333 South Hope Co. LLC
Financial Statements as of March 31, 2013 and December 31,
2012 and for the three months ended
March 31, 2013 and 2012
Index to Financial Statements
| | Page Number |
| | |
| Financial Statements | |
| | |
| Balance Sheets (unaudited) as of March 31, 2013 and December 31, 2012 | 1 |
| | |
| Statements of Operations (unaudited) for the three months ended March 31, 2013 and 2012 | 2 |
| | |
| Statements of Changes in Member’s Equity (unaudited) for the three months ended March 31, 2013 and 2012 | 3 |
| | |
| Statements of Cash Flows (unaudited) for the three months ended March 31, 2013 and 2012 | 4 |
| | |
| Notes to Financial Statements (unaudited) | 5-11 |
| 333 South Hope Co. LLC |
| Balance Sheets (unaudited) |
| |
| | | March 31, | | | December 31, | |
| | | 2013 | | | 2012 | |
| Assets | | | | | | | | |
| Real Estate at cost: | | | | | | | | |
| Land | | $ | 54,163,337 | | | $ | 54,163,337 | |
| Building and improvements | | | 345,239,982 | | | | 345,186,464 | |
| Tenant improvements | | | 41,759,739 | | | | 41,427,532 | |
| | | | 441,163,058 | | | | 440,777,333 | |
| Less accumulated depreciation | | | (55,029,392 | ) | | | (52,478,832 | ) |
| Real Estate, net | | | 386,133,666 | | | | 388,298,501 | |
| Cash and cash equivalents | | | 672,258 | | | | 3,819,759 | |
| Due from affiliates | | | 1,922,947 | | | | 968,306 | |
| Deferred rent receivable | | | 22,864,768 | | | | 966,270 | |
| Accounts receivable | | | 860,956 | | | | 20,154,510 | |
| Intangible assets net of accumulated amortization of $16,525,115 and $15,833,546 | | | 16,295,509 | | | | 16,987,080 | |
| Deferred charges net of accumation amortization of $9,436,856 and $8,827,802 | | | 16,514,717 | | | | 16,009,794 | |
| Prepaid and other assets net of accumulated amortization of $1,024,536 and $863,114 | | | 9,259,582 | | | | 8,867,511 | |
| | | $ | 454,524,403 | | | $ | 456,071,731 | |
| | | | | | | | | |
| Liabilities and Member's Equity | | | | | | | | |
| Mortgage note payable | | $ | 217,060,193 | | | $ | 218,063,451 | |
| Accounts payable, accruals and other liabilities | | | 14,593,940 | | | | 13,417,189 | |
| Deferred revenue | | | 11,613 | | | | 11,991 | |
| Intangible liabilities net of accumulated amortization of $8,245,512 and$7,918,005 | | | 5,766,127 | | | | 6,093,634 | |
| Total Liabilities | | | 237,431,873 | | | | 237,586,265 | |
| Member's equity | | | 217,092,530 | | | | 218,485,466 | |
| | | $ | 454,524,403 | | | $ | 456,071,731 | |
See notes to financial statements (unaudited).
