair values of approximately $5,849,000 and $903,000 at September 30, 2014 and December 31, 2013, respectively, in other assets. At September 30, 2014 and December 31, 2013, we recorded interest rate swaps and TRS that had a negative fair value of approximately $106,689,000 and $123,107,000, respectively, in accounts payable, accrued expenses and other liabilities.

52

We estimate the fair value of our long-term debt instruments by market rates, if available, or by discounting future cash payments at interest rates that approximate the current market. Estimated fair value is based upon market prices of public debt, available industry financing data, current treasury rates and recent financing transactions. Based on these parameters, the table below contains the estimated fair value of our long-term debt at September 30, 2014.
 
Carrying Value
 
Fair Value
 
Fair Value
with 100 bp Decrease
in Market Rates
 
(in thousands)
Fixed
$
2,892,316

 
$
3,241,230

 
$
3,463,453

Variable
 
 
 
 
 
Taxable
1,241,090

 
1,240,544

 
1,242,927

Tax-Exempt
582,990

 
579,824

 
578,095

Total Variable
$
1,824,080

 
$
1,820,368

 
$
1,821,022

Total Long-Term Debt
$
4,716,396

 
$
5,061,598

 
$
5,284,475




53

Item 3. Quantitative and Qualitative Disclosures About Market Risk (continued)
September 30, 2014
 
Expected Maturity Date
 
 
 
 
 
Year Ending December 31,
 
 
 
 
Long-Term Debt
2014
 
2015
 
2016
 
2017
 
2018
 
Period
Thereafter
 
Total
Outstanding
 
Fair Market
Value
 
(dollars in thousands)
 
 
Fixed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-rate debt
$
13,361

 
$
300,417

 
$
68,625

 
$
148,954

 
$
170,847

 
$
1,490,112

 
$
2,192,316

 
$
2,465,935

Weighted average interest rate
3.62
%
 
6.41
%
 
5.61
%
 
5.86
%
 
4.75
%
 
5.48
%
 
5.57
%
 
 
Convertible senior debt (1) 
—

 
—

 
50,000

 
—

 
350,000

 
300,000

 
700,000

 
775,295

Weighted average interest rate
—
%
 
—
%
 
5.00
%
 
—
%
 
4.25
%
 
3.63
%
 
4.04
%
 
 
Total Fixed-Rate Debt
13,361

 
300,417

 
118,625

 
148,954

 
520,847

 
1,790,112

 
2,892,316

 
3,241,230

Variable:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Variable-rate debt
1,747

 
134,364

 
28,380

 
974,973

 
25,255

 
76,371

 
1,241,090

 
1,240,544

Weighted average interest rate (2) 
3.84
%
 
2.87
%
 
2.03
%
 
5.84
%
 
3.19
%
 
2.95
%
 
5.20
%
 
 
Tax-exempt
135,810

 
10

 
10

 
10

 
78,506

 
368,644

 
582,990

 
579,824

Weighted average interest rate (2) 
2.45
%
 
3.01
%
 
3.01
%
 
3.01
%
 
1.01
%
 
1.22
%
 
1.48
%
 
 
Revolving credit facility (1) 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Weighted average interest rate
—
%
 
—
%
 
—
%
 
—
%
 
—
%
 
—
%
 
—
%
 
 
Total Variable-Rate Debt
137,557

 
134,374

 
28,390

 
974,983

 
103,761

 
445,015

 
1,824,080

 
1,820,368

Total Long-Term Debt
$
150,918

 
$
434,791

 
$
147,015

 
$
1,123,937

 
$
624,608

 
$
2,235,127

 
$
4,716,396

 
$
5,061,598

Weighted average interest rate
2.57
%
 
5.32
%
 
4.71
%
 
5.84
%
 
3.94
%
 
4.44
%
 
4.74
%
 
 
(1)
Represents recourse debt.
(2)
Weighted average interest rate is based on current market rates as of September 30, 2014.


54

Item 4. Controls and Procedures
The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or furnishes under the Securities Exchange Act of 1934 (“Securities Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. As of the end of the period covered by this quarterly report, an evaluation of the effectiveness of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act, was carried out under the supervision and with the participation of the Company’s management, which includes the CEO and CFO. Based on that evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2014.
There have been no changes in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
In connection with the rules, the Company continues to review and document its disclosure controls and procedures, including the Company’s internal control over financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and ensuring that the Company’s systems evolve with the business.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings
The Company is involved in various claims and lawsuits incidental to its business, and management and legal counsel believe these claims and lawsuits will not have a material adverse effect on the Company’s consolidated financial statements.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) and (b) – Not applicable.
(c) – Repurchase of equity securities during the quarter.
 
Issuer Purchases of Equity Securities
Period
Total
Number of
Shares
Purchased
 
Average
Price Paid
Per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
 
Maximum Dollar Amount that May
Yet Be Purchased
Under the Plans
or Programs
Class A Common Stock
 
 
 
 
 
 
 
July 1 through July 31, 2014
 
 
 
 
 
 
 
Common Stock Repurchase Program (1) 
—

 
$
—

 
—

 
$
100,000,000

Employee Transactions (2) 
—

 
$
—

 
—

 
 
August 1 through August 31, 2014
 
 
 
 
 
 
 
Common Stock Repurchase Program (1) 
—

 
$
—

 
—

 
$
100,000,000

Employee Transactions (2) 
994

 
$
19.20

 
—

 
 
September 1 through September 30, 2014
 
 
 
 
 
 
 
Common Stock Repurchase Program (1) 
—

 
$
—

 
—

 
$
100,000,000

Employee Transactions (2) 
—

 
$
—

 
—

 
 
Total


 
 
 


 


Common Stock Repurchase Program (1) 
—

 
$
—

 
—

 
$
100,000,000

Employee Transactions (2) 
994

 
$
19.20

 
—

 
 
(1)
On December 20, 2012, our Board of Directors approved a $100,000,000 common stock repurchase program. The repurchase program authorizes us to repurchase shares of our Class A common stock and Class B common stock on the open market or otherwise in amounts and at such times and prices as our Chairman, Chief Executive Officer or Chief Financial Officer shall determine. The repurchase program has no set expiration date.
(2)
Class A common stock repurchased to satisfy the minimum tax withholding requirements relating to restricted stock vesting.



55

Item 6. Exhibits
Exhibit
Number
 
Description of Document
 
 
 
*31.1
-
Principal Executive Officer’s Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
*31.2
-
Principal Financial Officer’s Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
**32.1
-
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
*101
-
The following financial information from Forest City Enterprises, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets (unaudited); (ii) Consolidated Statements of Operations (unaudited); (iii) Consolidated Statements of Comprehensive Income (Loss) (unaudited); (iv) Consolidated Statements of Equity (unaudited); (v) Consolidated Statements of Cash Flows (unaudited); and (vi) Notes to Consolidated Financial Statements (unaudited).
*
Filed herewith.
**
Furnished herewith.


56

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
FOREST CITY ENTERPRISES, INC.
(Registrant)
 
 
 
 
Date:
November 3, 2014
 
/s/ ROBERT G. O’BRIEN
 
 
 
Name: Robert G. O’Brien
 
 
 
Title: Executive Vice President and
         Chief Financial Officer
 
 
 
 
Date:
November 3, 2014
 
/s/ CHARLES D. OBERT
 
 
 
Name: Charles D. Obert
 
 
 
Title: Senior Vice President, Corporate Controller and Chief Accounting Officer

57

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