R7B-Decline Owners Right Of First Refusal Agmt w- 1691 Michigan Ave InvestmentsCOMMISSION ITEM SUMMARY
Condensed Title:
A Resolution Of The Mayor And City Commission, Authorizing The City Manager To Decline, The Owner's Reciprocal Right Of First
Refusal, Pursuant To The Agreement Of Lease ("Ground Lease") Between The City ("Owner") And 1691 Michigan Ave lnvestments Lp
("Tenant"), Dated September 1, 1999, lnvolving The Property ("Project") Located At 1691 Michigan Avenue; And Further Approving
Tenant's Sale Of The Project To CLPF - Lincoln, LLC Gp, A Subsidiary Of Clarion Partners ("Proposed Purchaser"), Subject To The
Administration's Successful Completion Of lts Evaluation Of The Proposed Purchaser ln Accordance With Article ',l0 Of The Lease
("City's Due Diligence"), And Payment To The City Of lts Reasonable Costs lncurred ln Connection With The Proposed Sale; And Further
The Cit And Citv Clerk To Execute Closino Documents On Behalf Of The
ntended Outcome
N/A
Supporting Data (Surveys, Environmental Scan, etc.):
2014 Statement of Operating Revenues and Expenses
The Notice of Sale, including the Section 10.5 disclosures
A proposed transfer and/or sale of the Project requires written notice to the Owner, with nature of the transaction and other information
requested by Owner ("Notice of Sale"). On November 1O,2015, Tenant provided Owner with a Notice of Sale that Tenant intended to sell
100% of its leasehold interest in the Project ("Sale") as follows: Owner City of Miami Beach; Seller: 1691 Michigan Ave lnvestment LP;
Proposed Purchaser: CLPF - Lincoln, LLC; Purchase Price: $109,250,000 cash transaction. Clarion Lion Properties Fund Holdings, LP
("Clarion"), parent companyto CLPF - Lincoln, LLC, was started November 17th, 1999. Clarion with $7.8 billion in assets engages in the
business of acquiring, owning, holding for investment and investing in real estate assets.
The City must approve or disapprove the proposed Sale by January 9, 2016. The Administration is in the process of finalizing its Due
Diligence in connection with the proposed Sale. Additionally, the City has the right to elect, within 45 days after Owner's receipt of the
Offer Notice (i.e. December 25, 2015), whether or not to consummate the Right of First Refusal Transaction, at the same price and other
material terms set in the Offer Notice.
The Project consists of a 6 story parking garage, having 729 parking spaces, approximately 120,000 square feet of Class A offlce space,
and approximately 40,000 square feet of ground floor retail space, currently leased at near 90% occupancy. The Project collects net
operating rents for parking spaces and leases, in the total sum of $313,138/month and $3,757,658/ year. The Garage Facility's net
operating revenues is $1,143,280 for calendar year 2014 and the Retail and Office Space's net operating revenues is $2,599,352 for
calendar year, as contained in the 2014 Statement of Operating Revenues and Expenses
The City, via applicable City ordinances, has had a longstanding position of keeping the parking rates below market for the benefit of its
residents and visitors and therefore cannot compete with the income stream of a privately operated garage. Assuming a debt service of
$4,370,000 (estimated bond rate al 4o/o of the full purchase price), estimated revenues of $6,739,062, and estimated expenses of
$3,294,105; the Project would run a deficit per year of $925,043; this does not take into consideration payment of principal, capital
improvements, and other additional costs the Project wrll incur.
The City receives Base Rent of $336,000 per yearl$25,846.15 per month and is scheduled to increase on January 1,2018 by the lesser
of the 5 year cumulative CPI or twelve percent (12%). Additionally, the City receives 2.5% of annual gross revenue. The City received
$185,094.85 for Percentage Rent for the 2014 calendar year, for a total rental income of $521,09.4.85. The Project will revert back to the
City at the end of the ninety (90) year Term, the Administration is recommending that the City reject the Right of First Refusal and
approve the Sale of the Project to the Proposed Purchaser. The Administration recommends that the Mayor and City Commission
approve the Resolution authorizing the City Manager to decline the Owner's Reciprocal Right of First Refusal,; and further approving
tenant's sale of the Project to the Proposed Purchaser, CLPF - Lincoln, LLC, subject to and conditioned upon the Administration's
successful completion of its evaluation of the proposed purchaser (the "City's Due Diligence"), and payment to the City of its reasonable
costs incurred in connection with the proposed sale including reimbursement of the City's Due Diligence costs, and further authorizing the
Citv Manaoer and Citv Clerk to execute closino documents on behalf of the Citv.
Board Recomm
Financial !nformation:
Financia! !mpact Summary: The proposed will have does change the revenue schedule to the City.
Glerk's Office
T:\AGINDA\20 1 $\ilecernber\TcED\1 691 M ichiq an\ 1 69 1 lVliclriqarr Sale SU M
AGENoA trEM R7 BE MIAMIBEACH oo1g lZ-16'ty119
MIAMIBEACH
City of Miomi Beoch, I200 Convention Center Drive Miomi Beoch, Florido 33 I 39, www.miqmibeochfl.gov
COMMISSION MEMORANDUM
TO:
FROM:
DATE:
SUBJECT:
the City C
A RESOLUTION OF THE MAYOR AND CITY COMMISSION OF THE CITY
OF MIAMI BEACH, FLORIDA AUTHORIZING THE CITY MANAGER TO
DECLINE, IN WRITING, THE OWNER'S RECIPROCAL RIGHT OF FIRST
REFUSAL, AS REQUIRED PURSUANT TO THE TERMS OF SECTION
36.2 OF THE AGREEMENT OF LEASE ("GROUND LEASE") BETWEEN
THE CITY ("OWNER") AND 1691 MICHIGAN AVE INVESTMENTS LP
("TENANT"), DATED AS OF SEPTEMBER 1, 1999, INVOLVING THE
IMPROVEMENTS TO THE PROPERTY ("PROJECT") LOCATED AT 1691
MICHIGAN AVENUE, MIAMI BEACH, FLORIDA; AND FURTHER
APPROVING TENANT'S SALE OF THE PROJECT TO CLPF - LINGOLN,
LLC GP, A SUBSIDIARY OF CLARION LION PROPERTIES FUND
HOLDINGS, LP ("PROPOSED PURCHASER"), SUBJECT TO THE
ADMINISTRATION'S SUCCESSFUL COMPLETION OF ITS EVALUATION
OF THE PROPOSED PURCHASER !N ACCORDANCE WITH ARTICLE 1O
oF THE LEASE ("CtTY',S DUE D!L!GENCE"), AND PAYMENT TO THE
CITY OF ITS REASONABLE COSTS INCURRED IN CONNECTION WITHTHE PROPOSED SALE INCLUDING, WITHOUT LIMITATION,
REIMBURSEMENT OF THE CITY'S DUE DILIGENCE COSTS; AND
FURTHER AUTHORIZING THE CITY MANAGER AND CITY CLERK TO
EXECUTE ANY AND ALL CLOSING DOCUMENTS ON BEHALF OF THE
CITY.
ADMINISTRATION RECOM MENDATION
Adopt the Resolution.
BACKGROUND
On January 5, 1998, the City issued RFP No. 20-97198, seeking proposals for the development of
Public-Private Parking facilities (the "RFP"). On April 6, 1998, proposals from five (5) different
development teams were submitted and evaluated by an Evaluation Committee, and on July 15,
1998, the City Commission authorized negotiations with four (4) of the proposed development
projects.
As a result of said negotiations, on July 7, 1999, the Mayor and City Commission adopted
Resolution No. 99-23236 approving the Agreement of Lease and the Development Agreement
between the City of Miami Beach and Lincoln Plaza Partners LLC, for Development of a mix-use
project located at Michigan and Jefferson Avenues between Lincoln Lane and 17th Street ("Land").
Mayor Philip Levine and Members
Jimmy L. Morales, City Manager
December 9,2015
120
Commission Memo Sale of The Lincoln
1691 Michigan Avenue
December 9, 2015
Page2 of 4
On December 20,2000, the Mayor and City commission adopted Resolution No. 2000-24220,
modifying the terms of the Lease by waiving the provisions of Section 10.3(a) and amending
Section 10.4, approving the sale and Assignment and Assumption of the Ground Lease from
Lincoln Plaza Partners LLC to LNR Jefferson LLC before a certificate of occupancy had been
obtained. On October 5, 2005, LNR Jefferson LLC changed its name to The Lincoln, LLC. On or
about July 18,2006, The Lincoln LLC sold its interest in the Project and assigned its leasehold
interest in the Land to Lincoln Miami Beach lnvestment LLC, a Delaware limited liability company,
pursuant to that certain Assignment and Assumption of Ground Lease recorded in O.R. Book,
24738, Page 4Q73, of the Public Records of Miami-Dade County, Florida. On November 17,2006,
Lincoln Miami Beach lnvestment LLC changed its name to OIK Lincoln Miami Beach lnvestment
LLC, and thereafter, on June 17,2009, merged with 1691 Michigan Ave lnvestment LP, a
Delawa re I imited liabi I ity partnershi p ("Tenant").
On December 13, 2013, the Mayor and City Commission approved Resolution No. 2014-28486
authorizing the Mayor and City Clerk to execute Amendment No. 1 to Agreement of Lease
("Ground Lease") by and between the City of Miami Beach and 1691 Michigan Ave lnvestment LP
("Tenant"), dated as of September 1, 1999, involving the improvements to property located at 1663
Michigan Avenue, Miami Beach, Florida ("Garage Facility") and 1691 Michigan Avenue, Miami
Beach, Florida ("Office Space") (collectively, the "Project"), modifying the Scope of Use under the
Ground Lease by reducing the minimum number of parking spaces required for the Garage
Facility, from 700 to 635 spaces, in order to accommodate the development of a Miniature Golf
Project, at the sixth floor of the Garage Facility. City Middle, LLC has experienced delays in
completing the project and on December 30,2014, pursuant to House Bll 7207, requested an
extension of DRB 22941which was due to expire on September 5, 2014. The City of Miami Beach
Planning Department granted the extension of DRB 22941 which now expires September 5,2016.
ANALYSIS
Pursuant to Section 10.5 of the Ground Lease ("Required Notices"), a proposed transfer and/or
sale of the Project requires written notice to the Owner, with the identity of the transferor,
transferee, nature of the transaction, percentage of interest conveyed and such other information
requested by Owner ("Notice of Sale"). On November 10, 2015, Tenant provided Owner with a
Notice of Sale that Tenant intended to sell IOOYo of its leasehold interest in the Project ("Sale") as
follows:
Owner of Ground Lease:
Seller:
Proposed Purchaser:
Purchase Price:
City of Miami Beach
1691 Michigan Ave lnvestment LP
CLPF - Lincoln, LLC
$ 1 09,250,000 cash transaction
Clarion Lion Properties Fund. LP ("Clarion"), a Delaware limited partnership, parent company to
CLPF - Lincoln, LLC, was started November 17th, 1999. Clarion with $7.8 billion in assets
engages in the business of acquiring, owning, holding for investment and investing in or engaging
in activities related to investments in realestate assets.
The Notice of Sale, including the Section 10.5 disclosures, and the Proposed Purchaser's
financials, are attached hereto as Composite Exhibit "1".
121
Commission Memo Sale of The Lincoln
1691 Michigan Avenue
December 9,2015
Page 3 of 4
The Lease further provides that the City, as part of its approval of the proposed Sale, may request
additional information in connection therewith, and to evaluate the Proposed Purchaser of the
Project (the "City's Due Diligence"). The City must approve or disapprove the proposed Sale by
January 9,2016. TheAdministration is inthe process of finalizing its Due Diligence in connection
with the proposed Sale.
Additionally, in accordance with Section 36.2 of the Lease ("Owner's Reciprocal Right of First
Refusal"), the City has the right to elect, in writing, within 45 days after Owner's receipt of the
Refusal Notice (i.e. December 25, 2015), whether or not to consummate the Right of First Offer
Transaction, at the same price and upon such other material terms set forth in the Offer Notice.
The Project consists of a 6 story parking garage, having 729 parking spaces, approximately
120,000 square feet of Class A office space, and approximately 40,000 square feet of ground floor
retail space, currently leased at near 90% occupancy. The Project collects net operating rents for
parking spaces, leases, in the total sum of $313,138/month and $3,757,6581 year. The Garage
Facility net operating revenues of $1,143,280 for calendar year 2014 and the Retail and Office
Space net operating revenues of $2,599 ,352 for calendar year, as contained in the 2014 Statement
of Operating Revenues and Expenses, attached hereto and made a part hereof as Exhibit "2".
ln determining whether or not to recommend exercising the Owner's Reciprocal Right of First
Refusal, the Administration requested revenue and expense figures from City-owned and managed
parking garages and prepared the following comparison:
Property # of Parking Sp.Revenue Expenses
Net (Jperating
lncome NOI per space
17th Garage
Sunset Harbour Gar.
Penn Garage
Avg per space
Projected
The Lincoln Garage
The Lincoln Off. and Retail
Total
4,282,321 $ 1,536,045 $ 2,746,275
734,il7 $ 390,591 $ 343,956840,586$ 408,232$ 432,354
2,064 $ 904
$ 2,014. $ 2,014
$ 1,504,875 $ 659,270 $ 845,605
$ 5,234,187 $ 2,634,835 $ 2,599,352
$ 6,739,062 $ 3,294j05 $ 3,444,957
1,460
435
535
$
$
$
729
160,000 sqft
$ 1,881
$ 791
$ 808
$ 1,160
(See Note-)
KPMG Audited Financial Statemets
The Lincoln Garage
The Lincoln Off. and Retail
Total
729
160,000 sqft
$ 2,203,615 $ 1,060,334
$ 5,234,',t87 $ 2,634,835
$ 7,437,802 $ 3,695,169
$ 1,143,28',1
$ 2,599,352
$ 3,742,633
$ 1,568
Note: The City Garages (17"' Garage, Sunset and Penn Garage are paid in full). lf the City acquired
the Lincoln Garage the average NOI per parking space of $1 ,160 would be reduced by debt service.
The City, via applicable City ordinances, has had a longstanding position of keeping the parking
rates below market for the benefit of its residents and visitors and therefore cannot compete with
the income stream of a privately operated garage. Assuming a debt service of $4,370,000
(estimated bond rate at 4o/o of the full purchase price), estimated Revenues of $6,739,062, and
estimated Expenses of $3,294,105; the Project would run a deficit per year of $925,043; this does
not take into consideration payment of principal, capital improvements, and other additional costs
the Project will incur.
Pursuant to the Lease, the City currently receives Base Rent, in the total sum of $336,000 per
yearl$25,846.15 per month. The Base Rent is scheduled to increase on January 1,2018 by the
lesser of the cumulative CPI over the previous five year term or twelve percent (12Yo). Additionally,
the City receives Percentage Rent, which is due within sixty (60) days from the end of each year, in
the amount of 2.5o/o of the Project's annual gross revenue. The City received a total sum of
122
Commission Memo Sale of The Lincoln
1691 Michigan Avenue
December 9,2015
Page 4 of 4
$185,094.85 for Percentage Rent for the 2014 calendar year, for a total rental income of
$521,094.85.
CONCLUSION
Based upon the foregoing, and the fact that the Project will revert back to the City at the end of the
ninety (90) year Term, The Administration therefore recommends that the Mayor and City
Commission approve the Resolution authorizing the City Manager to decline, in writing, Owner's
Reciprocal Right of First Refusal, as required pursuant to the terms of section 36.2 of the Ground
Lease; and further approving tenant's sale of the Project to the Proposed Purchaser, CLPF -
Lincoln, LLC, a subsidiary of Clarion, subject to and conditioned upon the Administration's
successful completion of its evaluation of the proposed purchaser in accordance with article 10 of
the Ground Lease (the "City's Due Diligence"), and payment to the City of its reasonable costs
incurred in connection with the proposed sale including, without limitation, reimbursement of the
City's Due Diligence costs; and further authorizing the City Manager and City Clerk to execute any
and all closing documents on behalf of the City.
;::mi:S\TilffiRJG
"1" - Proposed Purchaser's financials
"2" - Statement of Operating Revenues and Expenses for Tenant
t :\a ge nd a\2 0 1 5\d e c e m b e Atc e d\ 1 6 9 1 m b h ig a nl 1 6 9 1 m ic h ig a n s a le me m o. docx
123
RESOLUTION NO.
A RESOLUTION OF THE MAYOR AND CITY COMMISSION OF THE CITY OF
MIAMI BEACH, FLORIDA AUTHORIZING THE CITY MANAGER TO DECLINE, IN
WRITING, THE OWNER'S RECIPROCAL RIGHT OF FIRST REFUSAL, AS
REQUIRED PURSUANT TO THE TERMS OF SECTION 36.2 OF THE
AGREEMENT OF LEASE ("GROUND LEASE") BETWEEN THE ClTy
("owNER") AND 1691 MICHIGAN AVE INVESTMENTS Lp (,,TENANT"), DATED
AS OF SEPTEMBER 1, 1999, INVOLVING THE IMPROVEMENTS TO THE
PROPERTY ("PROJECT") LOCATED AT 1691 MtCHtcAN AVENUE, M!AM!
BEACH, FLORIDA; AND FURTHER APPROVING TENANT,S SALE OF THE
PROJECT TO CLPF - LINCOLN, LLC, A DELAWARE LIMITED LIABILITY
CoMPANY ("PROPOSED PURCHASER"), SUBJECT TO THE
ADMINISTRATION'S SUCCESSFUL COMPLETION OF ITS EVALUATION OF
THE PROPOSED PURCHASER IN ACCORDANCE WITH ARTICLE 10 OF THE
LEASE ("CtTY',S DUE D|LIGENCE"), AND PAYMENT TO THE CITY OF ITS
REASONABLE COSTS INCURRED IN CONNECTION WITH THE PROPOSED
SALE INCLUDING, WITHOUT LIMITATION, REIMBURSEMENT OF THE CITY'S
DUE DILIGENCE GOSTS; AND FURTHER AUTHORIZING THE CITY MANAGER
AND CITY CLERK TO EXECUTE ANY AND ALL CLOSING DOCUMENTS ON
BEHALF OF THE CITY.
WHEREAS, On January 5, 1998, the City issued RFP No. 20-97198, seeking
proposals for the development of Public-Private Parking facilities (the "RFP"). On April 6,
1998, proposals from five (5) different development teams were submitted and evaluated
by an Evaluation Committee, and on July 15, 1998, the City Commission authorized
negotiations with four (4) of the proposed development projects; and
WHEREAS, As a result of said negotiations, on July 7, 1999, the Mayor and City
Commission adopted Resolution No. 99-23236 approving the Agreement of Lease and
the Development Agreement between the City of Miami Beach and Lincoln Plaza Partners
LLC, for the development of a mix-use project, located at Michigan and Jefferson Avenues
between Lincoln Lane and 17th Street (the "Land"); and
WHEREAS, Ah Agreement of Lease was executed between the City of Miami Beach and
Lincoln Plaza Partners LLC, dated as of September 1, 1999 ("Ground Lease"), in connection with
the lease of the Land where Tenant agreed to develop a commercial project, consisting of an
office building, a parking garage, and ground floor retail space (collectively the "Project"), and
which Project is currently located at 1691 Michigan Avenue; and
WHEREAS, On December 20, 2000, the Mayor and City commission adopted
Resolution No. 2000-24220, modifying the terms of the Lease by waiving the provisions of
Section 10.3(a) and amending Section 10.4, approving the sale and Assignment and
Assumption of the Ground Lease from Lincoln Plaza Partners LLC to LNR Jefferson LLC
before a certificate of occupancy had been obtained; and
WHEREAS, On October 5, 2005, LNR Jefferson LLC changed its name to The
Lincoln, LLC; and
124
WHEREAS, On or about July 18, 2006, The Lincoln LLC sold its interest in the
Project and assigned its leasehold interest in the Land to Lincoln Miami Beach Investment
LLC, a Delaware limited liability company, pursuant to that certain Assignment and
Assumption of Ground Lease recorded in O.R. Book, 24738, Page 4073, of the Public
Records of Miami-Dade County, Florida; and
WHEREAS, On November 17, 2006, Lincoln Miami Beach lnvestment LLC
changed its name to OIK Lincoln Miami Beach lnvestment LLC, and thereafter, on June
17,2009, merged with 1691 Michigan Ave lnvestment LP, a Delaware limited liability
partnership ("Tenant"); and
WHEREAS, On February 12, 2014, the Mayor and City Commission approved
Resolution No. 2014-28486 authorizing the Mayor and City Clerk to execute Amendment
No. 1 to the Ground Lease by and between the City of Miami Beach and Tenant,
modifying the Scope of Use under the Ground Lease by reducing the minimum number of
parking spaces required for the Garage Facility, from 700 to 645 spaces, increasing the
minimum number of parking spaces required to be maintained at all times for use by the
general public from 100 to 155 parking spaces, and further increasing the monthly parking
spaces for members of the general public from 50 to 75, in connection with the
development of a miniature golf project, at the sixth floor of the garage with the subtenant,
City Middle, LLC; and
WHEREAS, City Middle, LLC has experienced delays in developing the miniature
golf project and to date Amendment No. t has not been executed; and
WHEREAS, Pursuant to Section 10.5 of the Ground Lease ("Required Notices"), a
proposed transfer and/or sale of the Project requires written notice to the Owner, with the
identity of the transferor, transferee, nature of the transaction, percentage of interest
conveyed and such other information requested by Owner ("Notice of Sale"). On
November 10,2015, Tenant provided Owner with a Notice of Sale that Tenant intended to
sell 100% of its leasehold interest in the Project ("Sale") as follows:
Owner of Ground Lease:
Seller:
Proposed Purchaser:
Purchase Price:
City of Miami Beach
1691 Michigan Ave lnvestment LP
CLPF - Lincoln, LLC,
a Delaware limited liability company
$1 09,250,000 cash transaction; and
WHEREAS, pursuant to Section 26.2(c)(iii) of the Lease, the City has until January
9, 2016, in which to approve or disapprove of the Sale of the Project to the Proposed
Purchaser; and
WHEREAS, in accordance with Section 36.2 of the Lease, "Owner's Reciprocal
Right of First Refusal", the City also has the right to elect, in writing, whether to
consummate the Right of First Offer Transaction, at the same price and upon such other
material terms set forth in the Offer Notice ("Offe/'); the City has until December 25,2015
to exercise this Right of First Refusal; and
125
WHEREAS, after considering the revenue figures from surrounding City-owned
and managed parking garages, which have a longstanding position of keeping the parking
rates below market for the benefit of its residents and visitors (as compared to the Project
garage, which is a privately managed garage), and estimated Project revenues, City Staff
determined that the Project would run an annual deficit of approximately $925,043,
without taking into consideration payment of principal, capital improvements, and other
additional costs the Project; and
WHEREAS, considering that the Offer materially exceeds the cost to construct a
City-owned parking, office, and retail facility and that the Project will revert back to the City
at the end of the Lease term, the Administration recommends that the City decline the
Reciprocal Right of First Offer Transaction; and
WHEREAS, the Administration further recommends that the City Commission
approve the sale of the Project to the Proposed Purchaser, CLPF - Lincoln, LLC, subject to
City staff's successful completion of the City's Due Diligence, Tenant's payment of the
City's Due Diligence costs, and execution of all required closing documents.
NOW, THEREFORE, BE IT DULY RESOLVED THAT THE MAYOR AND CITY
COMMISSION OF THE CITY OF MIAM! BEACH, FLORIDA, hereby authorize the City Manager
to decline, in writing, the Owner's Reciprocal Right of First Refusal, as required pursuant to the
terms of Section 36.2 of the Ground Lease; and further approve Tenant's sale of the Project to the
Proposed Purchaser, CLPF - Lincoln, LLC, a Delaware limited liability company, subject to and
conditioned upon the Administration's successful completion of its evaluation of the Proposed
Purchaser in accordance with Article 10 of the Ground Lease (the "City's Due Diligence"), and
payment to the City of its reasonable costs incurred in connection with the proposed sale including,
without limitation, reimbursement of the City's Due Diligence costs; and further authorize the City
Manager and City Clerk to execute any and all closing documents on behalf of the City.
PASSED and ADOPTED this day of
ATTEST:
2015.
Rafael E. Granado, CITY CLERK Philip Levine, MAYOR
T:IAGENDAVO1S\DecembeMCED\1691 Michigan\1691 Michigan Sale RESO 12-9-1S.docx
APPROVED AS TO
FORM & LANGUAGE
A & FOR EXECUTTON&-{''cityAttorney $hf E-
126
EXHIBIT 1
FAILI'RE TO RF,SPOND TO TEIS REQI,EST WTIEIN THE TIME PERIOI' PROVIIIEII IN
rEE LEASE AGREEMENT BETWEEN CITY OF MIAIvfl BEACE, FLORIDA AND 1591
IIIICEIGArT AVE INYESIXTIENT LP SIIALL CONSTITUIE AI'TOMATIC APPROVAL OT
TEE MATTERS IIESCRIBED HEREIN WITE RESIPECT TO SECTION 36.2 OT SUCII
LEASE AGREEMENT.
Novembcr 9,2015
Sent Vla IIPS rnd Eand Deliverv
City ofMiami Bcach
City Attorncy
1700 Convention Center Drive
Miami Bcrch, Florida 33 139
City ofMiami Beach
CityAttomey
17fi) Convontion @nEr Drivc
Mhmi Bcach, Florida 33139
Bloom & Minskcr
Suitc 700
Itt0l Brickell Avenue
Miami, Florida 33131
Attcntion: JoelN. Minslccr, P.A.
Rc: Lcasc Agrecment (as amcndcd ad assigne4 thc "Lcasc') benpeca CITY OF MIAMI BEACII,
FLORIDA, a municipal corporetiur duly organizcd and existing undcr the laws of the Stac of Florida
("Landlord ), and 169l Michigan Ave lnvcshcnt LP, a f,)clawur limited partrrership (successor in
intcrcst to Lincoln Plaza Partrcrs, LLC) fTcnant'), datcd Sepombcr 1, 1999, wilh rcspect to the
propcrty located at 169l Michigan Avonrr, Miami BGac[ Florida (tho'?renrisss); capiblized tcrms
uscd but not othenvisc dcfined horcin havc thc rrcEdngs given such tcnru in the Lossc.
Dear Sir or Madam:
Pursunt to Articlc 362(a) of the Lcase, Tenant hcrcby notifics Landlord that Tenant desircs !o sell its
loasehold inercst in the hemiscs. This notioc consitutcs an Offcr Noticc de.scribcd in Articlo 36.2(a) of
the Lease. Purnrant to Articlc 36.2(b) of thc Lcasc, Tcnant wiU not oon$rmmatc any ofrcr fiom e rhfud
party to purchasc the Premises until thc earlier to occur of (i) the cxpiration of 45 days foltowilg
Landlord's rrccip of this Oftr Notioe, or (ii) recoipt by Tenant of a noticc by Owner dcclining to
colr"sumroEtc ttc Right of First Offer Transaction. ln the event thgt Lcndlord elects not to corxumm& the
Right of First Offer Trursaction, Tcnant kindly requcsts that Landlord promptty provide a writcn stsemld
to Tenant of such intcntion by countcrsigning in thc applicablc signaurc block bclow.
127
Pursuant to Scction 36.2\t) and Exhibit 362(a) of thc [.easc, dro &rms of this OfferNotice are es folloun:
2. Closinq DstG - The closing of thc purchasc shall takc placc on a dat dcsiguted by Tcnant, but in
any cvent not loss than sixty (60) days nor morc dran nincty (90) days following tre dse such
Tenant elrcctttes a puuhasc sgrcetrcnt wi6 the purchaser. If landlord declines to bc thc pnnchascr
of this Right of First Offer Transscdon, Tcnant will likely coruummatc thc salc o a third psrty st
an earlicr dstc.
3, Dccd: Title - At thc closing, Tcmant shall convcy to the Purchascr (i) all of Tcnant's right, tittc end
intcrcst in and to the Prcmiscs by a specid wrranty deed and (ii) Ell of Tcnant's ri&g titlc ana
interest in an to this I*asc by an assignmcnt of lerse. The form of such dced and rrsignmart of
lcasc sha[ bc mrnratly acccptablc to TcNunt and Otrrns hrt stull not in any ovcmt prcvide for any
rcprcscntations by Tcnant 6fl1s1rhen a rtprcsenttion that Tcnant has not thcrstoforc ranerrcd &
assigrcd thc items bcing transfarrcd or convoyod there,by and rcprescntrtions and wamntics
customarily contained in a spocial wananty dccd. Tcnant's InErest in thc Premises and thc Leasc
shdl be conveyed to Oqmer subjcct to all lieru encurnbranccs md othcr mdcrs thcu affcoting the
titlc thercto and any stae of frcts a sunvey may rwcal (but in all oases subjcot o Tcnrm's
obligatiolu under Section 2.2 of the l,ease). Tmant strall also €fiGcuE all othcr doouments
customarily used in real estab transactions in Miami-IMc G*ty, Florida.
4. Rcnt Pnorations - At Urc closing of tlrc purchase, rll Rcntal and/or Impositions shdl bc p,rorsod
through the daE of closing and paid by tre party entitlcd thercto. If Landlord dcclines to Ue ttc
ryrcluser of this Right of First Otrer Tnnssc{ion, 0rc expenses will be custonrorily proratod as in
othcr rpal cstBtc tanssstions in Miasri-Dade County, Ftoridr, irrcluding buycr rocclving a crdit
with respcct to Landlord's post-closing obliptions undcr oxisting spaoe leasco for Enant
induocrncnt costs.
5. Elpenscs - Each party sball pay its own Etlomeyc' fccs. All titlc chargps, rccording fecs, suwcy
tharges and othcr cxpGnssc incunrd in connection with the purctuso shatl bo pard by purclrasoi.
Tcnant shill pay all documcntary stamp uxGs and suftax payablo in connoction with thc purchasc.
If Landlord d*lines to be fte purhasor of this Right of First Oftcr Tnnsaction, thpn-in a sato
tansaction to a third party purchascr, Tcnant shall pay transfcr ta:g documcntary $amp tax, Miarni-
Dade Cormty $fialq fccs and premium for titlo iruunncc, thc rccorrding fecs rclating to any titlc
clcaring documents nec€ssary to con$rmmaG thc salo, Tenant's attorneys' fccs, any ecs art
expenscs roquked to be paid to Lordlord for its consent and eny bnokorage commission due to trc
brokcr uscd in thc transaaion.
!f you havc any qucstions or nccd additiond information, fccl frce b contact us at HQ Capiul Real Eote
L.P.
l9lgn a ture P age Aa aclr dJ
128
Sinccrcly,
l59l Mchigan Avo Inrrcstnmt LP
cc: Andr{Kinry
SpcoccrlfcCann
DawPowell
WNTI A COPIBS TO:
CityofMiani Bcach
City Auormy
17fi) Convcntion Ccnter lhivc
Miami Bcrsb Ftoddr 33139
City of Miami Bcach
CityAttomcy
17CI Convention Centcr Drivc
Minmi BGrh, Florida 33139
Bloom&Mindrcr
Suic ?00
l40l Bricbll Avcnuc
Mrmi, Floride 33131
Atsrtion: Jocl N. Minrkcr, P.A.
129
The City ofMiami Borcb, Ftorida doec he,lety sleslllgf to consummstothc Right of First 0ffcr Trsnsastion
set forrh in this OffcrNotice.
SITY Or MIAM BEACS, TLORIDA,
amunicipal corporation ofthe State of Florida
By:-
Name:
130
I
EXUIBIT B
PERMITTED BIryER FINANCIAL STATEMENTS
131
FAILURE TO RESPOND TO THIS R.EQUEST WITHIN TIIE TIME PERIOD PROVIDED IN
THE LEASE AGREEMENT BETWEEN CITY OF MIAN{I BEACII, FLORIDA AND 169I
MICHIGAN AVE INVESTMENT LP SHALL CONSTITUTE AUTOMATIC APPROVAL OF
THE MATTERS DESCRIBED HEREIN WrTH RESPECT TO SECTION 103, 10.5 AhtD 10.6
OF SUCH LEASE AGREEMENT.