| 333 South Hope Co. LLC |
| Statements of Operations (unaudited) |
| |
| | | Three months ended | |
| | | March 31, | | | March 31, | |
| | | 2013 | | | 2012 | |
| | | | | | | |
| Revenue | | | | | | | | |
| Rental income | | $ | 7,766,631 | | | $ | 8,222,653 | |
| Operating expense recoveries | | | 4,276,114 | | | | 4,490,522 | |
| Parking income | | | 2,006,194 | | | | 1,704,237 | |
| Other income | | | 585,947 | | | | 335,772 | |
| Total revenue | | | 14,634,886 | | | | 14,753,184 | |
| | | | | | | | | |
| Expenses | | | | | | | | |
| Real estate taxes | | | 1,330,359 | | | | 1,320,144 | |
| Cleaning | | | 576,170 | | | | 567,946 | |
| Utilities | | | 897,175 | | | | 498,832 | |
| Repairs and maintenance | | | 925,193 | | | | 772,100 | |
| Elevators | | | 169,908 | | | | 163,378 | |
| Security and fire | | | 453,364 | | | | 485,192 | |
| Building management | | | 380,249 | | | | 366,947 | |
| Insurance | | | 815,162 | | | | 781,558 | |
| Parking and garage | | | 189,678 | | | | 172,151 | |
| Management fees | | | 376,844 | | | | 446,755 | |
| Depreciation and amortization | | | 3,840,996 | | | | 4,188,391 | |
| Other | | | 155,769 | | | | 79,376 | |
| Total expenses | | | 10,110,867 | | | | 9,842,770 | |
| Operating income | | | 4,524,019 | | | | 4,910,414 | |
| | | | | | | | | |
| Interest income | | | - | | | | 127 | |
| Interest expense | | | (3,028,582 | ) | | | (3,114,708 | ) |
| Net Income | | $ | 1,495,437 | | | $ | 1,795,833 | |
See notes to financial statements (unaudited).
| 333 South Hope Co. LLC |
| Statements of Changes in Member's Equity (unaudited) |
| |
| | | Three months ended | |
| | | March 31, | | | March 31, | |
| | | 2013 | | | 2012 | |
| | | | | | | |
| Total Member's equity, beginning of period | | $ | 218,485,466 | | | $ | 218,698,989 | |
| Distributions to Member | | | (2,888,373 | ) | | | (2,180,298 | ) |
| Net income | | | 1,495,437 | | | | 1,795,833 | |
| Total Member's equity, end of period | | $ | 217,092,530 | | | $ | 218,314,524 | |
See notes to financial statements (unaudited).
| 333 South Hope Co. LLC |
| Statements of Cash Flows (unaudited) |
| |
| | | Three months ended | |
| | | March 31, | | | March 31, | |
| | | 2013 | | | 2012 | |
| | | | | | | |
| Cash Flows Operating activities: | | | | | | | | |
| Net income | | $ | 1,495,437 | | | $ | 1,795,833 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
| Depreciation and amortization | | | 3,840,996 | | | | 4,188,391 | |
| Amortization of debt discount | | | 130,272 | | | | 127,264 | |
| Amortization of tenant inducements | | | 161,422 | | | | 57,539 | |
| Amortization of value of above/below market leases | | | (317,319 | ) | | | (339,253 | ) |
| Deferred rent | | | (2,710,258 | ) | | | (753,459 | ) |
| Bad debt expense | | | | | | | | |
| | | | | | | | | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Deferred leasing costs | | | (1,113,976 | ) | | | (437,926 | ) |
| Due from affiliates | | | (954,641 | ) | | | (1,468,525 | ) |
| Accounts receivable | | | 105,313 | | | | 76,641 | |
| Prepaid and other assets | | | (453,493 | ) | | | (944,885 | ) |
| Tenant Inducements | | | (100,000 | ) | | | - | |
| Lease commission | | | | | | | - | |
| Accounts payable, accruals and other liabilities | | | 1,435,629 | | | | (1,175,296 | ) |
| Deferred revenue | | | (378 | ) | | | (56,670 | ) |
| | | | | | | | | |
| Net cash provided by operating activities | | | 1,519,004 | | | | 1,069,654 | |
| | | | | | | | | |
| Investing activities: | | | | | | | | |
| | | | | | | | | |
| Additions to real estate | | | (644,603 | ) | | | (897,580 | ) |
| Building improvements | | | | | | | | |
| Tenant improvements | | | | | | | | |
| | | | | | | | | |
| Net cash used in investing activities | | | (644,603 | ) | | | (897,580 | ) |
| | | | | | | | | |
| Financing activities: | | | | | | | | |
| | | | | | | | | |
| Mortgage repayments | | | (1,133,529 | ) | | | (1,044,723 | ) |
| Distributions to Member | | | (2,888,373 | ) | | | (2,180,298 | ) |
| | | | | | | | | |
| Net cash used in financing activities | | | (4,021,902 | ) | | | (3,225,021 | ) |
| | | | | | | | | |
| Net decrease in cash and cash equivalents | | | (3,147,501 | ) | | | (3,052,947 | ) |
| Cash and cash equivalents, beginning of year | | | 3,819,759 | | | | 5,591,036 | |
| | | | | | | | | |
| Cash and cash equivalents, end of year | | $ | 672,258 | | | $ | 2,538,089 | |
| | | | | | | | | |
| Supplemental cash flow information: | | | | | | | | |
| Cash paid for interest | | $ | 2,902,490 | | | $ | 2,991,297 | |
| | | | | | | | | |
| Supplemental non-cash information: | | | | | | | | |
| Accrued capital expenditures | | $ | 22,474 | | | $ | - | |
| | | | | | | | | |
| Accrued deferred leasing costs | | $ | 1,809,585 | | | $ | 655,079 | |
See notes to financial statements (unaudited).
