Basis of Presentation and Summary of Significant Accounting Policies | 12 Months Ended |
Dec. 31, 2014 |
Accounting Policies [Abstract] | |
Basis of Presentation and Summary of Significant Accounting Policies | Basis of Presentation and Summary of Significant Accounting Policies |
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Predecessor Entities |
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Prior to October 15, 2013, Brookfield DTLA had not conducted any business as a separate company and had no material assets or liabilities. In accordance with accounting principles generally accepted in the United States of America (“GAAP”), the contribution of 333 South Hope and EYP Realty (together, the “Predecessor Entities”) constitute a transaction between entities under common control. A combination between entities that already share the same parent is not considered a business combination because there is no change in control at the parent level. Accordingly, the operations of the Predecessor Entities contributed to Brookfield DTLA by TRZ on October 15, 2013 are presented in the accompanying consolidated and combined financial statements as if they were owned by Brookfield DTLA for all historical periods presented and the assets and liabilities of BOA Plaza and EY Plaza were recorded at the carrying values reflected in the books and records of 333 South Hope and EYP Realty. As such, no gain or loss has been recorded in the consolidated statement of operations for the year ended December 31, 2013 due to this transaction. As a result of the transaction, TRZ’s interest in the Predecessor Entities was exchanged for a preferred and common interest in New OP and a preferred interest in DTLA OP. As a result of certain redemption features in the preferred instruments, these instruments have been classified in the consolidated balance sheet as mezzanine equity. See Note 6 “Mezzanine Equity.” |
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As used in these consolidated and combined financial statements and related notes, unless the context requires otherwise, the terms “Brookfield DTLA,” the “Company,” “us,” “we” and “our” refer to the combination of Brookfield DTLA Fund Office Trust Investor Inc. and the Predecessor Entities. |
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Principles of Consolidation and Combination and Basis of Presentation |
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The accompanying consolidated and combined financial statements are prepared in accordance with GAAP. The consolidated balance sheets as of December 31, 2014 and 2013 include the accounts of Brookfield DTLA and subsidiaries in which it has a controlling financial interest. The accompanying consolidated and combined statements of operations for the year ended December 31, 2013 include the accounts of the Predecessor Entities on a combined basis from January 1, 2013 through October 15, 2013 (the date of the merger); and the consolidated accounts of Brookfield DTLA from October 15, 2013 (the date of the merger) through December 31, 2013. The accompanying combined statements of operations |
for the year ended December 31, 2012 include the accounts of the Predecessor Entities on a combined basis. All intercompany transactions have been eliminated in consolidation and combination as of and for the years ended December 31, 2014, 2013 and 2012. |
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In determining whether Brookfield DTLA has a controlling financial interest in an entity and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, board representation, management representation, authority to make decisions, and contractual and substantive participating rights of the partners/members as well as whether the entity is a variable interest entity (“VIE”) and Brookfield DTLA is the primary beneficiary. |
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A VIE is broadly defined as an entity where either (i) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of an entity that most significantly impact the entity’s economic performance or (ii) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support. |
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A variable interest holder is considered to be the primary beneficiary of a VIE if it has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and has the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. Brookfield DTLA qualitatively assesses whether it is (or is not) the primary beneficiary of a VIE. |
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Consideration of various factors includes, but is not limited to, Brookfield DTLA’s ability to direct the activities that most significantly impact the VIE’s economic performance, its form of ownership interest, its representation on the VIE’s governing body, the size and seniority of its investment, its ability and the rights of other investors to participate in policy making decisions and its ability to replace the manager of and/or liquidate the entity. |
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The Company earns a return through an indirect investment in New OP. Brookfield DTLA Holdings, the parent of Brookfield DTLA, owns all of the common interest in New OP. Brookfield DTLA has an indirect preferred stock interest in New OP and its wholly owned subsidiary is the managing member of New OP. |
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The Company determined that New OP is a VIE and as a result of having the power to direct the significant activities of New OP and exposure to the economic performance of New OP, Brookfield DTLA meets the two conditions for being the primary beneficiary. Brookfield DTLA is required to continually evaluate its VIE relationships and consolidation conclusion. |
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Use of Estimates |
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The preparation of consolidated and combined financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated and combined financial statements and accompanying notes. For example, estimates and assumptions have been made with respect to fair values of assets and liabilities for purposes of applying the acquisition method of accounting, the useful lives of assets, recoverable amounts of receivables, impairment of long‑lived assets and fair value of debt. Actual results could ultimately differ from such estimates. |
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Recent Accounting Pronouncements |
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In April 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014‑08, Presentation of Financial Statements and Property, Plant, and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which requires entities to disclose only disposals representing a strategic shift in operations as discontinued operations. The new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The new standard is effective in the first quarter of 2015 for public organizations with calendar year-ends. Early adoption is permitted but only for disposals (or classifications as held for sale) that have not been reported in the financial statements previously issued. We do not believe that this update will have a material effect on Brookfield DTLA’s consolidated financial statements in future periods. |
