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10-Q
FOREST CITY REALTY TRUST, INC. filed this Form 10-Q on 11/02/2017
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________
Form 10-Q
_____________________________________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                 to                 
Commission file number 1-37671 
_____________________________________________________________
FOREST CITY REALTY TRUST, INC.
(Exact name of registrant as specified in its charter) 
_____________________________________________________________
Maryland
(State or other jurisdiction of
incorporation or organization)
 
 
 
47-4113168
(I.R.S. Employer
Identification No.)
 
 
 
 
 
Terminal Tower
Suite 1100
 
50 Public Square
Cleveland, Ohio
 
44113
(Address of principal executive offices)
 
(Zip Code)
216-621-6060
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
_____________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding, including unvested restricted stock, of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Outstanding at October 30, 2017
Class A Common Stock, $.01 par value
266,752,551 shares



Forest City Realty Trust, Inc. and Subsidiaries
Table of Contents
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1


PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Forest City Realty Trust, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
 
September 30, 2017
 
 
(Unaudited)
December 31, 2016
 
(in thousands)
Assets
 
 
Real Estate
 
 
Completed rental properties
$
7,280,498

$
7,112,347

Projects under construction and development
526,456

734,980

Land inventory
58,664

68,238

Total Real Estate
7,865,618

7,915,565

Less accumulated depreciation
(1,500,128
)
(1,442,006
)
Real Estate, net – (variable interest entities $2,323.0 million and $2,270.3 million, respectively)
6,365,490

6,473,559

Cash and equivalents – (variable interest entities $65.8 million and $59.3 million, respectively)
193,675

174,619

Restricted cash – (variable interest entities $56.7 million and $46.5 million, respectively)
141,021

149,300

Accounts receivable, net – (variable interest entities $62.2 million and $72.2 million, respectively)
201,413

208,563

Notes receivable – (variable interest entities $197.2 million and $154.3 million, respectively)
430,090

383,163

Investments in and advances to unconsolidated entities
543,504

564,779

Other assets – (variable interest entities $59.7 million and $72.2 million, respectively)
243,755

274,614

Total Assets
$
8,118,948

$
8,228,597

Liabilities and Equity
 
 
Liabilities
 
 
Nonrecourse mortgage debt and notes payable, net – (variable interest entities $1,462.6 million and $1,437.8 million, respectively)
$
3,129,289

$
3,120,833

Revolving credit facility


Term loan, net
333,568

333,268

Convertible senior debt, net
112,523

112,181

Accounts payable, accrued expenses and other liabilities – (variable interest entities $249.3 million and $241.9 million, respectively)
636,094

726,724

Cash distributions and losses in excess of investments in unconsolidated entities
105,719

150,592

Total Liabilities
4,317,193

4,443,598

Commitments and Contingencies


Equity
 
 
Stockholders’ Equity
 
 
Preferred stock – $.01 par value, respectively; 20,000,000 shares authorized, no shares issued


Common stock – $.01 par value
 
 
Class A, 371,000,000 shares authorized, 265,307,748 and 239,937,796 shares issued and outstanding, respectively
2,653

2,399

Class B, convertible, 0 and 56,000,000 shares authorized, 0 and 18,788,169 shares issued and outstanding, respectively

188

Total common stock
2,653

2,587

Additional paid-in capital
2,532,432

2,483,275

Retained earnings
831,244

812,386

Stockholders’ equity before accumulated other comprehensive loss
3,366,329

3,298,248

Accumulated other comprehensive loss
(10,631
)
(14,410
)
Total Stockholders’ Equity
3,355,698

3,283,838

Noncontrolling interest
446,057

501,161

Total Equity
3,801,755

3,784,999

Total Liabilities and Equity
$
8,118,948

$
8,228,597


The accompanying notes are an integral part of these consolidated financial statements.
2

Forest City Realty Trust, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
2016
 
2017
2016
 
(in thousands, except per share data)
Revenues
 
 
 
 
 
Rental
$
167,682

$
162,257

 
$
496,095

$
487,986

Tenant recoveries
26,671

33,755

 
80,735

93,989

Service and management fees
8,152

17,027

 
29,642

38,220

Parking and other
9,253

14,166

 
34,212

43,564

Land sales
21,786

10,325

 
45,308

22,479

Military Housing


 

3,518

Total revenues
233,544

237,530

 
685,992

689,756

Expenses
 
 
 
 
 
Property operating and management
71,961

87,460

 
228,912

258,815

Real estate taxes
21,748

21,682

 
64,305

67,748

Ground rent
3,837

3,780

 
11,491

10,866

Cost of land sales
13,301

3,148

 
22,996

5,190

Military Housing operating


 

2,730

Corporate general and administrative
16,480

17,917

 
46,081

51,779

Organizational transformation and termination benefits
2,633

8,092

 
14,021

22,493

 
129,960

142,079

 
387,806

419,621

Depreciation and amortization
60,194

62,892

 
189,496

188,521

Write-offs of abandoned development projects and demolition costs

10,058

 
1,596

10,058

Impairment of real estate
44,288

142,261

 
44,288

156,825

Total expenses
234,442

357,290

 
623,186

775,025

Operating income (loss)
(898
)
(119,760
)
 
62,806

(85,269
)
 
 
 
 
 
 
Interest and other income
20,361

11,980

 
40,529

32,665

Interest expense
(31,597
)
(34,060
)
 
(88,473
)
(101,130
)
Amortization of mortgage procurement costs
(1,338
)
(1,314
)
 
(4,067
)
(4,395
)
Loss on extinguishment of debt


 
(2,843
)
(29,084
)
Earnings (loss) before income taxes and earnings from unconsolidated entities
(13,472
)
(143,154
)
 
7,952

(187,213
)
Earnings (loss) from unconsolidated entities
 
 
 
 
 
Equity in earnings
8,295

6,433

 
23,834

25,520

Net gain on disposition of interest in unconsolidated entities
28,828


 
81,782

12,613

Impairment
(10,600
)
(306,400
)
 
(10,600
)
(306,400
)
 
26,523

(299,967
)
 
95,016

(268,267
)
Earnings (loss) before income taxes
13,051

(443,121
)
 
102,968

(455,480
)
Income tax expense (benefit) of taxable REIT subsidiaries
 
 
 
 
 
Current
304

525

 
4,817

1,774

Deferred


 

393

 
304

525

 
4,817

2,167

Earnings (loss) before gains on disposal of real estate
12,747

(443,646
)
 
98,151

(457,647
)
Net gain (loss) on disposition of interest in development project


 
(113
)
136,117

Net gain (loss) on disposition of full or partial interest in rental properties, net of tax
(256
)
14,067

 
13,573

103,085

Earnings (loss) from continuing operations
12,491

(429,579
)
 
111,611

(218,445
)
Discontinued operations, net of tax
 
 
 
 
 
Operating loss from rental property


 

(1,126
)
Gain on disposition of disposal group


 

64,553

Equity in earnings (loss)


 

(822
)
 


 

62,605

Net earnings (loss)
12,491

(429,579
)
 
111,611

(155,840
)
Noncontrolling interests, gross of tax
 

 
 
 
Earnings from continuing operations attributable to noncontrolling interests
(7,037
)
(1,282
)
 
(8,487
)
(5,163
)
Loss from discontinued operations attributable to noncontrolling interests


 

776

 
(7,037
)
(1,282
)
 
(8,487
)
(4,387
)
Net earnings (loss) attributable to Forest City Realty Trust, Inc.
$
5,454

$
(430,861
)
 
$
103,124

$
(160,227
)
 
 
 
 
 
 
Basic earnings per common share
 
 
 
 
 
Earnings (loss) from continuing operations attributable to common stockholders
$
0.02

$
(1.67
)
 
$
0.39

$
(0.87
)
Earnings from discontinued operations attributable to common stockholders


 