| 333 South Hope Co. LLC |
| Notes to financial statements (unaudited) |
| 1. | Organization and general |
The Bank of America Plaza (the “Property”) is a 1,421,711 square-foot office and retail building located in Los Angeles, California.
The Property is owned by 333 South Hope Co. LLC (the “Company” or “Borrower”), a Delaware limited liability company, which is a wholly owned subsidiary of TRZ Holding IV, LLC (“TRZ”). TRZ is a wholly owned subsidiary of Brookfield Office Properties Inc., a publicly traded real estate company (“Brookfield”).
| 2. | Basis of Presentation and Significant Accounting Policies |
Basis of Presentation
The financial statements are presented in accordance with accounting principles generally accepted in the United States of America which requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Significant estimates are required in the determination of future cash flows and probabilities in assessing net recoverable amount and net realizable value, depreciation and amortization and fair value for disclosure purposes.
The Company operates in a single reportable segment.
Significant Accounting Policies
Real Estate: Land is carried at cost. Building and improvements are recorded at historical cost and are being depreciated on a straight-line basis over the estimated useful life of the building which is 60 years with an estimated salvage value of 5%. Tenant improvements that are determined to be assets of the Company are recorded at cost; amortization is recorded to amortization expense on a straight-line basis over the term of the related lease.
Furniture, equipment and certain improvements are depreciated on a straight-line basis over periods up to 10 years.
Upon acquisition of real estate, the Company assesses the fair value of acquired assets (including land, buildings and improvements, identified intangibles, such as acquired above and below-market leases, acquired in-place leases and tenant relationships) and acquired liabilities and allocates the purchase price based on these assessments. The Company assessed fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information and records acquired intangible assets (incuding acquired above-market leases, tenant relationships and acquired in-place leases) and acquired intangible liabilities (including below-market leases) at their estimated fair value. The value of the acquired above market and below market leases are amortized and recorded as either a decrease (in the case of above market leases) or an increase (in the case of below market leases) to property rental revenue over the remaining term of the associated lease. The value of tenant relationships is amortized over the expected term of the relationship, which includes an estimated probability of the lease renewal. The in-place lease value is amortized as an expense over the remaining life of the leases. Amortization of tenant relationships and in-place leases is included within depreciation and amortization line item on the statement of operations.
Real estate is reviewed for impairment if events or changes in circumstances indicate that the carrying amount of the real estate may not be recoverable. In such an event, a comparison is made of the current and projected operating cash flows of the Property into the foreseeable future on an undiscounted basis, to the carrying amount of the real estate. Such carrying amount would be adjusted to its fair value, if necessary, to reflect impairment in the value of the asset. The Company assesses fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Projections of future cash flow take into account the specific business plan for the Property and management’s best estimate of the most probable set of economic conditions anticipated to prevail in the market. Management of the Company believes no impairment of the Property existed at March 31, 2013 and December 31, 2012.
