Attached files
| file | filename |
|---|---|
| EX-23.1 - EXHIBIT 23.1 - FOREST CITY ENTERPRISES INC | ex23112312014form10kaamend2.htm |
| EX-32.1 - EXHIBIT 32.1 - FOREST CITY ENTERPRISES INC | ex32112312014form10kaamend2.htm |
| EX-31.1 - EXHIBIT 31.1 - FOREST CITY ENTERPRISES INC | ex31112312014form10kaamend2.htm |
| EX-31.2 - EXHIBIT 31.2 - FOREST CITY ENTERPRISES INC | ex31212312014form10kaamend2.htm |
| 10-K/A - 10-K/A - FOREST CITY ENTERPRISES INC | fce-1231201410kaamend2.htm |
Exhibit 99.1 | ||
FC 8 Spruce Mezzanine, LLC and Subsidiaries
Consolidated Financial Statements
For the year ended December 31, 2014, the period from February 1, 2013
to December 31, 2013, and the year ended January 31, 2013
With Independent Auditors' Report
FC 8 SPRUCE MEZZANINE, LLC AND SUBSIDIARIES
TABLE OF CONTENTS
Consolidated Financial Statements | Page | |
Independent Auditors' Report | 1 | |
Consolidated Balance Sheets | 2 | |
Consolidated Statements of Operations and Comprehensive Income (Loss) | 3 | |
Consolidated Statements of Members' Equity | 4 | |
Consolidated Statements of Cash Flows | 5 | |
Notes to Consolidated Financial Statements | 6-14 | |
___________________________________________________________________________________
INDEPENDENT AUDITORS' REPORT
To the Members of
FC 8 Spruce Mezzanine, LLC:
We have audited the related statements of operations and comprehensive income (loss), members’ equity and cash flows for the period from February 1, 2012 to January 31, 2013, and the related notes to consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America and for designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of the financial statements.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the related statements of operations and comprehensive income (loss), members’ equity and cash flows referred to above present fairly, in all material respects, the operations and cash flows of FC 8 Spruce Mezzanine, LLC for the period from February 1, 2012 to January 31, 2013, in accordance with accounting principles generally accepted in the United States of America.
Other Matters
The accompanying balance sheet of FC 8 Spruce Mezzanine, LLC as of December 31, 2014 and 2013, and the related statements of operations and comprehensive income (loss), members’ equity and cash flows for the year ended December 2014 and the period from February 1, 2013 to December 31, 2013 were not audited, reviewed, or compiled by us and, accordingly, we do not express an opinion or any other form of assurance on them.
/s/ Novogradac & Company LLP
Long Beach, California
April 30, 2013
249 East Ocean Boulevard, Suite 900 Long Beach, CA 90802 TELEPHONE (562) 432-9482 FACSIMILE (562) 432-9483 http://www.novoco.com
FC 8 Spruce Mezzanine, LLC and Subsidiaries
Consolidated Balance Sheets
December 31, 2014 | December 31, 2013 | ||||||||||||
(Unaudited) | (Unaudited) | ||||||||||||
Assets | |||||||||||||
Cash and equivalents | $ | 4,972,826 | $ | 2,568,525 | |||||||||
Investment in unconsolidated subsidiaries | 90,872,142 | 119,185,095 | |||||||||||
Total Assets | $ | 95,844,968 | $ | 121,753,620 | |||||||||
Members' Equity | |||||||||||||
Members' Equity | $ | 95,844,968 | $ | 121,753,620 | |||||||||
Total Liabilities and Members' Equity | $ | 95,844,968 | $ | 121,753,620 | |||||||||
The accompanying notes and independent auditors' report
are an integral part of these consolidated financial statements.
