Summary of Significant Accounting Policies | 11 Months Ended |
Dec. 31, 2013 |
Accounting Policies [Abstract] | ' |
Accounting Policies | ' |
Summary of Significant Accounting Policies |
Nature of Business |
Forest City Enterprises, Inc. (the “Company”) principally engages in the ownership, development, management and acquisition of commercial and residential real estate and land throughout the United States. The Company operates through three strategic business units and has six reportable operating segments. The three strategic business units, which represent four reportable operating segments, are the Commercial Group, Residential Group and Land Development Group (collectively, the “Real Estate Groups”). The Commercial Group, the Company’s largest strategic business unit, owns, develops, acquires and operates regional malls, specialty/urban retail centers, office and life science buildings and mixed-use projects. Additionally, it operates Barclays Center, a sports and entertainment arena located in Brooklyn, New York, which is reported as a separate reportable operating segment ("Arena"). The Residential Group owns, develops, acquires and operates residential rental properties, including upscale and middle-market apartments and adaptive re-use developments. Additionally, the Residential Group owns interests in entities that develop and manage military family housing. The Land Development Group acquires and sells both land and developed lots to residential, commercial and industrial customers at its Stapleton project in Denver, Colorado. |
Corporate Activities and The Nets, a member of the National Basketball Association (“NBA”) in which the Company accounts for its investment on the equity method of accounting, are the other reportable operating segments. |
The Company has approximately $9.0 billion of consolidated assets in 26 states and the District of Columbia at December 31, 2013. The Company’s core markets include Boston, Chicago, Dallas, Denver, Los Angeles, the Greater New York City metropolitan area, Philadelphia, the Greater San Francisco metropolitan area and the Greater Washington D.C. metropolitan area. The Company has offices in Albuquerque, Boston, Dallas, Denver, Los Angeles, New York City, San Francisco, Washington, D.C., and the Company’s corporate headquarters in Cleveland, Ohio. |
Change in Fiscal Year-End |
On March 29, 2012, the Board of Directors of the Company approved a change to the Company's fiscal 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 ended December 31, 2013 as its transition period (the “2013 Transition period”) in this Form 10-KT. Due to the Year-end change, many of the differences in comparisons of the Company's results are impacted by the one-month difference between the 2013 Transition period and the full years. The Company believes the Year-end change is important and useful to its financial statement users to allow for increased comparability of its performance to its peers. The years 2013, 2012 and 2011 refer to the 11 months ended December 31, 2013 and the fiscal years ended January 31, 2013 and 2012, respectively. |
Principles of Consolidation |
The accompanying consolidated financial statements include the accounts of Forest City Enterprises, Inc., its wholly-owned subsidiaries and entities in which it has a controlling interest in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All intercompany balances and transactions have been eliminated in consolidation. |
The accounting guidance for consolidation of variable interest entities (“VIE”) requires an ongoing reassessment of determining whether a variable interest gives a company a controlling financial interest in a VIE. The Company continuously reassesses whether or not it has the (a) power to direct the activities of the VIE that most significantly affect its economic performance and (b) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. |
Variable Interest Entities |
The Company’s VIEs consist of joint ventures that are engaged in the ownership, development and management of office buildings, regional malls, specialty retail centers, apartment communities, military housing and The Nets. As of December 31, 2013, the Company determined that it was the primary beneficiary of 33 VIEs representing 24 properties, which are consolidated. The creditors of the consolidated VIEs do not have recourse to the Company’s general credit. As of December 31, 2013, the Company held variable interests in 59 VIEs for which it is not the primary beneficiary, which are accounted for as equity method investments. The maximum exposure to loss as a result of the ownership of these unconsolidated VIEs is limited to the Company’s applicable investment balances, which approximates $62,000,000 at December 31, 2013. |
Use of Estimates |
The preparation of consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related notes. Some of the critical estimates made by the Company include, but are not limited to, determination of the primary beneficiary of VIEs, estimates of useful lives for long-lived assets, reserves for collection on accounts and notes receivable and other investments, impairment of real estate and other-than-temporary impairments on its equity method investments. As a result of the nature of estimates made by the Company, actual results could differ. |