November 10,2015
Sent Via LIPS : :
City of Miami Beach
City Manager
1700 Convention Center Drive
Miami Beach, Florida 33139
City of Miami Beach
City Attorney
1700 Convention Center Drive
Miami Beach, Florida 33139
Bloom & Minsker
Suite 700
I401 Brickell Avenue
Miami, Florida 33131
Attention: Joel N. Minsker, P.A.
Re: Lease Agreement (as previously assigned, the "Lease") between CIry OF MIAMI BEACH,
FLORIDA, a municipal corporation duly organized and existing under the laws of the State of Florida
("Landlord"), and l69l Michigan Ave Investment LP, a Delarvare limited partnership (successor in
interest to Lincoln Plaza Partners, LLC) ("Tenant"), dated September l, 1999, with r€spect to the
property located at 169l Michigan Avenue, Miami Beach, Florida (the "Premises"); capitalized terms
used but not otherwise defined herein have the meanings given such terms in the Lease. For reference
a copy of the OfferNotice is attached hereto as Exhibit A.
Dear Sir or Madam:
If Landlord declines to accept that certain Offer Notice sent by Tenant on November 9, 2015 pursuant to
Section 36.2(a) of the Lease, then Tenant hereby requests Landlord's consent to a proposed Sale of
Tenant's interest in the Lease pursuant to Sections 10.3(c) and 10.5(a) of the Lease. Please note the
following information about the potential third party purchaser of Tenant's interest in the Lease: (i) the
name of the proposed purchaser is CLPF - Lincoln, LLC, a Delaware limited liabitity company, and the
proposed purchaser's address is c/o Clarion Partners, LLC, 1440 New York Avenue NW, Suite 200,
Washington, D.C. 20005, (ii) the Tenant's name is l69l Michigan Ave Inves[nent, LP, a Delaware limited
parhership, and Tenant's address is c/o American Fund US Investments LP, c/o HQ Capital Real Estate
L.P., I 14 West 47th Street, 23d Floor, New York, New York 10036-1508, and (iii) the contemplated Sale
is for one hundred percent (100%) of the leasehold interest under the Lease.
132
Th-9 nron@ purchaser is a srbsidiary of Clarion Partrers, a real estate invostnent alnnngemont company
wittr approximatety $36.E billion in total assets under managoment (for morc informaion, ptcasc scc
www.clarionoartncrs.cqm). The proposcd purcbaser hereby ccrtifies thst it is a pemritted Brryer pursuant
t9 Scction 103(c) of the Loase. Pursuaot to Section 10.3(cXA) of tho Lease, attached ptease nna rc
financial statements of the proposed purchaser afiachcd as Exhibit B (the "Financial Confide,otial
Information').
Pleaso note, to facilitarc I'ndlord's evsluation of the proposed purchaser, Clario,n Portrers is willing to
disclose to Landlord the Financial Confidential Information; provided, howerrer, by acc4ting sucn
Financial Confidential Information, Landlord agroes: (i) exccpt as required by applicable law, rcgulation or
legal process, to maintain in confidence and not disslose the Financial ConfidenGl Information, or ary part
thereof, to my third party other than to Landlod's represcntatives who have a need to know- sue,h
information (including without limitatiotr, its dir€otors, enrployees, financial advisors, ffiomeys ad
accountants) (collectively, "Reprcscntativesn) it being understood such Reprrsentatives shalt be informed
by Landlord of the confidential naturc of such information and shall bc dircctcd by Iaudlord to tncat such
inforrration confidentially, (ii) to talce the samc measures to maintain the confidcntiality of Oc Financial
Conlidential lnformation as I-andlord does with rcspec't to its own propriaary and confidential information;
and (iii) not to use any Financial Confidential Informuion for any purpose other than to evaluato whettrer
or not to consent to the proposed Sale of Tenant's intacst in the Lease. If the proposed Salo is not
oonsummat€4 or any time upou rcquest of Clarion Parmers for any rgtson, Landlord will rEturil to Clarion
Partners or destroy all writen Financial Confidential Information (except als mey be requircd for regrlatory
purposes).
Punuant to Section 10.(b) of the Lease, attached as Exhibi( C henAo please find a proposed form of
Assignment and Assumption of Ground lase (the 'Assumption of I*ase"). Pleasc confirm lhe
Assurnption of Lease is accepable for the consrmmation of the Sale to the proposed purchaser.
In the event that Iandlord consonts to tho proposed Sale of Tenant's intorest in the Lcase as dcscribcd
above and aPProves thc Assumption of kasc attachod hereto, Tenant kindly rcquests $Et landlord
promptly providc a writton statcrncnt to Tenant of such conscnt and approval by countersigring in the
applicablc signahre block bclow.
Ifyou have any questions or nood additional infomation, feel free to contact us at He Capital Real Estate
L.P.
lSignawe Page AttachedJ
133
By:
Sinoerely,
1691 MchigEn Avc lwcs&cot LP
cc: Andr0 Kiurcy
SpcnccrlttcCrrur
DrvePo*dl
WIIH A COPIES TO:
City of Mirmi Bcactr
City Managcr
17fi) Convention Ccmer [hive
Miuri Bcrch, Florida 33139
City of Miami Bcloh
CityAtbrucy
I 700 Cmvcfltion Crncr Drivp
Milni Bcrclt' Floride 33139
Blmm& tYlinslcr
Suia 7fi)
l40l BdokoU Avenuc
Minml Florids 33131
Atrcotion: Jocl N. Minskcr, P*A.
CX,PF-LincohLI,C
c/o Cluim Pafircrs, LLC
1440Ncw York AvcnrrN\il
suiE200
Washingon, DC20005
Atcntion: Barmn Willitutrs
MayerBrown LLP
214 Nortt Tqron Stncot
SuiE 3800
Chrd@, NC 282(D
Atbntion: Ihvid B. H. Sayc
134
The undersigned hcreby certifies to Landlord that it is a Pemitted Buyer pursuantto Setion 10.3(c) of the
Lease.
CLPF - LINCOLN, LLC,
a Delaware limited liability company
,n.( / *Q
Name: BanonlMlliams
135
The City of Miami Bcacb, Florida does hereby consent to the proposod Sale of Tenant's interest in the Leasc
as described ebove and approves the form ofAssumption oflease attached hereto.
cmY oF MIAM BEACTI, trLORIDA,
a municipal corporation of the Statc of Florida
By:-
Namc:
Title:
136
EXEIEITA
OFTER,NOTICE
137
138
,litlti l=
ii , ^',,.t,1'
,= =' a,:.
,,rtil ,,. - '
r rr ii ilrilL
r,lil iN\,
ut,,,,**Jli LLi,
.i
rlll: '
139
Annual Report 2014
Table of Contents
Letter to Shareholders
Fund Overview
Fund Performance
lnvestment Activity
Property Type Diversification
Property Operations
Property Diversification
Value-Add Activities
Capjtalization
National Market Update
Properties
Commitment to Sustainability
Notes
Report of lndependent Auditors
7
6
7
I
'to
13
14
1"5
16
2A
t6
34
35
37
For use with shareholders only. Flot intended ior public distfibution,
140
6.
r-uND trISCRtPTlOt'.j
The Clarion Lion Properties Fund is a core*style, open-end real
estate fund that holds a strategically diversif ied portfolio of
real estale assets across the four main property types in major
markets located throughout the United States. The primary
performance objective is to combine an attractive income
yield with long-term capital growth.
TljI cIJEnL()oir' ni_,5TlrJ IEX]r!
141
Letter to Shareholders
The Lion Properties Fund delrvered strong performance in 2014
with a total return for the year of 13.1601o. Accelerated leasing
activity and value gains across most of the Fund's portfolio drove
performance. The overall quallty of the Fund's portfolio, focus on
high-growth markets that are leading the improving U.S. economy,
bias towards urban and transit-oriented investments, and
maintained discipline in acquiring assets with accretive yields are
key contributors to results.
The Fund's one:year total return exteeded our original expectations of 10%-11% for the year.
lncome for 2O14 was 4.78% while appreciation was 8.O9%, again broad-based across the Fund's
portfolio. The Fund outperformed the ODCE benchmark over 2014 by 78 bps, largely driven by
value increases from office, industrial and tetail assets, Over a ftail:ng three-)rear basis, th€ Fund's
total annualized return has been 12.28%, stightly ahead of ODCE by 4 bps. The Fund's S-year
return is substantially ahead of the ODCE benchmark (+ll4 bps) due in large part to strong gains
from West Coast and Houston office assets, and strong recent gains at industrial and retail assets.
Total assets increased from $7,2 illion to $7.9 billion durins the year, and the portfolio rernains
broadly diversified over markets, property types and individual assets. The Fund accepted $412.0
million of new contributions during the year. based on the strength of the real estate market and Fund
returns, and paid out redemptions totaling $382.3 million. The Fund declared cash distributions
totaling $212.0 million resulting in a one-.year dividend yield of 4.15%.
The Fund saw continued strong improvement in operating fundamentals, Leasing activity was
very positive during 2O14, with over 5 million square feet of leasing cbmpleted. Overall occupancy
increased from 93,1% to 94.2%- This has been extremely helpfu! for the portfolio, but has created
some volatility in net operating income (NOl) growth, as ne\& leases at higher rents require
associated downtime and free rent.
ln general, we are seeing solid leasing demand, high occuparicy levels and the ability tO increase
rents. We expect healthy income growth over the next few years from the commercial property
sectors. and continued moderate g-rowth from the apartment sector, which began to normalize in
2O13. We continue to see rental rate increases across most markets and expect this to trend into
2O.15, driving operating income growth and value Et our properties.
The Fund made thirteen new investments totaling $947.7 million in 2014, and sold eight investments
totaling $495,8 million across ell property types. The Fund adhered closely to its investment
strategy, acquiring office properties in the San Francisco Bay Area and Austinl Urban and transit-
oriented apartment assets in the New York metro area and Denveri industrial bualdings in stiategic
secondary markets (Raleigh and lndianapolis); and a new Whole Foods-anchored retail center in
Austin, Texas. The Fund's most significant investments in 2Ol4 were a new outlet center and a new
Whole Foods.anchored power center, adjacent to each other in West Palm Beach, Florida. This
allowed the Fund to significantly increase its retail exposurer with newly developed, high-guality
assets having the potential for accretive yields.
Continued strong capital markets conditions in 2Ol4 allowed the Fund to opportunistically prune the
portfolio and continue re-balancing toward preferred markets and property types, The Ftrnd sold
the Lion ES hotel portfolio. significantly reducing its weighting to the hotel sector, The Fund also
sold the Specialty Labs Office Buiiding, a sinqle-tenant office building north of Los Angeles, for
asset/location considerations..All but one of the remaining sales served to reduce non-strategic
properties or exit non-strategic markets.
Ralch J. Beifcrd, lll
142
Leverage began 2Ol4 at 27.6Yo, within our target range of 2O-3O%, and stayed in tight range, ending the year at
27.9%.Ihe Fund had $4SO.O million of debt rnaturities over 2Ol4 which were replaced with two new financings:
$3OO.O million of fund level notes with maturities ranging fromT-12 years; as well as a new $185.O million mortgage
loan secured by fifteen industrial assets, with a terrn of 7 years. At the end of the year, the Fund also drew on its
line of credit (LOC) with the closing of the palm Beach lransactions, The new financings reduced the Fund's overall
interest cost quite significantly in 2014. starting the year at 5.7% and ending the year at 4.7yo (including the LOC).
This represents an annual savings of approximately $lO million in interest cost-
As we look to 2O15, improving economic daLa, evidenced in the second hatf of last year, continues to point to a
broadening econornic expansion and a strengthening lebor market. tn particular, consumer spending, business
investment, the housing rebound, lower fuel cssls and shrinking budget deficits are all expected to drive U.S.
economic growth going forward. Coupled with continuing low levels of new supply. this leads us to expect further
strengthening of cornmercial real estate fundamentals, with low vac€ncies and higher rent growth over the next
twelve months. Capital flows to real estate and transaction volume are expected to remain strong- Risks to the
near-term outlook exist in connection with a continued slowdown in global growth and transitioning global energy
markets"
The Fund s strategic plan for 2Ol5 includes increasinE exposure to mtsrkets and sectors we believe will show
superior growth or to have relative value, while continuing to prune assets that are in less desirable or strategic
markets. New York. Seattle. San Francisco and Boston are top picks among malor markets. while we vievv DallaslFt
Worth, Austin, Denver, Southeast Florida, Phoenix, Salt Lake City, Portland and Raleigh/Durham as showing
increasingly attractive Erowth omong secondary markets. We will remain focused on assets located in urban,
transit-oriented areas, and continue to be disciplined in regard to pricing,
On behalf of Clarion Partners and the Lion Properties Fund team, I would like to thank you for your continued
support of the Fund.
Portfolio Manager
(212) 88s-253s
Jeb. Belf ord@clarionpar tners.com
143
ffi
3
,rG. rr*stix
144
Fu nd Cverview
XEY STATISTICS (AS OF DECEMBER g,2A]r.)
Total Asset Value $7.925 Million Portfolio Occupancy
Net Asset Value $5.398 Million Cash Ratio
Per Share Value Leverage Ratlo 27.9%.
Number of lnvestr!1ents Average lrivestment Size $57 Million
Number of Markets Number of Shareholders
*
I
€:'
I
O
Office
Retail
fndustrial
A-partment
Hotel
Other
pa$t performance is f,ot indicative of futvr€ r€sults. Pleasa see Notes on paga 35 ftr 6dditoral drsciosu(e informat,oo
145
Fund Performance
FUND PERFORMANCE VERSUS hIFI-ODCE
LION PROPERTIES FUNC)
SIrce lBrptlon
T.YEAR 3:YEAR
:SINCE
IO-YEAR INCEPTION5.YEAR
lncome Return 4.74%5.O396 5.69%5.52%6.33%
Appreciation Return 8.O9%6.99%8,83%o.oo%o.63%
Total Return Befor€ Fees 13.r6%12.25%!4.89%s,52%6.99%
Tot6l Return Afte, Fees lz,ra%11.3096 I3,88%4.55%6.fl%
2Ol4 continued a trend of stronE performance for the Lion Properties Fund, with its fifth consecutive calendar year
of double digit returns. The Fund produced a 13.16% total return for the year, comprised of a 4.78o/o income return and
8^O9% from appreciation. The appreciation return was composed ot'l 59% in property-level gains. while debt mark-
to-market contributed 48 basis points.
The Fund's 2014 income return was 4.78Y"vs.5.07% for the ODCE. The Fund's incorne return was moderately
impacted this year by capital programs taking place at a handful of its apartment and hotel properties (reducing
NOI), rent concessions associated with several major leases that have boosted value (6OO North Michigan Avenue
and Arboretum Gateway for example). and interest cost on the Fund's debt. On the other hand, Fund appreciation
was 8.O9% vs. ODCE's 7.O3%. The Fund had strong value gains across most of its portfolio. with office, industrial and
retail assets leading the gains. Office properties incr€ased by l1.l%, with growth led by properties located in top office
markets such es the 5an Francisco Bay Area, Houston, Southern California, New York, and Boston. The Fund's
industrial portfolio experienced broad based value growth of 8.4% with significant increases aL properties where
major new leases wei.e signed. Retail value Elrowth of 8,O% was primarily driven by 6OO North Michigan Avenue in
Chicago. Apartment values lncreased a moderate 3,8%, as the Fund's Washington DC apartments again tempered
growth, decreasing in value by 1.3% during the year. Excluding Washington DC apartments, this sector would have
been up 6.8%. Hotel values increased by 6.5%, predominately due to capital spent on renovation programs currently
taking place at two of the Fund's four remaining hotel assets.
On a 3-year basis, the Fund's total return outperformed the ODCE benchmark by 4 bps. Superior property-level
performance and significant value gains at major assets during the last couple years have countered the impact of
the Fund's hotel and Washington DC weightings over the 3-year time frame.
The Fund's S-year return is substantially ahead of the ODCE index (+114 bps) due in large part to strong gains in the
ol'fice portfotio. particularly in the West Coast and Houston, strong recent gains at industrial assets (particularly
Southern California) and at retail assets. Apartment performance was strong early in the s-year period, but has
lagged in the last 3 years (with Washington DC-area apartments the maior factor). The single largest asset
contributor to outperformance has been 6O0 North Michigan Avenue. a prime urban retail asset in Chicago.
pasl pa/formanco rs ftot rndrcatrve of future results Plcase sec Notes on pa$e 35 lor aodrtronal d sclosu.e ,nformatron
! ';r.,ilir 7
146
lnvestment Activity
ACGUISITIONS
The Fund made thirteen nev.l investments in 2014, totaling $947.7 million. The Fund adhered closely to its stated
investment strat€gy throughout the yea( increasing its retail weighting significantly while atso adding to its industrial
overweight. The Fund acquired urban and transit'oriented apartment assets in the New York metro area and Denver.
The Fund added office properties in the san Francisco Bay Area and three smaller office assets within the high-growth
Texas markets of Austin and San Antonio. Geographically, the Fund succeeded in increasing exposure to several of its
target major markets (New York, San Francisco. Southeast Florida), and also to top secondary. high growth markets like
Austin, Denver and Raleigh,/Durham. The Fund remained disciplined on pricing, with average stabilized cap rates and
unlevered lRRs at what we believe are the top end of the market for core transactions.
The lar.gest new investments were Palrn Beach Outlets and Marketplace at the Outlets which served to increase the
Fund's overall retail weighting. The properties are adiacent to each other to form a critical mass of leading relail brands
at a highly infill, former mall site on 1.95 within Palm Beach County, one of the most affluent areas in the U.S. The
properties were purchased in December for a total value of $37].4 million. The investments are currently structured and
being held as mezzanine loans: however both will convert to equity during 2O15. The Fund also purchased Whole Foods
at the Domain, a newly-developed grocery center in Austin, Texas.
The Fr.rnd added five office properties during the year, most notably the $lO7.O million acquisition of 6O Spear, a Class
A creative office building in San Francisco's South Financial District. The Fund also increased its exposure in Silicon
Valley with the purchase of 29Ol Patrick Henry in Santa Clara. California. Additionally, Mira Vista and The Overlook were
acquired in the high-9rowth, tech-focused market of Austin. University Park Tech lll & lV were purchas€d in San
Antonio at a high going-in yield, and complement the Fund's existing industrrial assets in the submarket, University Park
Tech I & ll, which are located adjacent to the property.
During the year the Fund acquired three apartment assets, The Station at Riverfront Park in Denver. Colorado. and
Parkway Lofts and Printhouse Lofts in the New York metro area. The Station at Riverfront Park is situated in LoDo, a
short distance from Denver's Union Station, a high-profile urban redevelopment oroject and transportation hub.
Parkway Lofts, located in Bloomfield, NJ, and Printhouse Lofts, located in Wjlliamsburg, Brooklyn. are both brand new
luxury apartment properties located within walking distance to mass transit of fering short commutes to Manhattan.
Lastly, the Fund acquired a $'115.O million industrial asset, Research Tri-Center, a ten-building industrial park located in
the rapidly growing, supply constrained market of Raleigh,/Durham: as well as Plainfield Park. ll, a development project
in the lndianapolis msrket.
PURCHASE:. PRICE AT
PRoPERTY MErRo MARKE, tJfrtf
($ MrLlrHBi
,CAP PROJECTEDRATT IRR1PROPERTY NAME
Mira Vista Office Austin a5/o1/14 $s8.8 5.6?7.3X
The Overlook Office Austin os/ot/14 912.6 6.49(8.1*
U-niversity Park Tech lll & tV
Whole Foods at Domein
Office San Antonio 05/01/14 $26.8 8,9X 8,8X
Retail os/og/14
06/1944
$34.1
s14.9!
" - *1:-s]-
6.8X:
6.496
Plainfield park il
29Ol Patrick Henry Drive
lndustrial lndianapolis
Office Santa Clara o6/74/14 $26,0 7.9X
Resesrch Tri-Center lndustrial Raleigh oa/06/14 $115.O 6.5X
''!7..."
7,O%The Station at Riverfront Apartment Denver oa10T14 s66.6 3.6%1
60 Spear Office San Francisco oa/19/14 $107.0 I )Ct 6,916
Parkway Lofts Apartment New York ro/30/14 $x04.0 8.OX
Printhouse Lofts Apartment New York \/o6/14 $30.s 4.5%6.2%
Marketplace at The Outlets5
Retall t2/17n4
-9:S
4.4%
West Pdm geach 12/1114 $L16;7 5.5!6
$754.7 5.4XPalm Beach Outle$s west Palm Beach
Total 4117.,,"61
'FroJected lRRs 6G danv€d from Cla{ion partners'endersrifrnE pro,ectroni. and exle^d iO to 13 }'sars depsndinB on each inve$rect! forecasted sub,llted reeersim year
,Purchas€ price represpnted by to:al commitied development cost, Land aost al acquErtron was $'l.0OO OOO
rsrabi,rzed aap rate (deveiopmeot prqperty)
'Stabilizfd cap rate (strateg'c leas6-up property)
lpalm Beach Oetlels and Marketp,ace at the Outlets are loarlr Grr,ed 8t colt valoe5 of $112.05a,25O and $99.175.875. respectrvely, 6s of
December 31. 2014. ThE Furch6se:pr(e aboee is represntad by total committed amount whlch wili be paad wheo tha loans convert to eeuity.
Past performance rs not tDdrcatrvo of {st!(e r6solts. Please see Note$ on pag€ f,5 tor aciditional disclosure information.
147
DISPOSITIONs
The Fund had aoother active disposition year, taking the opportunity to execute strategic sales and prunc the
portfolio of weaker assets as demand in the market was strong. The Fund closed on sales totaling $495.8 million in
eight transactions across all five property type$.
The most significant disposition of the year was the sale ot the Lion ES hotel portfolio. The portfolio was sold for a
gross ptic€ of $8OO.O million, resulting in total gross proceeds of to the Fund $300.O million (LPF was a 37.5%
owner). The sale significantly reduced the Fund's hotel exposure as of December 31, 2014.
The Fund sold Specialty Labs Of fice Building, a single-tenant office building north of Los Angeles, for asset/location
considerations. The transaction clo$ed in December for $96.O million The Fund also sold two small medical office
buildings during the year for a total of $22.7 million: Gwinnett Medical located outside Atlanta for $Il.l million; and
Vero Medical Suites, located in Vero Beach. Florida, for $11.6 miltion.
The Fund continues to prune smaller non-strategic assets across its retail, apartment and industrial portfolios;
Pleasant Shops, a lackluster neighborhood retail center located outside Boston. for a total of $23.4 miltion; Banyan
Grove at Towne Square, an older apartment community in Virginia Beach, which sold for $4I.0 million; and two
smaller Phoenix industrial buildings. Fifth Street lndustrial and Geneva lndustrial, sold for $9.O million and $3 7
rnillion, respectively.
PROPERTY NAME
"Irll[-s-I-e,-"1lgy,*i?]
ll:::""$ ":19"?:
Lion ES Hotels
PROPERTYTYFE :
lndust.ial
METRO
MARI{ET
n*::-
BostonR€tail
L46T
APPNAISAI.CLOSE AT SHAREDATE (t MIIL|ONS)
04/14/14 $9.5
o7/24/1A 522.9
. SALE
PRIC6
A'T SHARE REALIZED($ MILLTONS)
-.-- "-1"?:9"
123.4
s300.0
IRR
9._11
-11.5%_
(0.5x)Hotel various oB/12114 $298.3
Gwinnett Medical Office AUanta oa/B/14 9L0.6 $x1,1 (13.4%)
Banyan Grove at Towne Square Apartment Virginia Beach os/o4/14 $44.0 $41.0 6-0r(
6eneva lndustrial lndustriBl Phoenix 10/03/14 EA,4 $3.7 6.2%
Sp€oalty Labs Office Building Office santa clarata 12l'tz/14 $98.r1 $96.0* ." ** X5.5%
Vero Medical Suites Office Vero Beach t2/18/14 $11.1 s11.5 4,19i
?otrl ,{r9.t t{9s.8 3.74
past pertormaoce is not indic6tivo of Ioiure rp5el!$. FlBnse see Notee on Sage 35 for Bodltrona! dr$closure i$(srfsation
148
Property Type Diversification
PROPERTY TYPE DIVERS ICA.TION AS OF DECEMBER 31,2014
gfflcc .apartmGnt lndultrltl Ratall flolrl OthGr
G LionPropsrilesfund I NCREtFFundlndo((NFt-ODCE)
Office - The Fund has a long-term underweight bias to the office sector, based in part on the sector's historical
underperformance comp€red to the index, often with more volatility and greater capital requirements. We remain
cautious on the appetite ol tenants, especially in traditional sectors like law, banking and insurance, to add new space.
Howeve( office properties tend to outperform as recovery periods continue, generating significant rent growth.
Of fice demand has been recove!'ing nicely in major mark€ts as companies grow and office fundamentals gained in
strength over 2014. This is expected to continue over 2O15-2O16 with the market continuing to experience low new
construction generally. The Fund's present strategy is to increase its near-term weighting to office but still maintain
its overall long-term underweight bias to the sector.
Apartment - The Fund remains overweight the apartment sector. consistent with its long-term bias, as apartments are
one of the two long-term best performing property sectors in the index. The Fund s present strategy is to modestly
move exposure to an even-weight stance, based on a more mixed near-term picture for the sector, On the positive side,
demographics, cautious demand for home purchases 6nd tight credit standards continue to push people into the renter
pool, especially towards urban and transit-oriented properties. On the negative side, new supply has returned to the
long-term national average and is exceeding it in a handful of individual markets. Rent growth has moderated, and rent
and value growth in the other ma.ior sectors are expected to exceed spartments in the near-term.
lndustrial - On a longer-term basis, the Fund maintains an even-weight bras to the sector, given its lower weight in the
index. ln the near term, howaver, our view rernains particularly bullish, and the Fund will continue its overweight to
industrial real estate based on strong fundamentals. The sector was hit hard in the downturn End rents on average are
still 6.4% below peak, indicating the recovery h€s still been relatively moderate to date. E'commerce has also been a
maior boon to the sector, driving new demand for big-box fulfillment and distribution centers. Leasing activity
nationally is ramping, with dccupancy levels reaching stabilized levels in many markets. increasingly giving landlords
the upper hand in lease negotiatiens. We expect these factors will lead to strong rent growth in the coming years.
Retall - Retail:properties have a track record of strong performance over the long-term compared to other property
types and the sector warrants:an overweight bias. The Fund succeeded in increasing its retail exposure in late 2014,
but is still modestly underweight the sector. The Fund is focused on four soecific format *ypes. The tirst is "high-
street" urban retail, which is destination affluent relail in maior cities. Tenant demand for these areas is robust. for
both sates and branding purposes. The second is grocery-anchored retail; necessity retail like grocery. remains a
strong performing category, particularly with a top grocer brand in affluent neighborhoods. The third are outlet
centers as this category has performed very well in recent years and represents a prime growth area for the retailers
themselves. Last are Class A malls (although extremely challenging to acquire) given their historic treck rec€rd of
producing very slrong returns
Hotel * The Fund currently has a weighting of 3.5% to hotels and expects this will be reduced to O-l% over the
medium term. Hotels are capital intensive and are relatively volatile compared to other property sectors. The market
also generally prices hotel assets for value-add to opportunistic returns, and generally with higher leverage levels.
The Fund does not view hotels as a core component of its strategy going forward.
Pist performBflcq is no! rndrc6tive of futurE results. Ple.se see Nores on Page 35 for additiondl diselosure infonfiation
149
MARKET ALLOCATION
MAJOR METRO MARKET
Boston
IPF WEIGHTING NPI-ODCE
12/s1/14
6.816
. IPD
w71/14
6.6X
12/31/14
5.?%
New York Metro 13,396 14.69i L4.27,
Washington DC L6.?A 8-4X 7.SX
South Florida 5.1X 4,5%4.8S
Chicago 6.6%7,3% 7.4%
Houston 6.4X 3.6*4.4%
Seattle 2.8v,3.9*4.AX
San Francisco Bay Area 10.5*9.296 9.4X
South€rn California 15.4,i 16.6%14.6ti
Rest of Country 25.t%26.7Y"
Boston - The Fund continues to favor Boston, where it is slightly underweight, given it has a strong technology
industry base, diverse economic drivers and a world class education system. Boston has also seen robust growth from
healthcare and biotechnology.
New York - The Fund is just moderately underweight the New York metro area as investment activity during 2Ol4
increased the Fund's allocation, Within New York, however, the Fund is underwerght office end overweight apartments.
We believe New York will be an outperforming market over the medium term, driven by its high per capita income and
internal immigration, strong housing market, position as the financial capital of the world, and highly productive
workforce and dynamic industry base. Office assets in Manhattan, industrial assets in northern New Jersey, and retail
assets within the city and boroughs will be particular targets.
Washington DC - The Fund continues to have a significant overweight to the Washington DC metro area, although well
down from its pre-2o13 weight. While Washington DC has performed well over the longer-term, it has been a poor
performer over the last 5 years. We believe that the metro will continue to underperform over the near-term given
continued concerns over federal employment growth and potentlal apartment overbuilding. This continues to
represent a significent risk factor for the Fund and we continue to seek to de-emphasiee washington DC exposure
through near-term asset sales, particularly apartments.
South Florida - The Fund has recently increased its exposure to South Florida given its strong population and job growth
prospects. Further, its ties to Latin America and international trade, and,economic drivers such as healthcare and tourism
make it an increasingly attractive area. The Fund will seek to moderately increase its overweight exposure to this market.
Chicago - The Fund has had a consistent underweight bias to Chacago and the Midwest in general. lts relatively even-
weight stance to Chicago is only due to the large size of 60O North Michigan Avenue, which has been a top performer
for the Fund. The Fund does not envision a modification tg this stance.
Houston - The Fund is moderately overweight the market and still views Houston as one of the top U"S. market.s
despite recent declines in energy pricing. Houston has become far more economically diversified, and we believe that
portions of the energy sector (and other sectors) may benefit from lower energy input costs and increased
consumption. Nonetheless, the market will bear watching closely and will temporarily not be a top target for new
investments. The Fund's primary holdings in Houston are in the office sector and the assets are well-positioned to
withstand current volatility in the energy industry, with 90% of the Houston office portfolio on long-term leases to
large, quality tenants with sizable balance sheets.
Seattle - Clarion continues to favor Seattle. which has a very strong technology industry base. Seattle draws jobs and
population growth for its lifestyle. The Fund would like to add to all property sectors in the markel.
18.O%
Psst porformance rs not indrcative of future results. Plea5e se Nole5 on PagF 35 for additi6nal drsc,osule inf$rftatron.
1t
150
San Francisco Bay Ar.ea - The Fund is modestly overweight the San FranciscolBay Area, where the technology sector
continues to be a major driver, and the city (and South Financial District and South of Market in particular) continLres to
be at the hub of recent and expected future growth. The area also ataracts a diverse economic base and dravrs affluent
residents for its quality of lifestyle. LPF favors in\,estments in the CBD (particularly South of Market), Silicon Valley and
in strong suburban areas. The Fund will seek to maintain its modest overweighl to the san Francisco area. but will seek
to reduce ils office overweight and increase other property sectors.
Southern California - The Fund's Southern California exposure is relatively even-weight to IPD and ODCE. LPF favors
select strong submarkets in Southern California, while being more neutral on the overall region. Los Angeles and the
lnland Empire continue to form one of the strongest industrial markets in the nation, while West LA, Santa Monica,
Playa Vista, Pasadena and parts of San Diego are examples of areas favorable for office, retarl and residential
investment.