0.25

Net earnings (loss) attributable to common stockholders
$
0.02

$
(1.67
)
 
$
0.39

$
(0.62
)
Diluted earnings per common share
 
 
 
 
 
Earnings (loss) from continuing operations attributable to common stockholders
$
0.02

$
(1.67
)
 
$
0.39

$
(0.87
)
Earnings from discontinued operations attributable to common stockholders


 

0.25

Net earnings (loss) attributable to common stockholders
$
0.02

$
(1.67
)
 
$
0.39

$
(0.62
)

The accompanying notes are an integral part of these consolidated financial statements.
3

Forest City Realty Trust, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)

 
Three Months Ended September 30,
 
2017
2016
 
(in thousands)
Net earnings (loss)
$
12,491

$
(429,579
)
Other comprehensive income:
 
 
Foreign currency translation adjustments


Unrealized net gains on interest rate derivative contracts
1,240

11,302

Total other comprehensive income
1,240

11,302

Comprehensive income (loss)
13,731

(418,277
)
Comprehensive income attributable to noncontrolling interest
(7,041
)
(1,286
)
Total comprehensive income (loss) attributable to Forest City Realty Trust, Inc.
$
6,690

$
(419,563
)
 
 
 
 
Nine Months Ended September 30,
 
2017
2016
 
(in thousands)
Net earnings (loss)
$
111,611

$
(155,840
)
Other comprehensive income:
 
 
Foreign currency translation adjustments

95

Unrealized net gains on interest rate derivative contracts
3,790

19,886

Total other comprehensive income
3,790

19,981

Comprehensive income (loss)
115,401

(135,859
)
Comprehensive income attributable to noncontrolling interest
(8,498
)
(4,399
)
Total comprehensive income (loss) attributable to Forest City Realty Trust, Inc.
$
106,903

$
(140,258
)

The accompanying notes are an integral part of these consolidated financial statements.
4


Forest City Realty Trust, Inc. and Subsidiaries
Consolidated Statements of Equity
(Unaudited)
 
 
 
 
 
 
 
Accumulated
 
 
 
Common Stock
Additional
 
Other
 
 
 
Class A
Class B
Paid-In
Retained
Comprehensive
Noncontrolling
 
 
Shares
Amount
Shares
Amount
Capital
Earnings
(Loss) Income
Interest
Total
 
(in thousands)

Balances at December 31, 2015
238,949

$
2,389

18,805

$
188

$
2,524,420

$
1,059,240

$
(67,905
)
$
456,224

$
3,974,556

Net loss, net of $776 loss attributable to redeemable noncontrolling interest
 
 
 
 
 
(158,402
)
 
6,078

(152,324
)
Other comprehensive income
 
 
 
 
 
 
53,495

15

53,510

Common stock dividends
 
 
 
 
 
(88,452
)
 
 
(88,452
)
Conversion of Class B common stock to Class A common stock
17


(17
)

 
 
 
 

Cost incurred for planned conversion of Class B to Class A common stock
 
 
 
 
(3,896
)
 
 
 
(3,896
)
Restricted stock and performance shares vested
1,267

12

 
 
(12
)
 
 
 

Repurchase of Class A common stock
(390
)
(3
)
 
 
(7,942
)
 
 
 
(7,945
)
Exercise of stock options
86

1

 
 
1,157

 
 
 
1,158

Stock-based compensation
 
 
 
 
25,463

 
 
 
25,463

Issuance of Class A common stock in exchange for 2016 Senior Notes
9


 
 
186

 
 
 
186

Acquisition of partners’ noncontrolling interest in consolidated subsidiaries
 
 
 
 
(56,101
)
 
 
19,916

(36,185
)
Contributions from noncontrolling interests
 
 
 
 
 
 
 
50,506

50,506

Distributions to noncontrolling interests
 
 
 
 
 
 
 
(31,578
)
(31,578
)
Balances at December 31, 2016
239,938

$
2,399

18,788

$
188

$
2,483,275

$
812,386

$
(14,410
)
$
501,161

$
3,784,999

Net earnings
 
 
 
 
 
103,124

 
8,487

111,611

Other comprehensive income
 
 
 
 
 
 
3,779

11

3,790

Common stock dividends
 
 
 
 
 
(84,266
)
 
 
(84,266
)
Conversion of Class B common stock to Class A common stock
24,612

246

(18,788
)
(188
)
(58
)
 
 
 

Cost incurred for conversion of Class B to Class A common stock
 
 
 
 
(9,305
)
 
 
 
(9,305
)
Restricted stock vested
763

8

 
 
(8
)
 
 
 

Repurchase of Class A common stock
(252
)
(2
)
 
 
(5,596
)
 
 
 
(5,598
)
Exercise of stock options
91

1

 
 
1,497

 
 
 
1,498

Issuance of Class A common stock under the deferred compensation plan for non-employee directors
13


 
 
309

 
 
 
309

Stock-based compensation
 
 
 
 
21,294

 
 
 
21,294

Exchange of 2006 Class A Common Units for Class A common stock
143

1

 
 
7,287

 
 
(7,288
)

Exchange of 2006 Class A Common Units for rental property
 
 
 
 
22,805

 
 
(35,037
)
(12,232
)
Issuance of Class A common stock in exchange for 2018 Senior Notes


 
 
1

 
 
 
1

Acquisition of partners’ noncontrolling interest in consolidated subsidiaries
 
 
 
 
10,931

 
 
(10,931
)

Contributions from noncontrolling interests
 
 
 
 
 
 
 
18,499

18,499

Distributions to noncontrolling interests
 
 
 
 
 
 
 
(28,845
)
(28,845
)
Balances at September 30, 2017 (Unaudited)
265,308

$
2,653


$

$
2,532,432

$
831,244

$
(10,631
)
$
446,057

$
3,801,755


The accompanying notes are an integral part of these consolidated financial statements.
5

Forest City Realty Trust, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)

 
Nine Months Ended September 30,
 
2017
2016
 
(in thousands)
Net earnings (loss)
$
111,611

$
(155,840
)
Depreciation and amortization
189,496

188,521

Amortization of mortgage procurement costs
4,067

4,395

Impairment of real estate
44,288

156,825

Impairment of unconsolidated entities
10,600

306,400

Write-offs of abandoned development projects
1,596

10,058

Loss on extinguishment of debt
2,843

29,084

Net (gain) loss on disposition of interest in development project
113

(136,117
)
Net gain on disposition of full or partial interest in rental properties, net of tax
(13,573
)
(103,085
)
Deferred income tax expense

393

Earnings from unconsolidated entities
(105,616
)
(38,133
)
Stock-based compensation expense
14,893

15,160

Amortization and mark-to-market adjustments of derivative instruments
773

4,162

Operating distributions from unconsolidated entities
53,388

57,256

Non-cash operating expenses and deferred taxes included in discontinued operations

(309
)
Loss from unconsolidated entities included in discontinued operations

1,400

Gain on disposition of disposal group included in discontinued operations, net of tax

(64,553
)
Decrease (increase) in land inventory
12,462

(4,370
)
Increase in accounts receivable
(15,671
)
(11,743
)
Decrease in other assets
5,056

9,629

Decrease in accounts payable, accrued expenses and other liabilities
(3,472
)
(79,099
)
Net cash provided by operating activities
312,854

190,034

Cash flows from investing activities
 
 
Capital expenditures
(306,937
)
(433,659
)
Capital expenditures of assets included in discontinued operations

(690
)
Payment of lease procurement costs
(9,297
)
(9,218
)
Increase in notes receivable
(31,047
)
(43,348
)
Payments on notes receivable

58,000

Decrease in restricted cash
11,610

12,897

Cash held at Arena upon disposition

(28,041
)
Proceeds from disposition of rental properties or development project
32,672

545,289

Contributions to unconsolidated entities
(56,590
)
(114,139
)
Distributions from unconsolidated entities
76,942