In April 2013, management approved a plan to demolish Ten MetroTech Center, an office building in Brooklyn, New York, to clear the land for its redevelopment or sale. Accordingly, the original useful life, estimated to expire in 2042, of Ten MetroTech Center was adjusted to expire at the demolition date in October 2013, which resulted in $45,500,000 of accelerated depreciation expense recognized in the Consolidated Statements of Operations during the 11 months ended December 31, 2013. |
Reclassifications |
Certain prior year amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year's presentation. Certain parcels of land adjacent to the Company's existing operating assets amounting to $34,250,000 were reclassified from projects under construction and development to land inventory in the Consolidated Balance Sheet as of January 31, 2013. |
Recognition of Revenue |
Real Estate Sales and Assets Held for Sale – The specific timing of a sale transaction and recognition of profit is measured against various criteria in the real estate sales accounting guidance covering the terms of the transaction and any continuing involvement in the form of management or financial assistance associated with the property. If the sales criteria are not met, the Company defers gain recognition and accounts for the transaction by applying the deposit, finance, installment or cost recovery methods, as appropriate. |
Consolidated properties that have been sold or determined to be held for sale are reported as discontinued operations. The determination of when an asset qualifies as held for sale requires significant judgment. Factors the Company considers when evaluating whether an asset qualifies as held for sale include, among other things, whether the potential sale is approved by management, the status of any marketing efforts, interest from prospective buyers, the status of any sale negotiations and the probability of whether the asset will be sold in twelve months. Each potential sale is evaluated based on its separate facts and circumstances. |
Leasing Operations – The Company enters into leases with tenants in its rental properties. The lease terms in the retail centers and office buildings generally range from 1 to 30 years, excluding leases with certain anchor tenants, which typically are longer. Minimum rents are recognized on a straight-line basis over the non-cancelable term of the related lease, which include the effects of rent steps and rent abatements under the leases. Overage rents are recognized after the contingency has been removed (i.e., sales thresholds have been achieved). Recoveries from tenants for taxes, insurance and other commercial property operating expenses are recognized as revenues in the period the applicable costs are incurred. |
Construction – Revenues and profit on long-term fixed-price contracts are recorded using the percentage-of-completion method. Revenues on reimbursable cost-plus fee contracts are recorded in the amount of the accrued reimbursable costs plus proportionate fees at the time the costs are incurred. |
Military Housing Fee Revenues – Property management and asset management fees are earned based on a contractual percentage of the annual net rental income and annual operating income, respectively, generated by the military housing privatization projects as defined in the agreements. Additional property management incentive fees are recognized based upon successful completion of criteria set forth in the property management agreements. |
Development fees are earned based on a contractual percentage of the actual development costs incurred. Additional development incentive fees are recognized based upon successful completion of criteria, such as incentives to realize development cost savings, encourage small and local business participation, comply with specified safety standards and other project management incentives as specified in the development agreements. |
Construction management fees are earned based on a contractual percentage of the actual construction costs incurred. Additional construction incentive fees are recognized based upon successful completion of certain criteria as set forth in the construction contracts. |
Arena Revenues – The Arena naming rights agreement with Barclays Services Corporation commenced with the opening of the Arena, has a 20 year term and is subject to certain extension rights. Arena naming rights revenue is recognized on a straight-line basis over the term of the agreement. |
Arena founding partner and sponsor agreements entitle the parties to certain sponsorship, promotional, media, hospitality and other rights and entitlements. These agreements expire at various terms ranging from one to seven years from the opening of the Arena and revenue is recognized on a straight-line basis over the term of the agreements. |
Arena suite licenses entitle the licensee to the use of a luxury suite in the Arena. The terms of the suite license agreements commenced on the date the Arena opened and range from one to seven years. Revenue is recognized on a straight-line basis over the term of the agreements. |
Ticketing fee revenue is based on the Arena's share of ticket sale fees in accordance with an agreement with Ticketmaster. Revenue from ticketing fees is deferred and recognized upon settlement of the related event. |
Recognition of Costs and Expenses |
Operating expenses primarily represent the recognition of operating costs, which are charged to operations as incurred, administrative expenses and taxes other than income taxes. Interest expense and real estate taxes during active development and construction are capitalized as a part of the project cost. |