Cash and cash equivalents:Cash and cash equivalents include all cash and short-term investments with an original maturity of three months or less. To date, the Company has not experienced any losses on invested cash.
Deferred costs:Direct financing costs are deferred and are being amortized over the term of the mortgage payable on the basis that approximates the effective interest method and are included in interest expense. All other deferred charges, primarily, leasing commissions incurred relating to leasing activities are deferred and amortized on a straight-line basis over the terms of the related leases.
Prepaid and other assets:Prepaid and other assets include prepaid insurance, deferred charges and tenant inducements. Any amounts paid to a tenant for improvements owned or costs incurred by the tenant are treated as tenant inducements. Amortization of tenant inducements is recorded on a straight-line basis over the term of the related lease as a reduction of the rental revenues.
Revenue recognition:The Company has the following revenue sources and revenue recognition policies:
| · | Rental Income – rental income from leases providing for periodic increases in base rent is recognized on a straight-line basis over the non-cancellable term of the respective leases. Differences between rental income and the contractual amounts due are recorded as deferred rent receivable. |
| · | Operating expense recoveries – recoveries of operating expenses and real estate taxes recognized in the period the expenses are incurred. |
Allowance for doubtful accounts:TheCompany periodically evaluates the collectability of amounts due from tenants and maintains an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required payments under the lease agreements. The Company also evaluates the deferred rent receivable balance to consider if an allowance is necessary. This receivable arises from earnings recognized in excess of amounts currently due under the lease agreements. Management exercises judgment in establishing these allowances and considers payment history and current credit status in developing these estimates. In addition, as of March 31, 2013 and December 31, 2012, no allowance for doubtful accounts was necessary.
Income taxes:The Company is not subject to federal, state and local income taxes; accordingly, the Company makes no provision for income taxes in its financial statements. The Company’s taxable income or loss, which is different than financial statement income or loss, is reportable by the Member.
The Company recognizes tax benefits from uncertain tax positions when it is more-likely-than-not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold. The Company had no unrecognized tax benefits at the beginning or end of March 31, 2013. The Company does not expect its unrecognized tax benefits balance to change in the next 12 months. The Company’s 2010, 2011 and 2012 tax years remain open due to the statute of limitations and may be subject to examination by federal, state and local tax authorities.
Concentration of risks:The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and accounts receivable. Management routinely assesses the financial strength of its tenants and, as a consequence, believes that its accounts receivable credit risk exposure is limited. The Company places its temporary cash investments with federally insured institutions. Cash balances with any one institution may at times be in excess of the federally insured limits. The property is located in Los Angeles, California, and this concentration imposes on the Company certain risks, including local economic conditions, which are not within management’s control.
Accounting for conditional asset retirement obligations;The Company has evaluated whether it has any conditional asset retirement obligations, which are a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional upon future events that may or may not be within an entity’s control. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and/or method of settlement. Accordingly, the Company would be required to recognize a liability and corresponding asset for the fair value of conditional asset retirement obligation if the fair value can be reasonably estimated.
Recently Issued Accounting Literature
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Update No. 2011-04, Fair Value Measurements (Topic No. 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU No. 2011-04”). ASU No. 2011-04 provides a uniform framework for fair value measurements and related disclosures between GAAP and International Financial Reporting Standards (“IFRS”) and requires additional disclosures, including: (i) quantitative information about unobservable inputs used, a description of the valuation processes used, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs, for Level 3 fair value measurements; (ii) fair value of financial instruments not measured at fair value but for which disclosure of fair value is required, based on their levels in the fair value hierarchy; and (iii) transfers between Level 1 and Level 2 of the fair value hierarchy. The adoption of this update on January 1, 2012 did not have a material impact on our consolidated financial statements, but resulted in additional fair value measurement disclosures (See Note 5 -Fair Value Measurements).