Top Secondary Markets - Aside f rom the rnaior markets,/areas described above, Clarion believes the following
secondary metros have strong growth prospects over the next three or more years: Austin (tremendous job end
population growth. thriving technology industry). Denver (energy, lifestyle), Phoenix/Scott$dale (population growth,
attraclive alternative to Southern California, major inland trade hub), Raleigh (technology,/biotech), Salt Lake City
(population growth. well educated workforce. low business costs. growing tech center), Dallas/Ft Worth (job growth,
diverse econorny, trade), and Portland (diverse economy, highly skillcd workforce).
Fir,: ptrriorr,snia i; aa: )nu,gii,y( t,l ,nilj* tist,i! F,jilals 9oa rJ6l9i On Fa$f; 55 lar 3ca:,t.onq: d.:a i)rrraj rr:ig1s,;31rs,,
151
Property C perations
Overall portfolio occupancy (excluding hotels) increased from 93.1% to 94.2% during 2O]4. The largest gain was in the
lndustriai sector, which increased from 9I-5% lo 94.8% based on strong leasing throughout the year. Overall, I87
leases were executed at the Fund's commercial properties. representing approximately 5 million sguare feet of space.
The Fund's hotel portfolio averaged occupancy of 76.6yo on a trailing-twelve month basis.
Same-property NOI was up 1.9o/o in 2O14, below prior years €s well as below expectations for the year, although a small
number of unusual foctors Bccount for much ol the variance. The office portfolio led with a 4-9% same-property
increase, based on rent gains associated with leases signed at various assets, including Chevy Chase Pavilion followinE
its renovation in 2013. Apartment assets delivered NOI growth of 3.O%, reflecting ov€rall more moderate rent growth in
that sector compared to the years immediately after the economic downturn. lndustrial NOI was up 2.7%, retlecting
feasing activity in 2O14 that will significantly boost same property NOI in 2Ol5 and 2016, given overall strong
fundamentals in that sector. Within the retail portfolio, NOI decreased 4,2o/oin 2Ol4 due to the new Under Armour fease
at 6OO North Michigan Avenue, as this resulted in build-out time and free rent during the year. Retail NOI will hEive a
very strong rebound in 2015 and 2016 as new lease revenue kicks in. Hotel net operating profit (NOP) was down lO.6%,
lafgely as a result of renovations at several remaining hotel assets. Hotel sector results r,vere also skewed by the gale of
the Lion ES hotel portfolio in 2014, as the Lion ES hotel portfolio was on pace to deliver proiected 12% year-over-year
NOP growth. Due to its sale, howeve( it is no longer included in the same-property analysis. Adjusting for both the Lion
ES sale and 600 North Michigan would have resulted in same-property NOI growth of 4.2% tor 2014 across the
portfolio. Partly as e result of strong 2Oll4 leasing activity, our projections show same-property NOl growth of 6.4%ia
2O'15 and 9.7oA in 2Q16.
SAME-PROPERTY
: pRopxnlY lYpe
lndustrial
NOr GROWTH (201'l-2016)l
2012 2013 2014v.2o1l v.2O'12 v.2O13
t.1% 6-21,
2015P
v" 2014
2O16P CURRENTv.20't5P OCCUpANCY
2.7% 8.8X 10.7Y 94.4%
9,2%94.2X0.6x4.9%5.0t63.4%Office
Apartment 5.5%2,3%3.O%5.8X
Betail 3,6%6.4r"(4.2%)16.7il 7.8fr 93.0$
Hotel 9.6%7.6!6 (10.6%)12.2%L7.7%76.616
Welghtcd Ayor.gc a.z*5.3r(6.4X 3,r!a 36r!(l.9x
Adluiled Wolghl.d Avcrrgtcr
1 Analysis set rncludes properties h6ld in a yoar-to-year afialysis and may vary oyer periods as proporties sre acquiled 8nd $old.
2 Excludss 5OO North Mlchlgan Avenue .nd adiusls for the sale of Lion ES Hotels.
Tenant Exposure - The Fund has favorable tenant diversity. with over 918 commercial tenants, none of which
represent greater than 1.5% of Fund revenue. The portfolio consists of predominantly stabilized assets with limited
vacancy exposure, and a lease expiration profile spread relatively evenly over the next lO years.
LEASH ROLLOVER SCHEDULE
tEAsE: ioLLovEi (% oF:TotrAL, hENTABLE SoU.ARE EEi
4.2*
Office
DE9EMBER 31;2O14
rr,rro.Oct PANCY :
94.2,^
2A15
7.7tr,
2016
12.3X
201V
14.0',K
,i6]8. , zol9 ..,'zozo+
6.3X.L2,6v"
Retail 93.0X 10.1!6 10.7X 12"316 4"69(9.91
__lli}_
52.4X
lndustrial 94,4%14.3X 6.816 10.9S L5.9%10.ox 41.116
Apartment N/A N/A N/A N/A N/A N,/A
Hotel 76.6%.NIA N/A N/a N/AN/n N./A
IOTTI 94.2X u22X 8.5n 11.rr 1l.o*
Past performance i$ not indicative af fulure redelts. Plsse see Notes on P6ge 35 lor Edditiooal disclssure Information
10.5*4tl,Lx
1 ;'iI 13
152
Property Diversification
BY GROSS RTAL ESTATE VALUE
PROPERTY TYPE (%)
r Office
f Apartment
s, lndustrial
r Retail
, Hotel
Land
31.9%
30.So/c
v.a%
16.1%
3.5%
o.2%
t Northeast '19.196
I M'xreast 2O,4%
E Paclfic 3O.O%
a Mountain 5.7%
I Southeast 5,6%
. Southwest 11.I%
East No Central 7,996
W€st No CeDtral O.O%
I Wholly Owned 88,8%
I Joint Venture n.2%
STRUCTURE (%)
CORE / VALUE.ADD (%)
I Operating 94.4%
r Development 3.7%
e Leasing 1,1%
Predevelopm€nt O.2X
I Core 93.7%
r Value-Add 6.3%
REGIOI'JAL DIVISION (%)
LIFECYCLE (%)
14 r. i ,.:lt:iril I i::r: :'..'i :'i : :,; ' ,:,rii
153
Value-Add Activities
Value-Add Activities * The Fund's value-add exposure is currently at 6.3% of its ass€ts (inclusive of capital committed
to the value.add programs), nearer the lower end of the Fund's 5o/o-15Yo target range. The Fund started 2Ol4 with five
development assets (addinq one during the year), four lease-up assets (defined as a property that is less than 60%
leased) and two land parcels. The three apartment developments are now nearing completion, with Balboa Park in San
Diego and Moda at North Bay Village in Miami in the preleasing phase and set to comrnence operating in'1O15. The
Acadia at Metropolitan Park in Washington DC is on schedule to be completed in 3Q15. All are on budget and market
conditions remain positive for each. The Fund's two industrial developments made substantial progress during the year
Mile High Build.ing 3 in Denver was completed in4Ql4 and is currentlyT2%leased with two leases out for signatur€ for
the remainder of the space. Plainfield Park ll in Indianapolis is 50% preleased and on pace for its scheduled completion
in February 2015. The'lo8,O0o-square foot Veritas Office Building build-to-suit office expansion in Houston was also
completed, with the tenant taking occupancy and rent commencing in the fourth quarter. With each of the Fund's
development proiects either delivering or stabilizing in over the next I8 months, the Fund is actively looking in 2O15 for
replacement value-add investments.
Most of the lease-up assets were leased during 2014, including Redlands Business Center (to Amazon), Turnbull Canyon
Distribution Center, Patterson Pass Business Park and 5O% of 3245 Meridian Parkway (all industrial). The Fund's current
lease-up pro.iects are: West lO Business Center, a 146,623 square feet warehouse building in Phoenix, where the former
single-tenant vacated in September 2Ol4: the remaining 51o/o ot 3245 Meridian Parkway; and the newly acquir'ed Parkway
Lofts, presently 54% leased. During 2015, the Fund plans to develop its remaining land parcel in the Mile High Distribution
Center in Denver. The Fund will continue to markel for sale its small land parcel in Tainpa.
DEVELOPMEI{T PIPETINE
PROPERTY
Balboa Park
ALL-IN STABILIZEDBASIS NOI DELIVERY
($ MILLIONS) ($ MILLIONS)' OATE
PROPERTY
A.partment
METRO
MAEKET
San Diego
APPRAISED REMAININGVALUE .COST
($ MTLLTONS) ,(6 MTLLTONS)
38.O 5.5 43-5 2-2 1015
Moda at North Bay Village Apartment 76.A u5 86.3 5.7 2A1s
The Acadia Apartment Washington DC I40.o 39.0 179.0 9.9 3G15
Plainfield PBrk ll lndustrlal lndianapolis 12.6 3.8 16.4 1.1 1Q1s
Total .267.1 059.8 atz7e trt.0
I At current market rents (un-trended from today)
LEASING ASSETS
PROP.ERTY
Parkway Lofts
PROPERTY MEIROTYPE MARKET
Apsrtment New York
APPRAISED REMAININgVALTJE COST
($ MILLIONS) ($ HILLIONS)
104.6 0.8
:. :.ALL-IN,:5TAB| LIZED' .BASIS''r ' iNOl 1i,2/31/.14
($ MrLLloNS.) {.$ MfrlLioNs) oc,ct/.P,cNcY
105.4 5.9 54X
3245 Meridian Parkway lndustrial SE Florida 1.421,'l o.l 2r.8 50x
West lO Business Center lndustrial Phoenix 7.4 0.s 0t60.57"4
Total srlt.I s2,0 *r:l5.0 t?.8
The Fund has also under:taken renovation projects at several €partment properties to upgrade common areas and unit
interior finishes. This activity is not included in the Fund's value-add bucket.
PROPERTIES IN RENOVATICIN
PROPERTV
Katahdin Woods
PROPERTY METROTYPE MARKET
Apartment Boston
Apartment Washington DC
APPRAISED REMAINING ',r. ALLIN :STABILIZED
,:' VALUE :COST ., BASIS .,r... NOI($ MrLLloNs).,($ MTLLToNS) ($ MTLLTONS) (9 MlLLroNs)
106.2
119*-.***gi'-. *- 36:4 --.19Westbrooke Place 4.6102.O
Broadway Knolls Aparirnent New York City 4.00..4az.1
2.7
7.96.6
84.8
LantEna Ridge ;".r,*[- ^*"51.0 0.0 ll?
L47,2Columbia Town Center Apartmenl Baltimore 135.O
Grand on M€mo/ial Apa!.tment Houston 39.4 1.5 42.3 2.2
Total 1111..i10.!$468.2
Pa$t pedormance is nol $drcaltve o{ future tesults. Fle3se s€e Noles on page 35 f6r add,t'ona! dEclosere lnlotrn3lxonl
12t.I
15
154
Capitalization
The Fund has an NAV of $5.4 biliion at 12/31/14. The current Fund, leverage ratio of 27.9%ls slightly up from27.60/o at
year-end 2013. The Fund! batance sheet currently includes approximately $2,2 billion of financing at par value, split
between property-level mortgages ($715 million), fund level notes (gl,25O miilion), and a line of credit balance ($2Os
million). The overall weighted average interest rate for the Fund is currently approximately 4.7%. with a 4-year
weighted average maturity.
LOAN PROFILE
securcd Property llgrtgisgl
Unsecured Fund Not€s
:: AVERAGEAVERAGE REMAINING TERM
INTEREST RATE (YEARS)
4,8% 4.3
AMO.UNT
AT SI"IARE
($ MlLr-roNs)
715
r.250 5.3%3.9
Fixed 1,84'r s.3x 3,0
Floating 6.11241.8*
Iotel cxcludlng Lln. of CrGdlt t.965 5.1t(
Lin€ of Credit 205
Tot.l D.bt (Par V.luc)2,170 4.7x 1.1
Total Dobt (Flrlv)2.215 4.14.ltt
ANJNUAL DEBT MATURITIES ($ MILLIONS)'
?016 2017 20!8
5.7!6 s.sx 5.8t6
I P&pe,ty tlortsEss
20r9
5.5*
20?s 202t 2022 2023 ?O24 2025 2026
3-'fd 4J% 4.8i6
I Fsd Notc.
The Fund completed its repayment of ?Ol4 maturities totaling approximately $49O million, and replaced the financing
with $3OO million of new unsecured notes and a $185 million mortgage loan secured by a pool of fifteen industrial
assets. The blended rate for all of the new fin6ncing is3.7%. The Fund will continue to replace near-term maturities
and take sdvantage of historically low intereSt rates to reduce debt costs and bgost income returns with
approximately $29O milljon of maturities set to expire in 2O15.
property-Level Mortgages - The Fund's property-level mortgages are predominantly associated with its apartment and
industrial portfolios and certain JV investments. Maturities for property-level debt are concentrated in 2O19 and 2021.
The $35O million in 2Ol9 maturities consist of twelve loans, nine of which are apartment property loans originated in
2OO9. with a cumulative balance of $3O3 million. The average LTV is J5% with an average interest rate of 5.6%, well
above current market rates. These loans c6rry very significant pre-payment penalties. generally prohibiting an earlier
retirement or refinance. Th€ aggregate negative debt mark-to-market associated v/ith the apartment loans is $i4 million.
lAmounls represeot the pnncrpal balance at the Fund 5 @^ershtp share and exclude the impact of debt ma.l to market. Amou.ts stso pxclude the Fuad's
line nf credit. lnfom,atroft ,s Js 6f December 31, ?O14 snd is $ubject td ch6n0e dt any time.
Past p&rtorm6rte '$ not indicsti\€ oi ltrture results. tlease see Not€s on paQe 35 for addrt'ooai di$Closqre informailon
16 i : iiil :j Iti.r: r ii.t : : r'iii;: i t_!1.11 j1:.ll.r"ir1 nil,i
155
ln July 2Oi4, the Fund closed on a $185 million mortgage loan secured by a pool of fifteen industrial assets. This
loan is cornprised of a $135 miltion fixed mortgage with an interest rate of 3.59/o and a maturity date of 7/1/21
and a $50 million floating mortgage with an interest rate of one-month LIBOR plus a spread ot 1.7Yo and a
maturity date of 7/1/21. Al12/31/'14 the f loating rate mortgag€ interest was L9%. 25% of the fixed rate mortgage
can be prepaid at par after 7/1/15 (atter one year) and the entire fixed rate mortgage can be prepaid at par one
year before maturity. The floating rate mortgage can be prepaid at por beEinning on7/1h5.
The Fund is expected to close on financing for the acquisition of the Palm Beach Outlets property in the first half
of 2O15. This mortgage is expected to be in the amount of $165 million, with the Fund's share being 9O%, or
$148.5 million.
Fund Level Notes - The Fund has $95O million in Fund level notes maturing between 2OI5 and 2Oi9. These notes
carry inflexible and expensive prepayment options, prohibitive of retiring the debt in favor of more attractive
curient financing. The average rate on these notes is 5.6%. ln total, the$e notes result in an aggregate of $27
million in negative debt mark-to-market (MTM). ln 2014, the Fund took out an add jtional $3OO million in Fund
level notes maturing between 2021 and 2026. The averaEe rates on these new notes are 4.1%.
Debt Mark-to-Matket - The interest rates associated with most of the Fund s debt are above current market cost
resulting in a cumulative debt MTM of approxamately $45 million (O.8% of Fund NAV). Debt MTM had a positive
impact on returns in 2014 though historically it has been a significant drag on returns.
Starting in the fourth quarter of 2O14, the Fund outsourced the valuation of its debt to Chatham Financial. The
outsourcing will ensure transparency and independence in the Fund's debt valuation and financial reporting
processes. The Fund also modified its methodology (after the Fund's Advisory Council approval) to be
consistenl. with a methodology developed by Chatham Financial. The new methodology should result in less
volatility in the Fund's debt MTM going forward. As more funds in general adoot this approach, we envision
better consistency within the ODCE with regard to debt valuations.
Line of Credit - The Fund maintains a line of credit to facilitate uneven flows of capital resulting from investor
contributions/redemptions, new acquisitions and dispositions. ln the fourth quarter of 2O14, the Fund exercised
the accordion feature increasing the commitment by $lOO million to a total of $35O million. As of December 31,
2014, the amount outstanding was $2O5 million. We are in the process of extending the line given the upcoming
maturity in June 2O16,
Derivatives - The Fund has no cierivatives as of 12/31/14.
Forward Strategy - The Fund is focused on continuing to lower its cost of borrowing. The Fund is addressing the
$293 million of financings that mature in the second hal{ of 2O15. The Fund will begin the marketing process for a
$15O to 2OO million loan secured by a pogl of mixed property type collaterel. Given the low interest rate
environment, the Fund will look to lock the interest rate as soon as pos:sible while drawing the debt in
coniunction with the second half 2O15 maturities. ln addition, the Fund will iook to issue approximately $2OO
million of unsecured notes during 2015. and, as noted previously. the Fund will be closing on $148.5 million
mortgage debt associated with the acquisition of Palm Beach Outlets.
The Fund's target leverage ratio is to be between 2O-5O7o LTV, and generally to be \^,ithin 3OO bps of the ODCE
average, currently 22.6%,-rh.e Fund expects to remain in the 26-28% range for 2015 to address the 2015
maturities and take advantage of the low interest rate environment. Longer term, the Fund will seek to replace
existing debt structures, which are generally inflexible and carry large prepayment penalties, with a mix of debt
that lo\i'rers borrowing costs, extends the average maturity, provides asset sale flexlbility, and attempts to
diminish prepayment costs and MTM fluctuations.
Past pBriotfrance is Do! lnd,!aarve 6t flture resu,t:. please see Noaes on paqe 35 tgr addiliooal drsclosurp into.matr$n
156
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ailr.?:aaa:::::=
a::::::.-:a a.a::aa::
;.a:a.a.1::!a-1.=
a.:;a::::::a:.::=
a,:;::::::,.:-4,=
.t:t:il'l:aal=
157
158
National Market Update
Economic Outlook
ln2014, the U.S, economy grew at a2.4/o annual rate, in-line with consensus expectations. A rise in personal
consumption and private inventory investment offset a drag from the decline in net trade exports of goods and
services and government expenditures- The forward momentum of economic growth continued, with a stronger
U.S. fiscal position and financial system. Looking forward in 2015, we expect full-year real gross domestic
product (GDP) to inCrease by 2.8% to 3.3%. lnflation and growth dynamics now appear to be more favorable for
the economic outlook in the U.S. than in the Eurozone. Key growth drivers are lower fuel prices, accelerating
consumer spending, the strengthening public sector; well-capitalized corporations, and a recovering housing
market. Potential risks to the near-term outlook rnay be connected to weaker global growth, geopolitical risks,
and transitioning oil markets,
ln 2014, the U.S. labor inarket expanded at the fastest pacb since 1999, Three miltion jobs were created, and the
average monthly i b gain reaqhed 246,OOO; this was a significant improvement when compared to 186,O00 in
2012 and]94,OOO in 2Oi3. ln Q4, total U.S. employment grew by 289,OOO jobs per month on average. The
unemployment rate deciined to a six-year low of 5.6%, the lowest level since 2008. With sustained employment
gains, the Fed completed its stated incremental wind-down of quantitative easing in October 2014 and may
begin to normalize interest rates in the second half of 2Ol5 or in 2O16. The rate of unemployment and inflation
will be integral to future monetary policy.
Stronger labor markets combined with higher overall household wealth have boosted consumer confidence. Low
debt service burdens, record high stock prices, home price appreciation, and lower gasoline prices are significant
tailwinds for consumer spending. ln Q4, total U.S. retail sales increased at a moderate pace, up3.7% over the
year and O.1% over Q3; given the lowest price of crude oil in six-years. ln 2014, inf lationary pressures remained
muted; the consumer price index (CPl) rose by O.7% and the core CPI (without food and energy) increased by
'1.6% year-over-year. The tJ.S. dollar surged against most currencies, including large gains against the euro, the
yen and the pound sterling.
ln2r.14, the strength of the housing sector g.ained momentum. Single-family housing starts rose to their highest
level since 2OO7, and are a key driver of overall economic growth. ln O4, new residential construction starts
increased by a.8% year-over-year; single-family starts increased by 6.8%, significantlyoutpacing multifamily
starts, up by 1.3%. ln the year ending in November 2014, the S&P/Case Shiller 20-City Composite Price Index
gained 4.3% across all cities. Annual home price gains continued to decelerate across the country in most cities,
indicating a more gradual pace of recovery, yet eight cities still saw prices rise faster than earlier in 2014. Existing
home sales still lag relative to prior peak, especially amongst first-time homebuyers, Over the next few years, as
demand for all housing-related activities increases, the segment is likely to contribute more to GDP growth. ln
€ggregate, housing accounts for approximately 17% of the U.S. economy.
: ll.,l, : r
159
Capital Markets Trends
The commercial real estate asset class represents a growing share of the global alternative investment managernent
market, Global capital flows into alternatives have doubled since 2OO5 and are now at record highs. During G4, the
average yield on lO-Year U.S. Treasuries ranged fr.om 2.1% to 2.5%, the average contract interest rate for fixed commercial
mortgage loans declined to .OYo, and the 3O-year fixed residential mortgage rate declined 30 basis points to 3.9%.
lmproved credit availability across public and private capital sources has escalated domestic and offshore institutionai
capital flows into U.S. commercial real estate to unprecedented levels. ln 2014, investment sales momentum continued,
with national transaction volume across the five rnajor property sectors totaling $423.8 billion, up17.O% year-over-year
and on par with the 2OOG level. Global capital flows into U.S. real estate rose 3z9%- Pricing and financing for core real
estate assets in top-tier markets remained highly competitive, causing yields and cap rates to tighten further. Some
institutional investor acquisition strategies have shifted further up the risk curve to value-add strategies, such as
redevelopment of well-located B:assets and mezzanine financing on premier assefs in gateway markets and
iecondary/tertiary markets, which target higher returns.
Liquidity abounds in the senior and subordinate debt markets, with the overall cost of capital near historic lows.
Non-bank lenders (life insurance companies, mortgage RElTs, and private debt funds) now account for a larger share
of outstanding mortgage debt. ln 2014, U,S. Commercial Mortgage-Backed Securities (CMBS) issuance totaled $9O.5
billion, less thon half the peak of $225.2 billion in 2097, while Life lnsurance Company volume rose by 24.8% to $80,O
billion. New regulations associated with the Dodd-Frank Act and Basel lll reforms will continue to further constrain
first mortgage (i.e, senior) lending capacity and irllpact the underwriting terms of commercial bank originators,
limiting LTV ratios and high-leverage constructron loans. Commercial real estate investment strategies are trend,ng
towards long-term fixed-rate debt and short-term leases to capture near-term growth more quickly.
ln 2014, the rebound in commercial real estate asset values accelerated across broader markets, Institutional-quality
commercial real estate investments today can offer higher risk-adtusted returns relative to traditional investments and
continue to provide yields well above the rate of inflation. ln 2014^ the NCREIF Property Index (NPI) reported an annual
total return of 11.8%. underperformins the S&P 5OO €nnual return of .l3.7%, and outperforming the Barclays Aggregate
Bond lndex annual return of 6.O%.
U.S. Real Estate Market Fundamentals
INDUSTRIAL
ln 20]4, the industrial sector outperformed across key real estate metrics in rnost markets nationwide. ln Q4. the
national industrial availability rate declined by 30 bps to lo.3%. the lowest level since G2 2OO8. The recovery has now
stretched through eighteen consecutive quarters, and the current avaalability rate is 42O bps below the cyclical high.
Over the quarter, net absorption reached 64.4 million sl significantly outpacing new construction, which totaled 32.7
million sf. Markets that saw the greatest reduction in availability rate from Q4 2013 to Q4 2Ol4 were Sacramento (-32O
bps), Atlanta (-3OO bps), Fort Lauderdale (-24O bps), Oakland (-25O bps), and Denver G]TO bps).
The industrial market is uniquely positioned to profit from broadening U.S. economic growth. ln 2014. stronE demand
prevailed across most markets, with rising industrial production, global trade. e-commerce, exports, and housing starts.
Leasing velocity is highest for Class-A b'ig-box warehouses over 35O,OOO sf (rn particular those over 1 million sf) and
small-to-mid-sized distrjbution facilities near highly populated metropolitan areas. New facilities with high-automation in
proximity to the consumer continue to be a top priority of Third-Party-Logistrcs (3PL) businesses, competing for fast
and cost-efficient e-retail delivery. Logistics traffic at strategic regional transportation hubs and East and Gulf Coast
ports tied to the Panama Canal expansion (scheduled for completion in 2O16) is likely to continue to shift new demand
and shipping routes. Overall, we believe that demand for warehouse space will remain strong over the next five years,
resulting in an ongoing decline in availability and rise in rents.
lndustrial inventory and new supply are highly concentrated in the top distribution markets. Six major corridors are
home to the nation's mega population centers - Los Angeles/lnland Empire, Dallas/Fort Worth, Chicago, New Jersey,
Philadelphia and Atlanta. Although new construction is escalating, in particular in the Class-A segment, it does not
appear to be exceeding current tenant requirements, as demand outpaces availeble supply in the larger size warehouse
segment. Value-add and development activjty is growing more quickly across established and emerging national
distribution markets. We expect deliveries to remEin relatlvely moderate through 2O15 year.end but accelerate from
2016 to 2017. with overall delivery of new warehouse space averaging 189 million 5f annually from 20'15 to 2O18, still
below the long-terrn average.
160
lo 2014, industrial transaction volume totaled $54,2 billion, up 12.5% over 2013, Trades of individual assets accelerated.
Sales of warehouse and flex property totaled $36.5 billion and $17.7 billion, respectively, Secondary Markets outpaced
Primary Markets, totaling $32.S billion and $21.7 billion, respectively. ln 2014, the Npl industriat sub-index posted an
annual total return of 13.4%, the best.performinE sector in the overall NPl.
APARTMENT
ln 2O14, multifamily sector fundamentals remained robust, with overall demand exceeding expectations and rent
growth re-accelerating, ln G4. the national vacancy rate remained al 4.2o/o, down just lO bps year-over-year, and 3BO
bps below the cyclical peak of B.o% at year-end 2oO9. Net absorption reached 45,027 units; outpacing completions
of 39,436 units" ln G4, effective rents increased by O.6% over 03 and 3.6% year-over-year. The steady increase in
effective rents for 24 straight quarters to levels nearor excoeding historical peaks in rnony markets indicates that
many landlords conlinue to be able to raise rents with new Completions. Markets that saw the greatest reduction in
vacancy rate from Q4 2013 to Q4 2Ol4 were Fort Worth (-9O bps), Sacramento (-8O bps), Philadelphia (-60 bps),
Phoenix G5O bps), and Atlanta (-4O bps).
Multifamily sector demand contlnues to thrive, while the home purchase market remains relatively weak, The
displacement of the single-family housing market has persisted to the benefit of apartments. Household formation is
now on the rebound; yet slow wage growth, tight credit. 3nd elevated student loan debt levels remain real challenges
to home ownership, in particular. for first-time buyers. Household creation among renters continues to outpace that
of owner-occupiers, driven by the continuing maturation of echo boomers entering the urban workforce and
downsizing by retirees. Demand is highest in, or in close proximity to. major employment hubs, and many rental
households pay a premium for access to modern arnenities, public transit, walkpbility, top grocery stores, and cuiture.
Favorable demographics and an improving economy, suggest the strong possibility of continued Erowth in rental
housing demdnd over the next several years.
Although the recent spike in rents in several top markets combined with low vacancy rates have accelerated the pace
of construction nationally, oversupply is not expected to pose a serious risk. The few markets that report rising new
supply levels also expect stronger rental demand. Looking ahead. we expect average new deliveries above the long-
term average, supported by a generational wave of demographic demand. Overall, rents are expected to moderate
over the next several years. especially in the absence of stronger wage growth.
ln 2014, multifamily transaction volume reached $'112,O billion, up 9.O% year-over-year and exceeding the 2OO7 level,
Mid- and high-rise properties increased by 9.2% to $7O.5 billion, while garden-style sales rose 8.5% to $41.5 billion. A
migration of capital into smaller markets continued: volume in Primary Markets sctually declined slightly, while it rose
in Secondary Markets. ln 2014, the multifamily sub-index of the NPI posted an annual total relurn of lO.3%, the
lowest-returning sector.
OFFICE
ln 2014, the recove,y of the office sector accelerated. with broad-based office-using employment growth across
most industries. ln Q4 2014" the national vacancy rate decreased by 2O bps to 13.9%, still 14O bps above the pre-
recession low. The national vacancy rate for Central Business District (CBD) markets decreased by 2O bps to 11.1%,
while the suburban vacancy rate decreased by 2O bps to 15.5%. Net absorption significantly rebounded to 15.2 million
sf, outpacing new construction of 8.5 million sf. Markets that saw the greatest reduction in vacancy rate from 04
2O13 to G42014 were Salt Lake City (-2BO bps), Austrn (-27O bps), Raleigh G27O bps), Stamford (-220 bps), and
Tampa (-22O bps).
ln 2O14. most U-S. office markets recorded higher demand torspace and positive net absorption. as corporate
confidence and expansionary activity grew. Overall, total net absorption across the country reached its highest level
since 2OO7- Leasing in the Finance, lnsurance, and Real Estate (FIRE) industries rebounded more significant{y,
absorbing a higher share of total space than in recent years; while Technology, Advertising, Media, and lnformation
(TAMI), energy, and health care industries continued to drive much of the tenant leasing activity in many markets.
New office buildings equipped with modern lT infrastructure and ccntemporary designs in top locations (near prime
transit and residential. retail. and hotel properties) generally trade at a premium. More major employers are relocating
or opening offices in lower-cost metros in the South, Southwest. and Southeast (such as, Dallas. Denver. Austin,
Phoenix, and Fort Lauderdale./Miami). Assuming ongoing growth in employmenl and capital investment, office
demand is expected to contrnue to expand over the next few years. furl.her reducing vacancy levels.
Although office fundamentals have improved significantly, available irrventory is still at relatively high levels and achievable
rents are generally too low in most markets to attract new development. Nevertheless, conslruction volumes are picking
up in top-performing markets: over the next several years, new construction and redevelopment are likely to be
concentrated in select markets, includingr Houston, San Francisco, Seattle and New York. Looking ahead, we expect new
deliveries to average 37.3 million sf annually from 2Ol5 to 2O18. well beiow the iong-term average of 44.9 million sf,
161
ln 2O14. office transaction volume totaled $1I8.5 billion. up14.6% year-over-year. with CBD markets increasing by I8.3%
and suburban markets by lt.O%. Primary Markets accounted tor 62.1% of the total investment sales. The bulk of trades
were single asset deals, and the largest office portfolios were mainly concentrated in a few low risk core markets.
Capital remains highly concentrated in Primary Markets and the migration to top Secondary Markets slowed relative to
2O]3. ln 2014, the office sub-index of the NPI posted a total return of 11.5Yo, the third best performing sector.
RETAIL
ln ?0I4, the recovery of neighborhood and community shopping cenler fundamentals continued slowly across most
segments. ln Q4 2014; the retail sector vacancy rate for neighborhood and community shopping centers declined by
10 bps to '1O.2%. ln ()4, effective rents increased by O.5% over Q3 and 2.O% year-over-year, Regional malls continued to
outperForm most neighborhood and community centers in occupancy, with a vacancy level of 8.O%, up lO bps year-
over-year. Landlords now see larger store vacancies as opportunities to secure superior tenants at higher rents.
Vacancy rates at many top malls remained well below pre-recession levels. Markets that saw the greatest reduction in
vacancy rate from 04 2013 to Q4 2O14 were West Palm Beach (-160 bps), Orlando G80 bps), San Jose (-8O bps),
Raleigh C7O bps) and Atlanta (-60 bps).