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In May 2014, the FASB issued ASU 2014-09 establishing Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. ASU 2014-09 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. ASU 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration that the entity expects to be entitled to receive in exchange for those goods or services and also requires certain additional disclosures. ASU 2014-09 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2016. We are currently evaluating the impact of the adoption of ASU 2014-09 on Brookfield DTLA’s consolidated financial statements. |
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In August 2014, the FASB issued ASU 2014-15. Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This topic provides guidance on management’s responsibility to evaluate whether there is substantial doubt about a company’s ability to continue as a going concern and requires related footnote disclosures. The amendments in this ASU are effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2014-09 on Brookfield DTLA’s consolidated financial statements. |
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Significant Accounting Policies |
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Business Combinations— |
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Purchase accounting is applied to the assets and liabilities related to all real estate investments acquired from third parties. In accordance with FASB Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, the purchase price of the real estate acquired is allocated to the acquired tangible assets, consisting primarily of land, building and tenant improvements, and identifiable intangible assets and liabilities, consisting of the value of above- and below-market leases, in-place leases, and tenant relationships, based in each case on their fair value. |
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The principal valuation technique employed by Brookfield DTLA in determining the fair value of identified assets acquired and liabilities assumed is the income approach, which is then compared to the cost approach. Tangible values for investments in real estate are calculated based on replacement costs for like type quality assets. Above- and below-market lease values are determined by comparing in-place rents with current market rents. In‑place lease amounts are determined by calculating the potential lost revenue during the replacement of the current leases in place. Leasing commissions and legal/marketing fees are determined based upon market allowances pro-rated over the remaining lease terms. Mortgage loans assumed in an acquisition are analyzed using current market terms for similar debt. |
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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 rental income in the consolidated and combined statements of operations 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 lease renewal. The value of in-place leases is amortized as an expense over the remaining life of the leases. Amortization of tenant relationships and in‑place leases is included in depreciation and amortization in the consolidated and combined statements of operations. |
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Investments in Real Estate— |
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Land is carried at cost. Buildings are recorded at historical cost and are 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%. Building improvements are recorded at historical cost and are depreciated on a straight-line basis over their estimated useful lives, which range from 7 years to 13 years. Tenant improvements that are determined to be assets of Brookfield DTLA are recorded at cost; amortization is included in depreciation and amortization expense in the consolidated and combined statements of operations on a straight-line basis over the shorter of the useful life or the applicable lease term. |
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Depreciation expense related to investments in real estate during the years ended December 31, 2014, 2013 and 2012 was $67.5 million, $29.1 million and $19.3 million, respectively. |
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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. If the undiscounted cash flows expected to be generated by an asset are less than its carrying amount, an impairment provision would be recorded to write down the carrying amount of such asset to its fair value. Brookfield DTLA assesses fair value based on estimated cash flow projections utilizing 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 expected to prevail in the market. Management believes no impairment of Brookfield DTLA’s real estate assets existed at December 31, 2014 and 2013. |
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Cash and Cash Equivalents— |
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Cash and cash equivalents include all cash and short-term investments with an original maturity of three months or less. |
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Restricted Cash— |
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Restricted cash consists primarily of deposits for tenant improvements and leasing commissions, real estate taxes and insurance reserves, debt service reserves and other items as required by our loan agreements. |
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Rents, Deferred Rents and Other Receivables, Net— |
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Differences between rental income and the contractual amounts due are recorded as deferred rents receivable in the consolidated balance sheet. Brookfield DTLA evaluates its deferred rents receivable to consider if an allowance is necessary. |
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Rents, deferred rents and other receivables, net also includes any amounts paid to a tenant for improvements owned or costs incurred by the tenant are treated as tenant inducements and are presented in the consolidated balance sheet net of accumulated amortization totaling $3.9 million and $2.7 million as of December 31, 2014 and 2013, respectively. Amortization of tenant inducements is recorded on a straight-line basis over the term of the related lease as a reduction of rental income in the consolidated and combined statements of operations. |
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Brookfield DTLA periodically evaluates the collectability of amounts due from tenants and maintains an allowance for doubtful accounts in the consolidated balance sheet for estimated losses resulting from the inability of tenants to make required payments under the lease agreements. Management exercises judgment in establishing these allowances and considers payment history and current credit status in developing these estimates. |
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The allowance for doubtful accounts for Brookfield DTLA totaled $0.4 million and $0.4 million as of December 31, 2014 and 2013, respectively. For the years ended December 31, 2014 and 2013, Brookfield DTLA recorded provisions for doubtful accounts of $24 thousand and $0.4 million, respectively. There was no provision for doubtful accounts recorded during the year ended December 31, 2012. |
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Due (to) from Affiliates, Net— |
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Amounts due to/from affiliates, net consist of related party receivables and payables from affiliates of BPO for advances made primarily for trade purposes. These amounts are due on demand and are non‑interest bearing. |
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Brookfield DTLA was indebted to BOP Management Inc. under a $25.0 million promissory note, which was included in due to affiliates, net in the consolidated balance sheet as of December 31, 2013. |