| 3. | Intangible assets and liabilities |
The following table summarizes the intangible assets and intangible liabilities as of March 31, 2013 and December 31, 2 012:
| | March 31, 2013 | | | December 31, 2012 | |
| | | | | | | |
| Intangible assets | | | | | | |
| | | | | | | |
| In-place leases | | $ | 4,519,912 | | | $ | 4,519,912 | |
| Tenant relationships | | | 28,242,836 | | | | 28,242,836 | |
| Above market lease | | | 57,876 | | | | 57,876 | |
| | | | 32,820,624 | | | | 32,820,624 | |
| Less accumulated amortization | | | (16,525,115 | ) | | | (15,833,544 | ) |
| Total intangible assets, net | | $ | 16,295,509 | | | $ | 16,987,080 | |
| | | | | | | | | |
| Intangible liabilities | | | | | | | | |
| | | | | | | | | |
| Below market leases | | $ | 14,011,639 | | | $ | 14,011,639 | |
| Less accumulated amortization | | | (8,245,512 | ) | | | (7,918,005 | ) |
| Total intangible liabilities, net | | $ | 5,766,127 | | | $ | 6,093,634 | |
Amortization of acquired below-market leases, net of acquired above-market leases resulted in an increase to rental income of $317,319 and $339,253 for the three-months ended March 31, 2013 and 2012, respectively. Estimated annual amortization of acquired below-market leases, net of acquired above-market leases for each of the five succeeding years commencing January 1, 2014 is as follows:
| Year ending December 31,: | | | | |
| 2014 | | $ | (1,181,804 | ) |
| 2015 | | | (1,173,852 | ) |
| 2016 | | | (1,071,559 | ) |
| 2017 | | | (928,346 | ) |
| 2018 | | | (133,385 | ) |
| Thereafter | | | 72,778 | |
| | | $ | (4,416,168 | ) |
Amortization of all other identified intangible assets (a component of depreciation and amortization expense) was $681,382 and $827,312 for the three-months ended March 31, 2013 and 2012, respectively. Estimated annual amortization of all other identified intangible assets including acquired in-place leases and tenant relationships for each of the five succeeding years commencing January 1, 2014 is as follows:
| Year ending December 31,: | | | | |
| 2014 | | $ | 2,648,186 | |
| 2015 | | | 2,512,018 | |
| 2016 | | | 2,313,089 | |
| 2017 | | | 1,681,640 | |
| 2018 | | | 1,353,171 | |
| Thereafter | | | 3,345,257 | |
| | | $ | 13,853,361 | |
In August 2004, the Company entered into two non-recourse mortgage notes in an aggregate amount of $242,000,000 consisting of a $192,000,000 mortgage note from Morgan Stanley Mortgage Capital Inc., which bears a fixed interest rate of 5.0626%, and a $50,000,000 mortgage note from Metropolitan Life Insurance Company, which bears a fixed interest rate of 6.26% (the “Mortgage Notes”). The Mortgage Notes mature on September 7, 2014. The Company may refinance our maturing debt as it comes due or choose to repay it.
The Company is required to make monthly payments of interest through September 2006. Beginning in October 2006, the Company is required to make monthly payments of principal and interest of $1,345,000. The Mortgage Notes are cross-collateralized by the Property and cross-defaulted.
Under the terms of the Mortgage Notes, the Company amortizes debt discount over the remaining debt term utilizing the effective interest method. Debt discount of $130,272 and $127,264 has been amortized into interest expense during the three months ended March 31, 2013 and 2012, respectively. As of March 31, 2013 and December 31, 2012, the unamortized debt discount was $782,847 and 913,119, respectively.
| 5. | Fair Value Measurements |
ASC 820,Fair Value Measurement and Disclosuresdefines fair value and establishes a framework for measuring fair value. The objective of fair value is to determine the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels: Level 1 – quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities; Level 2 – observable prices that are based on inputs not quoted in active markets, but corroborated by market data; and Level 3 – unobservable inputs that are used when little or no market data is available. The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider counterparty credit risk in our assessment of fair value.