Overall, improved consurner confidence and household net worth benefited profit margins across the retail sector, yet
weak income growth has constrained total spending. Goine forward, if signiflcantly Iower fuel prices persist,
discretionary spending is expected to accelerate, especially for low-income consumers. For many top retailers,
employing omni-channel strategies has been a winning strategy to capitalize on the complimentary nature of
e-cpmmerce and bricks-and-mortar retail. ln 2OI4. total U,S. retail sales increased by 3.7o/o: while holiday sales
increased by 4.Oy", an improvement over the 3.1% posted in 2013. Leasing trends across most retail categories and
markets continued to favor dense, urban markets, and e-commerce-resistant formats. Grocery-anchored centers,
transportation-oriented sites, hiEh-street districts. walkable shopping centers and malls, and major suburban
thoroughfares with critical mass are likely to be top performing segments.
New supply and redevelopment of neighborhood and community shopping centers remains at very low levels. More
recent completions are rnodeled after the newer retail subtypes (liflestyle centers, town centers, power centers, and
outlet centers). Value-add strategies are most likely to be implemented in coastal markets with larger populations and
more affluent households. Securing strong anchor tenants is a requiremgnt to attract top in-line tenants and financing
for new projects. Given recovering vacancy levels, we expect construction to remain well-below the long-term average
of 44.8 million sf per ye6r over the next few years, with new deliveries averaging only 17.2 million sf annually from 2Ol5
to 2O18. Continued improvement in overall retail demand will depend largely on discretionary income growth and
f inancial market stability.
ln 2014, retail transaction voiume reached $82.5 billion. up 31-3% over 2013. Individual property trades remained strong,
significantly ahead of portfolio and entity level deals. As trades in Secondary Markets rebounded strongly. sales within
the strip center segment accelerated by 35.2%, Malls and anchored retail represented the highest share of total capital
investment. ln 2014, the retail sub-index ot the NPI posted a total return of l3.l%, the second-highest returning sector.
ii:'.r:i 23
162
HOTEL
ln 2014, the U.S. hotel sector recovery accelerated above consensus expectations. reporting strong increases in all keyperformance metrics. Overall, occupancy increased by 3.6% lo 64.4%, while the average daily rate (ADR) rose by 4.6%
to $115.32, and revenue per available room (RevPAR) climbed by 8,3o,6 to $74.3 year-over-year. Top markets ranked by
RevPAR growth were Nashville (+19.O%), Denver (+16.20,6) and Atlanta (+13.'l%).
Over the past year, national demand rose by 4.5%, while supply was up 0.9%. Corporate profits and consumer
spending reached record highs, and more freguent business and leisure travel by millennials and retired baby
boomers is likely to continue to drive demand growth across the entire hospitality industry. Leisure travel and group
bookings rebounded more broadly, which has improved airport hotel and resort occupancies. Flight reservations
Picked up over the year, yet rates have not seen notable improvement. Nevertheless, gathering economic momentum
supports our expectation of notable gains in value and ADR hotel performance in 2OI4 and subsequent years^ We
expect RevPAR growth to reach 7.O% to B.O% in 2O15,
AII chain-scale segments (luxury to low-end) are in full recovery. Many are now expanding by entering new markets
and rebranding. As of December 2014, there werc 3,443 U.S. hotels (412.878 rooms) in construction, f inal planning, or
planning stages, a14.3% increase over the prlor year. Markets with the highest increase in rooms under construction
were San Diego (17O.3%), Houston (166.O%), Dallas (122.3%), Seattle (82.4%), and Miami (73.4vo). We expect growth in
hotel supply to remain below the long-terrn average for the next three years with hotel owners aod operators
Increasingly focused on maximizing revenue through value-add, capital improvement programs at hotels in top
locations.
ln 2O14, the hotel capital markets were active with both private and public lenders increasingty comfortable financing
prime hotel assets in gateway cities and top tourist destinations. The price per key has surpassed prior peak levels in
top markets. ln 2014, hotel transaction volume totaled $34-6 billion. vp26.7% year-over-year, wit.h Q4 having the
highest quarterly volume since 2OO7, Portfolio and entity-level sales were up 32% in 2014. Full-service hotels (up '15.5%
year-over-year) accounted for a larger share of total capital investment than the limited-service sector (up 55.O%). ln
2OI4, the hotel sub-index for the NPI posted an annual total return of 11.'170, the second lowest returning sector. We
note that th€ NPI has only 165 hotel assets. which may not be a representative sample of the lodging industry, or
high-end hotel properties.
24: !riiii,'l
163
ln 2O14, the rebaund in commercial real estate asset values
accelerated across broader markets. tnstitutional-quality
commercial real estate investments today can offer higher
risk-adjusted returns relative to traditional investments and
continue to provide yields well above the rate of inflation.
s::": l-1.-
164
Properties
APARTMENT
PROPERTY NAME
The Gramercy aI Metropolitan Park
VINTAGE ..YEAR OWNERSHIP % SIZE
200? 9a.4% 399
LocATtoN
Arlington, vA
OCCUPANCY
49.4v"
.REAI-i''r ESTATE
VALUE
,AT SHARE ($)
r85,923.080
Eastchester Heights Bronx, NY 2007 90.o%1.416 9S.8'6 r45,800.000
The Acadia at Metropolitan Park Arlington. VA 2An roo.o% 411 o.o%140.000.000
Columbia, MD 7004 100.o%531 94.4%135.000.000Columbia Town Center
The Mlllennium at Metropolitan Park Arlington, VA 20ro 9A:7%300 9s.3%132.628.208
'IOOO Jefferson Hoboken. NJ 2008 loo.o%217 93.5%129.s00.0oo
The Metropohtan at Reston Town Center Reston, VA 2006 loo.o%289 95,a%121.000.000
Avignon Townhomes Redmond, WA 2000 loo,0%272 92_6%110.000.000
Parkway Lofts Bloomfield. NJ 3612014'too.o%529v,104,598.484
lnfinity Harbor Pornt Stamford, CT 2013 too.0,16 242 97.r%104.300.0o0
Westbrooke Place Washington, DC 2000 loo.o%20r 92.5%102.000.000
Napervill€. lL 2006 100.o%417 95.496 91.200.000Railway Plaza
Dssert Club Apa.tments Phoenlx, AZ 2004 loo.ot6 497 95,0,6 83.100.000
Eroadway Knolls Holbrook. NY 2007 loo.o%244 97.2v"82,x00,000
Moda at North Bay Village North Bay Village, FL o.o962012
20t4
roo_o%285 76,800,000
The Station al Riverfront Park Denver, CO 100-o%273 93,O%67.800.O00
Missions at Chino Hills Chino Hills. CA 2006 100.0%240 92.5%60.800.000
Montclair Residences Montclair, NJ 2012 'too.o%163 92.6%59.900.000
Lantana Ridge A.ustin, TX 3542011'!oo-o%90.7ii 5X,000,000
Village on the Green Rancho Cucamonga, cA 20ll 'too.o%264 95.8%48.600.000
Rohnert Park, CA 20r'r 100.0%207 s8.5%44.700.000
-oJI -v_,S.l--uj
s-gfgrn: Ill:
44 Berry Street Brooklyn, NY 90.5%422011100.0%43.700.000
Grand on Memorial Houston, TX 2013 100-ov"228 86,Ox 39,400,O00
Remington at Ladera Ranch Ladeia Ranch. CA 2006 loo.o%154 94.2%36.800-OOO
Balboa Park San Diego. CA 2012 94.2%r00 o"o%35.921.486
Katahdin woods Lexlngton. MA 2006 100.o%r28 97.76k 54.900.000
Printhouse Lofts grooklyn. NY 2014 loo.or,36 IOO.O%30.531.985
Austin, TX 2010 loo.o%195 96.4!o 30,250,000
Rancho Santa. CA 20ll loo.o%ll5 93.9%25,100.000
Los Angel6s, C,A 2006 so.o%98.3%2X,960.00060
Platinum Southside'
Buena Vida at Town Center
Rochester Apartnients
Total Apartment 12,375,413,244
rSold subsequent to year-end
165
Properties
RETAIL
::.:::
PROPERTY NAME ::1
600 North Michigan Avenue
VINTAGELOCATION YEAR
Chicaso. lL 2OO3
OWNERSHIP lo .:.,SIZE
100.096 211,616
..: REAL
ESTATE
,VALUE
OCCI]PANCY ,AT SHARE ($)
92.6% 3X5i000,000
west Hollywood Gateway Los Angeles, CA 2OO4 IOO.O% 24A,067
100.0% 460.025
96.5% 118,000,000
Falm Beach Outletsr West Palm Beach, FL 2Ol4 99.2% 112,054,2s0
-
Marketplace al tl"_.9:!"t:
Chevy Chase-Reta'l
West Palm B€ach, FL 2Ol4 I00_o%294,449 9?.O% 99.17s.875
Washington. DC 2005 too_o%r{8.107 77.3% 93.400.000
Promenade at Sacramento Gateway sacr€mento, CA 2006 loo.o%344.891 88.6% 86.900.000
Village Shopping Center Boulder. CO 80.o%219.934 94.2%51.d40.0002007
Dunkirk Gateway Bunkirk, MD 2005 loo.o%'r53.291 98.O%43.200.000
Park Place Shopping Cent.r Tukwila, WA 2003 loo.o%153.879 tOO.o%42.300.@O
Free State Shopping Center Bowie. MD 2007 70.0%277.577 8s.O,6 39.564.000
Millennium Perk Livonia. Ml 2005 70.o%272,564 !oo.o%35.140.00X
Whole Foods et the Domain Austin. TX 20].4 loo.o%59.545 too.o%34.400.000
Water Tower Shoppes Celebration. FL 2012 lo0.o%120.o89 88.4%30.800.000
Victory Station Savannah. GA 2013 roo.o%_. .
64,1:l
155.752
100.o%25,100,000
Oriole Plaza Delray Beach, FL 2005 70.o96 93.9%20.230.000
Barcroft Plaza Falls Church. VA 2006 79.1%7o.o%98,109 19,950.000
Campus Plaza Bridgewater. MA 2OO4 68.5%'115,591 loo.o96'19,421,791
Greenlawn Plaza Huntington, NY 2006 67.O%'102,4r6 95.O%u,727.399
Atlantic Plaza North Reading, MA 2OO4 70.o%123.6',r5 ?o.2%14,770,O00
Martin Square Stuarl. FL 2005 7o.o"4 331.tO5 99.2%14.3s0,0@
Plaza Del Mercado silver Spring, MD 2004 70.o%95.139 602%13,090,000
Totrl Retail $1,247,013,516
rstructured as a loan with an option to convert to equity.
liI; l-lrriil, 27
166
P ro p ert ies
CITF'CE
. PROPERTY NAME
'lOO Fifth Avenue
LOCATTON
New York. NY
VINTAGE .:,YEAR ] '. OWNERSHIP %
2013 100.0.,'
:-t' r. REAL
ESTATE VALUEsrzE occuPANcY AT SHARE($)
277,412 98.O% 258.ff)0.000
Sand Hill Commonsr Menlo Pafk, CA 2006 100,0%133,124 99.9%240.000.000
475 Brannan Street San Francisco. CA 2012 100.o%243,233 IOO.O% 196.000.000
Arboretum Gateway Santa Monica, CA 2004 too.o%20t,oo5 loo.o%184.O00,000
Veritas Office Building Houston. TX 2004 100.0%475,927 IOO.O%
366.074 96.6%
"l9t':P":ry
150,800,o00WaterwayPlazal&ll Ihe Woodlands. Tx 2Ol3 roo.o%
l0l Arch St.eet Boston. MA 2005 rOO.O%
San Frdncisco, CA ?av 100.0%
19j:91' , - --?-19-T
1d3,OO0,000
l7_:*2 . 10933-*_-Slste
r57,aoo 77.1% 111,000.000
l9_Bi91g=I!:l
50 Spear
Brookline" MA 2013 loo.o%
3l5O Fairview Parl Falls Church. vA 2oil roo,o%252.613 100.0}6 90,ooo.ooo
Chevy Chise - Offics Washington. DC 2005 lo0.o%2o.4,621 99.1%87.300,OO0
350 Rhode lsland S6n Frahciscb. CA 2005 1OO.O%124,980 100.0%71,200.OO0
One Liberty Square Boston, MA 20r3 roo.o%157.563 93.2%6s.000,000
90.3%60.024.O00
Ten west Corporate Center Two Houstorr TX lo0.o%
Burbank. CA 2OO7 48.8%
S.n Diego, CA 2007 loo.o%
250.260 rOO.O%62.900.00020n
Central Park 254.763
One Del Mar 114,166 91.8%58.500.000
Mira Vista Austin. TX 20'l{ro0.o%12t,147 IOO.O%{:1.400.oo0
ll East 44th Street New York. NY 2007 49.O%133.602 IOO.O9a 38:!55.130-
38,300,000El Oorado Medical Tucson. AZ 2006 loo.o%185,281 63.7%
Legacy Medic6l Village Plano, TX 20il roo.o%94,359 100.0%35,600,0O0
University Park Tech lll & lV San Antonio, TX 2014 l0D.o%165.007 rOO.O9(
Prog.€rsi\e lnsurance Rancho cordova, cA 2o.o4 loo.o%158.582 8r.6%
3-1]!9rPl
29,300,OOO
Arques Business Park Sunnyvate, CA 2013 100.0%93.38s |OO.O%28,400,OO0
29Ol Patrick Henry Driee 58nta Clara.CA 100.o%a2,2?A r00.o%27,900,000
Ricoh Building Malvern. PA 2003 ]o0.o%ro6,8s5 roo.o%25,400,0s4
valley Parkway Medical Escofldido. CA 2007 100.0%70,o58 73.'lvo 23.400,000
Wood Hollow Offiae Park Novato, CA 2003 loo.0%r2r.670 6',r.r%22;70O.OOS
:475 Dunwoody Drive West Chester, PA 2004 roo.o%126.444 IOO.O%21.300,OO8
Cooro€. Tx 2007 loo.o%68,832 84.O%17,600.000qT'": x:g:{
The Overlook Austin. TX 2AV loo.o%50.725 rOO.O%ls.800,o00
9.900.000Hillcrest Medical San Drego, C,q 2007 loo-o%3r.605 60.4%
Total Office $2,478,279,r.30
149% interest sold subsequent to year-end.
167
Properties
INDUSTRIAL
PROPERTY NAME
Research Tri-Center
LOCATION
Durham. NC
REAL
':' ESTATEVINTAGE VALUE
YEAR OWNERSHIP % . SIZE OCCUPANCY AT SHARE ($)
2014 IOO.O% 1.33.4.024 90.4% 117.500.000
Redlands Business Ccnter Redlands. C,q 2Ol3 rO0.O% 70{ ;ll5 IOO,O% 65.500.000
2009 r0o.o% t,163,a65 90.3% 50.000.000Pioneer 35O Arlington, Tx
Moreno Valley, CA16850 Heacock Street 20il too.o%756,540 IOO.O% 57.200.OOO
M'ie High Distribution Center Denver. CO ?nn)roo.o%763.633 IOO.O% 56.800,000
399,473 IOO.O% 53.5OO,OOOKnort Disv;bu*.ion_C""_li"r"
"
Carmel Mountain
Buena Park. CA 200,2 loo.o96
s91!!9eo, !a 200s loo.o%-1ry*9-9" .19i:9%--*-59:*9!9s
501.250 99.9% 42.700.000Pacific Coast Park ll WAI9:2006 loo.ox
Durango Commerce Center
Sycemore Coltection
Phoenix. AZ 2008 loo.o%569.266 90.7% 40.700.ooo
Riverside. CA 2006 roo.o$6 {42.OOO !OO.O% 39.500.OOO
Siempre Viva Bus;ness Park San Diego. CA 2007 ro0.o%473.899 85.4% 38.400_OOO
chantilly Distribution center Chantiily. VA 2006 lo0.o%350.S43 IOO.O% 37400.OOO
!4ilalomE Distribution Center Anahe;rn, CA 2005 roo.o%319,174 100.096 37400,OOO
. lggn R"--"1lo . ...
Beltway Northwest
H:ywaldicA
Houston. TX
20--o-l*_...-
2c,a7
l-0oo%
loo.o%
,:27:7.15 10.9:91. 311_9ojom-
299,O25 92.4% 34,300,OOO
University Par* Tech I & ll 5sn Antonio, TX 2007 loo.o%190,762 |OO.O% 33.200,OOO
Valencie Commerceplex Valencia. CA 100.o%317,905 rOO.O% 32,OOO.OOO
200s loo.o%290,450 IOO.O% 30,800.OOO
20't3 IOO.0%
w_Iltt:r ag"YJllgl
74OO Htszsrd
Whittier, CA
Westminster. CA
Pdtterson Pass Business Park Tracy. CA
258,506 100.0% 29,300,000
20n loo.o% 404,400 roo.o% 25,500.ooo
Cotton Center .IPY:l:tI
Weston, FL
2005 loo.ogi ?25.435
loo.o%20r.845 IOO.O% 23,400"OOO
ts3.3% 24,200.000
3225 Meridian Parkw6y ?oo4
Guhn Road Disrribution Center Houston, Tx 2012 too.o%253,838 lOO,0% 21,600.000
,:3:"Ysl!s:P:f y-a,{-"...
Seattl€ Distribu:ion Cent€r
Weston, FL
Seatrlp, WA
2004 too.096 230.600 50.5X 2I,IOO.OOO
2004 loo.o%
20n Io0.o%295.800
99::1-* 19:9-09'9"9"9
79.O% 19200.000
t74.478
Crossroads Corporate Center salt Lake ciry, uT
Miie High 5 Denver" CO 2014 loo.os 2s5.767 71.8% lg_too.ooo
Waters Ridge Oistribution Cenier Le*isville, TX 20I tG0.o%367,744 100.0% 18.400.000
168
P ro pe rt ies
ll'..l DUSTRIAL {ccntin*sc)
PROPERTY NAME
ASP Valencia
REAL
ESTATE
VALTJE
ATSHARE ($)
.-*1j:*9..P9
16.900.OOO
LOCATION
Santa Clarita, CA
VINTAGE
YEAR
2005
OWNERSHIP % SIZE OCCUPANCY
IOO.O% 173.678 lO0.O%
Business lnteriors
r-yl, b-yl tayo:. Di" t :iPy t' g! 9:-1lii City of |ndustry, CA 2oo,2
ll*ig-: Ix-2005 1000%19e.:77!roo.o%
loo.o% 190,900 r00.0%r6,700,ooo
-R1:I9*Hanover. MD 20to 100096 98,855 too.096 I6,200,OOO
'r o2s A ll?:t -r
o*o_l/?I _
-"i-9:11:,Y"J r9?A
-f:?'"119 j"t
Chino lnternational
Hano!€r- MD
$outh Brufiswrck. NJ 2006
looo%r34.O00 ro0 096
too.o96 208,899 too.o96
lo0.o%346.800 roo.096
2011 16110,0r-9!q
l?:799oos
15,500,oooPlaintield. lN 20r1
Chino. CA 2006 looo%184.289 IOO O%15,500,OO0
c€pl:ai P?rk Souih Pi-srribulon c€nter
La Palma Distribution center
9I9::.c1tv.9.iL
Anaheim. CA
?-ol1
2006
loo:ox
1999t
loo.o%
3"&283 lOOtOJ6
127,122 IOO.O%
lo3.s85
J4,69-9:9.!9
r4,300.oo0
loo.0%t3"200.oooSun valley lndustrial
I"r:-*:l *9*:*"lr?:-9r *er
- lprntigluja_1[!.*. -
!YlE:I911.-l'r **
.Iy'9:: r93l-ol1-__
?l:1 -s,':.t-9y-:tr:lq9^ i"l
Northoort
"s-ylvalleyl cA
Schertz, Tx
200s
2011 roo.0?6 24d.800 lo0 096 r3.200.ooo
PLainlleld 1lN
Sler,ing, VA
2014 lo0.o%352,OO0 o09(r2.500.ooo
2006 loo.o%n2,427 100 0%
t56.4lo 100 0%
l?:4"99999
12,200;ooorg-*..12
remfi AZ
F,?xlli.-c,A
lg*"":il_
Phoenix, AZ
roo.ovo
2o02 100.o%l62,OOO 100 0%
loo,o%
r1.900,ooo
llao999s
n,200,ooo
2005 100.o%1o3,4'rd
119 x91l xj.h"r[9!l_
_w9'J"sLrgI 9"9-11," r_: l{k
" IlT-.l3tPt:ltib".s:: 9:$:l
West IO Business C€ntet
9OO Corporate Grove Drive
2o,o'4 100_o%128.640 IOO O%
roo.o%205.920 tOO O%9.800,oooy-::_Lq-!:t!:r9i ,
Cincinnati. OH 201'l IoO.O%91,800 too,0%
146;523 o-o%
8.roo.ooo
2AA2 ro0.o%7,390,000
5a,t Lake lndustr;ai Dislribution Center sal! Lske city, uT 20fi to0.ox 'roo.800 100,0s 6.500,008
Butfalo Grove. lL 20Q5 100.0%6S.S43 tooo%5,500.ooo
Tstal lndustrlal :11,378,390,(x)O
30
169
Pro perties
HOTEL
PROP€RTY NAME
Chevy Chas€ - Hotel
VINTAGEYEAR O\{NERSH|P'%
200s roo.o%
i ,',,''. , :: REALOCCUPANCY ESTATE VALUE. ATSHARE (t)
75.9% 73,500,000
8r.8% 94.900.000
LOCATION
:
washinqton, DC
SIZE
19S
Alexandda Monaco Alexandria- VA 2006 100.0%241
Hotel A,legro Chicago. lL 2047 100.o%483 73-8%90,900,000
Morrison House Alexandria, VA 452006loo.oz.81.4%1.1.,700,000
Totol Hotol $271,OOO,OOO
LAND
.PROPEHTY NAME
VINTAGEYEAR OWNERSHIP
'6
2007 100;0%
. ] .. REALOCCUPANCY ESTATE VALUE
.,,t r,r,,:' AT SHARE (!)
o.o% 10.5m.00,0Harvest Creek
LOCATION
a .:.
Brandon, FL
Mile Hish 4 Denver, CO 2001 r00.0%o.o%2,r00,000
TotaI Land I:':1,500,000
TOTAL PORTFOLIO 17,762,69s,8t0
i,ij i li:: j ill :, i! 31
170
ffi
il-jfu,,*'
-ffi
#
'li
.Y
fii
.-:.:
I
1
171
t^
t,
*1t
',li14lri1i..':.\\iiffirLiu i iri[ i
ir.r':i l.i ii[:],:.i.t r L i I Ll
),, ' 4.r:
::::::t t:u ::u ut:t u t I I :t :t :
,]
;,li*,*ii o\,,rirat:...r,: ;,-:.' ..,'., ..=:::i::::
!'.I :,: i,Fl lr { I-,:,, I I I iii.,rtir;:,
172
Com m itment to S u sta ina bility
Clarion Partners seeks exceptional investment returns by responsibly investing ond managing high performance, high
quality,.environmentally responsible, healthy, and productive places to live, work, shop, and stay that are beneficial to
our local communities. ln May 2OI3. Clarion Partners signed the United Nations-backed Principles for Responsible
lnvestment, strengthening our commitment to incorporating environmental. social. and governance issues into our
investmenl decisions. Clarion is also an active corporate member of the U.5. Green Building Council and the Urban
Land lnstitute's Sustainable Building Council,
Across the Firm we are committed to exploring and implementing sustainable development and operational guidelines
for our investments. We have registered all applicable of fice huildings under the EPA Energy Star program and are also
pursuing LEED (Leadership in Energy & Environmental Design) certification wherever cost-effective. We regularly
assess opportunities to integrate energy effieiency improvements through our capital proiects and in new
developments. These proiects include skylights and daylighting, reflective white roofing, energy efficient lighting, water
efficient irrigaiion systems, low E glass, shade features, recyclable materials and shop assembled subsystems that
reduce on-site waste (i.e,. precast panels). low-volatile organic compound emitting materials, motion and occupancy
lighting sensors. and electric vehicle charging stations. Clarion also works closeiy with tenants on implementing
efficiency capital projects while educating them on how to operate more efficiently and cost effectively. This not only
lowers costs but enhances the tendnt/ landlord relationship, building loyalty to the Firm's proiects over tirne.
Fourth Quarter Sustainability Highlight
KATAHDIN WOODS, LIXINGTON, MA
PROPERTY HIGHLIGHTS
128 unit rental apartment complex located in the Boston,metropolitan area
Seven building community originally constructed in 1989
The Property is located in a highly deslrable Massachusetts school district
in close proximity to tocal employrnent centers and amenities
Average unit size of 954 square feet
98% occupied
SUSTAIN,ABILITY HIGHLIGHTS
The Property completed installation of solar panels on 5 buildings in 2014
Expected simple payback ol 4.2 years and a retu!.n on cost of 1796
Resulted in $3O.OOO in utility savings. plus the ability to sell
approximately $3O,OOO in sblar renewable energy c-ertificates
Federal government program subsidy provided a 30% tax credit for
.Jle_?Pl9:1."._
ffi
H$BfiililMEl
Sqrs:.3
?*r,ut$GR SB .$iPRll[$JJ,tr#
173
N otes
1. lnvestment in the Fund entaits significant nsks that investors
should consider before making a decision to invest. An
investor should only invest in the Fund as part of an overall
investment strategy and only if the inve$tor is able to
withstand total loss of investment. tnve$tments in the Fund
can only be made pursuant to the Fund's offering
documents and private pl6cement memorandum, which
investors are advised to read carefully and pay special
attention to the risk factors set forth therein.
2, Returns o!.e presented beginning April 1, 2OOO, the Funds
inception date.
3. Returns are presented on a gross and net basis, and there is
no guarantee that the Fund will realize its investment
ob.iectives or that investors will receive a return of their
capital. Both gro$s and net returns assume income
reinvestment and take infs account transaction Costs. Net of
fee returns reflect asset management fees. The Fund's base
management fees are charged as a percentage of net asset
value ranging from effective rates of 0.859( to L.25X per
annum except for certain internal investors and investors
whose interest exceeds $100 million, in which case fees may
be negotiated with the Fund. lt4anagemsnt fees are billed by
Clarion Partners outside of the Fund and do not impact
NAV.
4. The Fund's total appreciation return consrsts of two
components: propertyrlevel appreciation and the impact of
debt marked to market. For the year ended December gl,
2O14, the total annual appreciation return was Le9%
comprised of a 7.59% property-level appreciation return and
a O.4B% debt mark to market return.
5, Fund returns are calculated on an inve$tment-level basis and
include leverage, cash balances and interest income from
short-term cash investments. Fund returns are generally
compared to the NCREIF Fund lndex Open-End Diversified
Core Equity (NFl-ODCE) equal weight The NFt-ODCE is a
fund-level, tirne-weighted return index and includes property
;nvestments at ownerthip share. cash balances. and leverage
(i.e., returns reflect the actual asset ownership positions and
financing strategy of the funds included in the index). NFt-
ODCE returns are presented before fees and are for
illustrative purposes only. investors cannot invest in an index.
6. Real estate asset values are established by independent
appraisals each quarter and the values presented herein are
based on the December 31, 2Ol4 appraisals. Gross real estate
value is the approised real estate vaiue of all assets, For real
estate owned in joint ventur.es, assets are carried ai the
Fund's ownership share. except for con$olidated ioint
ventures which are carried at looyo. Net asset value is the
equily value of the Fund. which equals tot.al assets lgss total
liabilities, as defined by Generally Accepted Accounting
Principles (GAAP)
7. Portfolio occupincy excludes hotels. properties in initial
lease-up, and properties undergoing significant renovation_
Hotel occupancy is depicted on a rolling twelve month basis;
6ll other property types present occupancy as of quarter-
end and are calculated on a percentage of leased square-
foot basis.
8. Total Asset Value is the Fund's consolidated wholly owned
total assets ond proportionate Share of loint venture total
assets.
9, The Cash Ratio rs calculated as the sum of all Fund-level
cash, wholly owned property cash, and the Fund's
proportionate share of ioint venture cash divided by the
Fund's consolidEted wholly owned total assets and
proportionate share of,oint venture total assets. Restricted
cash balances are excluded from the calculation.
10. The Leverage Ratio is calculated as the sum of the fair
market value, as applicable, of all Fund-level debt. wholly
owned property debt, and the Fund's proportionate share
of jo,nt venture debt divided by the Fund s consolidated
wholly owned total assets and proportionate shar€ of joint
venture total assets.
11. Annual time-weighted returns are calculated by linking
quarterly returns, using the formula below:
lnvestment lncome + Appreciation (Depreciation)
Beginning Net Asset Value + Time-Weighted Contributions -
Trme-Weighted Distributioos
For annual returns. the sum of the return components may
not equal the total gross return due to time-weighting (i.e.
chain:tinking) of quarterly returns.
12, Clarion Partners is a registered investment advisor under
the lnyestment Advisers Act of i94O.
13, The information contained in this report has been obtained
or derived from independent third party sources believed
to be reliable. This report contains forward-looking
statements relating to the plans, objectives, opportunities.
future performance and business of the Fund and the
future performance of the U.S. rnarket generally. These
forward-looking statem€nts include statements regarding
the current expec[ations, estimates, projectlons, opinions
and beliefs of the Fund, as well as the assumptions on
which those statements are based^ Words such as
'believes," "expects,' "anticipates,"'int€nds," "plans,"
"estimates," 'projects," "should" and "objective" and
variations of such words and similar words also identify
forward-looking statements, Such statements are forward-
looking in nature and involve a number of known and
unknown risks, uncertainties and other factors, and
accordingly, actua, results may differ materially from those
reflected or contemplated in such forward-looking
statements. No assurance can be given that the Fund's
investment obiectives will be achieved or that investors will
receive a return of their capital. lnvestors are cautioned not
to place undue reliance on any forward-looking statements
or examples included in this report and should bear in mind
that past performance is nol ne.e$sarily indicative of future
results. None of ih€ Fund, Clarion or any oI their affiliates or
principals nor 6ny olher individual or entity assumes any
obligatlon to update any forward-looking statements as a
result of new information. subsequent events or any other
circumstances" Such statements speak only as of the date
that they are originally made
14. This report. including all exhibits and appendices, has
been prepareci and pr€sented in complisnce with the Real
Estate lnfcrmation Standards (REIS), as deferrnined by
Clarion Partners.
35
174
ItI
175
Report of lndependent Auditors
THE INVESTORS
CLARION LION PROPERTIES FUND, LP
CLARION LION PROPERTIES FUND HOLDINGS REIT, LLC
CLARION LION PROPERTIES FUND HOLDINGS, L.P,
\ile have audited the sccompanying combined financial statempnts of the entities listed in Note 1 (the Fund). which
comprise the combined staternents of assets, liabilities and equity, including the schedules of investments, as of
December 31, 2014 and 2OI3, and the related combined statements Of operations. changes in equity and cash flows
for the years then ended, and the related notes to the combined financial statements.
MANAGEMENT'S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS
Management is responsible for the preparation and fair presentation of these financial statements in conformity
with U.S. generally accepted accounting principles: this includes the design, implementation and maintenance of
internnl control relevant to the preparation and fair presentation of financial statements that are free of rnaterial
rnisstatement, whether due to fraud or error,
AUDITOR'S RESPONSIBILITY
Our responsibility is to express an opinion on these frnancial statements based on our audits. We did not audit the
financial statements of Federal/Lion Venture LP (Federal/Lion Joint Venture), a limited partnership in which the Fund
has a 70% interest. In the combined financial statements. the Fund's investment in Federal,/Lion Joint Venture,
exclusive of unrealized depreciation, is stated at $108.4 million and $IO6.9 million as of December 31, 2Ol4 and 2013,
respectively. and the Fund's equity in the net income of Federal/Lion Joint Venture is stated at $6.4 million and $6.7
million, for the years then ended. ln addition. we did not audit the financial statements of RamcolLion Joint Venture
L.P, (Ramco/Lion Joint Venturg, a limited partnership in which the Fund has a 70% interest. ln the combined financial
statements, the Fund's investment. in Rarnco/Lion Joint Venture, exclusive of unrealized depreciation. is stated at $52.1
million as of December 31, 2013. and the Fund's equity in the net income ol Ramcollion Joint Venture is stated at $5.9
million for the year then ended. Those staterfients were audited by other auditors whose reports have been furnished
to us. and our opinion, insofar as it relates to the amounts included for Federal/Lion Joint Venture and Ramco/Lion
Joint Venture. is based solely on the reports of the other auditors. We conducted our audits in accordance with
auditing standards qenerally accepted in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the flnanciEl statements are free of fiaterial ffiisstatemenl.