26,756

Net cash (used in) provided by investing activities
(282,647
)
13,847

Cash flows from financing activities
 
 
Proceeds from nonrecourse mortgage debt and notes payable
159,174

260,871

Principal payments on nonrecourse mortgage debt and notes payable
(57,309
)
(85,143
)
Redemption of Senior Notes due 2018 & 2020

(157,644
)
Payments to noteholders related to exchange of convertible senior notes

(24,376
)
Transaction costs related to exchange of convertible senior notes

(2,460
)
Payment of costs incurred for conversion of Class B to Class A common stock
(11,266
)

Payment of deferred financing costs
(2,264
)
(5,332
)
Repurchase of Class A common stock
(5,598
)
(7,825
)
Exercise of stock options
1,498

1,158

Dividends paid to stockholders
(84,266
)
(72,832
)
Acquisitions of noncontrolling interests

(38,968
)
Contributions from noncontrolling interests
18,499

41,639

Distributions to noncontrolling interests
(29,619
)
(19,476
)
Net cash used in financing activities
(11,151
)
(110,388
)
Net increase in cash and equivalents
19,056

93,493

Cash and equivalents at beginning of period (including cash held for sale - 2016)
174,619

293,720

Cash and equivalents at end of period
$
193,675

$
387,213


The accompanying notes are an integral part of these consolidated financial statements.
6

Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)


A. Accounting Policies
General
Forest City Realty Trust, Inc. (with its subsidiaries, the “Company”) principally engages in the operation, development, management and acquisition of office, apartment and retail real estate and land throughout the United States. The Company had approximately $8.1 billion of consolidated assets in 20 states and the District of Columbia at September 30, 2017. The Company’s core markets include Boston, Chicago, Dallas, Denver, Los Angeles, Philadelphia, and the greater metropolitan areas of New York City, San Francisco and Washington D.C. The Company has regional offices in Boston, Dallas, Denver, Los Angeles, New York City, San Francisco, Washington, D.C., and the Company’s corporate headquarters in Cleveland, Ohio.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q, and should be read in conjunction with the consolidated financial statements and related notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2016. The results of interim periods are not necessarily indicative of results for the full year or any subsequent period. In management’s opinion, all adjustments (consisting solely of normal recurring matters) necessary for a fair statement of financial position, results of operations and cash flows as of and for the periods presented have been included.
Company Operations
The Company is organized as a Real Estate Investment Trust (“REIT”) for federal income tax purposes. The Company holds substantially all of its assets, and conducts substantially all of its business, through Forest City Enterprises, L.P. (the “Operating Partnership”). The Company is the sole general partner of the Operating Partnership and, as of September 30, 2017, the Company owns all of the limited partnership interests in the Operating Partnership.
The Company holds and operates certain of its assets through one or more taxable REIT subsidiaries (“TRSs”). A TRS is a subsidiary of a REIT subject to applicable corporate income tax. The Company’s use of TRSs enables it to continue to engage in certain businesses while complying with REIT qualification requirements and allows the Company to retain income generated by these businesses for reinvestment without the requirement of distributing those earnings. The primary businesses held in TRSs include 461 Dean Street, an apartment building in Brooklyn, New York, South Bay Galleria, Antelope Valley Mall and Mall at Robinson, regional malls in Redondo Beach, California, Palmdale, California and Pittsburgh, Pennsylvania, respectively, Pacific Park Brooklyn project, land development operations, Barclays Center arena (sold in January 2016), the Nets (sold in January 2016), and military housing operations (sold in February 2016). In the future, the Company may elect to reorganize and transfer certain assets or operations from its TRSs to other subsidiaries, including qualified REIT subsidiaries.
Segments
The Company is organized around real estate operations, real estate development and corporate support functions.
Real Estate Operations represents the performance of the Company’s core rental real estate portfolio and is comprised of the following reportable operating segments:
Office - owns, acquires and operates office and life science buildings.
Apartments - owns, acquires and operates upscale and middle-market apartments, adaptive re-use developments and subsidized senior housing.
Retail - owns, acquires and operates amenity retail within our mixed-use projects, regional malls and specialty/urban retail centers.
The remaining reportable operating segments consist of the following:
Development - develops and constructs office and life science buildings, apartments, condominiums, amenity retail, regional malls, specialty/urban retail centers and mixed-use projects. The Development segment includes recently opened operating properties prior to stabilization and the horizontal development and sale of land to residential, commercial and industrial customers primarily at its Stapleton project in Denver, Colorado.
Corporate - provides executive oversight and various support services for Operations, Development and Corporate employees.
Other - owned and operated several non-core investments, including the Barclays Center, a sports and entertainment arena located in Brooklyn, New York (“Arena”) (sold in January 2016), the Company’s equity method investment in the Brooklyn Nets (the “Nets”) (sold in January 2016), and military housing operations (sold in February 2016).

7

Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

Segment Transfers
The Development segment includes projects in development and projects under construction along with recently opened operating properties prior to stabilization. Projects will be reported in their applicable operating segment (Office, Apartments or Retail) beginning on January 1 of the year following stabilization. Therefore, the Development segment will continue to report results from recently opened properties until the year-end following initial stabilization. The Company generally defines stabilized properties as achieving 92% or greater occupancy or having been open and operating for one or two years, depending on the size of the project. Once a stabilized property is transferred to the applicable Operations segment on January 1, it will be considered “comparable” beginning on the following January 1.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related notes. Some of the critical estimates made by the Company include, but are not limited to, determination of the primary beneficiary of variable interest entities (“VIEs”), estimates of useful lives for long-lived assets, reserves for collection on accounts and notes receivable and other investments, gain on change of control of interests, impairment of real estate and other-than-temporary impairments on equity method investments. Actual results could differ from those estimates.
Reclassifications
Certain prior period amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year’s presentation.
Variable Interest Entities
As of September 30, 2017, the Company determined it was the primary beneficiary of 43 VIEs. The creditors of the consolidated VIEs do not have recourse to the Company’s general credit. As of September 30, 2017, the Company determined it was not the primary beneficiary of 36 VIEs and accounts for these interests as equity method investments. The maximum exposure to loss of these unconsolidated VIEs is limited to the Company’s investment balance of $166,000,000 as of September 30, 2017.
New Accounting Guidance
The following accounting pronouncements were adopted during the nine months ended September 30, 2017:
In March 2016, the Financial Accounting Standards Board (“FASB”) issued an amendment to the accounting guidance to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The adoption of this guidance effective January 1, 2017 did not have a material impact on the Company’s consolidated financial statements.
In August 2016, the FASB issued an amendment to the accounting guidance on the classification of certain transactions on the statement of cash flows where diversity in practice currently exists. The guidance addresses certain specific cash flow issues, including, but not limited to, debt prepayment or debt extinguishment costs and distributions received from equity method investments. This guidance is effective for fiscal years, and for interim reporting periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, and the Company has elected to adopt this guidance effective January 1, 2017. The adoption of this guidance did not have a material impact on the Company’s Consolidated Statements of Cash Flows.
In January 2017, the FASB issued an amendment to the accounting guidance for business combinations to clarify the definition of a business. The objective of this guidance is to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This guidance is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted, and the Company has elected to adopt this guidance effective January 1, 2017. The impact on the Company’s consolidated financial statements resulting from the adoption of this guidance will depend on the Company’s level of acquisitions, but will most likely increase the number of acquisitions accounted for as asset acquisitions rather than business combinations.

