EYP Realty, 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
| 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 |
| EYP Realty, LLC |
| Balance Sheets (unaudited) |
| |
| | | March 31, | | | December 31, | |
| | | 2013 | | | 2012 | |
| Assets | | | | | | | | |
| | | | | | | | | |
| Real Estate as cost | | | | | | | | |
| Land | | $ | 47,384,623 | | | $ | 47,384,623 | |
| Building and improvements | | | 331,530,717 | | | | 331,233,002 | |
| Tenant improvements | | | 32,527,600 | | | | 29,176,548 | |
| | | | 411,442,940 | | | | 407,794,173 | |
| Less: accumulated depreciation | | | (42,326,771 | ) | | | (40,020,990 | ) |
| | | | 369,116,169 | | | | 367,773,183 | |
| | | | | | | | | |
| Cash and cash equivalents | | | 91,432 | | | | 1,887,161 | |
| Accounts receivable, net of allowance of $16,028 and $16,022 | | | 1,592,306 | | | | 1,274,760 | |
| Due from Affiliates | | | 1,090,742 | | | | 817,292 | |
| Deferred rent receivable | | | 8,361,136 | | | | 8,041,936 | |
| Intangible assets net of accumulated amortization of $11,696,986 and $11,015,538 | | | 10,534,016 | | | | 11,215,464 | |
| Deferred leasing costs net of accumulated amortization of $4,196,217 and $5,791,883 | | | 8,903,521 | | | | 9,012,321 | |
| Prepaid and other assets (net of accumulated amortization of $898,641 and $818,562 | | | 3,202,770 | | | | 3,672,138 | |
| | | $ | 402,892,092 | | | $ | 403,694,255 | |
| | | | | | | | | |
| Liabilities and Member's Equity | | | | | | | | |
| | | | | | | | | |
| Mortgage note payable net of unamortized discount of $ 78,687 and $101,516 | | | 100,975,417 | | | $ | 101,614,188 | |
| Accounts payable and accrued liabilities | | | 8,107,193 | | | | 7,689,272 | |
| Deferred revenue | | | 48,894 | | | | 51,232 | |
| Intangible liabilities net of accumulated amortization of $18,776,358 and $18,535,445 | | | 3,880,621 | | | | 4,121,534 | |
| Total Liabilies | | | 113,012,125 | | | | 113,476,226 | |
| | | | | | | | | |
| Member's equity | | | 289,879,967 | | | | 290,218,029 | |
| | | $ | 402,892,092 | | | $ | 403,694,255 | |
See notes to financial statements (unaudited).
| EYP Realty, LLC |
| Statements of Operations (unaudited) |
| |
| | | Three months ended | |
| | | March 31, | | | March 31, | |
| | | 2013 | | | 2012 | |
| | | | | | | |
| Revenue | | | | | | | | |
| | | | | | | | | |
| Rental income | | $ | 5,443,084 | | | $ | 4,879,942 | |
| Operating expense recoveries | | | 2,857,436 | | | | 2,360,915 | |
| Parking income | | | 863,284 | | | | 644,710 | |
| Other income | | | 121,665 | | | | 155,815 | |
| | | | 9,285,469 | | | | 8,041,382 | |
| | | | | | | | | |
| Expenses | | | | | | | | |
| | | | | | | | | |
| Real estate taxes | | | 963,404 | | | | 800,876 | |
| Cleaning | | | 517,592 | | | | 402,508 | |
| Utilities | | | 530,048 | | | | 505,029 | |
| Repairs and maintenance | | | 867,063 | | | | 630,774 | |
| Elevators | | | 102,516 | | | | 81,749 | |
| Security and fire | | | 560,434 | | | | 454,323 | |
| Building management | | | 438,140 | | | | 386,270 | |
| Depreciation and amortization | | | 3,336,346 | | | | 3,044,776 | |
| Insurance | | | 396,352 | | | | 486,408 | |
| Parking and garage | | | 557,361 | | | | 404,222 | |
| Management fees | | | 266,643 | | | | 227,267 | |
| Other | | | 390,484 | | | | 115,771 | |
| Total expenses | | | 8,926,383 | | | | 7,539,973 | |
| Operating income | | | 359,086 | | | | 501,409 | |
| | | | | | | | | |
| Other income (expense) | | | | | | | | |
| | | | | | | | | |
| Interest income | | | - | | | | 62 | |
| Interest expense | | $ | (1,308,775 | ) | | | (1,354,694 | ) |
| Net loss | | $ | (949,689 | ) | | $ | (853,223 | ) |
See notes to financial statements (unaudited).