A,n audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial
st€tements. The procedures selected depend on the auditor'$ iudgment, including the assessment of the risks of
material misstatement of the financial statements, whether due to fraud or error. ln rnakins those risk assessments, the
auditor considers internal control relevant to the entity's preparation end fair presentation of the financial sfatements
in order to design audit procedures that are appropriate in the circumstafices, but not for the purpose of expressing
an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audlt also
includes evaluating the appropriateness of accounting policies used and the reasonableness of slgnificant accounting
estimates made by management, as well as evaluating the overall presentation of the financiel statements.
We believe thai the audit evidence we have obtained is sufficient and approgriate to provide a basis for our audit
opinlon.
OPINION
ln our opinion, based on our sudits and the reporls of the other auditors, the financial statements referred to above
present fairly, in all material respect!, the combined financial position of the entities listed in Note 1 at December 31,
2014 and 2013, and the combined results of their operations, changes in their equ;ty and their cash flows for the
years then ended. in conforrnity with U.S. general,y accepted accountrng principles.
New York, New York
March 3, 2015
6^","** fw,^Vttt
t,:37
176
Fi nancial Statements
Clarion Lion Properties Fund
COmbined Statements of Assets, Liabilities and Equity
(ln Thousands)
ASSETS
2014 20tz
Real estate investments, at fair value (cost; $6,230,601 in 2Ol4 and $5,592,768 in 2Ol3)
lnvesiment in non-consolidat€d joint ventures Bnd other investments. at fair value (cost: $652.457 in 2O14 and
$577.371 in 20]3)
Cash and cash equivalents
$ 7,o44SlO $6,039,244
640.7ffr 510,934
70B66 2U,096
Renls and other receivables, net of allowance for doubtful accounts of $782 in ZO14 and $1,974 in 2ol3N",".,"""iffi;;ild;ftirJ;;;il;;;sss4ilo;, -**:* -
17,85t 16,386
L7,t7t 9,984
Prepaid expenses and otherassets 12,O29 r0,910
Restricted cash 13.238 20.640
Tot6l assets I 7,e22,142 $5.8s2,194
LIABILITIESAND EOUITY
Liabilitiesl
_ M gtlg:gs jg!g'i:Ie9E, "t3l-uglg.
Senior notes payable, at fair value
6c4AO6 $ 661,400
t,277,L65 999.597
Accounts payable €nd accrued expenses 274,2rO 274.220
Credit facility 205,O00
0ther liabilities 29,557 58,615
Total llabllities 2,420,858 r,993,823
Equity
Clarion Lion Properties Fund partners'equity 5,!98,416 4,851,149
Non-controlling intcr€sts 2,868 7,222
Total equity 5,&L,zU 4.858.371^
Tobl lhbt,ltlos erd equlty , 7,AA2,A42 $6,852,194
See accompanying notes.
,:i
177
Financial Statem ents
Clarion Lion Properties Fund
Combined Schedules of lnvestments
(ln Thousands)
DECEMBER 3I 20r/l .
FAIR
t'IARKETCOSTT VALUE
2a]{ ,:.
FAIR
MARKETCOSTI VALUE"!::lE*:t rry:*rg:H*
East
lf,tlt:striei
lO35 A:rport IOO w5y-Hanover, MD t 14485 I 16,100 t 1{.484 $ 1s.s00
Chantit!y Distribution Center*Chanti,iy, vA 35,493 3400 36,371 35.100
Dulles Woods lll-StprlinE. VA la596 12,400 12.196 g*91_
Race Road-tlanove( MD 13,346 15,200 15.406 15,700
Research Tri-Center*Durham. NC t17,572 117,500
South River Road-5outh Brunswick, NJ
Toial lndusirlal
15,238 15,700 1.3,193 13.500
I ?:o7flfi t 215,300 $ 89.950 $ 91.000
0llir:(
lO Brookiine Place-Brookiin€. MA s u11,295 $ 125,000 5 Ur.X72 $121,172
IOO Fifih Av€nue-New York. NY 23.5.,rr2 258.000 233.285 '242.000
1O'l Arch Streel*Boston, MA 147.E81 143,000 1{4.458 r29.000
1{75 Dunwoody Drive-west Chester. PA
3l5O Fairview Park-Fal,s Church, VA
_i-a9-7,9' -- ,213@-.
90,530 90,000
3X.07s
90.530
39:99-"
104.000
ao&,729 87,t00 105.657 79.800
54,896 65,000 54,350 55.800
* cF.:*E:" _Y--"'hj!g-t-9 nr-_Dc
tricoh Building-Malvern, PA
One Liberty Sq.rare-Boston. MA
tr,385 25,400 30.{03 23.500
Totel Office t 820,952 * 816,000 $ 810,940 $ 779,6?2
P. c.srrren, ia L
IOOO Jefferson-Hob6k€n. NJ , 119,s0{ t 129,500 $ 118.768 $ 123,000
4a Berry Streei-Brooklyn. NY 27,644 43,7@ 2t,644 41,500
Banyan Grove at Towne Square-Virginia Beach, VA 42.946 44.000
Broadway Knolls*Holbrook, NY 72,966 82.100 72.495 78.900
Columbia Town Center*Columbia, HD 109.950 r3!i,000 107.694 ]33,000
lniinity Harbor Point-Stamford. CT
Katahdin Vr'oods- Lexi^qton" MA
99,549 104.300 99.28s 102.800
34.0O4 34.900 32,575
53.234
3-1:1-S
57,30053,397 59.900Montci3ir Residences*t tsnt(la!r^ N J
Parkw6y Lof as*Bloomf ;eld, N J 104.598 10{.598
Frinlhouse Lof tE-Brooklyn, NY 30,632 30,532
The Acadia at Meiropoliian park*Arlingion, VA 118,408 1{0,ooo 64,V27 72,tOO
The Grarnercy at Melropo!iion Fark-Arlington, VA 202,578 189,00O 201,969 193,000
3g
178
Financial Statements
Clarion Lion Properties Fund
Combined Schedules of lnvestments (continued)
(h Tholrsands)
Real Estate lnvestments
zQL4 , .
FAIR
MARKETCOSTI VALUE
,-: , 2O13.,.:-'':
FAIR
MARKETCO5T1 VALUE
East (corfrh!edJ
The Metropolitan al Reston Town Center-Reston, VA t L'11,932 $ 121,000 $ 121,565 $ 124.000
The Millennium at Metr6politan Park-Arlington, VA il19,925 tts,0oo 119.623
8,7L7 102,000
140.300*"^-*:*
- 9q,{qWesibrooke Place-Washington, DC 1Z*1€_.-
Total Residentlal tr,263,849 t1.409,630 $X,109,644 $1,241,400
Fela/,
Chevy Chase-Washingtoo, DC t 110,6105 s 93,400 :$ 107,145 $ 93,s00
Dunkirk Gateway-Dsnkirk, MD
Totrl Retail
41,502 43,200 4]-.379 40,200
t 152,107 s Xr6,60O $ 148,524 $ 133.700
Chevy Chase-Washington, DC t 90,!91 t 73,500 $ 79,938 $ 54.oOO
Alexand/ia Monaco-Alexandria. VA :'l1,999 94,900 110,440 94.500
Morrison House- Alexandria. VA 17,962 tI.700 -" 1"11P1 12.900
Total l{otel I 220,352 S 180,100 $ 208.179 $ 171.400
Midwast
lnditslriB!
14O North Mitchell Court-Addlson, lL $ 13,652 * 1L200 $ 13,6s2 $ X2,700
9OO Corpora(e Grove Drive-Buttaro Grove, lL
Plainf ietd Park-Plainfield, lN
5,429 5,500 6,182 4,900
Capitai Park South Distribution Center-Grove City, OH 13,124 14600 13,123 13.600
12,596 15,soo 12,692 14.000
Plainfield Park ll-Plainfield, lN 11,105 r.:1,600
Princeton Disiribution Center-Cincinnati, OH 7,671 8,10O 7,671 7.700
West Chester Commerce PErk-West Chester, OH 8,437 9,800 8.437 9.100
Total lndustrlal t 73,114 $ 77,300 $ 61,757 $ 62,000
Railway Plaza-Naperville, lL , ?5,472 s o1,2o0 $ 75,L7A $ 83,s00
4Or
179
Financia I Statem ents
Clarion Lion Properties Fund
Combined Schedules of lnvestments (continued)
(ln Thosaands)
DECET'IBER 3I ' :,2O14
FAIR
ltARKETCOSTT VALUE
2013
FAIR
MARKETCOSTI VALUE
..
R€a_l _Estate InY::_!IglL: -illd_y:*{.ry,u,,jjl_
listai!:
600 North Michigan i,r"_l.y::-![::s::l!
#otel.
t xr8,oss $ 315,000 $ u4,523 $ 271.000
Hotel Allegro-chicago, lL s 121,299 t 90,900 $ 113,451 $ 93.X00
9:vll_--
!nd$slial:
3225 Meridian Parkway-Y9tto1: Il
:311 l:1dl:f_:tyg:Y:: iel il
Beitway Northwest-H$uston, TX
J 23,L74 t 23,400 I 23,100 $ 21,900
16,099 21,100 t6,016 19,000
2ao2s :!4,30O 2r.422 31.900
148S0 16,900 L4-742 14.600Business lnteriors-lrving. T x
Guhn Road Distribution center-Houstdn, Tx 18,811 21,500 18,8Xr 20.500
Pioneer 360-Arlinqton,'r X
Tri County Distribution Center-Scheilz, TX
51t.895 60.000 54.26t 56.2S0
10,999 il1.200 10.906 12,X00
University Park Tech I & ll-San Anronio. TX 30,724 33,200 30.3t19 32.200
Water$ Ridge Oistribution Center-Lewisville. TX 15,414 18,400 14,736 16.900
Totll lndustrlal , 206991 t 242,100 $ 204.343 $ 225,350
-?li:i* -
Conroe Medical-Conro€, TX f r9,s69 $ 1z5oo $ 18.850 $ 17.240
6w;nn€tt Medicai-Lawrenceville. GA 18.t02 10.500
Legacy Medical Village-Flan*, TX
Mira Vista-,qustin. TX
t2,s7t 35,600 32.384 33.500
4,784 41.400
Ten West Coroorate Center Two-Houston, TX 45,379 62,900 45.362 59.000
The Overlook-Austin, TX 13,296 15,800
*-!tiy,*,:j:v- jjt-!.I-"*:llll&lv-:!gnAntonio.rx 26,885 31,100
Veritas Office Building-Housion. TX
Vero Medical Suites*Vero Beach, FL
105.199 167,900 75.185 126.700
11.523 10.900
Waterway Plaza I & il-The Woodiands, TX 12S,962 150,800 125,108 u8.200
Total office t 4o9,u7 $ s23,1O0 $ 325,61d $ 386.000
8tr.grrreflaral
Lantana Ridse-Austin, TX
Piatinrrm Southside-Austin. TX
45,6Ut 51,000 4?.585 48.750
2L,462 30.250 21,398 29,500
Grand on Mernorial-Houslon. TX 14,954 39,400 33,024 33,O2{
Moda ai Norih Bay Village-North B.y Vi'l6ge, FL
Total Resldentlal
65,680 76,800 31,177 37.500
, 157,718 S :JIZ45O $ X28.18,1 $ 148.774
41
180
Financia I Statements
Clarion Lion Froperties Fund
Combined Schedules of lnvestments (continued)
(ln Thousards)
DECEMBER 3I
Real Estate Investments
2014
FAIR
ilANKETCOSTI VALUE
2013
FAIR
l'lARKETCOST1 VALUE
South (con,'rnued)
Victory Station-Savennsh, GA t a,254 I 26,100 $ 24,.183 $24.183
waY.P-:' !l9p-?:i c,9luP-lllintr f.L "
Whole Foods at the Oomain-Austin. TX
b,e56 ,0,000 24,418 28.400
54.251 34,.t00
Total Retail t 82,971 3 91,300 S 48.601 $ s2.s83
Xarvest Creek-Brandon, FL t 1o,0oo t 10,500 $ xo,00o $ 1o.5oo
WEsl
l*t!il6lfial
'15850 Heacock Sl,reet-Moreno Valley, CA
2lsi Street Business Center-T€mpe, AZ
I 46,707
'
57,2OO $ d6,707 $ ss,600
1l"too10,556 10.195 9.0O0
26,624 29,1q)26.s95 27,OOO_iJ 9o_I_: r:9 :Y*.lrg' !:t, !1.
ASP Valencia-Santa Clarita, CA 16,484 17,600 L6,440 x6,800
Carmel Mouniain*San Dlego, CA 54,135 5r0.500 63.914 48,500
Chino lnternational-Chino. CA 17,995 15,500 17.996 14.800
28,893 24,200 28,746 26,00090r1":s:*?.i_:1".!::.t"*1
Crossroads Corporate Cenier-Salt Lake City, Ui Ii6,274 19,200 15.962 16.700
. - ?_Y3 l-s-"_ _c:t1?I"" _9: l l g:PF e ?: * : az 5L8s9 40,700 51,178 37,500
25,805 34.700 25,509 26,800Edei:9*19:*:::'9, 9A_
Fifth Street lndustrial-Fhoenix. AZ
Geneva lndijstrial-Tempe. AZ
7.833 9.500
4.609
25,qL 51.5i(r{,24.gfi 51.300
s,479 t1l,No 9.X03 10,300
4.400
12,541 14,t(x,12.547 14.000
1iI,194 19.lCO
Knott Distribution Cenr.er-Br:ena Park. CA
Kyrene Commons-Temp€. AZ
La Pa|ma Distribution Cenrer-Anaheim. CA
Miie Hish 3-Denver. CO
Mile High Distribution Ceoter-Denver, CO
Miraloma Distribution Cente,r*Anaheim. eA
Norlhport*Fremont, CA
47,656 55,800 47,472 53.600
30,803 37.{00 30,so3 35.300
14,033 11,/too 14.033 11.600
Facific Coast Park ll-Fife. WA lg,51ll 42,700 36,620 39,900
Patlerson Pass Business Parh-Tracy, CA 19,689 16.500 19,141 20,000
Fedlands Distribulion Center-Redlands- CA 48,741 65,500 44,f,19 49,400
s61r Lake hdustrial pistriburi?-ll cely:::lj*:9lr_ql*
S€attle Distriburion Center*Seartle, WA
5,071 6,s00 5,096 5.800
16,652 20,000 16.684 18.100
Siempr€ Viva Butiiiess PBrk*San Eiego, C,e 5t,725 :r8,400 53.590 38.200
sun Va!ley lndustrial-Sun Vatley, CA LO,977 13,200 10.917 12.900
Sycamore Col16ction-Rivers,de, CA
Turnbull Csnyon Oistribution Cenier-City of lnduslry, CA
t4,177 59,500 t4.o74 36.300
aL320 te,7m 10.99s 15.200
Val€nciE Commercsplex-Valencia, CA
West lO Business CenlE{-Phoenix. AI
1l,tl1
5,958
14000 aa E)a ?s-ooo
7,390 6.9L6
181
Fina ncia I State m e nts
Clarion Lion Properties Fund
Combined Schedules of lnvestments (continued)
(ln Thousands)
DECEHBER 31 2014 2013
FAIR
MARKETCOST1 VALUEcosrr
FA!R
MARKET
VALUEReal Estate lnvestments
w€st fc6ntl/rued)
ltvyas trial {tofith}t,*d}
whitrier lndus:ria r-lvhittier_ cA 3 22,950 I 30,8oo t 40,027 I {3:m
Total lndustrl.l t 762,r:26 t 443,690 $ 768,163 $ 783.000
Qltra
6O Spear-San Francisco, CA $ 107,061 I r:.r,OOO
35O Rhode lsland-San Francisco, CA 42,713 71.200 42,642 65,100
475 Brannan Street-San Fraocisco. CA 1s0,120 196,000 148,861 x69,000
Z9Ol Patrlck H6nry Drive-Santa Clara, CA 26,082 2%900
Arboretum Geteway-56n!a l'lonica, CA 10:"162 t8{,000 95.694 158,000
Arques Business Park*Sunnyvale, CA
El Dorado Medlcal*Tucron. AZ
27,r44 2E,.t6O 27.265 27.264
ll:llcresl Mgd:9al-san Dleso: cA
O ne_-le 1 M-ar-Sa-n_ q iego, C.a
43,358 38,100 43,29A 40,200
a:9*
66,230
9.900 13,837 9,600
58,500 65.820 53.800
proEressive lnsurance-Rancho Cordova, CA 41,455 29,300 41,466 29,500
*** r11u_-*?1rse* t## --rtr#:?19-Ii LIS-".sn:l:,_.Y: fl 9J3t*l
:r::Ir4l9ll1:-gv,qr9l3^t3 j!rta.9l*
Va{ley Parkway Medical-Escondldo, CA 30,771 23,400 3A,214 23,600
wood Hollow Office ParkrNovato, CA 49,714 22,700 49.731 21.300
Total OIflce I ut7,474 t:'040,5o0 $ 769.438
'
883.36s
,irts{$p.r:aial
Avignon Townhomes- Redmond, WA
Balboa Park-San Diego, CA
* 54,607 , 110,000 $ s4,39s $ 94,500
31,5S 38;O00 L7,354 21,900
Buene Vida at Town Center-Rancho Santa Margariia, CA n,t7a 25,100 22,O77 22,600
D€sert Ch.rb Apartments-phoenix, AZ 67,744 83.100 6,6.802 80.400
Missions at Chino Hills*Chrno Hilis. CA 74,3L7 50,800 74,lOO 5S.100
Oal{ View at Sonoma Hills-Rohnert P€rk, CA
Remington at Ladera nsnch-L8dera Ranch, CA 33,363 36,S00 33,918 35,2@
67,147 67.800The Station at Riverfront Park-Denver. CO
s7,t22 r04,7O0 36,957 40,000
Village 0r} ihe Green-Rancho Cucamonga, CA 43.753 48,600 43,s04 47,600
Total Residentlal | 432,477 t 51{,900 $ 349,107 $ 401,300
*,.,tail
Park Piace thopping Cent€r-Tukwila. WA s {5,811 I 42,3@ $ 45,8r.1 $ 40.700
* promenade_
-a_t
sacf at:$o-.9aj::i,?y- sa:Ie-menlo: cA 1i12,310 86,900 122,229 8i1.900
West Holiywood Gateway-Los Angeles. CA 74,6A7 118,000 78.132 110,000
Iotal Reteil I 246,723
'
247,200 $ 246.172 $ 235,600
! a,;i.
l4ile High 4-Oenver. CO 1" rjl*
l6,2lo,5ot
t 2,100 $
17,A44,970 $5,592,768 $6,039,2214Total Rcal Estate lnycstmant3
Totrl neat E6trt€ lnvertmaDt3 !s a Fercantage o, Totel Asictt 90,06x 88.14i
182
Fina ncia I Statements
Clarion Lion Properties Fund
Combined Schedules of lnvestments (continued)
(ln Thoussnds)
DECEMBER 3I 20a4
cosTr
FAIR
MARKET
VALUE
r 201'3': ' l
FAIR
MARKETCOSTI VALUE
Investment in Non-Consolidated Joint Ventures and Other lnve6tm€nts
Lion ES 4,909 t 4,909 $ 174,805 $ 136,547
Central Park &,42 It0,250 39,277 37,245
11 East 44th 2r,z!,a 20,886 22,374 L7,939
Federal 108.40s 101,906 106.958 101.,002
Marketplace at the Outietsr 99,176 99.176
P€lm Beach Oulletsr 112,054 112.OS
Panattoni 3,948 3,583
Ramco st.o12 48,942 52.098 45,607
Seiby 6,107 rt,435 6.029 10,873
Taconic 150,379 149,559 143.686 137,591
Village 54,r44 51"S86 28,2t6 20,747
Total :nvestment ln Non-Consolldated Jolnt Ventures and Other lnvestments I 652,457 t 540,713 $ 57737r $ 510.934
Total lnvastment ln Non-Consolidated Jolnt Ventures and Oth€r lnvestments rl e
Percentage of Totsl Assets 8-19t(7.46*
Total Real EElate end Non-ConEolldalcd Jolnt Ventura tnvertmsntE sod Oth!r
lnv66tnents t5,883,058 t7,68s,581 $6,170,139 $6.ss0,178
llnvestrnents al cost represent purchdse pi,be and subsequenl capilal addttions fot real estate investments. lnveslments at cost io non-consolidated joint
ventures represent the Fund's contributions, d$tributions aN atlocated shares of equity income {lass) from such joint ventJres.rLoan receiuable classfled as other investments.
See accompanying notes.
183
Fina ncia I Sta tem e nts
Clarion Lion Properties Fund
Combined Schedules of lnvestments (continued)
(h Thousands)
DECEMBER 3I,2O't4
TNVESTMENTS PERCENTAGE
AT COST' OF PORTFOLIO
INVESTMENT$ PERCENXAGE
-.....AT FMV OF FORTFOLIO
Glogrrphlcr
East t2,942603 42.s,X,$3,030,s51
Midwest 4L7,54O 5,1 s88,991 7,7
60uth 1,123,933 16.t L311,865 L7.L
West 2393',982 34.a 2,79,?74 55.8
Tot.l t6,E83,05S S7,5t5,6E1 1(xr.0x
Propcrty TYp.r
lndustrial $r"249860 18.1X i1,378,s90 17.8X
Office ,,141"755 t1-1 2,4/,0,et6 31.8
Residential 2,096,002 30.s 2,t74,t84 30.9
Retail LOt7247 15.1 1,203,764 15.7
346.550 5.O 275,909 !.6l"e"Lel*
Otherr rL53{12,600 0.2
Tot!l 16,883,0s8 100.0!a t7,685,683 100,0*
DECEMBER 3I.2OI3
Geographicr
INVESiTMEI{TS PERCENTAGE
ATCOST' OF PORTFOLIO
INVESTMENTS PERCENTAGE
AT FMV OF PORTFOLIO
East $2.660.407 43.19($2.68s.139 41.195
Midwesl 414,007 6.7 526,887 8.0
South 800,892 13.0 892.527
West 2,294,833 37.2 2,445.625 37.3
Total $6,170,139 100.096 $5,550,178 100-ox
Property Type?
lndustrial $t,124,272 x8.216 $1,1.61,350 L7.70a
Office 1.968.643 32.0 32.1
Residential 1,811,828 29.4
.* "?;19221 **-
2.023,238 30.9
Retail 755.O73 t2.2 860,239 13.1
Hotei 496.435 8.0 391.047 6.0
othed 13.948 14,O83 0.2
Total $6,170,139 100.0%$6.sso.178 t00.0%
'lnves'tments at cost represent purchase price aad subseguent capita! additions for real estate rnyestments. /nvestments af cosl ln non-conso lidated joint
reafures represeot the Fund:s contrlbutions, disfiAJilons and allocated shares af equity income (loss) from such joint vehtures. rnvestments €t cosi ,hother lnvestmenls represenf lhe outstanding principal on the Fund's taan receivabtei.zlnclude$ equity investrnent in non-consolidated joint ventures and othe( investments.tOther lncludes land.
See accompanying no|es.
lj i ,,.rr'i 45
184
Financial Statements
Clarion Lion Properties Fund
Combined Statements of Operations
(ln Thousands)
YEAR ENDED DECEMBER 31 2O].4
Revenues
2AL3
Rental revenue $ 417,369 $ 399.901
Hotel revenue 59,120 7X.996
1,078 6s6lnteres-l incorne
Other revenue 20,255 L7322
Total revenues 627,82;2 4a9,A75
Expenses
Real estate operating expenses 76,!r7 69,372
Real estate taxes and insurance 68,272 62,098
Hotel €xpenses 55,287 56.695
Qther expenses 12.30013,6/t3
Total expenses 211,s73 200.465
Net operating income 114,249 289.410
Equity income from noh-consotidated ioint ventures
lnt€rest^ expense and oiher Financ;ng cosis
l1,0tyl 35,643
(101-072)@2,944)
Net iovesiment income 244,22L 232.109
-te'::a'.:g9lg|::-t*t g:i tT:r5_*-__-.^*.^_(:"s73)(xx,225)
Loss on sale of noo-consolidated joint venture investments
Unrealized appreciation on real estai€ investments
Unrealized appreciation on mortEage and senior notes payabie
(18.872)<7,76L)
!85,299 362.821
Unrealized appreciation (depreciaiion) on non-consolidated joint venture investments 20,o70 (16,532)
25,19s 26,790
lncome from operations 652,O{0 586,202
Portion atlributable to non-controlling interests 4,359 (d.076)
Net income attributable to Clarion Lion Properties Fund t 655,t99 $ 582,126
See accompanying notes,
Clarion Lion Properties Fund
Combined Statements of Changes in Equity
(ln Thousa^ds)
YEARS ENDED DECEMBER 31.2014 AND 2O'I3
CLARION LION
PROPERTIES FUND
$ {,378.683
NON.CONTROLLING]. INTERESTS TOTAL
$ 7.745 $ 4.386,428Total equity at Decernber 3],2Ol2
Caoital contrrbutions 658,172 62 654,234
Distrlbutions and .edemptions (767,832)*" "-^**f :6911- *-.(772'4s3)
4,076 5t!5,202582,126Net income
Total equity at December 31,2O13 4,85L.149 7,222 4,858,371
Capltal contrlbutlons 485i126 61 la5,187
Dlstrlbutlons end red€mptlons (594.258)(56)(594314)
Net lncome (los3)656,399 (4,359)552,OlU)
46
t 5,398.416 * 2,868 I 5,rt0L284Total equlty at Deaember 31, 2ol4
See accompanying notes.
185
Fina ncia I Statements
Clarion Lion Froperties Fund
Combined Statements of Cash Flows
(ln Thousands)
YEAR ENDED DECEMBER 3I
Operating activitles
20I4 2013
lncome From opqrations 3652,O40 $ s86.202
Adtustments ro reconcile ,ncorne {rom operations lo net cash provided by oper€ting activities;
Equity income from non-cons6lidated ioint ventures (3r,o44)(35,643)
Unrealized appr€ciation on real estate invsstmentt
Unrealized (appreclation) depreciation on non-consolidated joint venture investments
Unrealized appreciation on mortgage and senior notes payable
(383,299) (362,821)
(20,o70)16,532
(25,195)e6,790)
Loss on sale of real estate investmsnts
Loss on sale of non-consolidated ioint venture investments
1,873 1r.225
18,872 7.767
Distr,bution ot earnings from non-consolidBtEd joint vantures 18,585 19.619
Change in operating assets and liobilities:
lncrease in rentS tsnd othet recervables. net of allowance for doubtful accounts
(lncrease) decrease in prepard expense! and other assets
(5r7){431}
cJle)6.095
D€crease (incr€ase) in r€stricted cash 2,4o2 (3.430)
lncr€ase (decrease) in accounts payable and accrued expenses
(Decrease) increase in other liabilities
lo,5I4 (2,073)
(t,349)32.598
Net cash provided by operating activities 241,795 248.844
lnvesting activlties
lssuance of notes receivable {238e)(393)
Proceeds from sale of reBl estate investment$. net
Proceeds frorn sale of non-consolidated joint venture investments, net
Furchase ot reat u.trt" i.,r..tl]ri]--(s2o,596){7U,574)
I8r,9lO 531.601
tx4.923 170,444
Purchase of other investments
Capitai expendi!Ures
Contributions to non-con6olidat€d ioint v€ntures
.- (21t,230)
(216,375)
(43,it60)
(97,430)
<2.6\2)
Net cash used in investing activities (68r,99s)(182.964)
Se e a cc o m panyi n9 notes-
47
186
Fin ancia I Statements
Clarion Lion Properties Fund
Combined Statements of Cash Flows (continued)
(h ThousBnds)
YEAR ENDED DECEMBER 3.I
Financing activlties
2Ol4 ' :::' 2013
Principal proceeds on mortgage and senior notes payable 485,OOO
Principal payments on rnortgage and senior notes payable
Proceeds from credit facility
(2s8,275) <22.349)
205,OOO
con!ribtrtions-oon-controlling interests 6?
Distributions -non-controlling interests
Capital contributions
(55)
157,321 65A.L72
Distribuiions and redemplions (521,981)(520,094)
Net cash provlded by tinancing activities 267,O72 15,791
(Decreese) increase in cash (r73,13O) &1,671
Cash and cesh equivalents at th€ beginning of the year 244,096 162,425
CBsh and cash equivalents at end of the year $ 70,966 $ 244.a96
Non-cash investing and financing activities
Oistributions and redemptions payable $ 't84,3r3 $ 212.036
Capital contributions received in advance 5,320 $ 3s.12s
Consolidation of non-consolidated ioint venture real estate !o wholly owned real estat€$ (2,790)
Consolidat;on of non-consolidated ioint venture ren(s and other investmenG to wholiy owned rents and other
receivables (950)
Consolidation of joint venture other liabiiities to wholly owned other liabilities 95
Conversion of note receivable to additiohal interest in consolidated ioint venture $ 4.661
Assumption of mortgsge notes payable $ 49,552
Accrued capital expenditures t 36,829 $ 19.710
Supplemental disclosure
Cash paid for interest $ 96,86!s 93,076
See accampanying notes
187
Notes to Combined Financial Statements
December 31,2014
1. BUSII.IESS AND ORGANIZATION
ING/Clarion Fund, LLC was formed on November 17, 1999, with
Nationale-Nederlanden lntervest ll B"V. (NNl) as the sole
member. Effective April l, 2OOO, (the Commencement Date),
ING/Clarion Fund, LLC changed its name to Clarion Lion
Propertles Fund, LLC (the LLC), Pursuant to the Limited
Partnership Agreement (the Agreement) dated October l. 2O'11,
the LLC converted into a Delaware limited partnership named
Clarion Lion Properties Fund. LP (the LP). On November 3O,
2011, all remaining interests of NNI were purchased by existing
limited partners of the LP.
Limited partners generally subscribe for interests in the LP by
contributing capital directly to the LP. lnvestors, in limited
circumstances, may also invest through other legal entities,
including Clarion Lion Properties Fund Holdings REIT, LLC (the
CLPF REIT) and Clarion Lion Properties Fund Holdings, L.P
(the Operating Partnership).
Clarion Lion Properties Fund represents the combined
interests of investors in the LP, the CLPF REIT and the
Operating Partnership (collectively or individually, Clarion Lion
Properties Fund or the Fund), The Fund engages in the
business of acquiring, owning. holding for investment and
investfng in or engaging inactivities related to investments in
real estate Essels,
Profits and losses are allocsted among the investors in
accordance with their respective percentage interests in the
Fund. Net operBting cash flow of the Fund may be distributed
to the investors in accordance with their respective percentage
interests in the Fund, at the discretion of Clarion Partners LPF
GP, LLC, a Delaware limited liability company and the general
partner of the LP (the GenerBl Partner) ond Clarion partners.
LLC. a New York limited liability company, the sole member of
the General Partner and the manager of the LP (Clarron or
Manager).
The term of the Fund is indefinite and may be terminated upon
the occurrence of certain events as defined in the Agreement.
The Fund has 22'l investors as of December 31, 2O14.