8

Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

The following new accounting pronouncements will be adopted on their respective effective dates:
In May 2014, the FASB issued an amendment to the accounting guidance for revenue from contracts with customers. The core principle of this guidance is an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance defines steps an entity should apply to achieve the core principle. This guidance is effective for annual reporting periods beginning after December 15, 2017 and interim reporting periods within that annual period and allows for both retrospective and modified retrospective methods of adoption. Early adoption was permitted for annual periods beginning after December 15, 2016. The Company intends to adopt the guidance using the modified retrospective method. Rental revenue from lease contracts represents a significant portion of our total revenues and is a specific scope exception provided by this guidance. However, common area maintenance and other tenant reimbursable expenses provided to the lessee are considered a non-lease component and will be required to be separated from rental revenue and recorded on a separate financial statement line item upon adoption of the new accounting guidance on leases discussed below. The Company has finalized a project plan, including determination of each applicable revenue stream required to be analyzed within the scope of this accounting guidance. The Company has completed its analysis of service and management fee revenues and parking and other revenues and has concluded the adoption will not have any impact on the method of revenue recognition. The Company continues the process of reviewing various contracts (primarily consisting of land and real estate sales) to analyze the overall impact the adoption will have on the Company’s Statement of Operations.
In February 2016, the FASB issued an amendment to the accounting guidance on leases. This guidance sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new guidance requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The guidance is expected to impact the Company’s consolidated financial statements as the Company has certain operating and land lease arrangements for which it is the lessee. The new guidance supersedes the previous leases accounting standard. This guidance is effective for fiscal years, and for interim reporting periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The adoption of the new guidance is expected to have an impact on the consolidated financial statements as the Company has material ground lease arrangements, as well as other lease agreements. In addition, the Company believes it will be precluded from capitalizing its internal leasing costs, as the costs are not expected to be directly incremental to the successful execution of a lease, as required by the new guidance. The Company is in the process of evaluating the impact of this guidance.
In November 2016, the FASB issued an amendment to the accounting guidance on the classification and presentation of changes in restricted cash on the statement of cash flows. The guidance requires restricted cash to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown in the statement of cash flows. This guidance is effective for fiscal years, and for interim reporting periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The guidance should be adopted using a retrospective transition method. The Company is currently in the process of evaluating the impact of adopting this guidance on its Consolidated Statements of Cash Flows.
In February 2017, the FASB issued an amendment to the accounting guidance on the derecognition of nonfinancial assets. The guidance clarifies the definition of an in substance nonfinancial asset and the recognition of gains and losses from the transfer of nonfinancial assets and for partial sales of nonfinancial assets, which would include real estate. This guidance is effective for fiscal years, and for interim reporting periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The Company is in the process of evaluating the impact of this guidance.
In August 2017, the FASB issued an amendment to the accounting guidance on derivatives and hedging activities. The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. The transition method is a modified retrospective approach that will require the Company to recognize the cumulative effect of initially applying the guidance as an adjustment to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that an entity adopts the update. This guidance is effective for fiscal years, and for interim reporting periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company is in the process of evaluating the impact of this guidance.


9

Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

Related Party Transactions
The Company and certain of its affiliates entered into a Master Contribution and Sale Agreement (the “Master Contribution Agreement”) with Bruce C. Ratner (“Mr. Ratner”), Executive Vice President, and certain entities and individuals affiliated with Mr. Ratner (the “BCR Entities”) in August 2006 to purchase their interests in a total of 30 retail, office and residential operating properties and service companies in the Greater New York City metropolitan area. The Company issued Class A Common Units (“2006 Units”) in a jointly-owned, limited liability company in exchange for their interests. The 2006 Units may be exchanged for one of the following forms of consideration at the Company’s sole discretion: (i) an equal number of shares of the Company’s Class A common stock or, (ii) cash based on a formula using the average closing price of the Class A common stock at the time of conversion or, (iii) a combination of cash and shares of the Company’s Class A common stock. If the Company elects to pay cash as full or partial consideration in exchange for 2006 Units, the exchanging unit holder(s) may elect to redeem such 2006 Units for an in-kind distribution of one or more properties in lieu of cash, provided certain conditions set forth under the Exchange Rights Agreement adopted pursuant to the Master Contribution Agreement are met.   The Company may, in its sole discretion, elect not to proceed with an in-kind redemption if the Company determines in good faith that the Company will suffer any adverse effects from proceeding with the in-kind redemption. The Company has no rights to redeem or repurchase the 2006 Units. Pursuant to the Master Contribution Agreement, certain projects under development would remain owned jointly until each project was completed and achieved “stabilization.” Upon stabilization, each project would be valued and the Company, in its discretion, would choose among various ownership options for the project. In connection with the Master Contribution Agreement, the parties entered into the Tax Protection Agreement (the “Tax Protection Agreement”). The Tax Protection Agreement indemnified the BCR Entities included in the initial closing against taxes payable by reason of any subsequent sale of certain operating properties and expires in November 2018.
Pursuant to the Master Contribution Agreement, 2006 Units not exchanged are entitled to a distribution preference payment equal to the dividends paid on an equivalent number of shares of the Company’s common stock. The Company recorded $219,000 and $553,000 during the three and nine months ended September 30, 2017, respectively, and $116,000 and $543,000 during the three and nine months ended September 30, 2016, respectively, related to the distribution preference payment, which is classified as noncontrolling interest expense on the Company’s Consolidated Statement of Operations.
As a result of the January 2017 sale of Shops at Bruckner Boulevard, an unconsolidated specialty retail center in Bronx, New York, the Company accrued $482,000 related to a tax indemnity payment due to the BCR Entities in accordance with the terms of the Tax Protection Agreement. The Company paid the BCR Entities $361,000 during the nine months ended September 30, 2017 and expects to remit the remaining quarterly installment during the three months ended December 31, 2017.
As a result of the January 2016 sale of 625 Fulton Avenue, a development site in Brooklyn, New York, the Company accrued $6,238,000 related to a tax indemnity payment due to the BCR Entities in accordance with the terms of the Tax Protection Agreement. Installments totaling $4,680,000 were paid during the year ended December 31, 2016. The remaining amount was included in accounts payable, accrued expenses and other liabilities at December 31, 2016 and was paid in January 2017.
In August 2017, certain BCR Entities exchanged 686,865 of the 2006 Units. The Company assigned and transferred its ownership interest in 500 Sterling Place, a previously 100% owned apartment community in Brooklyn, New York, for the exchanged 2006 Units. The agreed upon value of the exchanged property was based on an independent third party appraisal and both parties agreed to use $20 as the basis in determining the number of 2006 Units to be exchanged. The Company accounted for the non-cash exchange as a purchase of noncontrolling interests, resulting in a reduction of noncontrolling interests of $35,037,000, a reduction of completed rental properties, net of $45,044,000, a reduction of nonrecourse mortgage debt of $34,382,000 and an increase to additional paid-in capital of $22,805,000, accounting for the agreed upon value of the exchanged property and the difference between the value of consideration exchanged and the historical cost basis of the noncontrolling interest balance. In September 2017, the Company made a $222,000 payment to the BCR entities for the overpayment of estimated closing costs related to the August 2017 exchange transaction. At September 30, 2017 and December 31, 2016, 1,111,044 and 1,940,788 of the 2006 Units were outstanding, respectively.
In March 2017, certain BCR Entities exchanged 142,879 of the 2006 Units. The Company issued 142,879 shares of its Class A common stock for the exchanged 2006 Units. The Company accounted for the exchange as a purchase of noncontrolling interests, resulting in a reduction of noncontrolling interests of $7,288,000, an increase to Class A common stock of $1,000 and a combined increase to additional paid-in capital of $7,287,000, accounting for the fair value of common stock issued and the difference between the fair value of consideration exchanged and the historical cost basis of the noncontrolling interest balance.
During the three months ended September 30, 2017, the Company distributed $997,000 to Mr. Ratner, which represented his share of the retainage release of a development fee earned during 2005 on a fee project for building the Kings County Supreme Court for New York City. The retainage was being held until the final certificate of occupancy was issued. The Company obtained the final certificate of occupancy and collected the retainage during the three months ended September 30, 2017, at which time Mr. Ratner’s share was distributed.