2
FC 8 Spruce Mezzanine, LLC and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income (Loss)
Period from | |||||||||
Year Ended | February 1, 2013 to | Year Ended | |||||||
December 31, 2014 | December 31, 2013 | January 31, 2013 | |||||||
(Unaudited) | (Unaudited) | (Audited) | |||||||
Revenues | |||||||||
Rental income | $ | — | $ | — | $ | 29,398,037 | |||
Other revenues | — | — | 1,190,718 | ||||||
Total Revenues | — | — | 30,588,755 | ||||||
Operating Expenses | |||||||||
Depreciation and amortization | — | — | 16,085,892 | ||||||
Operating and maintenance expenses | — | — | 5,029,392 | ||||||
Utilities expense | — | — | 2,270,943 | ||||||
Advertising | — | — | 977,521 | ||||||
Insurance | — | — | 926,238 | ||||||
Management fee | — | — | 693,877 | ||||||
Real estate taxes and other | 576,727 | 68,915 | 461,613 | ||||||
Total Operating Expenses | 576,727 | 68,915 | 26,445,476 | ||||||
Net gain on disposition of partial interest in FC Holding | — | — | 123,790,358 | ||||||
Interest expense | — | — | (12,178,510 | ) | |||||
Amortization of mortgage procurement costs | — | — | (780,557 | ) | |||||
Equity in loss from unconsolidated subsidiaries | (3,406,361 | ) | (590,036 | ) | (213,584 | ) | |||
(3,406,361 | ) | (590,036 | ) | 110,617,707 | |||||
Net Income (Loss) | (3,983,088 | ) | (658,951 | ) | 114,760,986 | ||||
Other Comprehensive Income: | |||||||||
Amortization of interest rate contract | 25,938 | 23,776 | 44,629 | ||||||
Total Other Comprehensive Income | 25,938 | 23,776 | 44,629 | ||||||
Total Comprehensive Income (Loss) | $ | (3,957,150 | ) | $ | (635,175 | ) | $ | 114,805,615 | |
The accompanying notes and independent auditors' report
are an integral part of these consolidated financial statements.
3
FC 8 Spruce Mezzanine, LLC and Subsidiaries
Consolidated Statements of Members’ Equity
Members' Equity | |||||||||
Balance at January 31, 2012 (Audited) | $ | 270,308,248 | |||||||
Contribution | 10,000,000 | ||||||||
Distributions | (266,066,303 | ) | |||||||
Net Income | 114,760,986 | ||||||||
Other Comprehensive Income | 44,629 | ||||||||
Balance at January 31, 2013 (Audited) | $ | 129,047,560 | |||||||
Distributions | (6,658,765 | ) | |||||||
Net Loss | (658,951 | ) | |||||||
Other Comprehensive Income | 23,776 | ||||||||
Balance at December 31, 2013 (Unaudited) | $ | 121,753,620 | |||||||
Distributions | (21,951,502 | ) | |||||||
Net Loss | (3,983,088 | ) | |||||||
Other Comprehensive Income | 25,938 | ||||||||
Balance at December 31, 2014 (Unaudited) | $ | 95,844,968 | |||||||
The accompanying notes and independent auditors' report
are an integral part of these consolidated financial statements.