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During September 2014, Brookfield DTLA paid $25.8 million in full settlement of the principal and interest outstanding on the intercompany loan using proceeds from the mortgage loan secured by the Figueroa at 7th retail property. See Note 12 “Related Party Transactions.” |
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Deferred Charges, Net— |
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Leasing costs, primarily commissions related to leasing activities, are deferred and are presented as deferred charges in the consolidated balance sheet net of accumulated amortization totaling $28.3 million and $17.9 million as of December 31, 2014 and 2013, respectively. Deferred leasing costs amortized on a straight-line basis over the terms of the related leases as part of depreciation and amortization in the consolidated and combined statements of operations. |
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Prepaid and Other Assets, Net— |
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Prepaid and other assets include prepaid insurance, prepaid real estate taxes and other operating costs. |
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Mortgage Loans, Net— |
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Mortgage loans are presented in the consolidated balance sheet net of unamortized debt discounts totaling $6.9 million and $11.9 million as of December 31, 2014 and 2013, respectively. |
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Debt discounts totaling $5.0 million, $0.8 million and $0.6 million were amortized during the years ended December 31, 2014, 2013 and 2012, respectively, over the terms of the related mortgage loans on a basis that approximates the effective interest method and were included as part of interest expense in the consolidated and combined statements of operations. |
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Revenue Recognition— |
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Rental income from leases providing for periodic increases in base rent is recognized on a straight-line basis over the noncancelable term of the respective leases. Recoveries of operating expenses and real estate taxes are recorded as tenant reimbursements in the consolidated and combined statements of operations in the period during which the expenses are incurred. |
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Income Taxes— |
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Brookfield DTLA has elected to be taxed as a real estate investment trust (“REIT”) pursuant to Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its tax year ended December 31, 2013. Brookfield DTLA intends to conduct its operations so as to continue to qualify as a REIT. Accordingly, Brookfield DTLA is not subject to U.S. federal income tax, provided that it continues to qualify as a REIT and distributions to its stockholders, if any, generally equal or exceed its taxable income. |
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Qualification and taxation as a REIT depends upon Brookfield DTLA’s ability to meet the various qualification tests imposed under the Code related to annual operating results, asset diversification, distribution levels and diversity of stock ownership. Accordingly, no assurance can be given that Brookfield DTLA will be organized or be able to operate in a manner so as to continue to qualify as a REIT. If Brookfield DTLA fails to qualify as a REIT in any taxable year, it will be subject to federal and state income tax on its taxable income at regular corporate tax rates, and it may be ineligible to qualify as a REIT for four subsequent tax years. Brookfield DTLA may also be subject to certain state or local income taxes, or franchise taxes on its REIT activities. |
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Brookfield DTLA has made no provision for income taxes in its consolidated and combined financial statements for the years ended December 31, 2014, 2013 and 2012. Brookfield DTLA’s taxable income or loss is different than its financial statement income or loss. |
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Brookfield DTLA recognizes tax benefits from uncertain tax positions when it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more likely than not recognition threshold. Brookfield DTLA had no unrecognized tax benefits of December 31, 2014 and 2013, and Brookfield DTLA does not expect its unrecognized tax benefits balance to change during the next 12 months. Brookfield DTLA’s 2013 tax year remains open due to the statute of limitations and may be subject to examination by federal, state and local authorities. The Predecessor Entities’ 2010, 2011 and 2012 tax years as well as the Predecessor Entities’ short tax period ended October 15, 2013 remain open due to the statute of limitations and may be subject to examination by federal, state and local tax authorities. |
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Derivative Financial Instruments— |
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Brookfield DTLA uses interest rate swap and cap contracts to manage risk from fluctuations in interest rates as well as to hedge anticipated future financing transactions. Interest rate swaps involve the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount. Interest rate caps involve the receipt of variable-rate amounts beyond a specified strike price over the life of the agreements without exchange of the underlying principal amount. The Company believes these agreements are with counterparties who are creditworthy financial institutions. |
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Brookfield DTLA adheres to the provisions of ASC Subtopic 815-10-15, Derivatives and Hedging (“ASC 815-10-15”). ASC 815-10-15 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires the recognition of all derivative instruments as assets or liabilities in the Company’s consolidated balance sheet at fair value. Changes in the fair value of derivative instruments that are not designated as hedges, or that do not meet the hedge accounting criteria in ASC 815-10-15, are required to be reported through the statement of operations. Brookfield DTLA has elected to designate its interest rate swap as a cash flow hedge. |
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Segment Reporting |
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Brookfield DTLA operates in a single reportable segment referred to as its office segment, which includes the operation and management of commercial office properties. Each of Brookfield DTLA’s operating properties is considered a separate operating segment, as each property earns revenues and incurs expenses, individual operating results are reviewed and discrete financial information is available. Management does not distinguish or group Brookfield DTLA’s consolidated operations based on geography, size or type. Brookfield DTLA’s operating properties have similar economic characteristics and provide similar products and services to tenants. As a result, Brookfield DTLA’s operating properties are aggregated into a single reportable segment. |
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Accounting for Conditional Asset Retirement Obligations |
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Brookfield DTLA 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, Brookfield DTLA recognized a liability for a conditional asset retirement obligation. |