10

Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

In December 2016, the Company’s Board of Directors approved, and the Company entered into a reclassification agreement with RMS Limited Partnership (“RMS”), the former controlling stockholder of the Company's Class B shares, (the “Reclassification Agreement”). The Reclassification Agreement provided that, at the Effective Time, as defined in the Reclassification Agreement, following the satisfaction of the conditions thereto, each share of Class B Common Stock issued and outstanding immediately prior to the Effective Time would be reclassified and exchanged into 1.31 shares of Class A Common Stock, with a right to cash in lieu of fractional shares (the “Reclassification”). At the Company’s Annual Meeting of Stockholders held on June 9, 2017, the stockholders approved the Reclassification. See Note ICapital Stock for additional information.
In October 2016, the Company entered into a Reimbursement Agreement with RMS (the “Reimbursement Agreement”). The Company agreed to reimburse RMS (together with its officers, directors, employees, beneficiaries, trustees, representatives and agents)(“Reimbursed Persons”) for reasonable and documented fees and out-of-pocket expenses of RMS’s financial, legal and public relations advisors incurred in evaluating and negotiating the Reclassification. In addition, the Company agreed to reimburse the Reimbursed Persons for (i) reasonable costs and expenses incurred in connection with any Proceeding (as defined in the Reimbursement Agreement) to which such Reimbursed Person is a party or otherwise involved in and (ii) any losses, damages or liabilities actually and reasonably suffered or incurred in any such Proceeding by a Reimbursed Person. Amounts incurred subject to the Reimbursement Agreement were approximately $4,060,000 and $1,207,000 during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively. See Note ICapital Stock for additional information.
During the three months ended September 30, 2017, Charles A. Ratner, the Company’s former Chairman of the Board and brother of James A. Ratner, the Company’s current Chairman of the Board, purchased a life insurance policy from the Company for $826,000, which represented the book value and net cash surrender value of the policy at the time of the transaction.
Accumulated Other Comprehensive Loss
The following table summarizes the components of accumulated other comprehensive income (loss) (“accumulated OCI”):
 
September 30, 2017
December 31, 2016
 
(in thousands)
Unrealized losses on interest rate derivative contracts (1) 
$
10,683

$
14,473

Noncontrolling interest
(52
)
(63
)
Accumulated Other Comprehensive Loss
$
10,631

$
14,410

(1)
Includes unrealized losses on interest rate swaps accounted for as hedges held by certain of the Company’s equity method investees.
The following table summarizes the changes, net of noncontrolling interest, of accumulated OCI by component:
 
Foreign Currency Translation
Interest Rate Contracts
Total
 
(in thousands)
Nine Months Ended September 30, 2017
 
 
 
Balance, January 1, 2017
$

$
(14,410
)
$
(14,410
)
Loss recognized in accumulated OCI

(385
)
(385
)
Loss reclassified from accumulated OCI

4,164

4,164

Total other comprehensive income

3,779

3,779

Balance, September 30, 2017
$

$
(10,631
)
$
(10,631
)
Nine Months Ended September 30, 2016
 
 
 
Balance, January 1, 2016
$
(95
)
$
(67,810
)
$
(67,905
)
Gain (loss) recognized in accumulated OCI
95

(10,184
)
(10,089
)
Loss reclassified from accumulated OCI

30,058

30,058

Total other comprehensive income
95

19,874

19,969

Balance, September 30, 2016
$

$
(47,936
)
$
(47,936
)

11

Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

The following table summarizes losses reclassified from accumulated OCI and their location on the Consolidated Statements of Operations:
Accumulated OCI Components
Loss Reclassified from Accumulated OCI
 
Location on Consolidated Statements of Operations
 
(in thousands)
 
 
Nine Months Ended September 30, 2017
 
 
 
Interest rate contracts
$
2,194

 
Interest expense
Interest rate contracts
1,981

 
Earnings (loss) from unconsolidated entities
 
4,175

 
Total before noncontrolling interest
 
(11
)
 
Noncontrolling interest
 
$
4,164

 
Loss reclassified from accumulated OCI
Nine Months Ended September 30, 2016
 
 
 
Interest rate contracts
$
27,536

 
Interest expense
Interest rate contracts
113

 
Net gain on disposition of full or partial interest in rental properties, net of tax
Interest rate contracts
2,421

 
Earnings (loss) from unconsolidated entities
 
30,070

 
Total before noncontrolling interest
 
(12
)
 
Noncontrolling interest
 
$
30,058

 
Loss reclassified from accumulated OCI

12

Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

Noncontrolling Interest
During the nine months ended September 30, 2017, the Company exercised a promote option in the Arizona State Retirement System joint venture agreement, whereby the Company increased its ownership in the joint venture from 25.00% to 29.63%, as a result of the joint venture’s cumulative financial performance and estimated value creation. The non-cash transaction resulted in a decrease to noncontrolling interest and a corresponding increase to additional paid-in capital of $10,931,000.
The Company owned an equity interest in Barclays Center arena and the Nets through the Company’s consolidated subsidiary Nets Sports & Entertainment (“NS&E”). During the nine months ended September 30, 2016, subsequent to the sale of Barclays Center and the Nets, the Company purchased NS&E’s partners’ interest for $38,951,000. This cash payment together with the partners’ historical noncontrolling interest debit balance resulted in a decrease to additional paid-in capital as reflected on the Consolidated Statement of Equity.
Organizational Transformation and Termination Benefits
The following table summarizes the components of organizational transformation and termination benefits:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
2016
 
2017
2016
 
(in thousands)
Termination benefits
$
1,764

$
2,710

 
$
10,501

$
10,273

Shareholder activism costs
869


 
3,520


Reorganization costs

5,382

 

11,357

REIT conversion costs


 

863

Total
$
2,633

$
8,092

 
$
14,021

$
22,493

For the periods presented, the Company experienced workplace reductions and recorded the associated termination benefits expenses (outplacement and severance payments based on years of service and other defined criteria) for each occurrence.
Shareholder activism costs are comprised of advisory, legal and other professional fees associated with activism matters. Reorganization costs consist primarily of consulting and other professional fees related to the 2016 restructuring of the organization by function (operations, development and corporate support). REIT conversion costs consist primarily of legal, accounting, consulting and other professional fees. The Company has segregated these costs along with termination benefits and reported these amounts as organizational transformation and termination benefits in the Consolidated Statements of Operations and reported in the Corporate segment.
The following table summarizes the activity in the accrued severance balance for termination benefits:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
2016
 
2017
2016
 
(in thousands)

Accrued severance benefits, beginning balance
$
11,710

$
11,277

 
$
9,969

$
16,338

Termination benefits expense
1,764

2,710

 
10,501

10,273

Payments
(4,615
)
(3,394
)
 
(11,611
)
(16,018
)
Accrued severance benefits, ending balance
$
8,859

$
10,593

 
$
8,859

$
10,593


13

Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

Supplemental Non-Cash Disclosures
The following table summarizes the impact to the applicable balance sheet line items as a result of various non-cash transactions. Non-cash transactions primarily include dispositions of operating properties whereby the nonrecourse mortgage debt is assumed by the buyer or otherwise extinguished at closing, exchanges of 2006 Units or senior notes for Class A common stock or rental property, changes in consolidation methods of fully consolidated properties due to the occurrence of triggering events including, but not limited to, disposition of a partial interest in rental properties, change in construction payables and other capital expenditures, notes receivable from the sale of rental properties or development project, redemption of redeemable noncontrolling interest, adoption of new accounting guidance for debt issuance costs and capitalization of stock-based compensation granted to employees directly involved with the development and construction of real estate.
 