Depreciation and amortization is generally computed on a straight-line method over the estimated useful life of the asset. The estimated useful lives of buildings (other than the Arena) and certain first generation tenant allowances that are considered by management as a component of the building are 40 to 50 years. The estimated useful life of the Arena is 34.5 years, reflecting the ground leases on which the Arena was built. Subsequent tenant improvements and those first generation tenant allowances that are not considered a component of the building are amortized over the lesser of the remaining useful life of the asset or the term of the tenant’s lease. This estimated life is based on the length of time the asset is expected to generate positive operating cash flows. Actual events and circumstances can cause the life of the building and tenant improvement to be different than the estimates made. Additionally, lease terminations can affect the economic life of the tenant improvements. |
Major improvements and tenant improvements that are the Company’s assets are capitalized in real estate costs and expensed through depreciation charges. Tenant improvements that are lease inducements are capitalized into other assets and amortized as a reduction of rental revenues over the term of the tenant’s lease. Repairs, maintenance and minor improvements are expensed as incurred. |
A variety of costs are incurred in the development and leasing of properties. After determination is made to capitalize a cost, it is allocated to the specific component of a project that is benefited. Determination of when a development project is substantially complete and capitalization must cease involves judgment. The Company’s capitalization policy on development properties is based on accounting guidance for the capitalization of interest cost and accounting guidance for costs and the initial rental operations of real estate properties. The costs of land and buildings under development include specifically identifiable costs. The capitalized costs include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes, salaries and related costs and other costs incurred during the period of development. The Company considers a construction project as substantially complete and held available for occupancy upon the completion of tenant improvements, but no later than one year from cessation of major construction activity. The Company ceases capitalization on any portion substantially completed and occupied or held available for occupancy, and capitalizes only those costs associated with the portion under construction. Costs and accumulated depreciation applicable to assets retired or sold are eliminated from the respective accounts and any resulting gains or losses are reported in the Consolidated Statements of Operations. |
Impairment of Real Estate |
The Company reviews its real estate portfolio, including land inventory, for impairment whenever events or changes indicate that its carrying value may not be recoverable. Impairment indicators include, but are not limited to, significant decreases in property net operating income, significant decreases in occupancy rates, the physical condition of the property and general economic conditions. A property’s value is impaired only if, in management’s estimate, the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property are less than the carrying value of the property. In addition, the undiscounted cash flows may consider a probability-weighted cash flow estimation approach when alternative courses of action to recover the carrying amount of a long-lived asset are under consideration or a range is estimated at the balance sheet date. Significant estimates are made in the determination of future undiscounted cash flows including future net operating income, estimated hold periods, risk of foreclosure and estimated cash proceeds received upon disposition of the asset. To the extent an impairment has occurred, the loss will be measured as the excess of the carrying amount of the property over the fair value of the property. Determining fair value of real estate, if required, also involves significant judgments and estimates including discount and capitalization rates. Changes to these estimates made by management could affect whether or not an impairment charge would be required and/or the amount of impairment charges recognized. |
Impairment of Unconsolidated Entities |
The Company reviews its unconsolidated entities for other-than-temporary impairments whenever events or changes indicate that its carrying value in the investments 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 unconsolidated entities. This determination is based upon the length of time elapsed, severity of decline, possible recovery period and other relevant facts. Determining fair value of a real estate investment and whether or not a loss is other-than-temporary involves significant judgments and estimates. Examples of these estimates include timing and amounts of expected cash flows, discount rates, capitalization rates and comparable sales data, among other things. Changes to these estimates could affect whether or not an impairment charge would be required and/or the amount of impairment charges recognized. |
Stock-Based Compensation |