4
FC 8 Spruce Mezzanine, LLC and Subsidiaries
Consolidated Statements of Cash Flows
Period from | |||||||||||||
Year Ended | February 1, 2013 to | Year Ended | |||||||||||
December 31, 2014 | December 31, 2013 | January 31, 2013 | |||||||||||
(Unaudited) | (Unaudited) | (Audited) | |||||||||||
Cash Flows from Operating Activities | |||||||||||||
Net Income (Loss) | $ | (3,983,088 | ) | $ | (658,951 | ) | $ | 114,760,986 | |||||
Adjustments to reconcile net income (loss) to net cash | |||||||||||||
provided by operating activities: | |||||||||||||
Depreciation and amortization | — | — | 16,085,892 | ||||||||||
Net gain on disposition of partial interest in FC Holdings | — | — | (123,790,358 | ) | |||||||||
Amortization of mortgage procurement costs | — | — | 780,557 | ||||||||||
Equity in loss from unconsolidated subsidiaries | 3,406,361 | 590,036 | 213,584 | ||||||||||
Cash distributions from unconsolidated subsidiaries | 24,932,530 | 9,296,205 | 4,900,000 | ||||||||||
Changes in operating assets and liabilities: | |||||||||||||
Increase in accounts receivable, net | — | — | (950,380 | ) | |||||||||
Decrease in prepaid expenses and other assets | — | — | 1,861,806 | ||||||||||
Decrease in accounts payable and accrued expenses | — | — | (720,459 | ) | |||||||||
Decrease in accounts payable, affiliates | — | — | (210,334 | ) | |||||||||
Increase in security deposits payables | — | — | 1,517,683 | ||||||||||
Net cash provided by operating activities | 24,355,803 | 9,227,290 | 14,448,977 | ||||||||||
Cash Flows from Investing Activities | |||||||||||||
Net proceeds from disposition of partial interest in FC Holdings | — | — | 248,019,207 | ||||||||||
Capital expenditures | — | — | (31,145,470 | ) | |||||||||
Decrease in restricted cash | — | — | 17,460,607 | ||||||||||
Payment of lease procurement costs | — | — | (2,607,603 | ) | |||||||||
Decrease in cash and equivalents from deconsolidation of FC Holdings | — | — | (2,881,414 | ) | |||||||||
Net cash provided by investing activities | — | — | 228,845,327 | ||||||||||
Cash Flows from Financing Activities | |||||||||||||
Contributions from members | — | — | 10,000,000 | ||||||||||
Distributions to members | (21,951,502 | ) | (6,658,765 | ) | (266,066,303 | ) | |||||||
Net cash used in financing activities | (21,951,502 | ) | (6,658,765 | ) | (256,066,303 | ) | |||||||
Net increase (decrease) in cash and equivalents | 2,404,301 | 2,568,525 | (12,771,999 | ) | |||||||||
Cash and equivalents at beginning of period | 2,568,525 | — | 12,771,999 | ||||||||||
Cash and equivalents at end of period | $ | 4,972,826 | $ | 2,568,525 | $ | — | |||||||
Supplemental Disclosure of Cash and Non-cash Activities: | |||||||||||||
Cash paid for interest, net of capitalized interest | $ | — | $ | — | $ | 13,268,273 | |||||||
Capital expenditures included in construction payables | $ | — | $ | — | $ | 7,559,755 | |||||||
Capital expenditures included in accounts payable, affiliates | $ | — | $ | — | $ | 512,036 | |||||||
The accompanying notes and independent auditors' report
are an integral part of these consolidated financial statements.
5
FC 8 Spruce Mezzanine, LLC and Subsidiaries
Notes to Consolidated Financial Statements
A. Organization and Summary of Significant Accounting Policies
Organization
FC 8 Spruce Mezzanine, LLC (“FC Mezzanine”), a Delaware limited liability company, was formed for the purpose of acquiring a 100% membership interest in FC 8 Spruce Holdings, LLC (“FC Holdings”), which wholly owns FC 8 Spruce Street Residential, LLC (“FC Residential”). FC Residential, a New York limited liability company, was formed for the purpose of owning and operating the Rental and Retail Units (the “Units”) of the Spruce Street Condominium located on 8 Spruce Street in Manhattan, New York.
On December 20, 2012 (the “Deconsolidation Date”), FC Mezzanine sold a 49.00% interest in FC Holdings to 8 Spruce Street GA Investor LLC (the “GA Investor”), a Delaware limited liability company for cash consideration of $250,390,000 and recognized a net gain on disposition of partial interest in FC Holdings of $123,790,358, under accounting guidance related to real estate sales, in the accompanying Consolidated Statements of Operations. The proceeds from the sale net of closing costs totaled $248,019,207. FC Mezzanine retains a 51.00% interest in FC Holdings.