| EYP Realty, 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 | | $ | 290,218,029 | | | $ | 259,051,676 | |
| Contributions from member | | | 611,627 | | | | 8,823,804 | |
| Net loss | | | (949,689 | ) | | | (853,223 | ) |
| Total Member's equity, end of period | | $ | 289,879,967 | | | $ | 267,022,257 | |
See notes to financial statements (unaudited).
| EYP Realty, LLC |
| Statements of Cash Flows (unaudited) |
| |
| | | Three months ended | |
| | | March 31, | | | March 31, | |
| | | 2013 | | | 2012 | |
| | | | | | | |
| Operating activities | | | | | | | | |
| Net loss | | $ | (949,689 | ) | | $ | (853,223 | ) |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | | | |
| Depreciation and amortization | | | 3,336,346 | | | | 3,044,776 | |
| Amortization of debt discount | | | 22,829 | | | | 22,489 | |
| Amortization of tenant inducements | | | 80,079 | | | | 63,704 | |
| Amortization of above and below market leases | | | (183,574 | ) | | | (223,487 | ) |
| Deferred rent | | | (319,200 | ) | | | (318,486 | ) |
| Change in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | | (408,194 | ) | | | (25,008 | ) |
| Deferred leasing costs | | | (297,655 | ) | | | (235,159 | ) |
| Due from affiliates | | | (273,450 | ) | | | - | |
| Prepaid and other assets | | | 389,287 | | | | (1,175,165 | ) |
| Accounts payable and accrued liabilities | | | 258,361 | | | | 262,271 | |
| Deferred Rent | | | (2,338 | ) | | | (3,346 | ) |
| Net cash provided by operating activities | | | 1,652,802 | | | | 559,366 | |
| | | | | | | | | |
| Investing activities | | | | | | | | |
| Decrease in restricted cash | | | - | | | | - | |
| Additions to real estate | | | (3,398,557 | ) | | | (10,383,640 | ) |
| Net cash used in investing activities | | | (3,398,557 | ) | | | (10,383,640 | ) |
| | | | | | | | | |
| Financing activities | | | | | | | | |
| Repayment of mortgage note payable | | | (661,601 | ) | | | (615,341 | ) |
| Contributions from Member | | | 611,627 | | | | 8,823,804 | |
| Net cash provided by financing activities | | | (49,974 | ) | | | 8,208,463 | |
| | | | | | | | | |
| Net decrease in cash and cash equivalents | | | (1,795,729 | ) | | | (1,615,811 | ) |
| Cash and cash equivalents, beginning of year | | | 1,887,161 | | | | 1,921,055 | |
| Cash and cash equivalents, end of year | | $ | 91,432 | | | $ | 305,244 | |
| | | | | | | | | |
| Supplemental cash flow information | | | | | | | | |
| Cash paid for interest | | $ | 1,285,946 | | | $ | 1,332,206 | |
| | | | | | | | | |
| Non-cash Investing Activities | | | | | | | | |
| Accrued capital expenditures | | $ | 2,302,526 | | | $ | 216,303 | |
See notes to financial statements.
See notes to financial statements (unaudited).
EYP Realty, LLC
Notes to financial statements (unaudited)
| 1. | Organization and general |
The Ernst & Young Plaza (the “Property”) is a 1,244,000 square-foot office and retail building located at 725 Figueroa Street, Los Angeles, California.
The Property is owned by EYP Realty, LLC a Delaware limited liability company (the “Company” or “Borrower”), which 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 (“GAAP”). In the opinion of management, all adjustments, consisting of only those of a normal and recurring nature, considered necessary for a fair presentation of the financial position, results of operations and changes in cash flows have been made. The preparation of financial statements in conformity with GAAP 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.
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 assesses 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: The Company 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. As of March 31, 2013 and December 31, 2012, the Company had $16,028 and $16,028 respectively in allowances for doubtful accounts. In addition, as of March 31,2013 and December 31, 2012 no allowance for deferred rent receivable 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).