Stock-based compensation cost is measured at the date of grant and is based on the fair value of the equity award. The fair value of stock options is computed using the Black-Scholes option pricing model, which incorporates assumptions for risk-free rate, expected volatility, dividend yield, and expected life of the options. The fair value of restricted stock is equal to the closing price of the stock on the date of grant. The fair value cost of stock options and restricted stock, as adjusted for estimated forfeitures, is recognized over the requisite service period of the grantee using the straight-line attribution method. Cost recognition is accelerated if the grantee is retirement-eligible (as defined in the 1994 Stock Plan, as amended) or becomes retirement-eligible before the end of the nominal vesting period. The cost is recognized immediately if the grantee is retirement-eligible at the date of grant or on a straight-line basis over the period ending with the first anniversary from the date of grant when the individual becomes retirement-eligible. The fair value of performance shares that do not have a market condition is equal to the closing price of the underlying stock on the date of grant. The compensation cost is recognized on a straight-line basis over the requisite service period if it is probable that the performance goals will be achieved. The fair value of performance shares that have a market condition is computed using a Monte Carlo simulation. The compensation cost is recognized over the requisite service period if the requisite service is rendered, even if the market condition is never satisfied. |
Earnings Per Share |
The Company’s restricted stock is considered a participating security pursuant to the two-class method for computing basic earnings per share (“EPS”). The Class A Common Units issued in exchange for Bruce C. Ratner’s noncontrolling interests in the Forest City Ratner Company portfolio in November 2006, which are reflected as noncontrolling interests in the Consolidated Balance Sheets, are considered convertible participating securities as they are entitled to participate in dividends paid to the Company’s common shareholders. The Class A Common Units are included in the computation of basic EPS using the two-class method and are included in the computation of diluted EPS using the if-converted method. The Class A common stock issuable in connection with a put or conversion of the Puttable Equity-Linked Senior Notes due 2014, Convertible Senior Notes due 2016, Convertible Senior Notes due 2018, Convertible Senior Notes due 2020 and Series A Cumulative Perpetual Convertible Preferred Stock are included in the computation of diluted EPS using the if-converted method. |
Acquisition of Rental Properties |
Upon acquisition of a rental property, the purchase price of the property is allocated to net tangible and identified intangible assets acquired based on fair values. Above-market and below-market in-place lease values for acquired properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) the Company's estimate of the fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. Capitalized above-market lease values are amortized as a reduction of rental revenues (or rental expense for ground leases in which the Company is the lessee) over the remaining non-cancelable terms of the respective leases. Capitalized below-market lease values are amortized as an increase to rental revenues (or rental expense for ground leases in which the Company is the lessee) over the remaining non-cancelable terms of the respective leases, including any fixed-rate renewal periods that are probable of being exercised. For the Company's below market lease and in-place lease intangibles that remain at December 31 and January 31, 2013, there were no fixed rate renewal periods associated with these leases that the Company deemed probable of renewal and included in the calculation of the intangible asset value or related amortization period. |
Intangible assets also include amounts representing the value of tenant relationships and in-place leases based on the Company's evaluation of each tenant’s lease and its overall relationship with the respective tenant. The Company estimates the cost to execute leases with terms similar to in-place leases, including leasing commissions, legal expenses and other related expenses. This intangible asset is amortized to expense over the remaining term of the respective lease. The Company's estimates of value are made using methods similar to those used by independent appraisers or by using independent appraisals. Factors considered by the Company in this analysis include an estimate of the carrying costs during the expected lease-up periods, current market conditions and costs to execute similar leases. In estimating carrying costs, the Company includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, which primarily range from three to twelve months. The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired. The Company also uses the information obtained as a result of its pre-acquisition due diligence in considering any conditional asset retirement obligations, and when necessary, will record a conditional asset retirement obligation as part of its purchase price. |