The previous owner of the Units, prior to formation of FC Residential, was FC Beekman Associates, LLC (“FC Beekman”), a New York limited liability company. FC Beekman was formed for the purpose of owning, developing and operating the Units and was wholly-owned by FC Beekman Mezzanine, LLC (“Beekman Mezzanine”), a Delaware limited liability company. On December 17, 2012 (the “Transfer Date”), FC Beekman transferred its deed in the Units to FC Residential (the “Transaction”). Concurrent with the Transaction, FC Mezzanine contributed its 100% membership interest in FC Residential to FC Holdings and was its sole member. Prior to the Transfer Date, Beekman Mezzanine and its wholly owned subsidiary are referred to as the “Company”. Concurrent with the Transaction, FC Mezzanine and its subsidiaries are referred to as the “Company”. Profits and losses are allocated and contributions and distributions are made in accordance with each of the respective Company’s operating agreements.
The Spruce Street Condominium (or “Project”) is a 76-story mixed-use building containing approximately 1,110,800 gross square feet and approximately 675,500 rentable square feet (“RSF”). It is comprised of the following condominium units: (i) 899 apartments, 4 of which are penthouse apartments (the “Rental Units”), and approximately 1,300 RSF of ground level retail space (the “Retail Units”); (ii) an ambulatory care facility located on the 5th floor, together with below-grade parking of approximately 175 spaces (the “Hospital Units”); and (iii) a pre-kindergarten through eighth grade New York City public school located on floors one through four (the “School Units”). The Hospital Units and the School Units are owned by NYU Downtown Hospital and New York City Department of Education (the “School”), respectively. The Hospital Units were constructed as part of the consideration for the purchase of the land. The School reimbursed the Company up to an agreed upon amount for costs incurred in constructing the School Units.
6
FC 8 Spruce Mezzanine, LLC and Subsidiaries
Notes to Consolidated Financial Statements
A. Organization and Summary of Significant Accounting Policies
Change in Year-End
The Company changed its year-end to December 31 from January 31, effective December 31, 2013 (the “Year-end change”). As a result, the Company is presenting an 11 month period ending December 31, 2013 as its transition period. The years 2014, 2013 and 2012 refer to the calendar year ended December 31, 2014, the 11 month period from February 1, 2013 to December 31, 2013 and the fiscal year ended January 31, 2013, respectively.
Significant Subsidiary
The Company is a 26% owned equity method investment of Forest City Enterprises, Inc. (“FCE”), a publicly traded company. The Company was deemed to be a significant subsidiary of FCE for FCE’s fiscal year ended January 31, 2013 but not for the 11 month period from February 1, 2013 through December 31, 2013 or the year ended December 31, 2014. Therefore, audited consolidated financial statements for the Company are required to be filed with the Securities and Exchange Commission in accordance with Rule 3-09 of Regulation S-X as of and for the fiscal year ended January 31, 2013. The consolidated financial statements as of December 31, 2014 and the 11 month period from February 1, 2013 to December 31, 2013 are unaudited.
Basis of Presentation
FC Mezzanine prepares its financial statements on the accrual basis of accounting consistent with accounting principles generally accepted in the United States of America (“GAAP”).
In accordance with accounting guidance for consolidation, prior to the Deconsolidation Date, the accompanying financial statements present the consolidated results of the Company. On the Deconsolidation Date in accordance with the voting model, FC Mezzanine commenced accounting for its investments in FC Holdings in accordance with the equity method of accounting (the “Deconsolidation”).
Use of Estimates
The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Rental Income
The Company's primary source of income is from leasing residential apartments, which are leased for terms of 12 months to 24 months. Certain leases provide for rent abatement periods of one to two months. Revenue is recognized on a straight-line basis over the related lease terms.
Cash and Equivalents
The Company considers all cash balances on deposit with financial institutions and highly liquid investments with a maturity of three months or less at the date of acquisition to be cash equivalents.
7
FC 8 Spruce Mezzanine, LLC and Subsidiaries
Notes to Consolidated Financial Statements
A. Organization and Summary of Significant Accounting Policies
Concentration of Credit Risk
The Company maintains cash deposits with major financial institutions which from time to time may exceed federally insured limits. The Company periodically assesses the financial condition of the institutions and believes that the risk of any loss is minimal.