2^ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying combined financial statements have been
prepared in accordance with the FASB Accounting Standards
Codification (ASC), the authorrtative reference for U,S.
generally accepted accounting princrples (GAAP) and include
the accounts of each of the wholly owned tifle holding
companies owning real estate investrnents and maiority owned
or controlled real.estate entities. All significant intercompany
balances and transactions are eliminated in consolidation,
INVESTMENTS IN JOINT VENTURES
The Fund accounts for its investments in joint ventures where
it does not have a controlling interest under the equity method
of accounting. Accordingty. the Fund reports its share of net
income (losses) from its investment in non-consolidated joint
ventures in the accompanying combined financial statements.
USE OF ESTIMATES
The preparetion of financial statements in conformity with
accounting principles generalty accepted in the United States
requires management to make estimat€s end assumptions
that affect the reporled amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of
revenues and expenses during the reporting period, Actuai
r€sults could difler from those estimates,
RENTAL OPERATIONS
The real estate investments earn rental income from
commercial tenants under Ieasing arrangements that are
accounted for as operating leases. These leases generally
provide for minimum rents and escalation charges to tenants
for their pro rata share of real estate taxes and operating
expenses. Rental income, including fixed rents that vary over
the term of the lease^ is recorded as earned under the terms of
the related agreements and not on a straight-line basis. since
the impact of increases in fixed rents is considered in
determining the estimated current value of the properties.
Revenue from rental of residential units is recognized as
eamed over the terms of the leases, which are generally one
year.
HOTEL OPERATIONS
Hotel room revenue and other hotel revenues are recognized
when earned.
INCOME TAXES
The CLPF REIT has made an election to be taxed as a real
estate investment trust (REIT) under Sections 855 through
86O of the Internal Revenue Code of i986, as amended. ln
general, a corporation that distributes at least 9O% of its REIT
taxable income to ils members in any taxable year, and
complies with c€rtain other requirements (i.e.. sources of its
revenues) is not sublect to federal income taxation to the
extent of the income which it distributes. lf it fails to qualify as
a REIT in any taxable year, it will be subject to federal income
tax at fegular corporate rates on its taxable income. Even if it
qualifies for taxation as a REIT, it may be subiect to certain
state and local taxes on its income and property and to federa,
income and excise taxes on its undistributed income, as noted
above. The CLPF REIT met the qualifications for REIT status
for the years ended December 31, 2014 and 2O13. Additionally.
CLPF REIT distributed'lOO% of taxable income in both years.
and as a result did not owe any federal income tax or
undistributed earnings excise tax- Accordingly, no provision has
been made for federal income taxes for the years ended
December 31, 2Ot4 and 20]3.
The Fund also has a number of taxable REIT subsidiaries (TRS).
The Fund, CLPF REIT and TRS incurred federal and state taxes
in the aggregate of approximately gl.4 million for the yesrs
ended December 31. 20'14 and 20'13. Such amounts are
included in other expenses in the accompanying combined
statements of operations. Under ASC 74O-1O, lncome Taxes,
deferred tax assets and liabilities are recognized for tBmporary
differences between the carrying amounts of assets and
liabilities for financial s[atement reporting purposes and the
amounts used for income tax purposes, A, valuation allowance
is recognized if it is more-likely-than-not that some portion of
the deferred asset will not be realized. At December 31,2014,
the deferred tax liability was approximately gO.3 mitlian.
if applicable, the Fund will recognize interest and penalties
related to the underpayment ol'income taxes as a component
of income tax expense. The Funcl is not currently under
examination by a taxing authority. The statute of limitations for
examination for the Fund's major tax ,urisdictions remains open
for tax years 2oll through 2014.
ASC 74O'1O also prqvides guidance for how uncertain tax
positions should be recognized. measured, presented and
disclosed in the Financial staternpnts.
:r
188
Notes to Combined Financial Statements
The Fund has elected the fair value option far al, of its
mortgage and senior notes payabte to better align the
measurement attributes of both the assets and liabilities whileproviding investors with a more meaningful indication of the
fair value of the Fund's net asset value.
The following is a description of the valuation techniques used
for assels and liabilities measured at fair value:
REAL ESTATE INVESTM ENTS
The values of real estate investments have been prepared giving
consideration to the income. cost and sales comparison
approaches of estimating property value. The income approach
estimates an income stream for a property (typically 1O years)
and discounts this ineome plus a reversion (presumed sale) inio
a present value at a risk ad,usted rate. Yield rates and growth
assumptions utilized in this approach are derived frorn market
transactions as well as other financial and industry dala. The
cost approach estimates the replacement cost oF the buildifig
iess physical depreciation plus the land value. Generally, this
approach provides a check on the value derived using the
income approach. The salet comparison approach compares
recent transactions to the appraised prop€rty. Adiustrnents are
made for dissimilarities which typically provide a range of value.
The income approach and, in limited situations, the sales
comparison approach were used to value approximately lOO%
of the Fund's real estate investments for the years ended
Dec€mber 3l,2Ol4 and 2013. The discount rBte and the exit
capitalization rate are significant inputs to these valuation5.
These rates are based on the location, type and nature of each
property, and current and anticipated market conditions.
Many factors are also considered in the determination of fair
value including, but not limited to. the operating cash flows and
financial performance of the properties. property types and
geographic locations, the physical condition of the as$et,
prevailing market capitalization rates, prevailing market discount
rate$, general economic conditions, economic conditions
specific to the market in which the Essets are located. and any
specilic rights or terms associated with the investment. Because
of the inherent uncertaintie$ of valuation, the values reflected in
the combined financial statemenls may materially differ from
the values that would be determined by negotiations held
between parties in a sale transaction.
For each calendar year, the Fund follows a valuation policy
whereby investment values are determined quarterly by one
self-contained appraisel reporl and three limited restricted
appralsals, in accordance vyith the Uniform Standards of
Professional Appr€isal Practice (USPAP). The limited restricted
appraisals inctude less documeniation. bul nevertheless meet
the minimurn requirements of the Appraisal Standards Board
and the Appraisal Foundation and are considered appraisals. In
these appraisals, a full discounted cash flow analysis, which is
the basis of an income approach, is the primary focus, For new
Fund acquisitions, a self-contained appraisal report will be
completed to determine the fair markei value at the end of ihe
first full calendar quarter following the acquisition.
Since appraisals consider the estimated ef fect of physical
depreciation. historieal cost depreciation and 6mortization on
real estate related assets have been exctuded from nel
investment income.
During 2Ol4 and 2O13, all appraisais for the Fund were
prepared by independent external appraisers. The external
appraisals are reviewed by an external appraisal management
flrm and reviewed and approved by senior management
quarterly" .Alt appraisal reports and appraisal reviews comply
with the currentfy published USPA,P, as promulgated by the
Appraisal Foundation. The Fund's real estate investments are
generally classified within Level 3 of the valuatron hierarchy.
INVESTMENTS IN NON.CONSOLIDATED JOINT VENTURES
lnvestments in non-consolidated.ioint ventures are stated at
the fair value of the Fund's ownership interest in the underlying
entities. The Fund's ownership inlerests are valued based on
the fair value of the underlying real e$tate and any related
mortgage loans payable using the sarne techniques as
described within this Note, updated and approved by
management on a quarterly basis. Any other factors, such as
ownership percentage, ownership rights, buy/sell agreements,
distribution provisions, and capital c6ll obligations are also
conridered. Upon the disposition of all investments in joint
ventures by an investee entity, the Fund will continue to sLate
its eguity in the remaining net assets of the investee entity
during the wind down period, if any that occurs prior to the
dissolution of the investee entity. The Fund's investments in
non-consolidated joint ventures are generally classified within
Level 3 of the valuation hierarchy.
NOTES RECEIVABLE AND OTHER INVESTMENTS
The fair value of notes receivable and other rnvestments held
by the Fund have been determined by giving consideration to
the velu? of the underlying collateral and interest rate. which
are updated qutsrterly by personnel responsible for the
management of each investment and reviewed by senior
rnanagement at each reporting period. The fair value of the
not€s approximates the princlpal amount outstanding plus
accrued interest- The Fund's notes receivable are classified
within Level 3 oF the valsalion hierarchy.
MORTGAGE AND SENIOR NOTES PAYABLE
At December 31, 2013, the fair values of rnortgage and senior
notes payable are determined by discounting the future
contractual cash llows to the pregent value using 6 current
market interest rate, which is updated quarterly by personnel
responsible for the management of each investment and
reviewed by senior management at each reporting period. The
market rate is determined by giving consideration to one or
more of the following criteria as appropriate: (i) interest rates
for loans of comparable quality and maturity, (ii) the value of
the underlying collateral, and (iii) the prevailing state of the
debt markeis. The Fund's mortgage and senior notes payable
are generally classified within Level 3 of the valuation hierarchy
The significant unobservable inputs used in the fair value
measurement of the Fund's rnortgage notes payable are the
selection of certain credit spreads and the loan to value ratios.
The significant unobservable inputs used in the fair value
measurement of the Fundls senior notes payable are the
selection of certain cr€dit spreads.
ln the:fourth quarter at 2014. the Fund outsourced its debt
valuations to an independent third party Service provider and
also modified its debt vatuation methodology. The modified
method. which is consistent with ASC 82O, focuses on
transactions between market participants using an investor's
cost of equity capital based on current market conditions.
At December 31, 2OI4, the fair values of mortgage and senior
notes payable are determined by discounting the difference
between lhe contractual loan paymentc nnd estirnated market
loan payments at an equity discount rate based on asset
appraisals that reflect how a typical third-party investor would
value the cash flows. Market loan payments ore derived from
overall market lending rates, debt origination and assumption
transactions in the market, and property specific factors,
including loan to value and cap rate changes" The Fund's
mortgage and senior notes payabl€ are generally classified
within Level 3 of lhe valuation hierarchy. The significant
unobservoble inputs used in the fair value measurement of the
Fund's mortgage note$ payable ar€ the selection of certain
credit spreads and the loan to value ratios" The significant
unobservable inputs used iri the fair value measurement of the
Fund's senioi notes payable ?re the selection of certain credit
spreads.
OTHER
Other asset$ and iiabilities are vglued et cost or face amqunt,
since these are the amounts at vrhich they are anticipated to be
realized or liouidated.
51
189
Notes to Combined Financial Statements
ASC 74O-1O requires the evaluation of tax positions taken or
expected to be taken in the course of preparing the Fund's tax
returns to determine whether the tax positions are more-likely-
than-not of bsing $ustained upon examrnation by the
applicable tax authorily. based on the technical merits of the
tax position, and then recognizing the tax benefit that is more-
likely-than-not tq be realized Tax positions not deemed to
meet the more-likely-than-not threshold would be recorded as
a tax expense in the current reporting period. Management
believes any such position would be ammaterial to the
combined f inancial statements,
CASH AND CASH EGUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents
include cash on-hand, demand deposits, and certain investmenls
with maturities of three months or less when purchased.
RESTRICTED CASH
At December 31,2014 and 2013, restricted cash consisted of
escrows for tenant security deposits, as well as real estate tax,
insurance. loan, and capital escrows.
CONCENIRATION OF CREDIT RISK
Financial instrume:nts that potentially subject the Fund to
concentrations of credit risk consist primarily of cash and cash
equiyalents in excess of'amounts insured by the Federal Deposit
lnsurance Corporation (FDIC). The Fund places its cash and
cash equivalents with high quality financial institutions.
ACOUISITION. DEVELOPMENT AND CONSTRUCTION
(ADC) ARRANGEMENTS
The Fund evaluates loans receivable where the Fund
participates in the residual profits through loan provisions or
other contracts to ascertain whether the Fund has the same
risks and rewards as an owner or a joint venture partner. Where
the Fund concludes that such arrangements are more
appropriately treated as an investment in real estate, the Fund
reflects such loan receivable as an other investment in the
combined staternents of assets, liabi,ities and equity.
RECLA5SIFICATION OF PRIOR YEAR PRESENTATION
Certain Decernber 31, 2Ol3 amounts in the combined statements
of cash flows have been reclassified to conform to the
December 31, 2014 presentation. Such reclassifications have no
effect on previously reporteo net income or partners'equity.
3, RECENTLY ISSUED ACCOUNIING PRONOUNCEMENTS
ln June 2013. the FASB issued amended guidance that ciarifies
the scope, measurement and disclosure requirements for
investment companies under US GAAP The amended guidance
requires an entity to have certain fundamental characteristics
and to consider other typical chtsracteristics to qualify as an
investment company. The amended guidance requires an
investrnent cornpany to measure non*controlling ownershjp
interests in other investment companies at fair value rather than
using the equity method of accounting. The guidance also
requires new disclosures about an entity's status or changes in
status as Investmenl company and application of the guidance
in ASC 946, Financial Services - lnvestment Campanies, as well
as information about f inancial support provided or
contractually requlred to be provided by an investment
cornpany to any of its investees^ The amended guidance was
effective for annual periods beginning after December 15. 2Oi3.
Management evaluated the guidance in,ASC 946 and
determined the Fund continues to qualify as an investment
company.
ln February 2O15, the FASB issued Accounting Standards
Update No. 2o15-O2 (ASU 2O15-O2), Consolidations (Topic- BlO)
- Amendments to the Consolidation Analysis, which makes
amendments to the current consolidation guidance, including
introducing a separate consolidation analysis specific to llmited
partnerships and other similar entities Under this analysis,
limited partnerships and other similar entities will be considered
a variable-rnterest entity unles! the limited partners hold
substantive kick-out rights or participating rights, ASU 2O15'O2
is effective for annual periods ending on or after December'15,
2016, Earty adoption is permitted. Management is currently
evaluating the impact of adoptinE this new accounting
stsndards update on the Fund's combined financial statements.
4. FAIR VALUE MEASUREMENTS
ASC 82O-lO, Fair Value Measurements and Disclosures, clarifies
the definition of fair value for fjnancial reporting, establishes a
framework for measuring fair value, and expands disclosures
about fair value measurements. ASC 82O-lO emphasizes that
fair value is a market-based measurement, not an en[ity-
specific rneasurement. Therefore, a fair value measuremenl
should be determined based on the assumptions that market
participants would use in pricing an asset or liability.
The statement establishes a hierarchy for inputs used in
measuring fair value that maximizes the use of observable
inputs and minimizes the use of unobservable inputs by
requiring that the most observable input be used when
available. Observable inputs are inputs that the market
participonts would use in pricing the asset or liability based on
market data obtained from sources independent of the Fund.
Unobservable inputs are inputs that reflect the Fund's
6ssumptions about the assumptions market participants would
use in pricing the asset or liability developed based on the best
information available in the circumstances. The hierarchy is
measured in three levels based on the reliability of inputs:
/ eve/ I-Valuation based on quoled prices in active markets for
identical assets or liabilities that the Fund has the ability to
access, Valuation adiustment and block discounts are not
applied to Level I instruments.
Level2-Valuations based on quoted prices in less active.
dealer or broker markets. Fair values are primarily obtained
from third party pricing services for identical or comparable
assets er liabilities.
level 3-Valuations derived from other valuation methodologies,
includlng pricing models. discounted cash flow models and
similar techniques. and not based on market, exchange, dealer, or
broker-traded transactions. Level 3 valuations incorporate certain
assumptions and projections that are not observable in the
market and require significant professional judgment in
determining the fair vaiue assigned to such essets br liabilities.
ln instances where the determination of the fair value
measurement is based on inputs from different levels of lhe
fair value hierarchy, the level in the fair value hierarchy within
which the entire fair value measurement Falls is based on the
lowest level input that is significant to the fair value
measurement in its entirety.
ASC 825, Financial tnstrumenfs, provides entities with a one-
time irrevocable option to fair value eligible assets and
liabilities and requires both qualitative and guantitative
disclosures to those for which an election is made. Unrealized
gains and losses on items for which the fair value option has
been elected are reported in earnings.
50 i'..'ir 11.1:1 ;1i
190
Notes to Combined Financial Statements
The following are the major categories of assets and liabilities measured at fair va,ue on a recurring basis during the year ended
December 3'1. 2014:
(ln Thousands)
LEVELI: LEVEL2:ouorED pRrcEs lN stcHtrrcani LEvEL s:
ACTIVE MARKETS OTHER SIGNIFICANTFORIDENTICAL OBSERVABLE UITIOBSERVABLEASSETS : INPUTS INPUTS TOTAL
t- t- 17,044,970 $7,O44,97O
DESCRIPTION
.lt*::"ttjt'y.9.jiry$
lnvestment in non.consolidated joint ventures and other investments
NoteS leceivable
54s,7Lt 640,713
t7,r73 L7,t73
Tota! :nvestmenls and notes receivable s-t-t7,703,Os6 $7,703,056
Mortgage notes payable t-$-t 634,906 $ 634,so6
Senior notes payabte u77,16s 1"277,L85
Toral mortgage ind senior nctes payabl€$-t-*r,9u,071 tt 91ao71
The following is a .econciliation of the beginning and ending balances forassets and liabilities measured at fair value on a recurring
basis using significant unobservable inputs (Level 3) during the year ended December 31, 2O14:
(ln Thousands)
INVESTMENT
IN NON-
CONSOLIDATED
JOINT VENTURES
REAL ESTATE AiID OTHER NOTESINVESTMENTS INVESTMENTS RECEIVABLE
TOTAL
LEVEL 3
INVESTMENTS MORTGAGE
AND NOTES NOTES
RECEIVABLE PAYABLE
$6.s60,162 156L400
TOTAL
LEVEL 3., IiIORTGAGE
SENION ANDSENIORNOTES NOTESPAYABLE PAYASLE
Beginning balance-
January l,2O14 16,039,244 1s10,9:14 19,984 3999,587 t1,560887
Tolal realtzed and unre3ii?ed
gains and losses included in
n€t income
Furchases, saies, issuances.
and settlements:
381,426 1.198 382,624 t2,77s)(22,422)(2s.lgs)
Purchases 520.395 211,230 73L626
sales (191,930)(il14.923)(316,8s3)
"*lfl?" _"*Jfffg"
..... ._:.....,... qT'2731
233,492
300,000 t185,000
(258,273'
Cap;ial expenditures 233,492
Consoiidation of non-
consoiidated ioiril ventureproperty io wholty owned
property 2,790 (5,64s)(8ss)
lssuances
Settlements
Non-consolidated joint
venture contributrons
Non-consolidaied ;ointventure distributions
43,460 43,450
(18.585). .-1*fI-1)
49,552 49,552
Assumption of mortgage
note pdyable;il;;'^;;;';;;.
corsolidat€d ioinl ventures
included in net income
49,552 49,552
11,044 3L044
Ending balance-
Dgcember 31. 2Ol4
t2
,7,O44,9rO $640,711 3L7,373 tr,7o3,os6 $614,105 $t,277,765 t1,912,071
191
Notes to Combined Financial Statenrents
Total unrealized gains ol $383,299 tar 2414 included above are
attributable to real estate investments held at December 3.l.
2OI4. and are included in unrealized appreciation on real estate
investments in the accompanying combined statements of
operations. Total reallzed losses of $1.873 for 2Ol4 included
above are attributable lo real estate investments sold during
the year ended December 31, 2ol4 and are included in loss on
sale of real estate investments in the accornpanying combined
statements of operations. lncluded as part of total reali?ed
losses recognized is the reversal of cumulative unrealieed gains
as ol December 31, 2Ol3 of $15,4O5.
Total unrea,ized gains of $2O.O7O far 2014 included above are
attributable to non-consqlidBled joint venture investments held
at December 31.2014. and are included in unrealiz€d
appreciation on non-consolidated ioint venfure investrn€nts in
The following table shows quantitative information about significant unobservable inputs related to the Level 3 fair: value
measurements used at December 31, 2014:
(ln Thousands)
REAL ESTATE INVESTIIENTS FAIR VALUE VALUATION TECHNIOUE(S) UNOBSENVAALE INPUTS RANGES (WEIGHTED AVERAGE)
hdvslrial $1,r78,390
Discounted cash flows
Direct capitalization analysis
the accompanying combined staternenis of operations. Total
reaiized losses of $18,872 tor 2A14 included above are
attributed to non-consolidated ioint venture investments sold
during the year ended December 51, 2OI4 and are included in
Ioss on sale of non-consolidated loint venture investments.
lncluded as part of total realized losses recognized is the
reversal of cumulative unrealized losses as of December 3,l.
2O13 ol $34,217.
Total unrealized gains of $2,773 and $22,422 for 2ol4
included above are attributable to mortgage and senior
notes payable, respectively, held at December 31. 2O14. and
are included in unrealized appreciation on mortgage and
senior notes payable in the accompanying combined
statements of operations.
Discount rate
Exit capitalizatlon rate
6.00x*8.50,( {7.15t6}
5.sor(-s.00x (6.37r()
Of f,ce
Discounted cash flows
2,179.700 D,rectcapitalieationanalysrs
Dilcount rate
€xit caDitalization rate
6.zsx-9.OOX (7.09*)
5.50s-8.00% (6.30x)
Residential 2,213,180
Discounted cash flowr
Direct capitalization ahalysis
Discount rate
Exit capitallzation rale
6.25\-7.75I (6.79%)
4.75X-6.00'6 (5.43X)
790,10O
Discounted cash flows
Direct capitalization inalysis
Discount rate
Exit caoitalization rate
5.75:(-7.50% (6.74X)
5.00*-6.sox (5"76S)
Hotel
Discounted cash flows
27L,OAA Directcapitali:ationanalysis
Discount rate
Exit capitalization rate
9.14,6-9.50* (9.37!.)
7.501-8.OOX (7.78'r)
Land 12,5,00 Sales corrrparison approach Pr,c€ per square foot i3.0e$5.x4 per square foot
Total Real Estate. lnvesrment s $7,O*r,s70
192
Notes to Combined Financial Statements
The following table shows quantitative information about significant unobservable inputs relaied to the Level 3 fair value
measurernents used at December 31, 2Ol4:
(ln Thousands)
INVESTMENT IN
HON-CONSOLIDATED
JOTNT VENTURES FAIR VALUE V-ALUI.\TION ECHNIOUE(S) UNOBSERVABLE INPUTS RANGES (WEIGHTED AVERAGE)
_91!:?:_
Properlies
Discounted cash flows
$ 98,579 Direct capitalization analysis
Discount rate
Exit capitalization rate
6.25%-7,M <6.775)
5.25%-6.2515 (5.86%)
Mortgage notes payabie 41.755 Net oresent value
Credit spreads
Loan to value ratio
L.451"-4.95lI <2.99v,)
39.02%-47.34j, G2.76fr.)
4,312
Total Office $ 51,136
*asidfit;al
Properties
Discounted cash flows
1L67,761 Direct capitalizationanalysis
Discount rate
Exit iapitalization rate
6.50,.17.75X <7.59%)
5.00x-5.75% (5.65x)
I"lortgage notes payable 10,782 Net present value
Credit spreads
Loan to value ratio
2.20X(2.20X)
49.10'( (49.1016)
4,026
Tolal Residential $161,00s
l?*ta;!.
Properties
Discounted cash flows
t245,683 Directcapitalizatiohanalysis
Discount rate
Exit capitalization rate
7.O0S-10,7s* (7.89S)
6.50%-9.25X (7.:.5*)
Mortgage notes payable Net ptesent value
Credit spreads
Loan to value rEtio
4.2414-4.72?, <4.4tr4)
52.L4%-59.9sn (54.X 3l$)
Totsl Retail $202,431
H0lel
Other's are9-?
Total Hotel $ *,e09
Total lnvestment in Non-
Consolidated Joint Ventures $429,/l83
'Othet lepresefits lf,e FuddS share af the net assets io lre non.€onsolidated joint ventures, carried at cost which approximates fair value
193
Notes to Combined Financial Statements
The following table shows quantitative information about signi{icant unobservable inputs related to the Level 3 fair value
mearurements used at December 31,20t4:
(ln Thousands)
OTHER INVESTIT,IEHTS FAIR VALUE
Other lnvestments-Retail , 2t,.,,23A
vALUATtOnTECHN|OUE(S) UNOBSERV.AaLEINPUTS RAi{GES(WEIGHTEDAVERA6E}
Oul$tending principai
amount plus accruedinterest lnterest rate 4.75%-6.00% (5.4xx)
(ln Thousands)
NOTES iFECEIVABLE
Noles Receiv6ble I 17,37I
FAIRVALUE VALUATIOII TECHT{IOUE(5) UNOBSERVABLE INPUT5 NANGES (WEIGHTED AVERAGE)
Outstand;ng principal
6rnount plus accrued
interest lnterest rate 4.00*-4.501 ({.31ro
(ln Thousands)
I|ORTGAG.E NOTES.PAYABLE
lndustrial
FAIR VALU.E , VA|-UAT|ON TECHNTOUE(S)
i 240.499 Net present value
UHOBSERVAEtE INPUTS
Credit spreads
Loan to value ratio
NANGES (WEIGHT.ED AVEFAgE)
1.68r(-3.96'.r {1.94X)
29"U%-57.92X (46.71X)
CIllti_* ..."...
Residentiai
ts:58
105,839
Nel p-j-lselt ygYe
Net p/esent value
Credit spreads
Loan to value ratio
3.38X-5.30X (4.44er)
13.19X-71.5S'( (41.49ri)
Credit spreads
Loan to value ratio
2.70X-3.11* (2.93*)
29.49X-39.151 (35.321)
Total Morigage Notes Payable 3 514,906
(ln Thousands)
SEN}OR NOTES PAYAALE
Senior Notes Payable
FAIR VATUE V{LUATION TECHNIOUE(S)
,L,277,765 Net Dres€nt value
UHOBSERVAELEINPUTS RAH6ES(WEIGHTEDAVERAGE)
Credit soreads 1.701i-4^33X (3.321()
The following are the n"rajor categories of assets and hab,lities measured at lair value on a recurring basrs during the year ended
December 31, 2O13:
(h Thousands)
DESCRIPTION
Real estate investrnents
LEVEL Ij
G-UoTED f,RICEs IN
.ACTIVE MARKETS' ron tDEr.trrcnl
ASSETs
LEVEL 2: :::.
SIGN ICANT LEVEL 3;OTHER SIGNIFICANT
OBSERVABLE UNOBSERVABLEINPUTS INPUTS TO'TAL
6,039r44$ - $5,039.244 $
lnvestment in non-consolidated joint ventures sroj934* - 510:-9-J1
9.984 9.984Not€s receivable
Total investments and notes receivable q-$ 6.560,162 $ 6,550.162
i:19:P.:'H.9j e:xb le
Senior noies payabl€
q-$ 661.400 t 65,1a00
999,s87
Total mortgage€nd senior notos payable $-C.$ 1,650.987 $ 1,560,987
194
Notes to Combined Financial Statements
The following is a reconciliation of the beginning and ending balances for assets and liabilities measured at fair value on a recurring
basis using significant unobservable inputs (l-evel 3) during the year ended December 31, 2Oi3:
(ln Thousands)
TOTAL ::rNvEsrMENr reftiii
IN NON. INVESTMENTS MORTGAGE
REAL ESTATE CONSOLIDATED NOTES AND NOTES NOTES
INVESTMENTS JOINTVENTURES RECEIVABLE RECEIVABLE PAYABLE
. TOTAL.: LEVEL 5SENIOR. .MORTGAGENOTES ANDSENIOR
PAYABLE NOTES PAYABLE
Eeginning balance-
January l, 2Ol3 $s,333.O45 $587,03s $14.2s2 $6.0s4.332 ,$695,681 31,014,445 $1,710,125
Total realized and unreaiized
gains and losses included
in net income 3s1.596 12a,293)327,303 (X1,932)(].{.858)(26,790)
Purchases, sales, issuances,
8nd settlements:
.... .P,rf"r"t .... *.
Sales
lssuances
784.574 7A4,574
393 393
Settlements (22,349)(22,349,
Capital expenditures 101.530 r.01.630
Conversion of note receivable
to addltional interest in
consolidated ioint venture 9,691".._"".". (4,661).**.*.*_.--:
Non-consolidated ioint
venture contributions 2,672 2,672
Non-consolidated joint
venture dist/ibutions (19,619)(19,6L9)
Equity income from non-
consol;dated ioint ventures
included in net income 35,643 35.643
Ending balance-
Decembei 31,2013 $6,039.244 $510,934 $9,984 $6,560,162 $661,400 s999,587 $1.660.987
Total unrealized gains of $362,821 for 2Ol3 included above are
attributable to real estate investments held at December 31,
2O13. and are included in unrealized appreciation on real estate
investments inthe accompanying combined statements of
operatlons. Total realized losses of $11,225 for 2Oi3 included
above are attributable to real estote investments sold during
the year ended D€cember 31. 2Ol3 and are included in loss on
sale of real eslate investments in the accompanying combined
statements of operations. lncluded as part of total realized
losses recognized is the revErsal of cumulative unrealized gains
as of December 3.1, 2O12 ol $57.439.
Total unrealized losses of $I6.532 for 2Ol3 included above are
altributable to non-consolidated joint venture investments held
at December 31, 20]3, and are included in unrealized
appreciation (depreciation) on non-consolidated joint venture
investments in the accompanying combined statements of
operations. Total realized losses of $7,761 for 2Ol3 included
above are attributable to non-consolidated joint venture
investments sold during the year ended December 31. 2Ol3 and
are included in loss on sale of non-consolidated ioint venture
investments. lncluded as part of total realized loss€s
recognized is the reversal of cumulative unrealized losses as of
December 31,2OI2 of $53,770.
Total unrealized gains of $11,932 and $]4,858 for 2013 included
above are attributable to mortgage and Senior notes payable,
respectively, held at December 31, 2OI3. and are included in
unrealized'appreciation on mortgage and senior notes payable
in the accompanying combined statements of operations.
56 I l:'1i l
195
Notes to Combined Fina ncia I Statements
The following table shows quantitative information about signif icant unobservable inputs related to the Level 3 fair value
measurements used 6t December 31, 2Ol5:
(ln Thousands)
REAL ESTAf,E 1NVESTMENTS .].FAIR VALUE
lndustrial $1,161,350
VALUATTON TECHNTOUE(S) UNOBSFRV_AF.l-E INPUTS
Discounted cash flows Dlscount rate
Direct capitalization analysis Exit capitalization rate
RANG.ES (WEIGHTED AVERAGE)
6.2s96-9.00X (7.36r()
5.7s%-8.00* (6.54%)
Discounted cash flows
2,O45,O37 Directcapitalizationanalyris
Discsunt rate
Exit capitalization rate
6.2s%-9.50* (7.26*)
5.5016-8,25S (5.,47'6)
Resjdential L.874.974
Discounted cash flows
692,883 Dir€ctcapitalizationanalysis
Discounted cash flows
Di r€ct capitalization analysis
Discount rate
Elit capitalization rate
6.25%-10.00* (7.00r()
5.00*-5.2s!6 (s.s8s)
6.25X-7.75% (7.30X)
5.50X-6.75!6 (6.0016)
Discount rate
Exit capitalization rate
Discounted cash flows
254,500 Directcapitalizationanalysis
Discount rate
Exit capitalization rat€
9.12x-10.00fr (9.51"X)
7.50t(-8.00x (7.67)6)
Sales comparison approach Price per square foot $3.00 per square foot
Total Real EsEte lnvestments $6.039.244
196
Notes to Combined Financial Statements
The following table shows quantitative inlorrnation about significant unobservable input$ related to the Leyel 3 fair value
measurements us€d at December 31.2Ol3:
(h Thousands)
INVESTMENT IN
NON.CONSOLIDATED
JOINT VENTURES FAIR VALUE VALUATION TECHNIOUE(s) UNOBSERVI\BLE INPUTS RANGES (WEIGHTED AVERAGE)
Allice
Prooetties $93.154
Discounted cash flows
Dir€ct capitalization analysis
Discount (6to
Exit caortalization rate
6.75%-7,00* (6.90%)
5.75X-5.25% (6.05X)
Hortgage notes payable 4t.44?Net present value
Crsdit spreads
Loan to value ratio
3.75X-4.90n (4.38'{)
39.14%-50.33U U4 221$')
Olherr 3,43?