When calculating the estimated value to assign to a tenant relationship intangible asset, the Company estimates the likelihood that a lessee will execute a lease renewal and other factors relative to the relationship. In determining the likelihood of lease renewal, the Company utilizes a probability weighted model based on many factors. Other qualitative factors related to the relationship that the Company considers include, but are not limited to, the nature and extent of the business relationship with the tenant, growth prospects for developing new business with the tenant and the tenant’s credit quality. The value of tenant relationship intangibles is amortized over the remaining initial lease term and expected renewals, but in no event longer than the remaining depreciable life of the building. The value of in-place leases is amortized over the remaining non-cancelable term of the respective leases and any fixed-rate renewal periods that are deemed probable. |
In the event that a tenant terminates its lease, the unamortized portion of each intangible asset, including market rate adjustments, in-place lease values and tenant relationship values, would be charged to expense. |
Cash and Equivalents |
The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. Cash equivalents are stated at cost, which approximates market value. |
Cash flows associated with items intended as hedges of identifiable transactions or events are classified in the same category as the cash flows from the items being hedged. Cash flows from derivatives not designated as cash flow or fair value hedges are generally classified in the investing section in the Consolidated Statements of Cash Flows. |
Cash flows associated with lease procurement costs are classified as investing activities and consist primarily of lease commissions and related legal fees associated with procuring first generation tenants under long-term lease agreements for office buildings, retail regional malls or specialty retail centers. The Company primarily incurs these costs during the development phase of the project and they are integral to starting construction and ultimately completing the project. Management views these lease procurement costs as part of the initial investment to obtain long-term cash inflow. |
The Company maintains operating cash and reserves for replacement balances in financial institutions which, from time to time, may exceed federally insured limits. The Company periodically assesses the financial condition of these institutions and believes that the risk of loss is minimal. |
Restricted Cash and Escrowed Funds |
Restricted cash and escrowed funds represent restricted amounts with financial institutions for debt services payments, taxes and insurance, collateral, security deposits, capital replacement, improvement and operating reserves, bond funds, development escrows and construction escrows. |
Allowance for Doubtful Accounts and Reserves on Notes Receivable |
The Company records allowances against its rent receivables from tenants and other receivables that it considers uncollectible. These allowances are based on management’s estimate of receivables that will not be realized from cash receipts in subsequent periods. The Company also maintains an allowance for receivables arising from the straight-lining of rents. This receivable arises from earnings recognized in excess of amounts currently due under lease agreements. Management exercises judgment in establishing these allowances and considers payment history and current credit status in developing these estimates. The allowance against the straight-line rent receivable is based on historical experience with early lease terminations as well as specific review of significant tenants and tenants that are having known financial difficulties. There is a risk that the estimate of the expected activity of current tenants may not accurately reflect future events. If the estimate does not accurately reflect future tenant vacancies, the reserve for straight-line rent receivable may be over or understated by the actual tenant vacancies that occur. |
The Company estimates the allowance for notes receivable based on its assessment of expected future cash flows estimated to be received with consideration given to any collateral of the respective note. If the estimate of expected future cash flows does not accurately reflect actual events, the reserve on notes receivable may be over or understated by the actual cash flows that occur. |
Investments in Unconsolidated Entities |
The Company accounts for its investments in unconsolidated entities 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 each unconsolidated entity is allocated in accordance with the provisions of the applicable operating agreements, which may differ from the ownership interest held by each investor. Certain investments in unconsolidated entities' share of cumulative allocated losses and cash distributions received exceeds its cumulative allocated share of income and equity contributions. As a result, the carrying value of certain investments in unconsolidated entities is negative. Unconsolidated entities with negative carrying values are included in cash distributions and losses in excess of investments in unconsolidated entities in the Consolidated Balance Sheets. Differences between the Company’s carrying value of its investment in unconsolidated entities and the Company’s underlying equity of such unconsolidated entities are amortized over the respective lives of the underlying assets or liabilities, as applicable. The Company records income or loss in certain unconsolidated entities based on the distribution priorities, which may change upon the achievement of certain return thresholds. |