Nine Months Ended September 30,
 
2017
2016
 
(in thousands)
Non-cash changes to balance sheet - Investing Activities
 
 
Projects under construction and development
$
(51,996
)
$
(37,542
)
Completed rental properties
(126,810
)
(1,173,460
)
Restricted cash
3,331

(12,265
)
Notes receivable
2,500

277,050

Investments in and advances to affiliates - due to dispositions or change in control
603

125,741

Investments in and advances to affiliates - other activity
(218
)
2,708

Total non-cash effect on investing activities
$
(172,590
)
$
(817,768
)
Non-cash changes to balance sheet - Financing Activities
 
 
Nonrecourse mortgage debt and notes payable, net
$
(109,751
)
$
(846,965
)
Convertible senior debt, net
(1
)
(125
)
Class A common stock
59


Additional paid-in capital
49,335

(12,065
)
Redeemable noncontrolling interest

(159,202
)
Noncontrolling interest
(54,129
)
19,059

Total non-cash effect on financing activities
$
(114,487
)
$
(999,298
)

B. Notes Receivable
The following table summarizes the Company’s interest bearing notes receivable:
 
September 30, 2017
December 31, 2016
Maturity Date
Weighted Average Interest Rate
 
(in thousands)
 
 
Stapleton
$
195,846

$
141,034

Various
8.56%
The Nets sale
125,100

125,100

January 2021
4.50%
Barclays Center sale
92,600

92,600

January 2019
4.50%
Other
16,544

24,429

Various
4.94%
Total
$
430,090

$
383,163

 
 


14

Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

C. Nonrecourse Mortgage Debt and Notes Payable, Net
The following table summarizes the nonrecourse mortgage debt and notes payable, net maturities as of September 30, 2017:
Years Ending December 31,
 
 
(in thousands)
2017
$
190,767

2018
494,058

2019
474,981

2020
228,929

2021
194,944

Thereafter
1,578,094

 
3,161,773

Net unamortized mortgage procurement costs
(32,484
)
Total
$
3,129,289


D. Revolving Credit Facility
In November 2015, the Company entered into a Revolving Credit Agreement which provided for total available borrowings of $500,000,000 (increased to $600,000,000 in May 2016) and contains an accordion provision, subject to bank approval, allowing the Company to increase total available borrowings to $750,000,000 (“Revolving Credit Facility”).
The Revolving Credit Facility matures in November 2019, and provides for two six-month extension periods, subject to certain conditions. Borrowings bear interest at the Company’s option at either London Interbank Offered Rate (“LIBOR”) (1.23% at September 30, 2017) plus a margin of 1.15% - 1.85% (1.25% at September 30, 2017) or the Prime Rate (4.25% at September 30, 2017) plus a margin of 0.15% - 0.85% (0.25% at September 30, 2017). In addition, the Revolving Credit Facility is subject to an annual facility fee of 0.20% - 0.35% (0.25% at September 30, 2017) of total available borrowings. Up to $150,000,000 of the available borrowings can be used for letters of credit. The applicable margins and annual facility fee are based on the Company’s total leverage ratio (adjusted quarterly, if applicable).
The Revolving Credit Facility has restrictive covenants, including a prohibition on certain types of dispositions, mergers, consolidations, and limitations on lines of business the Company is allowed to conduct. Additionally, the Revolving Credit Facility contains financial covenants, including the maintenance of a maximum total leverage ratio, maximum secured and unsecured leverage ratios, maximum secured recourse leverage ratio, a minimum fixed charge coverage ratio, and a minimum unencumbered interest coverage ratio (all as specified in the Revolving Credit Agreement). At September 30, 2017, the Company was in compliance with all of these financial covenants.
The following table summarizes available credit on the Revolving Credit Facility:
 
September 30, 2017
December 31, 2016
 
(in thousands)
Total available borrowings
$
600,000

$
600,000

Less:
 
 
Outstanding borrowings


Letters of credit
42,873

44,215

Available credit
$
557,127

$
555,785

As of September 30, 2017 and December 31, 2016, unamortized debt issuance costs related to the Revolving Credit Facility of $2,038,000 and $2,757,000, respectively, are included in other assets on the Consolidated Balance Sheets.


15

Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

E. Term Loan, Net
In May 2016, the Company entered into a Term Loan Credit Agreement which provides a $335,000,000 senior unsecured term loan credit facility (“Term Loan”).
The Term Loan matures in May 2021 and bears interest at the Company’s option at either LIBOR (based on the approximate date of the initial borrowings and adjusted monthly thereafter) (1.24% at September 30, 2017) plus a margin of 1.30% - 2.20% (1.45% at September 30, 2017) or the Prime Rate plus a margin of 0.30% - 1.20% (0.45% at September 30, 2017). The applicable margins are based on the Company’s total leverage ratio. Upon the Company obtaining an investment grade credit rating, established by certain debt rating agencies for the Company’s long term, senior, unsecured non-credit enhanced debt (the “Debt Ratings”), the applicable margin will, at the Company’s election, be based on the Company’s then-current Debt Ratings.
The Term Loan contains identical financial covenants as the Revolving Credit Facility as described in Note DRevolving Credit Facility. Additionally, the Term Loan contains customary events of default provisions, including failure to pay indebtedness, breaches of covenants and bankruptcy or other insolvency events, which could result in the acceleration of all amounts and cancellation of all commitments outstanding under the Term Loan, as well as customary representations and warranties and affirmative and negative covenants.
The following table summarizes outstanding borrowings of the Term Loan, net:
 
September 30, 2017
December 31, 2016
 
(in thousands)
Total outstanding borrowings
$
335,000

$
335,000

Net unamortized debt procurement costs
(1,432
)
(1,732
)
Total
$
333,568

$
333,268


F. Convertible Senior Debt, Net
The following table summarizes the convertible senior debt, net:
 
September 30, 2017
December 31, 2016
 
(in thousands)
4.250% Notes due 2018
$
73,215

$
73,216

3.625% Notes due 2020
40,021

40,021

 
113,236

113,237

Net unamortized debt procurement costs
(713
)
(1,056
)
Total
$
112,523

$
112,181

During the nine months ended September 30, 2016, the Company entered into separate, privately negotiated exchange agreements with certain holders of the Company’s convertible senior notes. Under the terms of the agreements, holders agreed to exchange certain notes for either shares of Class A common stock or cash payments. Under the accounting guidance for induced conversions of convertible debt, additional amounts paid to induce the holders to exchange the notes were expensed resulting in a loss on extinguishment of debt.
The following table summarizes the convertible senior debt transactions completed during the nine months ended September 30, 2016:
Agreement Date
Issuance
Aggregate Principal
Class A Common Shares Issued
Cash Payments to Noteholders
Loss on Extinguishment
 
 
(in thousands, except share data)
January 20, 2016
2016 Senior Notes
$
125

9,298

$

$
59

March 14, 2016
2018 Senior Notes
77,310


90,958

15,370

March 17, 2016
2018 Senior Notes
4,000


4,707

795

March 14, 2016
2020 Senior Notes
76,334


86,858

12,823

Total
$
157,769

9,298

$
182,523

$
29,047

All of the senior debt are unsecured senior obligations and rank equally with all existing and future unsecured indebtedness; however, they are effectively subordinated to all existing and future secured indebtedness and other liabilities of the Company’s subsidiaries to the extent of the value of the collateral securing that other debt.