Intangible assets and liabilities
The following table summarizes the intangible assets and intangible liabilities as of March 31, 2013 and December 31, 2012:
| | | March 31, 2013 | | | December 31, 2012 | |
| Intangible assets | | | | | | |
| | | | | | | | | |
| In-place leases | | $ | 1,983,217 | | | $ | 1,983,217 | |
| Tenant relationships | | | 18,005,092 | | | | 18,005,092 | |
| Above market leases | | | 2,242,693 | | | | 2,242,693 | |
| | | | 22,231,002 | | | | 22,231,002 | |
| Less accumulated amortization | | | (11,696,986 | ) | | | (11,015,538 | ) |
| Total intangible assets, net | | | 10,534,016 | | | $ | 11,215,464 | |
| | | | | | | | | |
| Intangible liabilities | | | | | | | | |
| | | | | | | | | |
| Below market leases | | $ | 22,656,979 | | | $ | 22,656,979 | |
| Less accumulated amortization | | | (18,776,358 | ) | | | (18,535,445 | ) |
| Total intangible liabilities, net | | $ | 3,880,621 | | | $ | 4,121,534 | |
Amortization of acquired below-market leases, net of acquired above-market leases resulted in an increase to rental income of $183,574 and $223,487 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:
| Years ending December 31,: | | | | |
| 2014 | | $ | 754,398 | |
| 2015 | | | 623,085 | |
| 2016 | | | 353,205 | |
| 2017 | | | 115,412 | |
| 2018 | | | 169,369 | |
| Thereafter | | | 580,278 | |
| | | $ | 2,595,747 | |
Amortization of all other identified intangible assets (a component of depreciation and amortization expense) was $676,446 and $532,246 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:
| Years ending December 31,: | | | | |
| 2014 | | $ | 1,508,027 | |
| 2015 | | | 1,409,936 | |
| 2016 | | | 1,310,537 | |
| 2017 | | | 1,260,363 | |
| 2018 | | | 942,184 | |
| Thereafter | | | 1,896,839 | |
| | | $ | 8,327,886 | |
On January 28, 2004, the Company refinanced certain note agreements with Eurohypo AG, New York Branch, the New York branch of a German banking corporation, as lender, for $120,000,000 (the “Note Agreement”). The Note Agreement bears a fixed interest rate of 5.068% and is scheduled to mature on February 1, 2014. Under the terms of the Note Agreement, the Company is required to make monthly payments of principal and interest totaling $649,182 through the maturity date. The Note Agreement is collateralized by the Property. We may refinance our maturing debt as it becomes due or choose to repay it.
The Company amortizes debt discount over the remaining debt term utilizing the effective interest method. Debt discount of $22,829 and $22,489 has been amortized into interest expense during the three months ended March 31, 2013 and 2012. As of March 31, 2013 and December 31, 2012 the unamortized debt discount was $78,687 and $101,516, 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 Company’s consolidated balance sheets include the mortgage payable. The fair value of our 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 $100,975,417 and $102,976,674, and $101,614,188 and $104,002,864, respectively.
Future minimum base rentals (on a non straight-line basis), exclusive of operating expense recoveries, to be received under non-cancelable tenant operating leases as of March 31, 2013 for each of the next five years and thereafter are as follows:
| Year ending December 31, | | | | |
| 2014 | | $ | 19,859,524 | |
| 2015 | | | 18,372,945 | |
| 2016 | | | 15,506,557 | |
| 2017 | | | 14,146,251 | |
| 2018 | | | 12,335,340 | |
| Thereafter | | | 50,238,875 | |
| Total | | $ | 130,459,492 | |
| 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. . Leasing fees of $66,395 were paid to the affiliate during the year. 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 fee | | $ | 266,643 | |
| General, administrative and reimbursable expenses | | | 152,075 | |
| Insurance | | | 396,352 | |
Related party receivable at March 31, 2013 was $1,090,742 which consists of cash transfers in the amount of $2,980,632 offset with property related party payables in the amount of $1,889,890.
Insurance premiums are paid by Brookfield Properties Holdings Inc. (“BPHI”), a related party. BPHI allocates the cost to the Company which then fully reimburses BPHI.
| 8. | Commitments and contingencies |
Litigation
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.
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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