The Company invests in projects through partnerships and limited liability entities. The Company may provide funding in excess of its legal ownership. These fundings are typically interest-bearing or entitle the Company to a preference on and of such advances on property cash flows and are included in investments in and advances to unconsolidated entities. |
Other Assets |
Included in other assets are costs incurred in connection with obtaining financings which are deferred and amortized over the life of the related debt. Costs incurred in connection with leasing space to tenants are also included in other assets and are deferred and amortized using the straight-line method over the lives of the related leases. |
Intangible Assets |
Upon an acquisition of a rental property, the Company records intangible assets acquired at their estimated fair value separate and apart from goodwill. The Company amortizes identified intangible assets with finite lives on a straight-line basis over the period the assets are expected to contribute directly or indirectly to the future cash flows of the acquired property. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss is recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its estimated fair value. |
In connection with the Company’s military housing projects, intangible assets are recorded based upon the costs associated with acquiring military housing development and management contracts. Intangible assets related to the military housing development contracts are amortized based upon the ratio of development fees earned in relation to overall fee income to be earned throughout the contract period. Intangible assets related to the military housing management contracts are amortized based upon a straight-line basis over the remaining term of the management contracts. |
Accumulated Other Comprehensive Loss |
The following table summarizes the components of accumulated other comprehensive income (loss) (“accumulated OCI”): |
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| | | | | | | | | | | | |
| December 31, | January 31, | | | |
| 2013 | 2013 | 2012 | | | |
| (in thousands) | | | |
Unrealized losses on securities | $ | — | | $ | 340 | | $ | 445 | | | | |
| | |
Unrealized (gains) losses on foreign currency translation | 189 | | (69 | ) | 1,558 | | | | |
| | |
Unrealized losses on interest rate contracts(1) | 125,059 | | 168,497 | | 194,928 | | | | |
| | |
| 125,248 | | 168,768 | | 196,931 | | | | |
| | |
Income tax benefit | (48,517 | ) | (65,382 | ) | (76,315 | ) | | | |
Noncontrolling interest | (149 | ) | (183 | ) | (156 | ) | | | |
Accumulated Other Comprehensive Loss | $ | 76,582 | | $ | 103,203 | | $ | 120,460 | | | | |
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-1 | Included in the amounts as of December 31, 2013, January 31, 2013 and January 31, 2012 are $97,360, $126,506 and $143,303, respectively, of unrealized loss on an interest rate swap associated with New York Times office building on its nonrecourse mortgage debt with a notional amount of $640,000. This swap effectively fixes the mortgage at an all-in lender interest rate of 6.40% and expires in September 2017. | | | | | | | | | | | |
The following table summarizes the changes, net of tax and noncontrolling interest, of accumulated OCI by component for the 11 months ended December 31, 2013: |
|
| | | | | | | | | | | | |
| Securities | Foreign Currency Translation | Interest Rate Contracts | Total |
| (in thousands) |
Balance, February 1, 2013 | $ | (208 | ) | $ | 42 | | $ | (103,037 | ) | $ | (103,203 | ) |
|
OCI before reclassifications | 430 | | (158 | ) | 22,707 | | 22,979 | |
|
(Gain) loss reclassified from accumulated OCI | (222 | ) | — | | 3,864 | | 3,642 | |
|
Total other comprehensive income | 208 | | (158 | ) | 26,571 | | 26,621 | |
|
Balance, December 31, 2013 | $ | — | | $ | (116 | ) | $ | (76,466 | ) | $ | (76,582 | ) |
|
The following table summarizes (gains) losses reclassified from accumulated OCI and their location on the Consolidated Statements of Operations for the 11 months ended December 31, 2013: |
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Accumulated OCI Components | (Gain) Loss Reclassified from Accumulated OCI | | Location on Consolidated Statements of Operations | | | | | | | |
| (in thousands) | | | | | | | | | |
Interest rate contracts | 6,258 | | | Interest expense | | | | | | | |
| | | | | | |
Interest rate contracts | 82 | | | Equity in earnings | | | | | | | |
| | | | | | |
| 6,340 | | | Total before income tax and noncontrolling interest | | | | | | | |
| | | | | | |
| (2,460 | ) | | Income tax benefit | | | | | | | |
| (16 | ) | | Noncontrolling interest | | | | | | | |
| $ | 3,864 | | | Loss on interest rate contracts reclassified from accumulated OCI | | | | | | | |
| | | | | | |
Historic and New Market Tax Credit Entities |