Total offic€$ 55,184
R*!,dantial:
Properties
Discounted cash flows
$153.451 Directcapitalizatronanalysis
Discount rate
Exit capitalization rate
6.5€rr.-7,75X (7.581)
5.00r(-5.75X (s.65X)
MortgsEe notes payable LO.478 Net oresent valu€
Credil spreads
Loin to v6tue ratio
2.ssi (2.55%)
50.36x t50.361*)
Oiherl 5,292
Total Residential $148,26s
RAGi!
Properties
Mortgage notes payable
Discounted cash flowr
$253,550 Directcapitalizationanalysis
87.996 Net present valug
. Credit spreads
"!9!! tq":":!g:_,:Ig*.
4.55S-6.2ry (5.28%)
46.O2X-7 4.23* t6t, 47 %)
DiSCOUnt rste
Exit capitalization rate
7.50flr-11.00X (8.15r)
7,W%-9.25,. <7.44v,1
1.801
Total Retail $167,355
llo!ei;
Propertres
Discount€d cash flows
$316,763 Directcapitalizationanalysrs
Discount rate
Exit caoitiliration rate
10.24'{ (10.24%)
8.97r( (8-97X)
Mortgage notes payable 187.500 Net present value
Credit spreads
Loan to value ratio
1.60,i-10.181 (5.80X)
59.19X (59.19S)
{)ther'7.2A4
Total l-lot€l 9136.5{7
I irt,
L"^d -$17e-0
793
Sales comparison approach Price per square foot S3.68-$3.72 per square toot
Otherl
Total Land s 3.585
Tot6l lnvestrnent ia Non-
Consolidated Joint Ventures $s10,934
lother reptesents the Furd! share of the net ,ssets rn the non*consalidatad ioint ventules, caftied at east which approximates fair value.
197
Notes to Combined Financia I Staternents
The foltowing tables show quantitative informaiion about significant unobse,'vable inputs related to the Level 3 fair value
rneasurements used at December 31, 2O13:
(ln Thousands)
NOTES RECEIVABLE
Notes Receivable
FAIR VALUE
$ 9.984
VALUATION'ECHN IOUE(S)
Ouistanding principal
_ amount plus accrued
interest
UNOBSERVABLE INPUTS RANGES (VIISTCHTED.IWERAGE)
lnterest rate 4.5016 (4.5O%)
(1n Thous€nds)
MORTGAGE NOTES PAYABI.E
lndustrial
r&e vAlUr vALUATToN TEcHNrauE(s)
15,310 Net present value
UNOBSERV-ABL€ INFU S
Credit spreads
Loan to value ratio
RANGES (WEIGHTED AVERAGE)
5,39X-5.35X (5.79S)
33.? 4X- 42.27l, (38.7 A&'
Offbe 109,919 Net present value
Credit spread!
Loail to vallre rtstio
4.25%,-7,2AX $.0L*}
f7 .7 9Y,-7 2.f 4X (a5;68%)
Residential 4{8.096 Net present value
Credit sDr€ad3
*:l_!9 Y"lYe'..::ig
Credit rpreads
Loan to value rBtio
2.30ts-5.75X (3.51X)
33.96x,-68.r.2r (46.90',d)
Retail 88,075 Net present value
5.16ts-s.17r (5.r78)
24.465F53.s3r( (31.6s*)
Tot6l MortEage Nol€s P6yabla $ s61.400
(ln Tho{saods)
SENIOR NOTES PAYABLE
Senior Notes Payable
FAIR VALUE VALUATION TECHNIOUE(S)
$999.587 Net present value
UNOASERVABLEINPUTS RAN6ES(WEIGHTEDAVERAGE)
Credit spreads 2,@8-5.25% (3.24r{)
5. REAL E5TATE INVESTMENTS
Fulure minimum rents to be received under non-cancelable
commercial operating leases as of December 31, 2O14, are
approximately as follows (showfr in thousands):
ln addition to the minimum rent amounts, various l€ases
provide for escalation charges to tenanls as well as
percentage rents. Escalation charges and percentage rents in
the amount of approximately $55 millron and $50 million are
included in rental revenue for the years ended December 31,
2Ol4 and 20t3, respectively.
During 2Oi4, the Fund purchased l3 wholly owned properties
for a total purchase price of approximately $564 million.
During 2O13. the Fund purchased lO wholty owned properties
for a total purchase price of approximately $783 million.
2015
TOTAL
$ 268"4$5
2016 244.276
l9g
2018
217.850
191.262
2019 164.137
There€fter 527,655
Total $1.613.635
5S
198
Notes tc Combined Financial Statements
During the year ended December 31, 2OI4, the following properties were sold:
PROPERTY NAII{E'
Fif th Street lndustrial
PBOPERTYTYPE LOCATION
lndustrial Phoenix. AZ
.: GNOSS SA,LE REALIZED
PR|CE o) CAIN^LOSS)o)
SALE DATE .: (ln Hllllons) :(1n Mllliqns)
o4/74/20L4 tg.O t(0.6)
Gwinnett Medical Office Lawrencevllle.GA OB4S/2O74 lL1 (o.3)
ganyan Grgve at Towne Square Resldential Virsinia Beach, VA O9/O4/2O14 4l.0 (!.2)
Geneva Industrial lndustrial Tempe, AZ LO/O3/2014 (0.8)5.8
Specialty Labs Office Building Office Santa Clarita, CA L2/12/2O14 t.2
Vero Medical Suites Office Vero Beach, FL t2/1a12014
Total $172.s 3o.z
'Gtoss sale price excludes a partial sale thal occurred during the year with a Eross sale priie of $13.1 million.zRealized gainloss exc/udes the impact of any residual amount associated with properties sold in priot years, howeveL excludes the partial sale that
occurred during the year with a realized loss of $1,3 mlllion,
During the year ended December 3I, 2013, the following properties were sold;
GROSS SALE REALIZED
PROPERTY NAME
Progress Distribution Center
PROPERTY TYPE
lndustrial
PRIcE GArN/(LoSs)o)LocArloN SALE DArE <rn uirrion'J -'-iiiliniJ'it>
Lawrenceville. GA A3/'lt/2O13 $6.5 $ (O.3)
Elliort West Otfice Seattle. WA 04/oe/2013 r42.5 (5.O)
One Metro Center Office Washington, EC w130/2013 307.s Q.9)
Hohokam l0 West Park lndustrial Phoenix. AZ o8/o6no1s 3.9 o,9
Office lrvine. CA ae/ag/2013 12.9 o.9".-lr"tLs t -_--
Banting lll Office lrvine, CA oa/o9no1s 17.1 x.9
J"l 15 South 3rd Street lndust.ial Milwaukee. Wl ro/o3/2013 (0.9)
5319 South 3rd Street lndustrial Milwaukee, Wl to/03/2013
3,1
(1.3)
(1.4)Fr;nklin Commerc€ Center lndustrial F anklin, wl to/03/2a13
Pewaukee Commerce
Center I lndustrial Pewaukee, Wl to/o3/2013 3.5 (o.3)
Pewaukee Commerce
Center ll
Falcon Pines Apartments
lndustrial-------'-'
Residential
F"ll?uk9,-e-:Yl
Orlando. FL
to"193l?9:1
'tl,/22/2013
4.2
31.s
.(o.1?
0.5
$542.4 $(11.s)
'Realized gain/loss excludes the ifipact of any residual amount associated with prcperties sold io prior years
At December 31,2014, the Fund owned l2l properlies of which
118 are wholly owned and 3 are in joint ventures in which the
Fund owns the controlling interest. At December 31, 2013, the
Fund owned ll4 properties of which lll vr'ere wholly owned and
3 were in ioint ventures in which the Fund owned the
controlling interest.
6. INVESTMENT IN NON.CONSOLIDATED JOINT VENTURES
During the nermal course of business, the Fund makes
contributions to their non-consolidated ioint ventures at its
relative ownership interest in each ioint venture. The Fund's
contributions to non-consolidated ioint ventures for the years
ended December 31, 2014 and 2Ol5 were $43 5 million and
$2.6 million, respectivety.
At December 31,2Ol4 and 2013, the FUnd had no unfunded
commrtments to its unconsolidated joint ventures.
On July I, 2OO4, the Fund entered into a jornt venture with
Federal Realty lnvestment Trrrst (FRIT) and formed Federal/
Lion Venture. L.P. (Federal) to lnvesl in neighborhood/
community shopping centers. On July 24,2014, Federal sold
Pleasant Shops for a realized gain of $2.9 million. At December
31. 2014, Federal owns a total of 6 properties. The carrying
value of the Fund's investment in Federal as of December 31.
2014 and 2O13 was approximately $102 million and $lOl million,
respectively, with an ownership interest of approximately 7O%.
During the year ended December 3], 2014, the Fund
contributed $15.7 million to Federal, representing ils share of
the loan payoffs related to two properties, Plaza Del Mercado
and Atlantic PJaza.
60
199
Notes to Combined Financial Statements
On December 29,2044, the Fund eotered into a ,oint v€nlure
with Ramco-Gershenson ProBerties Trust (RPT) and formed
Rarnco/Lion Venture, L.P. (Ramco) to invest in neighborhood,/
community shopping centerg in the Southeastern and
Midwestern United Stales. On March 25. 2013, the Fund so'd its
70% interest in 13 of the 16 properties for a realieed gain of $7,4
million. At December 31,2014, Ramco owns a total of 3
properties. The Fund's investment in Ramco as of December
31, 2014 and 2OI3 was approximately $49 million and $46
million, respectively, with an ownership interest of 7O%. During
the year ended December 31, 2O13. the Fund contributed $O.1
mitlion related to the normal course of business for the Ramco
properties.
On August l, 2006, the Fund ente.ed into a joint venture with
SFM-XlX, LLC and Rochester lnvestors, subsidiaries of R. W.
Selby and Company. lnc. (Selby), to invest in a multifamily
residential property located in Los.Angeles, Calilornia
(Rochester Apartments). The carrying value of the Fund's
investment in Rochester Apartments as of bqth December 31,
2O14 and 2O13 was approx;mately $11 million with an ownership
interest of 9O%"
On December 28, 2006. the Fund entered into a ioint venture
with Montecito Medical lnvestment Company, LLC (Montecito)
to iovest in medical office properties located throughout the
United States. Under the oriEinal agreement, the Fund had a
93% ownership interest in the joint venture. During 2O12, the
Fund paid approximately $3 million to the loint venture partner
to acquire its interest in 6 of the 7 properties. During the year
ended December 31,2O'13. the Fund contributed $l.O million
related to the norm€l course of business for the Knoll North
property. On August l, 2Ot3 the Fund sold its interest in the 1
remaining property for a realized gain of $O.3 million,
On March 1,2OO7, the Fund entered into a joint venture with
35OO Partners, LLC, a subsidiary of M- David Paul & Associates,
LLC (Central Park) to invest in an office building located in
Burbank, California" The Fund's carrying value of the
investment in Central Park as of December 31, 2Ol4 and 2O13
was approximateiy $4O million and $37 million, r€spectively.
v.rith an ownership interest of approximately 49%.
On March 9, 2OO7, the Fund entered into a joint venture with
Tqconic Eastchester lnvestors. LLC (Taconic) to invest in a
multifamily residentia, property located in Bronx, Nevr York-
The Fund's carrying value of the investment in Taconic as of
December 3'l,2Ol4 and 2013 was approxim8tely gr50 million
and $137 mrllion, respectively (see Note 8), with an ownership
interest of 9O%. During the years ended December 3'1, 2Ol4
and 2O13, the Fund contributed $1.6 million and $1.4 million,
respectively, to fund capital calls requelled by Taconic.
On April 18, 2OO7, the Fund enlered into a ioint venture with
Panattoni Development Company, Inc. The venture purchased
four parcels of land and one operating industrial building
Iocated in Denver, Colorado (Mile High). On February 14.2014
the Fund paid $0.3 million to the ioint venture partner to
acquire its interests in the remaining two land parcels and
therefore conrolidating these as part of reei €state investments
on the cornbined statement of assets. liabilities and equity as
of December 31, 2014. During the year ended December 31,
2013, the Fund contributed $O.l million reiated to the normal
course of business for the panattoni properties.
On May 23.2OO7, the Fund entered Inlo a ioint venture with
Lion Vallre Fund and REollHenley and acquired Apple
Hospilality Two, lnc^ (Lion ES), a non-traded public REIT with
47 upscale extended-stay hotels in lB states thrqughout the
united States as of December 31,2O13. The Fund's ownership
interest in Lion ES was 37.5% at December 31, 2013. On August
12,2014, Lion ES was sold for $8OO.O million and had a realized
loss of approximately $21 million. The Fund's carrying value of
the investment in Lion ES as of December 31,2014 and 2Ol3
was approximately $5 million and $137 million, respectively. The
Fund's residual investment in l-ion ES at Oecembgr 31,2014
was a sale holdback. which is expected to be distributed in the
first half of 2O15.
On July 18, 2007. the Fund entered into a joint venture with
DCD America, tLC (11 E 44th) to inv€st in an office building
located in New York, New York. The Fund's carrying value of
the investment in ll E 44th as of D€cember 31, 2Ol4 and 2Ol3
wa9 approximately $21 million and $18 million, respectively,
with an ownership interest of approxirnately 49%.
On July 20,2AO7, the Fund entered into a joint venture with
Gart Propertie$, LLC (Vilioge) to invest in a community
shopping center located in Boulder, Colorado. The Fund's
carrying value of the investment in Village as of December 3.I.
2014 and 2013 was approximately $5? million and $21 million,
respectively (see Note 8), with an ownership interest of 8O%. ln
2O14. the Fund contributed $26 million to Village to fund the
loan payoff of Village Shopping C€nter^
As of December 31, 2014. the Fund is not contractually
obligated to provide financial supporl to any of its loint
ventures.
200
Notes to Cornbined Financial Statements
.: CENTRALFEDENAL RAMCO PARK TACONIC
A summary of the f inancia, information for the non-consolidated joint yeotures at December 31. ?Ot4 is as follows (shown in thousands);
Balence sheet
LION ES OTHERI
zo1,-
TOTAL
As3ets
Real estate lnvestments t a19,720 t 99,500 t ,23.000 I 162,000 s - 1767,40A
'
73,-,720
Other assets 5,58!2,3119 7FA6 9,100 14190 5,253 43,8t1
Total assets $ 18s,103 $ 101,919 t 110,386 t 171,100 $14,190 ttt2,65a $ 175,5s1
"L-l*-l,l,I, ".":ndgI!:j.' lilrt"l
Morlgage noies payabl€34,789 , 30,093 t 118,0(}0 $-t -149,197$ I,62,279
Other liabilities 3,465 ,"852 3ra 49lt 1 098 5.315 15,022
Total liabiliries 38,254 5L94s la,378 4,911 t@8 57,713 L77,gL
Total partners' capital 14r,O49 69,974 82,0O8 :,66,L87 u,,092 119,9rU)598,250
Total liabilities End partners' capitai t 185,103 s 1o1,o1r t illo,t8S t 171,100 $14190 t172,5sr $ 77s,ss1
Fund's iRvesiment interest , 10L906 I 48,942 I 40.2s0 t 149,569 I 4909t83,907t 423,483
lncome statement
Revenues
^ErP_"r": -.. _
Realized qain (loss)
17,910 t 10,635 $ 10,167 f 18,7s9t 183,36s t 16,067 f 156,e6.
8:t72 5,9s7 6,a81 13,1ill 155,498 10,395 2{X},025
4,461 (s6,r:l2)(51,671)
Unrealized (deoreciation) appreciation 5,987 3,457 ,,772 6,09s 10,196 29,907
Nei income t 19.646 t 8,115 , 7,658 t 1r"711 , (28,25s) t 15,968 t t4,771
Fund's equity in net income2 I 12,062 t 5,593 $ S,Zce s 10,ss8 I O0,600) I 10,89r $ 52,242
lother includes the Fund's equity interest in Selby, Panattonl Vllage, and ll E 44th and excludes fhe inlesamenfs in Marketplace at the Outlels and
Palrh Beach Outlit:s in 'the amaunt ol $211.2 million which ls included in the combined s.talements ()1ss'ets. liabilities and eouity.tThe fi.tnd's shae of
"quity
in net incorne includes unrealized appleciationldepleciaiion and realircd gainltoss on sale (if applicable).
A summary of the financial information for the non-consolidated ioint ventures at December 31. 2OI3 is as follows (shown in thousands):
FEDERAL
CENTRAL ..'RAMCO PARK TACONIC LION ES OTHERI
2013
TOTAL
Ealance sheet
Ass€ts:
Real estate investments s 200,620 $ 9s,700 $ 116,000 s 147,000 -1_^8114
37,744
s 159.800 s 1.563.S20
5.94I 65.163Other assets 2.891 1.736 6,260 L0,59:.
Total assets $ 203.511 $ 97,436 I )22,tffi $ 1s7,s91 t 882.444 $ 165.741 $ 1,528.983
Llabi li t ies a n9.
"!:-
jr_tn:f : :--p lt
_"1
Mortgage notes payable s7.655 $ 30,s06 $45.403 t - 9 500.000 $83,780 $ 717344
Other liabiliries
Total liabilities
.1.25.1 1,867 1,007 {,955 18.319 3.358 34,747
58.906 32.373 --a-:?Jl . .j1€:119-*-8ff19 *....zt8.091
144,605 65.053 75.850 ]52.656 364.X25 78.s93 880.892
46,410
Total partners' caprrel
Total liabilities and partners' capital $ 203,51r $ 97,436 $ L22,260 $ 157,591 $ AA2/44 $ 165,741 $ 1,628.983
FUnd's inv€stment interest $ 101,002 $ 45,507 $37-?45 $ 137.3C1 S 135.547 $ 53.142 $ 510,934
lncome statement
REvenues xB.B64 $ 19,948 $9.685 $r7p],2 1 269,6?8 $16.463 $ 352.500
Expenses
Realized gEin (los!)
9,211 11.,585 6,114
(308)
L2.792 233,336 12,099 285,137
<22)(330)
7,288 (1.O!'O) (79.997) 8,599 (57.681)Unrealized (d€preciation) appreciation 13.223 (s.704)
Net income $ 22,876 $ 2.35r. t 10,859 $4.030 $ ({3,705) $ 12.941 $9.352
Fund s eqijlty in net income'$ 15.783 $ (5.540) S 5,299 $3.6?7 $ (16.389) 3 8.570 S x1.350
:Otie/ rncrudEs the Fr/"'d's eeuily inte/est io $elbtr F*naltonr, l4]lagE Mocrecrta. and ll E 441h.2rfle Fuods sia.e ol eqsity ifi net ficome ncludes unreal?ed apprpcdtion/deprccialian aad reat$ed gBinlos"s on sa/e fifdpglicabrej.
201
Notes to Combined Financial Statements
7, OTHER INVESTMENTS
Palm Beach Outtets
ln Decernber 2014. the Fund provided $ll2.O million of
mezzanine financing to a third party developer (the
Developer) for a retail outlet center in West Palm Beach,
Florida (Palrn Beach Outlets). The mezzanine loan has a term
of five years with a fixed annual interest rate of 67o due
monthly in arrears. Palm Beach Outlets has an existing first
mortgage construction loan with Wells Fargo for $206.3
million of which $123.4 million w8s drawn. The Fund entered
into a put,/call option with the Developet where the Fund has
the option to purchase the property and the seller has the
optaon to sell the property to the Fund. The contractual
purchaselsale price of Palm Beach Outlets is $283^O million.
The Fund can exercise the option by providing written notjce
to the Developer during the period between January ?.20fs
and March 16,2015. The closing date of the purchase shall be
not less than 45 days and not more than 9O days after the
option exercise notice,
The Fund expecis to exercise the pur:chase option and
convert the loan to equity ownership within the first 6 months
of 2O15. Once converted, Palm Beach Outlets will be held in a
ioint venture with the Fund owning a 90% interest and a
member of the Developer retaining a l0% interest. The joint
venture expects to borrow up to a $.165.0 million first
mortgage concurrently with the closing of the purchase.
Based on the characteristics of this ADC Affangement which
are similar to those of an investment, combined with the
expected residual profit being greater than 5O%, the
arrangement is accounted for as a real estate investment And
is reported as an investment in non-consotidated joint
ventures and other investments in the combined statements
of assets, liabilities and eguity at December 31,2014. ln
addition, the Fund determined that the option to pur.chase
the entire developed property is not a derivative financial
instrument pursuant to U.S. GAAP. As such, the embedded
feature is not required to be bifurcated and the fair value
accounting for the embedded feature at each reporting date
is not applicable.
The Fund h6s determined Palm Beach Outlets to be a variabie
interest entity (VlE). The Fund's involvement is solely as the
lender on the mezzanine loan with protective rights as the
lender. The Fund does not have power to direct theactivities
that most significantly impact economic performance of the
VlE. As a res.ult, the Fund is not the primary beneficiary and is
not required to consolidate the VlE.
Marketplace at the Outlets
ln December 2O14, the Fund provided a glo O mitlion first
mortgage and $89 million of mezzanine financing to a third
ptsrty developer (the Developer) for a retail shopping center in
West Palm Beach, Florida (Marketplace at the Outtets). The
first mortgage has a term of five years with a fixed annual
intere$t rate of 4.75% due monthly in arrears. The mezzanrne
oan has d term o[ five years with a fixed annual interest rate of
4.75/o due monthly in arrears. The Fund entered into a put/call
option with the Developer. where the Fund has the opt;on to
purchase the property and the Developer has the option to sell
the property to the Fund. The contractual purchase/sale price
of the property is $116;7 million. The Fund can exercise the
option by providing written notice to the Developer during the
period between October 7, 2Ol5 and January 7. 2016. The
closing date of the purchase shall be not less than 6O days and
not more than 9O days after the option exercise notice. The
Fund expects to exercise the purchase option and convert the
loans to equity ownership within the fourth guarter of 2O15.
Once converted, the property will be a wholly-owned asset of
the Fund.
Based on the characteristics of this ADC Arrangement which
are similar to those of an investment, combined with the
expected resldual proflt being greaier than 50%, the
arrangement is acqounted for as a real estate inyestment and
is reported as an investment in non-consolidaied ioint ventures
and other investments in the combined statements of assets,
liabilities and equity at December 31, 2014.ln addition, the
Fund determined that the option to purchase the entire
developed property is not a derivative financlal instrument
pursuant to U.S. GAAP. As such, the ernbedded feature is not
required to be bifurcated and the fair value accounting for the
embedded feature at each reporting date is not applicable.
The Fund has determined Marketplace at the Outtets to be a
VlE, The Fund's involvement is solely as the lender on the
mortgage and the rnezzanine loans with protective rights as
the lender. The Fund does not have power to direct the
activities that most significantly impact economic performancs
of the VlE. As a result, the Fund is not the primary beneficiary
and is not required to consolidate the VtE.
8. NOTES RECEIVABLE
Kettler
On May 4.2OO9, the Fund made a loan of $3.5 rnillion to
Pentagon East One A, LLC (Pentagon), the minority interest
partner in CLPF-Metropolitan One Venture. L.p. (The Gramercy
at Metropolitan F6rk) and a subsidiary of Kettler, lnc. The note
was secured by Pentagon's lO% minority inter.est in The
Gramercy at Metropolitan Park and was guaranteed by Keltler,
lnc.
The loan bore interest at an annual rate of 8% with interest
payments due monthly. The borrower w6s permitted to defer
monthly interest, in which case any such interest was added to
the unpaid principal balance annually on June I of each year.
The aggregate unpaid principal amount and any outstandinE
accrued interesl was payable at maturity on April 30, 2013. All
distributions due to the borrower from The Gramercy at
Metropolitan Park during the term of the loan were to be
applied towards any accrued interest and principal outstanding
at that time. On July l. 2013. with an effective date of January l,
2OI3, the loan was converted to equity in The Gramercy at
Metropolitan Park which increased the Fund's interest to
95,8%.
Taconic
On November lZ 2O'lO, the Fund made a shortfall contribution
and partner loan (as defined in the ioint venture agreement) of
$8.7 million to Taconic Eastchester lnvestors, LLC and Taconic
Eastchester Principals. LLC (collectively catled Taconic
Partners). This amount represents the Taconic Partners: pro
rata share of the total contribution necessary to secure the
loan payoff at the underlying property (Eastchester Heights)
on the same day.
The loan bears interest at an annual rate of 4.5%.
r: ii 6!
202
Notes to Combined na ncia I StatementsFi
The principal balance and any accrued and unpaid interest are
secured by a first priority lien upon and security interest in the
Taconic Partners' right to all distributions from the
partnership. The aggregate unpaid principal amount and ahy
outstanding accrued interest is payable at maturity on
November 17,2O2O. although a f ive-year extension option is
available" A,ll distributions due to the Taconic Partners frorn
Eastchester Heights during the term of the loan shall first be
applied towards any accruecl and unpaid interest at that time.
At December 31, 2014 and 2OI3. total principal and accrued
interest outstanding on the loan was approximately 910,3
million and $'lO.O million, respectively.
Village
On July 30, 2014, the Fund made a shortfall contribution and
a partRer loan (as defined in the .ioint venture agreement) of
$6.5 mallion to GRI Village Management LLC Gart Village
Partners). This amsunt represents Gart Partners'pro rata
share of the total contribution.necessary to secure the loan
payoff at the underlying property (Village Shopping Center)
on the same day.
The loan bears interest at an annual rate of 4%. The principal
balance and any accrued and unpaid interest are secured by
a first priority lien upon and security interest in the Gart
Village P6rtners'right to all distributions from the
partnership. The aggregate unpaid princinel amount and any
outstanding accrued interest is payable at maturity on
November'3O,2024. All distributions due to Gart Partners
from Village Shopping Center during the term of the loan
shall first be applied towards any accrued and unpaid interest
at that time. At December 31,2014, total principal and
accrued interest outstanding on the loan was approximately
$6.5 million.
9. f'4ORTGAGE NOTES PAYABLE
At December 31, 2014, the Fund had 17 mortgage loans,
which are collateralized by 30 real estate properties with an
aggregate fair value of approximately $],672 million. Such
fiortgage loans have interest rates ranging from 1.86% to
6.75%. with a weighted average interest rate of 4-9O% and
maturity dates ranging from 2Ol5 to 2021. At December 31,
2014, the fair value of the Fund's fixed rate first mortgage
notes payable based on market borrowing rates at December
31, 2Ol4 for mortgage notes with similar terms and property
specific factors was approximately $585 million with a
principal balance of approximately $568 million.
At December 31, 2014. the fair value of the Fund's Floating
rate first mortgage notes payable based on market
borrowing rates at December 31, 2Ot4 for mortgage notes
with similar terms and Oroperty specific factors was
approxrmately $5O million with a principal balance of
approximately $5O mlllion.
The future minimurn principa, payments for the next five years
and thereafter are as follows (in thousands):
2015 $ 30,7s3
2d.838
2917-_
2018
81.O94
7,598
2019 288,835
Thereafter 1a5.OOO
Total
As of December 31, 2013, the Fund had 20 mortgage loans,
which were collateralized by 20 real estate properties wifh an
aggregate fair value of approximately $1,658 million. Such
mortgage loans had interest rates ranging from 5.22% to
7.28%, wilh a weighted average interest rate of 5.68% and
matr.rrity dates ranging lram 2014 to 2O19.
At December 3I, 2013. the fair value of the Fund's fixed rate
first mortgage notes payable based on borrowing rates
available ai December 31, 2Ol3 for notes with similar terms
and average maturities was approxirnately $661 million with a
principal balance of approximately $644 million.
.IO, SENIOR NOTES trAYABLE
On April 27,2OO5, the Fund rssued $iOO rnillion ot 5.48% Senior
Notes. Se"ies B, due April 27.2017.
On August 23, 2OO5, the Fund issued $2O0 million of Senior
Notes coneisting of (i) $lOO million of 5.22% Senior Notes, Series
C, due August 23,2015. and (ir) $lOO million of 5.32% Senior
Notes, Series D, due August 23,2017,
On December 15,2OO5, the Fund issued $2OO million of Senior
Notes consisting of (i) $l5O million of 5.62% Senior Notes, Series
E, due December 15,2015, and (ii) $5O million of 5.72% Senior
Notes, Series F, due Decernber '15, 2017.
On December 6, 2006, the Fund issued $25O million of Senior
Notes consistins of (i) $I25 million of 5.73% Senior Notes, Series
G, due December 6, 2016. and (ii) $125 million of 5,837o Senior
Notes, Series H, due December 6, 20]8.
On June 15,2OO7, the Fund issued $2OO million of Senior Notes
consisting of (i) $50 million of 5.69% Senior Notes. Series l. due
June 15, 2O16. and (ii) $l50 million of 5.847o Senior Notes, Series
J, due June 15, 2019.
On February 14,2O14, the Fund issued $]50 million of Senior
Notes consisting of (i) $12 million of 3.95% Senior Notes, Series
K, due February 14, 2021; (,i) $98 million of 4.60% Senior Notes,
Series L, due February 14,2024, and (iii) $40 million of 4.75%
Senior Notes, Series M, due February 14.2026.
On June 2. 2014. the Fund issued $5O million of floating rate
Senior Notes, Series N. due June 2,2021. These notes bear an
interest rate of LIBOR plus a spread ot 1.7o%. At December 31,
2014, the rate was 1.93%.
On July 1,2014.the Fund issued $1OO million of Senior Notes
consisting of: (i) $5O million of 4.15% Senior Notes, Series O. due
July l, 2o2l; (ii) $35 million of 4.8O% Senior Notes, Series P, due
Julyl,2Q24; and (iii) $15 rnillion of 4.95% Senior Notes, Series Q,
due July 1.2026.
The Senior Notes bear interest only and the principal payments
are due on their maturity date. As of December 31, 2014 and
2O13, the estimated fair value of the Fund's Senior Notes was
approximately $1,277 million and $l,OOO million, respectively,
with a principal balanc€ sf $1.25O and $950 million,
respectively. The fair value is calculated by discounting the
difference between the contractual note payments and
estimated market note payments at an equity discount rate
equivalent to that which ra,ould be utilized by market
participants.
2016
64 l i,:,r,i ,, irr:i t,iii-'i. i rrif
$618.118
203
Notes to Combined Financial Statements
The future rninimum principal payrnents for the next five years
and thereaf ter are as follows (in thousands):
2015
2016
2018 125,000
p019 150.000
Thereafter 300,000
$ 1,250.000
,II. CREDIT FACILITY
On June 22,2012, the Fund obtained an unsecured credit
facility (the Facility) from a syndicate of lenders in the amount
of $25O million with an accordion feature to increase the size
up to $4OO million, On November 25,2014 the Fund exercised
the accordion feature in the amount of $1OO million, which
increased the total Faciiity to $35O million. The Facility has a
four year term with 6 one year extension option. Draws under
the Facility may be Base Rate Loans or Eurodollar Rate Loans,
as defined. Base R€te Loans bear interest at a rate €qual to
Base Rate plus the Applicable Rate (as defined). Base Rate
eguals the highest of (a) Federal Funds Rate plus 0.5%: (b)
Bank of America's daily announced prime rate; and (c) the
Eurodollar Rate plus]%. Eurodollar Rat€ Loans bear interest at
a rate equal to Eurodollar Rate plus the Applicable Rate.
Eurodollar Rate equals to the daily announced BBA LIBOR,
Applicable Rate is based upon the Fund's consolidated
leverage ratio as set forth in the mosi recent compliance
certificate.