Investment in Unconsolidated Subsidiaries
The Company accounts for its investments in unconsolidated subsidiaries using the equity method of accounting whereby the cost of an investment is adjusted for the Company’s share of income or loss from the date of acquisition, increased for equity contributions made and reduced by distributions received. The income or loss for unconsolidated subsidiaries is allocated in accordance with the provisions of the applicable operating agreements, which may differ from the ownership interest held by each investor.
Impairment of Unconsolidated Subsidiaries
The Company reviews its unconsolidated subsidiaries for other-than-temporary impairments whenever events or changes indicate that its carrying value in the investment may be in excess of fair value. A loss in value of an equity method investment which is other-than-temporary is recognized as an impairment of equity method investment. Determining fair value of a real estate investment and whether or not a loss is other-than-temporary involves significant judgments and estimates. The Company did not record any impairment of unconsolidated subsidiaries for the periods presented.
Income Taxes
The Company is a limited liability company. No provision or benefit for federal, state and local income taxes has been reflected in the consolidated financial statements of the Company since such income taxes, if any, are the responsibility of the individual members.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to report information regarding its exposure to various tax positions taken by the Company. Management has determined whether any tax positions have met the recognition threshold and has measured the Company's exposure to those tax positions. Management believes that the Company has adequately addressed all relevant tax positions and that there are no unrecorded tax liabilities. Federal and state tax authorities generally have the right to examine and audit the previous three years of tax returns filed. No interest or penalties from federal or state tax authorities were recorded in the accompanying financial statements.
Subsequent Events Review
The Company has evaluated events and transactions that occurred between January 31, 2013 and the date of the Report of Independent Auditors, which is the date the consolidated financial statements were available to be issued. There were no significant subsequent events.
8
FC 8 Spruce Mezzanine, LLC and Subsidiaries
Notes to Consolidated Financial Statements
B. Deconsolidation (unaudited)
Deconsolidation of FC Holdings
The following table represents the consolidated balance sheet of FC Holdings immediately prior to the Deconsolidation Date followed by the significant accounting policies of certain balance sheet accounts of FC Holdings and the Company’s accounting for derivative instruments:
December 19, 2012 | ||||||||
(Unaudited) | ||||||||
Net real estate | $ | 752,280,928 | ||||||
Cash and equivalents | 2,881,414 | |||||||
Restricted cash | 28,714,293 | |||||||
Accounts receivable, net | 1,118,254 | |||||||
Prepaid expenses and other assets | 990,285 | |||||||
Mortgage procurement costs, net | 13,932,809 | |||||||
Lease procurement costs, net | 2,073,956 | |||||||
Total Assets | $ | 801,991,939 | ||||||
Mortgage loan payable | $ | 539,000,000 | ||||||
Construction payables | 15,512,975 | |||||||
Accounts payable and accrued expenses | 1,015,412 | |||||||
Accounts payable, affiliates | 522,266 | |||||||
Security deposits | 3,866,699 | |||||||
Total Liabilities | 559,917,352 | |||||||
Members' Equity | 242,074,587 | |||||||
Total Liabilities and Members' Equity | $ | 801,991,939 | ||||||
Real Estate
The Company's capitalization policy follows the accounting guidance on capitalization of interest cost and accounting for costs and initial rental operations of real estate properties. Determination of when a development project is substantially complete and capitalization must cease involves a degree of judgment. The Company ceases capitalization on the portion substantially completed and occupied or held available for occupancy and capitalizes only those costs associated with the portion under construction. Upon receipt of certificates of occupancy from the City of New York, the Units are deemed substantially complete. The initial apartments became available in March 2011. As of August 2012, the Project was deemed 100% complete.
Real estate is recorded at cost. Depreciation of property is calculated using the straight-line method over the estimated useful lives of the assets which range from 5 to 50 years. The cost of maintenance and repairs is charged to expense as incurred and major improvements are capitalized.