The Company has investments in properties that have received, or the Company believes are entitled to receive, historic preservation tax credits on qualifying expenditures under Internal Revenue Code (“IRC”) section 47 and new market tax credits on qualifying investments in designated community development entities (“CDEs”) under IRC section 45D, as well as various state credit programs, including participation in the New York State Brownfield Tax Credit Program, which entitles the members to tax credits based on qualified expenditures at the time those qualified expenditures are placed in service. The Company typically enters into these investments with sophisticated financial investors. In exchange for the financial investors’ initial contribution into the investment, the financial investor is entitled to substantially all of the benefits derived from the tax credit. Typically, these arrangements have put/call provisions (which range up to 7 years) whereby the Company may be obligated (or entitled) to repurchase the financial investors’ interest. The Company has consolidated each of these entities in its consolidated financial statements and has included these investor contributions in accounts payable, accrued expenses and other liabilities. |
The Company guarantees to the financial investor that in the event of a subsequent recapture by a taxing authority due to the Company’s noncompliance with applicable tax credit guidelines, it will indemnify the financial investor for any recaptured tax credits. The Company initially records a liability for the cash received from the financial investor. The Company generally records income upon completion and certification of the qualifying development expenditures for historic preservation tax credits and upon certification of the qualifying investments in designated CDEs for new market tax credits, resulting in an adjustment of the liability at each balance sheet date to the amount that would be paid to the financial investor based upon the tax credit compliance regulations, which range from 0 to 7 years. Income related to the sale of tax credits of $19,347,000, $20,800,000 and $27,296,000 was recognized during the 11 months ended December 31, 2013 and the years ended January 31, 2013 and 2012, respectively, which was recorded in interest and other income. |
Income Taxes |
Deferred tax assets and liabilities are recorded to reflect the expected tax consequences on future years attributable to temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The Company has recognized the benefit of its tax loss carryforward, which it expects to use as a reduction of the deferred tax expense. The Company records valuation allowances against deferred tax assets if it is more likely than not that a portion or all of the deferred tax asset will not be realized. The Company’s financial statements reflect the expected future tax consequences of a tax position if that tax position is more likely than not of being sustained upon examination, presuming the taxing authorities have full knowledge of the position and all relevant facts. The Company records interest and penalties related to uncertain income tax positions as a component of income tax expense. |
Derivative Instruments and Hedging Activities |
Derivatives are recorded at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and whether it meets the hedge accounting requirements. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain interest rate risk, even though the contracts do not qualify for or the Company has elected not to apply hedge accounting. |
Noncontrolling Interest |
Interests held by partners in consolidated entities are reflected in noncontrolling interest, which represents the noncontrolling interests’ share of the underlying net assets of the Company’s consolidated subsidiaries. Noncontrolling interest that is not redeemable is reported in the equity section of the Consolidated Balance Sheets. |
Noncontrolling interests where the Company may be required to repurchase the noncontrolling interest at fair value under a put option or other contractual redemption requirements are reported in the mezzanine section of the Consolidated Balance Sheets as redeemable noncontrolling interest. The Company adjusts the redeemable noncontrolling interest to redemption value (which approximates fair value) at each balance sheet date with changes recognized as an adjustment to additional paid-in capital. |
2013 Transition Period Comparative Data |
The following table presents certain financial information for the 11 months ended December 31, 2013 and 2012, for comparability purposes. |
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| 11 Months Ended December 31, | | | | | | |
| 2013 | 2012 | | | | | | |
(Unaudited) | | | | | | |
| (in thousands) | | | | | | |
Revenues from real estate operations | $ | 1,020,108 | | $ | 984,054 | | | | | | | |
| | | | | |
Expenses | | | | | | | | |
Operating expenses | 675,585 | | 608,422 | | | | | | | |
| | | | | |
Depreciation and amortization | 279,189 | | 195,044 | | | | | | | |
| | | | | |
Write-offs of abandoned development projects and demolition costs | 40,414 | | 14,029 | | | | | | | |
| | | | | |
Impairment of real estate | 475,555 | | 30,660 | | | | | | | |
| | | | | |
Net loss on land held for divestiture activity | 7,382 | | 4,457 | | | | | | | |
| | | | | |
| 1,478,125 | | 852,612 | | | | | | | |
| | | | | |
Interest expense | (292,324 | ) | (236,287 | ) | | | | | | |
Amortization of mortgage procurement costs | (8,561 | ) | (10,186 | ) | | | | | | |
Gain on extinguishment of debt | 4,549 | | 6,807 | | | | | | | |
| | | | | |
Interest and other income | 52,332 | | 42,246 | | | | | | | |
| | | | | |
Net gain on disposition of partial interests in rental properties | 496,092 | | — | | | | | | | |
| | | | | |
Loss before income taxes | (205,929 | ) | (65,978 | ) | | | | | | |
Income tax benefit | (9,334 | ) | (13,291 | ) | | | | | | |
Net gain on change in control of interests | 2,762 | | 6,766 | | | | | | | |