16

Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

G. Derivative Instruments and Hedging Activities
Risk Management Objective of Using Derivatives
The Company maintains an overall interest rate risk management strategy using derivative instruments to minimize significant unplanned impact on earnings and cash flows caused by interest rate volatility. The strategy uses interest rate swaps and caps having indices related to the pricing of specific liabilities. The Company enters into interest rate swaps to convert floating-rate debt to fixed-rate long-term debt, and vice-versa, depending on market conditions. Interest rate swaps are generally for periods of one to ten years. Interest rate caps are generally for periods of one to three years. The use of interest rate caps is consistent with the Company’s risk management objective to reduce or eliminate exposure to variability in future cash flows primarily attributable to increases in interest rates on its floating-rate debt.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage exposure to interest rate movements. The Company primarily uses interest rate caps and swaps as part of its interest rate risk management strategy. Interest rate caps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an upfront premium. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in accumulated OCI and is subsequently reclassified into earnings during the period the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value is recognized directly in earnings. Ineffectiveness was insignificant during the three and nine months ended September 30, 2017 and 2016. As of September 30, 2017, the Company expects it will reclassify amounts recorded in accumulated OCI into earnings as an increase in interest expense of approximately $4,338,000 within the next twelve months. However, the actual amount reclassified could vary due to future changes in the fair value of these derivatives.
Fair Value Hedges of Interest Rate Risk
The Company enters into total rate of return swaps (“TROR”) on various tax-exempt fixed-rate borrowings. The TROR convert borrowings from a fixed rate to a variable rate. The TROR requires the payment of a variable interest rate, generally equivalent to the Securities Industry and Financial Markets Association (“SIFMA”) rate (0.94% at September 30, 2017) plus a spread. Additionally, the Company has guaranteed the fair value of the underlying borrowings. Fluctuation in the value of the TROR is offset by the fluctuation in the value of the underlying borrowings, resulting in minimal financial impact. At September 30, 2017, the aggregate notional amount of TROR designated as fair value hedging instruments is $555,936,000. The underlying TROR borrowings are subject to a fair value adjustment.

17

Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

Nondesignated Hedges of Interest Rate Risk
The Company uses derivative contracts to hedge certain interest rate risk, even though the contracts do not qualify for, or the Company has elected not to apply, hedge accounting. In these situations, the derivative is recorded at its fair value with changes reflected in earnings.
The Company has certain undesignated TROR where the associated debt is held by an unconsolidated affiliate or unrelated third parties. The change in fair value of these TROR is recognized in earnings. At September 30, 2017, the aggregate notional amount of these TROR is $137,517,000.
In instances where the Company enters into separate derivative instruments effectively hedging the same debt for consecutive annual periods, the duplicate amount of notional is excluded from the following disclosure in an effort to provide information that enables the financial statement user to understand the Company’s volume of derivative activity.

The following table summarizes the fair values and location in the Consolidated Balance Sheets of all derivative instruments:
 
Fair Value of Derivative Instruments
 
Asset Derivatives
(included in Other Assets)
 
Liability Derivatives
(included in Accounts Payable,
Accrued Expenses and Other Liabilities)
 
Current
Notional
Fair Value
 
Current
Notional
Fair Value
 
(in thousands)
 
September 30, 2017
Derivatives Designated as Hedging Instruments
 
 
 
 
 
Interest rate swaps
$
63,591

$
680

 
$
34,248

$
1,253

TROR
319,921

4,695

 
236,015

2,762

Total
$
383,512

$
5,375

 
$
270,263

$
4,015

Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
Interest rate caps
$
69,518

$

 
$

$

TROR
100,551

5,076

 
36,966

11,849

Total
$
170,069

$
5,076

 
$
36,966

$
11,849

 
 
 
 
 
 
 
December 31, 2016
Derivatives Designated as Hedging Instruments
 
 
 
 
 
Interest rate swaps
$
64,248

$
593

 
$
34,666

$
1,504

TROR
235,970

5,008

 
316,015

12,442

Total
$
300,218

$
5,601

 
$
350,681

$
13,946

Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
Interest rate caps
$
69,518

$

 
$

$

TROR
100,800

4,117

 
37,044

12,256

Total
$
170,318

$
4,117

 
$
37,044

$
12,256


18

Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

The following table summarizes the impact of gains and losses related to derivative instruments designated as cash flow hedges included in the accumulated OCI section of the Consolidated Balance Sheets and in equity in earnings and interest expense in the Consolidated Statements of Operations:
 
 
 
Loss Reclassified from Accumulated OCI
Derivatives Designated as
Cash Flow Hedging Instruments
Gain (Loss) Recognized
in OCI
(Effective Portion)
 
Location on Consolidated Statements
of Operations
Effective
Amount
Ineffective
Amount
 
(in thousands)
Three Months Ended September 30, 2017
 
 
 
 
 
Interest rate caps and interest rate swaps
$
(49
)
 
Interest expense
$
(683
)
$
(1
)
 
 
 
Earnings (loss) from unconsolidated entities
(605
)

Total
$
(49
)
 
 
$
(1,288
)
$
(1
)
Nine Months Ended September 30, 2017
 
 
 
 
 
Interest rate caps and interest rate swaps
$
(385
)
 
Interest expense
$
(2,144
)
$
(50
)
 
 
 
Earnings (loss) from unconsolidated entities
(1,981
)

Total
$
(385
)
 
 
$
(4,125
)
$
(50
)
 
 
 
 
 
 
Three Months Ended September 30, 2016
 
 
 
 
 
Interest rate caps and interest rate swaps
$
1,406

 
Interest expense
$
(9,103
)
$
3

 
 
 
Net gain (loss) on disposition of full or partial interest in rental properties, net of tax



 
 
 
Earnings (loss) from unconsolidated entities
(796
)

Total
$
1,406

 
 
$
(9,899
)
$
3

Nine Months Ended September 30, 2016
 
 
 
 
 
Interest rate caps and interest rate swaps
$
(10,184
)
 
Interest expense
$
(27,512
)
$
(24
)
 
 
 
Net gain (loss) on disposition of full or partial interest in rental properties, net of tax

(113
)

 
 
 
Earnings (loss) from unconsolidated entities
(2,421
)

Total
$
(10,184
)
 
 
$
(30,046
)
$
(24
)

19

Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

The following table summarizes the impact of gains and losses related to derivative instruments not designated as cash flow hedges in the Consolidated Statements of Operations:
 
Net Gain (Loss) Recognized
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
2016
 
2017
2016
 
(in thousands)
Derivatives Designated as Fair Value Hedging Instruments
 
 
 
 
 
TROR (1) 
$
2,869

$
(1,153
)
 
$
9,367

$
(1,776
)
Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
Interest rate caps and interest rate swaps
$
(45
)
$

 
$
(45
)
$
(94
)
TROR
(432
)
26

 
1,366

(1,955
)
Total
$
(477
)
$
26

 
$
1,321

$
(2,049
)
(1)
The net gain (loss) recognized in interest expense from the change in fair value of the underlying TROR borrowings was $(2,869) and $(9,367) for the three and nine months ended September 30, 2017, respectively, and $1,153 and $1,776 for the three and nine months ended September 30, 2016, respectively, offsetting the gain (loss) recognized on the TROR.
Credit-risk-related Contingent Features
The principal credit risk of the Company’s interest rate risk management strategy is the potential inability of a counterparty to cover its obligations. If a counterparty fails to fulfill its obligation, the risk of loss approximates the fair value of the derivative. To mitigate this exposure, the Company generally purchases derivative financial instruments from the financial institution that issues the related debt, from financial institutions with which the Company has other lending relationships, or from financial institutions with a minimum credit rating of AA at the time of the transaction.
Agreements with derivative counterparties contain provisions under which the counterparty could terminate the derivative obligations if the Company defaults on its obligations under the Revolving Credit Agreement and designated conditions are fulfilled. In instances where the Company’s subsidiaries have derivative obligations secured by a mortgage, the derivative obligations could be terminated if the indebtedness between the two parties is terminated, either by loan payoff or default of the indebtedness. In addition, certain subsidiaries have agreements containing provisions whereby the subsidiaries must maintain certain minimum financial ratios. As of September 30, 2017, the Company does not have any derivative contracts containing credit-risk related contingent features, such as a credit rating downgrade, that may trigger collateral to be posted with a counterparty.
The following table summarizes information about collateral posted for derivatives in liability positions as of September 30, 2017:
 
Collateral Information
 
Notional Amount
Fair Value Prior to Nonperformance Risk
Nonperformance Risk
Collateral Posted
Nature of Collateral
Credit Risk Contingent Feature
 
(in thousands)
 
 
Property Specific Swaps
$
34,248

$
1,314

$
(61
)
$

Mortgage liens
None
TROR
272,981

14,590

21

67,806

Restricted cash, notes receivable, letters of credit
None
Total
$
307,229

$
15,904

$
(40
)
$
67,806

 
 

H. Fair Value Measurements
Fair Value Measurements on a Recurring Basis
The Company’s financial assets consist of interest rate caps, interest rate swaps and TROR with positive fair values included in other assets. The Company’s financial liabilities consist of interest rate swaps and TROR with negative fair values included in accounts payable, accrued expenses and other liabilities and borrowings subject to TROR included in nonrecourse mortgage debt and notes payable, net.