The Company reviews its long-lived assets to determine if its carrying costs will be recovered from future undiscounted cash flows whenever events or changes indicate that the recoverability of long-lived assets may not be supported by current assumptions. In cases where the Company does not expect to recover its carrying costs, an impairment loss is recorded in accordance with accounting guidance on the impairment of long-lived assets. Significant estimates are made in
9
FC 8 Spruce Mezzanine, LLC and Subsidiaries
Notes to Consolidated Financial Statements
the determination of future undiscounted cash flows. The Company did not record any impairments for the periods presented.
B. Deconsolidation (unaudited)
Restricted Cash
Restricted cash consists of cash held in escrow as required by the Lender and tenant security deposits as required by tenant leases. Escrow funds are released upon certain conditions being met.
Allowance for Doubtful Accounts
Tenant receivables are periodically evaluated for collectability based on the tenants' past history, their current status and financial condition.
Deferred Costs
Mortgage procurement costs are deferred when incurred and amortized over the term of the related financing. Credit enhancement procurement costs are deferred and amortized over the term of the enhancement. Lease procurement costs are deferred when incurred and amortized on a straight-line basis over the term of the related lease. Lease procurement costs related to leases of one year or less are expensed as incurred.
Fair Value of Financial Instruments
Management estimates the fair value of its debt instruments by discounting future cash payments at interest rates that approximates the current market. The estimated fair value is based upon market prices of public debt, available industry financing data, current treasury rates, recent financing transactions and other factors.
Real Estate Tax Abatement
The Project has been granted a phased abatement of real estate taxes for a twenty year period after construction in accordance with Section 421-a of the New York State Real Property Tax Law. To receive this abatement, all Rental Units in the Project will be subject to the New York City Rent Stabilization Law during the abatement period. The Law restricts the percentage increases in rent charged on new and renewed leases. It also restricts the lease term to be no longer than two years.
Derivative Instruments and Hedging Activities
The Company maintains an overall interest rate risk-management strategy that incorporates the use of derivative instruments to minimize unplanned fluctuations in cash flows and earnings that may be caused by interest rate volatility. The principal risk to the Company through its interest rate hedging strategy is the potential inability of the financial institutions from which the interest rate protection was purchased to cover all of its obligations. To mitigate this exposure, the Company purchases its interest rate protection from either the institution that holds the debt or from institutions with a minimum A- credit rating. The Company does not enter into derivative financial instrument contracts for trading or speculative purposes.
As required by accounting guidance for derivative instruments and hedging activities, all derivatives are recognized on the Consolidated Balance Sheets at their fair value. On the date that the Company enters into a derivative contract, it designates the derivative as either a hedge of a forecasted
10
FC 8 Spruce Mezzanine, LLC and Subsidiaries
Notes to Consolidated Financial Statements
B. Deconsolidation (unaudited)
transaction or the variability of cash flows that are to be received or paid in connection with a recognized asset or liability (“a cash flow hedge”). Changes in the fair value of a derivative that is designated and qualifies as a cash flow hedge, to the extent that the hedge is highly effective, are recorded in other comprehensive income (loss) until earnings are affected by the variability of cash flows of the hedged transaction. Any hedge ineffectiveness (which represents the amount by which the changes in fair value of the derivative exceed the variability in the cash flows of the forecasted transaction) is recorded in current-period earnings as interest expense in the accompanying Consolidated Statements of Operations.
The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management strategy for undertaking hedging transactions. The Company formally assesses (both at the hedge’s inception and on an ongoing basis) whether the derivatives used in hedging transactions were highly effective in offsetting changes in the cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods.
The Company discontinues hedge accounting prospectively when; (1) it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item; (2) the derivative expires or is sold, terminated, or exercised; (3) it is no longer probable that the forecasted transaction will occur; or (4) management determines that designating the derivative as a hedging instrument is no longer appropriate. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company records the derivative at its fair value on the Consolidated Balance Sheets, recognizing changes in the fair value in current-period earnings as interest expense in the accompanying Consolidated Statements of Operations.