| | | | | |
| | | | | | | | |
Earnings from unconsolidated entities, including impairment, gross of tax | 107,825 | | 84,543 | | | | | | | |
| | | | | |
Net gain (loss) on land held for divestiture activity, gross of tax | 1,338 | | (42,606 | ) | | | | | | |
| | | | | |
| 109,163 | | 41,937 | | | | | | | |
| | | | | |
Loss from continuing operations | (84,670 | ) | (3,984 | ) | | | | | | |
Discontinued operations, net of tax | 13,880 | | 61,074 | | | | | | | |
| | | | | |
Net earnings (loss) | (70,790 | ) | 57,090 | | | | | | | |
| | | | | |
Noncontrolling interests | 65,483 | | (5,635 | ) | | | | | | |
| | | | | |
Net earnings (loss) attributable to Forest City Enterprises, Inc. | (5,307 | ) | 51,455 | | | | | | | |
| | | | | |
Preferred dividends and inducements of preferred stock conversions | (185 | ) | (32,129 | ) | | | | | | |
Net earnings (loss) attributable to Forest City Enterprises, Inc. common shareholders | $ | (5,492 | ) | $ | 19,326 | | | | | | | |
| | | | | |
New Accounting Guidance |
The following accounting pronouncements were adopted during the 11 months ended December 31, 2013: |
In July 2013, the Financial Accounting Standards Board ("FASB") issued an amendment to the accounting guidance on the use of benchmark interest rates for hedge accounting. This guidance provides an entity the option to use the Fed Funds Effective Swap Rate, in addition to the rate on United States Treasuries and London Interbank Offered Rate ("LIBOR"), for hedge accounting purposes. The guidance also removes restrictions on using different benchmark rates for similar hedges. This guidance is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements. |
In February 2013, the FASB issued an amendment to the accounting guidance for the reporting of amounts reclassified out of accumulated OCI. This guidance does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated OCI by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated OCI by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The required disclosures upon adoption of this guidance on February 1, 2013 are included in the Company’s consolidated financial statements. |
In July 2012, the FASB issued an amendment to the accounting guidance on testing indefinite-lived intangible assets for impairment. This guidance provides an entity the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If an entity concludes that it is not more likely than not that the asset is impaired, then the entity is not required to take further action. If an entity concludes otherwise, it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative test by comparing the fair value with the carrying amount. This guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this guidance on February 1, 2013 did not have a material impact on the Company’s consolidated financial statements. |
In December 2011, the FASB issued an amendment to the accounting guidance on derecognition of in substance real estate. This guidance specifies that when a parent company (reporting entity) ceases to have a controlling financial interest (as described in the accounting guidance on consolidation) in a subsidiary that is in substance real estate as a result of a default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance on property, plant and equipment to determine whether it should derecognize the in substance real estate. Generally, a reporting entity would not satisfy the requirements to derecognize the in substance real estate before the legal transfer of the real estate to the lender and the extinguishment of the related nonrecourse indebtedness. This guidance is effective for fiscal years and interim reporting periods within those years, beginning on or after June 15, 2012. The adoption of this guidance on February 1, 2013 did not impact the Company’s consolidated financial statements or their comparability to previously issued financial statements as the guidance in this amendment is consistent with the Company's previous accounting policies. |
In December 2011, the FASB issued an amendment to the accounting guidance that requires entities to disclose both gross and net information on financial instruments and transactions eligible for offset on the balance sheets and financial instruments and transactions subject to an agreement similar to a master netting arrangement. In January 2013, the FASB issued guidance clarifying that the scope of disclosures about offsetting assets and liabilities should apply only to derivatives and hedging instruments. This guidance is effective for annual and interim reporting periods beginning on or after January 1, 2013. The adoption of this guidance on February 1, 2013 did not have a material impact on the Company’s consolidated financial statements. |
The following new accounting pronouncement will be adopted on its respective required effective date: |
In July 2013, the FASB issued an amendment to the accounting guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or tax credit carryforward exists. This guidance, which clarifies whether the unrecognized tax benefit should be recorded as a liability or reduction of the related deferred tax asset, is effective for fiscal years and interim reporting periods within those years, beginning after December 15, 2013. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The Company does not expect the adoption of this guidance to have a material impact on the Company's consolidated financial statements. |