The Facility is subject to certain customary compliance
reeuirements, including a consolidated leverage ratio. 6
secured and unsecured leverage ratio, an interest and
unencumbered interest coverage ratio. a minimum net asset
value requirement and certain asset and liability composition
limitations. The Fund is in compliance with such requirements
at December 3'1, 2014,
The Fund values the Facility at the cufient contractual price
and applicable interest rate at the time o, each draw. As of
December 31,2014, there was $2O5 million drawn on the
Facility.
12, EOUITY
CAPITAL CONTRIBUTIONS AND REDEMPTIONS
During 2O14. the Fund received capital contributions of
approximately $485 million, representing additional
investments from existing investors and initial contributions
related to the admittance of 18 new investors.
The Fund declared distributions to its investors. according to
their share percentages at the time of distribution, aggregating
$212 million, of which approximately $55 million remained
unpaid at December 31, 2014, and is included in accounts
payable and accrued expenses in the accompanying combined
statements of assets, liabilities and equity,
During 2OI4, the Fund accepted a total of $382 million in
redemption requests- At December 31,2AM, approxirnately
$l3O miilion of redernptions remained unpaid and is included in
accounts payable and accrued expenses in the accompanying
combined staternents of assets, liabilities and equity. All
outstanding redemptions and distributions were paid in
January 2O15.
During 2Oi3, the Fund received c.apital contributions of
approximately $658 million, representing additional
investments from existing investors and initial contributions
related to the admittance of 24 new investors.
The Fund declared distributions to its investors, according to
their share percentages at the time of distribution, aggregating
$2OO millioo, of which approximately $51 rnillion rernained
unpaid at December 31, 2013, and is included in accounts
payable and sccrued expenses in the accompanying combined
statements of assets, liabilities and equity.
During 2013, the Fund accepted a total of $568 million in
redemption requests. At December 31, 2013. approximately
$161 million of redemptions remained unpaid and is included in
accounts payable and accrued expenses in the accompanying
combined statements of assets, liabilities and equity. All
outstanding redemptions and distributions were paid in
January 2O14.
The investors are not obligated to make any additional capital
contributions except as stated in each investor! Subscription
Agreement.
TRANSFER AND REDEMPTION OF INTEREST
The transfer of interests and substitution of investors may be
made at the discretion of the Manager pursuant to the terms of
the Agreement. Any transferee of an interest in the Fund who
is not admitted as a substituted investor shall have the right to
receive allocations and distributions pursuant to the
Agreement but shall have no other rights under the
Agreernent.
lnterests may be redeemed by an investor at any time
throughout the term of the Agreement upon 9O days'prior
written request. Redeemed interests shall remain outstanding
and share in any cash distributtons until the interests are
surrendered upon payment oF the redemption price.
lmmediately prior to the redemption of an investor, the Fund
shall adjust the carrylng values, as defined. of the Fund's assets
and liabilities upwards or downwards and such gains or losses
will be allocaled to the investors in accordance with their
percentage interests, as defined (the Aci,iusted Equity). To the
exLent that liquid assets of the Fund, as determihed in the sole
discretion of the General Partner. are insuf ficient to satisfy
redemption requests, redemptions will be redeemed on a pro
rata basis as liquid assets become avaiiable. Under no
circumstances will the General Partner be required to cause
the Fund to sell investments to satisfy redemption requests.
The redemption price on the redeemed interest is equal to the
investors'percentage interest in the Adjusted Equity.
250-,q00
lIs.900
250,0002Ar7
fotal
65
204
Notes to Combined Financia I Statements
i3, PROPERTY MANAGEMENT FEES
Properties are generally managed by third-party managing
and leasing agents. The management fees, as provided by the
property manaqement agreements, range from t.3% to 4.O% of
revenue or gross receipts, ln certain cases, property
management fees are charged based upon a fixed amount, as
defined by the agreement. Property management fees earned
by third-party managing and leasing agents for each of the
years ended December 31,2014 and 2Ol3 were $B milJion and
$7 mlllion, respectively, and are included in real estate
operating expenses in the accompanying combined statements
of operations.
14. RELATED.PARTY TRANSACTIONS
CASH MANAGEMENT FEE AND MANAGEMENT FEE
The Fund and Clarion entered into a management agreement
effective April 1, 2OOO, to provide management services to the
Fund. Pursuant to the Agreement, Clarion is entitled to receive
the following fees for its services, payable quarterly and in
arrea rs:
. A Cash Management Fee equal to O,1O% per annum of the
cash and cash eguivalents held by the Fund;6nd
. A Management Fee equal to (il1.25% per annum of the
amount of each investor's Management lnterest, as defined,
up to and including $10 million; (b) 1.OO% per annum of each
investor's Management lnterest. as defined, in excess of $'lO
million up to and including $25 million; and (c) O.85% per
annum of the amount of each investor's Management
lnterest, as defined, in excess of $25 milhon up to and
including $lOO million. The Management Fee for investors
with Management lnterests, as defined, in excess of $lOO
million shall be agreed upon between the Manager and such
inv€stor.
The Cash M6nagement Fee and Management Fee are the
obligation of each individual investor and, therefore. are not
reflected in the accompanying combined financial statements.
Fees not paid directly by any individual investor will be oaid by
the Fund on behalf of such investor and deducted from
quarterly distributions. For the years ended December 31, 2Ol4
and 2013, such fees were approximately $47 million and $42
million, r'espectively.
PROPERTY MANAGEMENT FEES
Certain related partles to the Fund are the management and
leasing agents for several properties. The management fees, as
provided by the property management agreements, range
tram 2.5Yo to 3.3% of revenue, gross receipts or a fixed amount,
as detined by the agreement Property management fees
earned by the related pdrties were approximately 91.4 million
and $2 million for the years ended December 3I, 20'14 and
2013, and are included in real esttste operating expenses in the
accompanying eombined statements of operations. Property
management fees payable to the related parties were
approximately $O.l million and $O.? million for the years ended
December 31,2014 and 20]3, respectively, and are rncluded in
accounts payable and eccrued expenses in the accompanying
combined statements of assets, liabilities and equity,
I5. FINA^NCIAL HIGFILIGHTS
ASC 946, Financial Services-lnveslment Cofipdnies, requii'es
disclosure of total return, as well as ratios of expenses and
net investment income to average net assets (the Financial
Highlights).
The following are the Flnancial Highliehts attributable to
investors of the Fund for the years ended December 31, 2Ol4
and 2013, after cash management and management fees,
which are not expenses of the Fund but are the obligation of
individual investors:
YEAR FNOED PECEMtsER 31
Net ihvestment income ratio:
AVERAGE NET
ASSETSI
20111 : 2013
Operating expense ratioB 5-76 6.87
Total returno 12.18 11.80
iAverage net assets are rneasured using the weighted-dverag€ equily
during the year including net income adiusted for the cash
managemen[ fee and asset manage/nenl fee desctibed in Note 14.,Net investmenf incorne ratio includes ificome /ess a/,1 expenses
ificluding cash management and assef maoagement fees described in
Note 14. Amount excludes realized and unrealized gains and /osses.,Operating expeose ratio includes all expenses including cash
management and rsset rnrnagefieot y'ees described in Note 14.lAnnual tirne-weighted retuhs arc calculated by linking quarlerly
returns: quarterly relurns are calculated by dividing net income after
cash management and management fees over weighted-average
equity, Weighted-average equity is calculated by addihg time'
weighted contributions to and subtracting titne-weighted
distributions from the beginning equity bE/aace.
I6. SUBSEQUENT EVENTS
Subsequent evenls have been evaluated by the Fund through
March 3, 2O15, the issuance date of the combined financial
statements.
On January 2,2015, the Fund rnade draws totaling $l3O million
under the Facility, which bear interest at a rate of
approximately 1.2%,
On January 6, 2O15, the Fund sold Platinum Southside. a
multifamily property in Austin, Texas, for a gross sales price of
$28.5 million.
On January 7, 2015. the Fund sold 49% of the common units of
CLPF-Sand Hill Cornmons, L.P for a purchas€ price of $7O.6
million. Ihe Fund retained the remaining 5]% interest in the
common units as lvell as a preferred partnership interest of
$96 million.
On January 9, 2015, the Fund paid down $8O million under the
Faciiity.
3.70X 3.8896
66 ,: i '. ii;: i :'i
205
The Management Team
PICIURET FROI.T LEFI 10 R'CHT:
Doug Wolski, Directoc Lion ploperties Fund Assistant Portfolia Manager
Lynn Stattel, Vice President. Lion Properties Fund Cantroller
Geneva King, Senlor Assoclafe, Lion Prcperties Fund Assistant Controller
Daniel Farr. Senior Vice President. Lion Propert,es Fund Chief Financiat Officer
Jeb Belford, Managing Dilectat Lion Properties Fund portfolio Manager
Joe Leahy, Associate, Lion Properties Fund
Deteisha Smith, Senrbr assaaib{e. Lion properties Fond,Ass/sldnl Contfillet
Jon Gelb, Senror l/rce prcsident, Lian properties Fund Assistant Pattfalio NBnaget
Harris Markowitz, SenrorAssociate, Lion Prcpefties Fund
Cui Tung, vice President, Lian Prapefties Fund Contrcller
AB$UT CLAE}ON PARTNERS
One of the leading real estale inveslment aovisors in the Ameilcas, Ciarion Part.ners'
strength is derived from a broad network of experienced professionals who bring a deep
knowledge of local markets to every investmenl decision^ With of fices in maior markets
across the United States and Brazil. Clarion Fartners offers an array of real estate
investment services to institutional investors. For 30 years, Clarion Partners has achieved
investment success in both ttre private and public seclors
WWW.CLARIONPARTNERS,COM
206
207
E:KHIBITC
r]ORM OF ASSUMPTION OT LEASE AGREEMEITTT
208
EXHIBIT 2
1691 MICHIGAN AVE INVESTMENT LP
(FORMERLY OIK LINCOLN MIAMI BEACH INVESTMENT LLC)
(A Delaware Limited Partnership)
Financial Statements - Federal Income Tax Basis
December 31, 2014 and 2013
(With Independent Auditors' Report Thereon)
209
1691 MICHIGAN AVE INVESTMENT LP
(FORMERLY OIK LINCOLN MIAMI BEACH IIWESTMENT LLC)
(A Delaware Limited Partnership)
Table of Contents
Independent Auditors' Report
Statements of Assets, Liabilities, and Owners' Equity - Federal Income Tax Basis
Statements of Revenues and Expenses - Federal Income Tax Basis
Statements of Changes in Owners' Equity - Federal Income Tax Basis
Statements of Cash Flows - Federal Income Tax Basis
Notes to Financial Statements - Federal Income Tax Basis
Page(s)
1-2
J
4
5
6
7-12
210
KPMG LLP
345 Park Avenue
NewYork, NY 10154-0102
Independent Auditors' Report
The Partners
1691 Michigan Ave Investment LP
(Formerly OIK Lincoln Miami Beach Investment LLC):
We have audited the accompanying financial statements of 1691 Michigan Ave Investment LP (the
Company), which comprise the statements of assets, liabilities, and owners' equity - Federal income tax
basis as of December 31,2014 and2013, and the related statements of revenues and expenses - Federal
income tax basis, changes in owners' equity - Federal income tax basis and cash flows - Federal income tax
basis for the years then ended, and the related notes to the financial statements.
M an ag eme nt's Re sp o n s ib ilifii fo r t h e F i n un c ial St ate me nt s
Management is responsible for the preparation and fair presentation of these financial statements in
accordance with the basis of accounting the Company uses for federal income tax purposes; this includes the
design, implementation, and maintenance of internal control relevant to the preparation and fair presentation
of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted
our audits in accordance with auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
financial statements. The procedures selected depend on the auditors' judgment, including the assessment of
the risks of material misstatement of the financial statements, whether due to fraud or error. In making those
risk assessments, the auditor considers internal control relevant to the Company's preparation and fair
presentation of the financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's
internal control. Accordingly, we express no such opinion. An audit also includes evaluating the
appropriateness ofaccounting policies used and the reasonableness ofsignificant accounting estimates made
by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
KPMG LLP is a DelaME limited liability partnership,
the U.S. msmb€r fim of KPMG lntemational CoopeEtive
('KPMG lntsmational'), a Swiss €ntity.
211
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the assets,
liabilities, and owners' equity of 1691 Michigan Ave Investment LP as of December 31, 2014 and2013, and
its revenues and expenses, changes in owners' equity and cash flows for the years then ended in accordance
with the basis of accounting the Company uses for Federal income tax purposes described in Note 2(a).
Basis of Accounting
We draw attention to Note 2(a) of the financial statements, which describes the basis of accounting. The
financial statements are prepared on the basis of accounting the Company uses for Federal income tax
purposes, which is a basis of accounting other than U.S. generally accepted accounting principles. Our
opinion is not modified with respect to this matter.
Emphases of Matters
As described in Note 2(f;, because many types of transactions are susceptible to varying interpretations under
Federal, state and local income tax laws and regulations, the amounts reported in the accompanying financial
statements may be subject to change at a later date upon final determination by the respective taxing
authorities.
As described in Note 1, on August 1,2013, American Fund US Investments LP, a Delaware limited
partnership, as the sole limited partner, owning a 100%o economic interest in the Company, filed IRS Form
966 "Corporate Dissolution or Liquidation" to dissolve itself and the Company by no later than July 31,
2016.
Our opinion is not modified with respect to these matters.
t@r"t<= tR
August 21,2015
212
1691 MICHIGAN AVE INVESTMENT LP
(FORMERLY OIK LINCOLN MIAMI BEACH IIWESTMENT LLC)
(A Delaware Limited Partnership)
Statements of Assets, Liabilities, and Owners' Equity - Federal Income Tax Basis
December 31, 2014 and 2013
Assets
Real estate - net of accumulated depreciation of $ 16,809,806 and
$1 4,840,444 in 201 4 and 2013, respectively
Cash and cash equivalents
Accounts receivable
Prepaid expenses and other assets
Deferred financing costs, net of accumulated amortization of
$514,289 and $419,458 in 2014 and2013, respectively
Deferred leasing commissions, net of accumulated amortization of
$870,085 and $675,280 in2014 and 2013, respectively
Organization costs, net of accumulatedamortization of $58,348
and $51,238 in2014 and2013, respectively
Total assets
Liabilities and Owners' Equity
Mortgage payable
Accrued interest
Accounts payable and accrued liabilities
Tenant security deposits
Total liabilities
Commitments and contingencies (notes 5 and 6)
Owners'equity
Total liabilities and owners' equity
See accompanying notes to financial statements -Federal income tax basrs.
2014 2013
$ 60,724,882
5,834,467
254,034
38,337
73,131
880,707
48,308
$ 67,853,866
62,225,693
3,810,425
309,475
38,701
70,461
712,876
55,418
67,223,049
39,000,000
367,453
340,973
517,928
39,000,000
370,010
413,293
431,862
40,226,354
27,627,512
40,215,165
27,007,884
67,853,866 67.223.049
213
1691 MICHIGAN AVE INVESTMENT LP
(FORMERLY OIK LINCOLN MIAMI BEACH IIYVESTMENT LLC)
(A Delaware Limited Partnership)
Statements of Revenues and Expenses - Federal Income Tax Basis
Years ended December 31,2014 and2013
2014 2013
Revenues:
Rental income
Tenant reimbursements
Parking income
Interest and other income
Total revenues
Expenses:
Depreciation and amortization
Interest
Property operating expenses
Real estate taxes
Parking garage expense
Ground rent
General and administrative expenses
Property management fees
Asset management fees
Bad debt
Total expenses
Excess ofrevenues over expenses
See accompanying notes to financial statements - Federal income tax basis.
4,676,681
557,506
2,203,615
4,778,337
572,428
2,707,390
196,35115.025
7,452,827
2,266,109
839,737
1,722,763
914,125
634,428
518,890
164,596
774,963
166,104
32,195
7,648,506
2,423,654
967,907
1,011,305
840,816
532,747
524,460
2gg,40g
170,475
151,042
81,682
6,833,199
619,628
6,993,497
655,009
214
Balance, December 31, 2012
Excess ofrevenues over expenses
Deemed conhibution from Owner
Cash distribution to Owner
Balance, December 31, 2013
Excess ofrevenues over expenses
Balance, December 31, 2014
See accompanying notes to financial
_ _4.,O75n_ 27,627,512
-
169I MICHIGAN AVE INVESTMENT LP
(FORMERLY OIK LINCOLN MIAMI BEACH INVESTMENT LLC)
(A Delaware Limited Partnership)
Statements of Changes in Owners' Equity - Federal Income Tax Basis
Years ended December 3l-2014 and2013
t69t
Michigan Ave
Investment
GP LLC
(General
Partner)
AFt]S
(Formerly IVG)
28,067,704
655,009
3,791
(1,718,610)
27,007,884
619,628
Total
28,067,704
655,009
3,781
(1,718,610)
27,007,884
619,62g
statements - Federal income tax basis.
215
1691 MICHIGAN AVE INVESTMENT LP
(F'ORMERLY OIK LINCOLN MIAMI BEACH INVESTMENT LLC)
(A Delaware Limited Partnership)
Statements of Cash Flows - Federal Income Tax Basis
Years ended December 31,2014 and 2013
2014 2013
Cash flows from operating activities:
Excess of expenses over revenues
Adjustments to reconcile excess ofexpenses over revenues
to net cash provided by operating activities:
Depreciation and amortization
Changes in operating assets and liabilities:
Decrease in accounts receivable
Decrease in prepaid expenses and other assets
Decrease in accounts payable and accrued liabilities
Increase (decrease) in tenant security deposits
(Decrease) increase in accrued interest
Net cash provided by operating activities
Cash flows from investing activities:
Payments for building and improvements
Payments for tenant improvements
Payments for deferred leasing commissions
Net cash used in investing activities
Cash flows from financing activities:
Payments for defened financing costs
Cash distribution to owner
Net cash used in financing activities
Increase in cash and cash equivalents
Cash and cash equivalents, beginning ofyear
Cash and cash equivalents, end ofyear
Supplemental cash flow information:
Cash paid for interest
Supplemental disclosure of noncash investing and financing transactions:
Operating expense paid by AFUS treated as a deemed capital
contribution
See accompanying notes to financial statements - Federal income tax basis.
$ 5,834,467 3,810,425::
842,294 597,897
3,781
$ 619,628
2,266,109
55,441
364
(72,320)
86,066
(2,ss7)
2,952,730
(2,7se)
(465,792)
(362,636)
(83 1 ,1 87)
(97,501)
(e7,s0l)
2,024,042
3,810,425
655,009
2,423,654
47,991
36,659
(37,496)
(40,260)
370,010
3,455,567
(68,984)
(192,052)
(138,994)
(400,030)
(281,827)
( I,718,610)
(2,000,437)
1,055,100
2,755,325
216
1691 MICHIGAN AVE INVESTMENT LP
(FORMERLY OIK LINCOLN MIAMI BEACH INVESTMENT LLC)
(A Delaware Limited Partnership)
Notes to Financial Statements - Federal Income Tax Basis
December 31,2014 and 2013
(1) Organization and Business
OIK Lincoln Miami Beach Investment LLC (OIK Lincoln), a Delaware limited liability company, was
formed on June 6,2006. Oppenheim Immobilien Kapitalanlagegesellschaft mbH, a German limited
liability company, as nominee for American Fund OIK (OIK), was the sole common unitholder of OIK
Lincoln. In November 2007,IVG Institutional Funds GmbH acquired a 50.1o/o interest in Oppenheim
Immobilien Kapitalanlagegesellschaft mbH, thus changing its name to IVG Institutional Funds GmbH
as nominee for American Fund - OIK (IVG). OIK Lincoln was organized for the objective and purpose
of making investments in real estate assets, and owning, managing, supervising and disposing of such
investments.
On July 18, 2006, OIK Lincoln purchased a 162,577 square foot office building, retail space, parking
garage, and related improvements located at 1691 Michigan Avenue, Miami Beach, Florida
(the Property) and assumed the leasehold interest in the ground lease of the Property.
On May 25, 2009, 1 69 I Michigan Ave Investment LP (the Company) was formed as a Delaware limited
partnership to be treated as a disregarded entity for U.S. federal income tax purposes pursuant to section
368(aX1XA) of the Internal Revenue Code (the Code) by and between 1691 Michigan Ave Investment
GP LLC (the General Partner), owning a zero percent economic interest in the Company, and American
Fund US Investments LP (AFUS), a Delaware limited partnership, as the sole limited partner, owning a
l00oZ economic interest inthe Company. IVG is the limited partner of AFUS with a 1000% economic
interest and American Fund US Investments GP LLC is the general partner ofAFUS witha}o/oeconomic
interest. On June 17,2009, OIK Lincoln merged with and into the Company (the Merger). The Company
has been accounted for on a carryover basis pursuant to the Code.
The Company's purpose was to acquire the Property, and to thereafter, own, encumber, operate, sell or
otherwise deal with all or part of the Properfy for the benefit of AFUS.
On August 1,2013, AFUS filed IRS Form 966 "Corporate Dissolution or Liquidation" to dissolve itself
and the Company by no later than July 31,2016. As of December 31, 2014, AFUS has not formally
liquidated or filed a Certificate of Cancellation.
(2) Summary of Significant Accounting Poticies
(a) Principles of Reporting
The accompanying financial statements of the Company have been prepared on the accrual basis
of accounting utilized for Federal income tax reporting purposes in the United States of America.
Accordingly, such statements are not intended to present financial position, results of operations,
changes in owners' equity and cash flows in conformity with accounting principles generally
accepted in the United States of America (GAAP), which would require, among other things:
adjustments to depreciation and amortization to reflect the economic useful life of real estate;
rental income to be recorded on straight-line basis over the terms of the related leases; and
recording ofnondeductible expenditures as expenses in the statements ofrevenues and expenses.
(Continued)
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(b)
1691 MICHIGAN AVE INVESTMENT LP
(FORMERLY OIK LINCOLN MIAMI BEACH IIWESTMENT LLC)
(A Delaware Limited Partnership)
Notes to Financial Statements - Federal Income Tax Basis
December 31.2014 and 2013
Use of Estimates
The preparation of financial statements in conformity with the accrual basis of accounting utilized
for Federal income tax reporting purposes requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. These estimates and assumptions are based on
management's best estimates and judgment. Management evaluates its estimates and assumptions
on an ongoing basis using historical experience and other factors, including the current economic
environment. The current economic environment has increased the degree of uncertainty inherent
in these estimates and assumptions, including projected future revenue and leasing activity.
Management adjusts such estimates when facts and circumstances dictate. As future events and
their effects cannot be determined with precision, actual results could differ from those estimates.
The real estate and capital markets are cyclical in nature. The real estate industry is affected by the
repricing of risk, the illiquidity of the financial markets and the change in the U.S. economy. These
significant market risks impact transaction and leasing activity and created uncertainty as to the
future operation and valuation of real estate investments. Management has exercised their
professional judgment in determining the valuations and estimates contained in the financial
statements. Real estate investment values are affected by, among other things, occupancy rates,
rental rates and interest and inflation rates. As a result, determining the estimates of certain
accounts involves many assumptions. Amounts ultimately rcalized from these accounts may vary
significantly from the carrying values presented.
Revenue Recognition
The Company recognizes revenue on the accrual basis in accordance with the Federal income tax
basis of accounting. Prepaid rents, including tenant reimbursements, are recognized as rental
income in the period received.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of ninety days or less at the
time of acquisition to be cash equivalents. The Company maintains cash and cash equivalent
balances which, at times during the year, exceeded the $250,000 amount insured by the Federal
Deposit Insurance Corporation.
Depreciation
Depreciation is calculated by the Modified Accelerated Cost Recovery System (MACRS) method
and is deducted over a recovery period, as defined by the Code. The Company also recognizes
bonus depreciation as applicable and allowable under the Code.
(c)
(d)
(e)
(Continued)
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(/)
1691 MICHIGAN AVE INVESTMENT LP
(FORMERLY OIK LINCOLN MIAMI BEACH IT{VESTMENT LLC)
(A Delaware Limited Partnership)
Notes to Financial Statements - Federal Income Tax Basis
December 31, 2014 and 2013
Income Taxes
The Company is a disregarded entity for federal income tax purposes; however AFUS is subject
to federal and state income taxes on the Company's taxable income. The Company's excess of
revenues over expenses is included in AFUS's income tax returns. No provision for Federal, state
or local income taxes is made in the accompanying financial statements. Because many types of
transactions are susceptible to varying interpretations under Federal, state and local income tax
laws and regulations, the amounts reported in the accompanying financial statements may be
subject to change at alater date upon final determination by the respective taxing authorities.
The Company has assessed its tax positions for all open tax years which are from 20ll to 2014
and concluded that there were no material uncertain tax liabilities to be recognized or disclosed.
Capital Expenditures
Significant renovations which extend the useful life ofthe Property are capitalized as required by
the Code. Expenditures for maintenance and repairs are charged to operations as incurred.
Defemed Costs
Deferred financing costs are amortized on the straight-line method over the term of the mortgage
payable. Deferred leasing commissions are amortized on the straight-line method over the lease
term. Organization costs are amortized on the straight-line method over fifteen years.
Environmental Matters
Under various Federal, state and local environmental laws, statutes, ordinances, rules and
regulations, an owner of real property may be liable for the costs of removal or remediation of
certain hazardous or toxic substances at, on, in or under such property as well as certain other
potential costs relating to hazardous or toxic substances. These liabilities may include government
fines and penalties and damages for injuries to persons and adjacent property. Such laws often
impose liability without regard to whether the owner knew of, or was responsible for, the presence
or disposal of such substances. Accordingly, the Company, as the owner of such property may be
held directly liable for any such damages. As of December 31, 2014 and 2013, the Company is
not aware of any environmental matters that could have a material impact on the financial
statements.
Re cent Ac co unting Pro nounc e me nts
In August 2014,the FASB issued guidance which requires management to assess an entity's ability
to continue as a going concern for a period of one year after the financial statements are issued.
The guidance is effective for years beginning in 2017 for nonpublic companies. Management is
currently evaluating the impact of adopting this new standard on the financial statements.
@)
(h)
(,
a)
(Continued)
219
1691 MICHIGAN AVE INVESTMENT LP
(FORMERLY OIK LINCOLN MIAMI BEACH IIWESTMENT LLC)
(A Delaware Limited Partnership)
Notes to Financial Statements - Federal Income Tax Basis
December 31. 2014 and 2013
(3) Real Estate
The following is a summary of the components of real estate at December 31,2014 and2Ol3:
2014 2013
Building and improvements
Tenant improvements
Total
Less accumulated depreciation
Real estate, net 60,724,882 62,225,693
The Property is a Class 'oA" low-rise multi-tenant office building and was acquired for approximately
$75.8 million. The Property is subject to a long-term ground lease with the City of Miami Beach, which
owns the underlying land (Note 6a). As of December 37, 2014 and 2013, the Property is 9l% and 86Yo
occupied, respectively.
(4) Allocation to Owners
lncome, losses and cash distributions are allocated 100%oto AFUS.
(5) Mortgage Payable
On July 9, 2070, AFUS obtained a $39 million mortgage payable with a foreign bank with an original
maturity date of July 9, 2012. ln 2072, the lender approved the extension of the maturity date of the
mortgage payable to July 9, 2014. For the first six months of the extension term, the mortgage note
payable bore interest at a variable rate of 6-month LIBOR, plus a 2.1Yo margin For the remaining 18
months of the extension term, the Company elected an interest rate at a variable rate of 6-month LIBOR
plus 1.96%.
On June 11,2074, the lender approved atwo year extension of the maturity date of the mortgage payable
to July 8,2016. The loan bears interest at a variable rate of 6-month LIBOR, plus a 1.6% margin. The
interest rate was 1.9272% and 2.356%o as of December 3 l, 2014 and 2013, respectively.
The mortgage payable requires the Company to maintain a debt service coverage and loan to value ratio,
as defined. As of December 31, 2014 and2013,the Company was in compliance with the debt service
coverage and loan to value ratio.
Interest expense in2014 and2013 amounted to $839,737 and $967,907, respectively.
$ 74,903,792
2,630,906
77,534,688
16,909,906
74,901,023
2,165,114
77,066,137
14,840,444
r0 (Continued)
220
1691 MICHIGAN AVE INVESTMENT LP
(FORMERLY OIK LINCOLN MIAMI BEACH INVESTMENT LLC)
(A Delaware Limited Partnership)
Notes to Financial Statements - Federal Income Tax Basis
December 31, 2014 and 2013
(6) Commitments and Contingencies
(a) Ground Lease
The Property is subject to a long term ground lease expiring in 2053. The base gtound rent was
originally $300,000 per annum, set to increase by the lesser of 12Yo or the cumulative consumer
price index (CPI) over the previous five year period commencing with the eleventh year (2012),
and every five years thereafter. 1n2012, the base ground rent increased to $336,000 per annum. In
addition to the base ground rent, the Company pays annual percentage rent equal to2.5%o ofProject
Revenue, as defined. In2014 and 2013, the percentage rent amounted to $182,890 and $188,460,
respectively, which is included as part of ground rent expense on the accompanying statements of
revenues and expenses - Federal income tax basis.
As of December 3 1 , 20 I 4, future minimum base ground rent payments due under the ground lease
are approximately as follows:
$ 336,000
336,000
376,320
376,320
376,320
19,558,692
$ 21.3s9.652
(b) Other
The Company, in the normal course of business, may be involved, either directly or indirectly, in
litigation, claims and other legal matters. While the outcome of these proceedings is not presently
determinable with certainty, management believes that any such outcome will not have a material
adverse impact on the financial position or results of operations of the Company.
(7) Related-PartyTransaction
AFUS has engaged Real Estate Capital Partners Limited Partnership as the asset manager (Asset
Manager) for the Company and certain of its affiliates. Prior to the Merger, IVG paid certain fees on
behalf of OIK Lincoln directly to the Asset Manager, which are not included in the accompanying
financial statements. Subsequent to the Merger, the Asset Manager began charging the Company an
asset management fee of 4%o of the net operating income derived from the Property, as defined. Asset
management fees amounted to $ 166,104 and $ 151,0 42 for the years ended December 31,2014 and 2013,
respectively.
Year ending December 3l:
2015
2016
2017
2018
2019
Thereafter
11 (Continued)
221
(8)
1691 MICHIGAN AVE INVESTMENT LP
(FORMERLY OIK LINCOLN MIAMI BEACH IIWESTMENT LLC)
(A Delaware Limited Partnership)
Notes to Financial Statements - Federal Income Tax Basis
December 31, 2014 and 2013
Property Management Fees
On June 18, 201 1, the Company entered into a property management agreement with Jones Lang LaSalle
America (Florida), Inc. (the Property Manager) to provide management and leasing services to the
Company. The Property Manager has responsibilities for managing the day to day operations of the
Property. The Property Manager is entitled to a property management fee equal to the greater of
(i) $4,500 or (ii)2.5% of the Properfy's gross income, as defined. Property management fees incurred
amounted to $174,863 in2014 and $170,475 in 2013.
In addition, the Property Manager is also entitled to a fee for supervision of construction, capital
improvements and tenant leasehold improvements at the Property. ln2014 and2013, no construction
supervision fees were incurred by the Company.
Future Minimum Lease Payments
Minimum lease payments under the noncancelable leases in effect at December 31,2014, are as follows:
(e)
Year ending December 3l:
2015
2016
2017
2018
2019
Thereafter
4,429,697
4,192,338
2,944,032
2,095,053
1,843,924
1.504.977
$ 17,009,021
The above table does not include option or renewal periods. In addition to the minimum lease payments
described above, some leases require tenants to reimburse the Company for certain operating expenses,
which amounted to $557,506 and $572,428 in2014 and2013, respectively.
ln 2014 and 2013, one tenant in the entertainment industry represents approximately 13% of rental
income.
(10) Subsequent Events
The Company has evaluated subsequent events through August 21,2015 the date at which its financial
statements were available to be issued and determined that there were no subsequent events requiring
recognition or disclosure.
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RESOLUTION TO BE SUBMITTED
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