FC Beekman purchased a London Interbank Offered Rate (“LIBOR”) based interest rate cap on March 26, 2008 for $3,698,000 to reduce its exposure to variability in expected future cash outflows attributable to increases in interest rates on its variable rate debt. The cap has a notional value of $476,100,000, an effective date of April 1, 2011 and a maturity date of April 1, 2013. At the time of purchase, the cap qualified and was designated as a cash flow hedge. During 2011, due to the pay down of the Bonds, the cap no longer qualified to receive hedge accounting and the Company reclassified other comprehensive income (“OCI”) in the amount of $1,071,077 as an increase to interest expense representing a missed forecasted future transaction. After the reclassification, the remaining balance of OCI related to the interest rate cap during the time it was designated as a cash flow hedge which was during the development phase of the property. In accordance with accounting guidance on derivatives and hedging activities, the Company is amortizing the remaining OCI on a straight-line basis over a period of 50 years.
On the Deconsolidation Date, the Company wrote off 49.00% of the accumulated OCI balance to members’ equity. As of December 31, 2014 and December 31, 2013, the balance of accumulated OCI was $1,201,801 and $1,227,739, respectively. The Company expects that within the next twelve months it will reclassify amounts recorded in accumulated other comprehensive loss as an increase in FC Mezzanine’s share of depreciation expense of approximately $26,000.
11
FC 8 Spruce Mezzanine, LLC and Subsidiaries
Notes to Consolidated Financial Statements
B. Deconsolidation (unaudited)
The following table presents the impact of losses related to the interest rate cap designated as a cash flow hedge included in the accompanying Consolidated Statements of Operations and within members’ equity on the Consolidated Balance Sheets:
On Accompanying Consolidated Statements of Operations | On Accompanying Consolidated Balance Sheets | |||||||||||||||
Depreciation and amortization | Interest Expense | Equity in loss from unconsolidated subsidiaries | Prepaid expenses and other assets | Accumulated other comprehensive income (loss) | ||||||||||||
Balance at January 31, 2012 (unaudited) | $ | 38,144 | $ | 1,155,038 | $ | — | $ | 8 | $ | (2,504,810 | ) | |||||
Depreciation expense | 38,144 | — | — | — | 38,144 | |||||||||||
Deconsolidation event | — | — | — | (8 | ) | 1,208,666 | ||||||||||
FC Mezzanine's share of depreciation expense | — | — | 6,485 | — | 6,485 | |||||||||||
Balance at January 31, 2013 (audited) | 38,144 | — | 6,485 | — | (1,251,515 | ) | ||||||||||
FC Mezzanine's share of depreciation expense | — | 23,776 | — | 23,776 | ||||||||||||
Balance at December 31, 2013 (unaudited) | $ | — | $ | — | $ | 23,776 | $ | — | $ | (1,227,739 | ) | |||||
FC Mezzanine's share of depreciation expense | — | 25,938 | — | 25,938 | ||||||||||||
Balance at December 31, 2014 (unaudited) | $ | — | $ | — | $ | 25,938 | $ | — | $ | (1,201,801 | ) | |||||
Mortgage Loan Payable
The Company obtained financing for the Project from the New York City Housing Development Corporation (“HDC”). On May 28, 2008, HDC issued $203,900,000 principal amount of 2008 Series A Revenue Bonds. On March 4, 2009, HDC issued $158,700,000 principal amount of 2009 Series A-1 Revenue Bonds and $79,350,000 principal amount of 2009 Series A-2 Revenue Bonds. On May 12, 2010, HDC issued $98,050,000 principal amount of 2010 Series A-1 Revenue Bonds and $95,000,000 principal amount of 2010 Series A-2 Revenue Bonds. On July 1, 2011, the Company retired $96,000,000 of the Bonds. The Bonds were scheduled to mature on March 1, 2048 and were refinanced on November 13, 2014.
C. Equity Method Investment
Effective December 20, 2012, FC Mezzanine accounts for its interest in FC Holdings under the equity method of accounting. At December 31, 2014 and 2013, FC Mezzanine’s investment basis of $90,872,142 and $119,185,095, respectively, represents its 51% interest in FC Holdings.