Financial Assets and Liabilities not measured at Fair Value
Financial assets and liabilities that are not measured at fair value on the balance sheets include the mortgage payable. The fair value of the Company’s mortgage payable is calculated by discounting the future contractual cash flows of these instruments using current risk adjusted rates available to borrowers with similar credit ratings, which are provided by a third-party specialist. The fair value of mortgages payable is classified as Level 2. As of March 31, 2013 and December 31, 2012 the carrying amounts and fair value of our mortgage payable were 217,060,193 and 224,179,966, and 218,063,451 and $226,207,162, respectively.
Future minimum rental income (on a non straight-line basis), to be received under non-cancelable tenant operating leases in effect at March 31, 2013 for each of the next five years and thereafter are as follows:
| Years ending December 31,: | | | | |
| 2014 | | | 27,988,872 | |
| 2015 | | | 30,338,222 | |
| 2016 | | | 31,480,893 | |
| 2017 | | | 31,636,122 | |
| 2018 | | | 23,231,226 | |
| Thereafter | | | 77,351,962 | |
| | | $ | 222,027,297 | |
| 7. | Related party transactions |
The Company entered into an arrangement with a corporation, which is affiliated through common ownership with the Company’s Member, under which the affiliate is to provide property management and various other services. Management fees are based on 3.0% of operating revenue (as defined). Costs and fees incurred to such affiliate, which are included in operating expenses, are as follows:
| Management fees | | $ | 376,844 | |
| General, administrative and reimbursable expenses | | | 134,807 | |
| Insurance | | | 815,162 | |
| Leasing and construction management fees | | | 369,645 | |
As of March 31, 2013 a non-interest bearing receivable of $1,922,947 which consists of cash transfers in the amount of $3,000,000 offset by costs incurred by related parties on our behalf in the amount of $1,077,053, is due on demand to TRZ Holdings II LLC.
As of December 31, 2012 a non-interest bearing receivable of $986,306 which consists of cash transfers in the amount of $3,000,000 offset by costs incurred by related parties on our behalf in the amount of $2,031,694 is due on demand to TRZ Holdings II LLC.
Insurance premiums are paid by Brookfield Properties Holdings Inc. (“BPHI”), a parent company of Brookfield Financial Properties LP. The cost is allocated to the Company which then fully reimburses BPHI.
| 8. | Commitments & contingencies |
The Company may be subject to pending legal proceedings and litigation incidental to its business. In our opinion after consultation with legal counsel, the outcome of such matters, including the matter referred to below, is not expected to have a material adverse effect on our financial position, results of operations or cash flows.
Insurance
The Property is covered under an insurance policy entered into by Brookfield that provides all risk property and business interruption for Brookfield’s commercial portfolio with an aggregate limit of $1.5 billion per occurrence. In addition the property is also covered by a terrorism insurance policy that provides aggregate coverage of $4.0 billion for all for Brookfield’s U.S. properties. To the extent an act or acts of terrorism produce losses in excess of the limits in place the resulting loss could have a material effect on the Company’s financial statements. The Company has reviewed its mortgage loan agreement and is in compliance, in all material respects, with the contractual obligations regarding terrorism insurance contained therein.
Environmental
Property contains asbestos and although the asbestos is contained in accordance with current environmental regulations, the Company’s practice is to remediate the renovation or redevelopment of the Property. Accordingly, the Company has determined that this meets the criteria for recording an asset retirement obligation in the aggregate amount of $526,080 and $523,605 as of March 31, 2013 and December 31, 2012, respectively which is included in “Accounts payable, accruals and other liabilities” on the Company’s balance sheets. There can be no assurance that the identification of new areas of contamination, changes in the extent or known scope of contamination, or changes in cleanup requirements would not result in significant costs to us.
Subsequent to March 31, 2013, and through June 12, 2013 the date through which management evaluated subsequent events and on which the financial statements were available for issuance, management has concluded that there were no subsequent events to be disclosed.
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