12
FC 8 Spruce Mezzanine, LLC and Subsidiaries
Notes to Consolidated Financial Statements
C. Equity Method Investment
Below is a reconciliation between the Company’s carrying value and its members’ equity in FC Holdings’ balance sheet at December 31, 2014 and 2013:
December 31, 2014 | December 31, 2013 | |||||||
(Unaudited) | (Unaudited) | |||||||
Investment in FC Holdings | $ | 90,872,142 | $ | 119,185,095 | ||||
Basis difference(1) | (140,145,162 | ) | (142,339,776 | ) | ||||
FC Mezzanine Equity in FC Holdings | $ | (49,273,020 | ) | $ | (23,154,681 | ) | ||
(1) | The basis difference is primarily caused by the gain recognized on the sale of partial interest in FC Holdings and certain costs capitalized at the FC Mezzanine level. | |||||||
Summarized balance sheet information for FC Holdings as of December 31, 2014 and 2013 is as follows:
December 31, 2014 | December 31, 2013 | |||||||||||
(Unaudited) | (Unaudited) | |||||||||||
Net real estate | $ | 715,641,945 | $ | 730,729,362 | ||||||||
Cash and equivalents | 4,258,919 | 2,654,690 | ||||||||||
Restricted cash | 5,006,724 | 23,454,273 | ||||||||||
Accounts receivable, net | 1,355,533 | 1,111,667 | ||||||||||
Accounts receivable, affiliate | 178,820 | — | ||||||||||
Prepaid expenses and other assets | 864,284 | 2,498,041 | ||||||||||
Mortgage procurement costs, net | 8,643,835 | 13,048,407 | ||||||||||
Lease procurement costs, net | 380,266 | 987,323 | ||||||||||
Total Assets | $ | 736,330,326 | $ | 774,483,763 | ||||||||
Mortgage loan payable | $ | 550,000,000 | $ | 539,000,000 | ||||||||
Construction payables | — | 3,291,247 | ||||||||||
Accounts payable and accrued expenses | 3,070,803 | 1,308,645 | ||||||||||
Accounts payable, affiliates | — | 990,028 | ||||||||||
Security deposits | 3,524,286 | 3,807,465 | ||||||||||
Total Liabilities | 556,595,089 | 548,397,385 | ||||||||||
GA Investor equity | 229,008,257 | 249,241,059 | ||||||||||
FC Mezzanine equity | (49,273,020 | ) | (23,154,681 | ) | ||||||||
Total Members' Equity | 179,735,237 | 226,086,378 | ||||||||||
Total Liabilities and Members' Equity | $ | 736,330,326 | $ | 774,483,763 | ||||||||
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FC 8 Spruce Mezzanine, LLC and Subsidiaries
Notes to Consolidated Financial Statements
C. Equity Method Investment
Summarized operating information, which represents 100% of the operations of FC Holdings for the year ended December 31, 2014 and the 11 month period from February 1, 2013 to December 31, 2013, is as follows:
For the period | |||||||||||||
For the year ended | February 1, 2013 | ||||||||||||
December 31, 2014 | to December 31, 2013 | ||||||||||||
(Unaudited) | (Unaudited) | ||||||||||||
Revenues | $ | 54,212,016 | $ | 43,509,111 | |||||||||
Depreciation and amortization | (18,385,030 | ) | (17,172,297 | ) | |||||||||
Operating expenses | (13,143,536 | ) | (13,800,383 | ) | |||||||||
Interest expense | (29,022,794 | ) | (13,353,569 | ) | |||||||||
Net loss | $ | (6,339,344 | ) | $ | (817,138 | ) | |||||||
FC Mezzanine's portion of net loss | $ | (3,233,065 | ) | $ | (416,740 | ) | |||||||
FC Mezzanine depreciation expense | (173,296 | ) | (173,296 | ) | |||||||||
Equity in loss from unconsolidated subsidiaries | $ | (3,406,361 | ) | $ | (590,036 | ) | |||||||
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