20

Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

The following table summarizes information about financial assets and liabilities measured at fair value on a recurring basis, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value:
 
September 30, 2017
 
Level 1
Level 2
Level 3
Total
 
(in thousands)
Interest rate swaps (assets)
$

$
680

$

$
680

Interest rate swaps (liabilities)

(1,253
)

(1,253
)
TROR (assets)


9,771

9,771

TROR (liabilities)


(14,611
)
(14,611
)
Fair value adjustment to the borrowings subject to TROR


(1,933
)
(1,933
)
Total
$

$
(573
)
$
(6,773
)
$
(7,346
)
 
 
 
 
 
 
December 31, 2016
 
(in thousands)
Interest rate swaps (assets)
$

$
593

$

$
593

Interest rate swaps (liabilities)

(1,504
)

(1,504
)
TROR (assets)


9,125

9,125

TROR (liabilities)


(24,698
)
(24,698
)
Fair value adjustment to the borrowings subject to TROR


7,434

7,434

Total
$

$
(911
)
$
(8,139
)
$
(9,050
)
The following table presents a reconciliation of financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
 
Net
TROR
Fair value
adjustment
to the borrowings
subject to TROR
Total
 
(in thousands)
Nine Months Ended September 30, 2017
 
 
 
Balance, January 1, 2017
$
(15,573
)
$
7,434

$
(8,139
)
Total realized and unrealized gains (losses):
 
 
 
Included in earnings
10,733

(9,367
)
1,366

Balance, September 30, 2017
$
(4,840
)
$
(1,933
)
$
(6,773
)
Nine Months Ended September 30, 2016
 
 
 
Balance, January 1, 2016
$
(10,785
)
$
2,810

$
(7,975
)
Total realized and unrealized gains (losses):
 
 
 
Included in earnings
(3,731
)
1,776

(1,955
)
Balance, September 30, 2016
$
(14,516
)
$
4,586

$
(9,930
)
The following table presents quantitative information about the significant unobservable inputs used to estimate the fair value of financial instruments measured on a recurring basis as of September 30, 2017:
 
Quantitative Information about Level 3 Fair Value Measurements
 
Fair Value September 30, 2017
Valuation
Technique
Unobservable
Input
Input Values
 
(in thousands)
 
 
 
TROR
$
(4,840
)
Third party bond pricing
Bond valuation
94.85 - 120.73
Fair value adjustment to the borrowings subject to TROR
$
(1,933
)
Third party bond pricing
Bond valuation
94.85 - 102.59
Third party service providers involved in fair value measurements are evaluated for competency and qualifications. Fair value measurements, including unobservable inputs, are evaluated based on current transactions and experience in the real estate and capital markets.
The impact of changes in unobservable inputs used to determine the fair market value of the credit valuation adjustment, TROR and fair value adjustment to the borrowings subject to TROR are not deemed to be significant.

21

Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

Fair Value of Other Financial Instruments
The carrying amount of accounts receivable and accounts payable, accrued expenses and other liabilities approximates fair value based upon the short-term nature of the instruments. The carrying amount of notes receivable approximates fair value since the interest rates on these notes approximates current market rates for similar instruments when considering the risk profile and quality of the collateral, if applicable. The Company estimates the fair value of its debt instruments by discounting future cash payments at interest rates the Company believes approximate the current market. Estimated fair value is based upon market prices of public debt, available industry financing data, current treasury rates, recent financing transactions, conversion features on convertible senior debt and loan to value ratios. The fair value of the Company’s debt instruments is classified as Level 3 in the fair value hierarchy.
The following table summarizes the fair value of nonrecourse mortgage debt and notes payable, net (exclusive of the fair value of derivatives), term loan, net and convertible senior debt, net:
 
September 30, 2017
 
December 31, 2016
 
Carrying Value
Fair Value
 
Carrying Value
Fair Value
 
(in thousands)
Nonrecourse mortgage debt and notes payable, net
$
3,129,289

$
3,135,150

 
$
3,120,833

$
3,105,587

Term loan, net
333,568

333,686

 
333,268

333,527

Convertible senior debt, net
112,523

134,064

 
112,181

122,795

Total
$
3,575,380

$
3,602,900

 
$
3,566,282

$
3,561,909


I. Capital Stock
Pursuant to the Reclassification Agreement, the Board submitted a proposal for stockholder approval to eliminate the dual-class share structure at the Company’s 2017 Annual Meeting of Stockholders. This proposal was approved by the stockholders at the Company’s Annual Meeting of Stockholders on June 9, 2017 and became effective following the market close on June 12, 2017. As a result, each of the 18,788,163 shares of Class B common stock issued and outstanding immediately prior to the Effective Time were reclassified into 1.31 shares of Class A common stock. As such, 24,612,495 additional shares of Class A common stock were issued to the prior Class B common stockholders. Upon completion of this transaction, all outstanding shares of common stock are entitled to one vote per share on all matters brought to the Company’s stockholders, including but not limited to, the election of the entire Board of Directors.
Certain professional and consulting fees, including investment banking success fees, incurred directly related to the stock conversion were recorded as a $9,305,000 reduction to additional paid-in capital, in accordance with applicable accounting requirements when raising permanent equity. Amounts include costs paid on behalf of RMS in accordance with the Reimbursement Agreement. See the “Related Party Transactions” section of Note AAccounting Policies for detailed information on the Reimbursement Agreement.

J. Dividends
Prior to the taxable year ended December 31, 2016, our predecessor, Forest City Enterprises, Inc., operated as a C corporation. A REIT is not permitted to retain earnings and profits (“E&P”) accumulated during the periods when the company or its predecessor was taxed as a C corporation or accumulated by the Company’s or its predecessor’s TRS not converted to a qualified REIT subsidiary. The Company was required to make a distribution to its stockholders that equaled or exceeded its accumulated positive E&P. The 2016 E&P dividend summarized below was based on the estimated cumulative positive E&P of the Company’s predecessor.

22

Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

The following table summarizes cash dividends declared by the Board of Directors on the Company’s common stock (in thousands, except per share data):
Type
Date Declared
Record Date
Payment Date
Amount Per Share
Total Cash Payment
2017
 
 
 
 
 
Quarterly
August 22, 2017
September 5, 2017
September 18, 2017
$
0.14

$
37,343

Quarterly
May 17, 2017
June 9, 2017
June 23, 2017
$
0.09

$
23,482

Quarterly
March 1, 2017
March 13, 2017
March 27, 2017
$
0.09

$
23,441

 
 
 
Total
$
0.32

$
84,266

 
 
 
 
 
 
2016
 
 
 
 
 
Quarterly
November 30, 2016
December 12, 2016
December 23, 2016
$
0.06

$
15,620

Quarterly
August 18, 2016
September 2, 2016
September 16, 2016
$
0.06

$
15,621

Quarterly
May 17, 2016
June 10, 2016
June 24, 2016
$
0.06

$
15,623

Quarterly
February 18, 2016
March 4, 2016
March 18, 2016
$
0.06

$
15,596

E&P
February 18, 2016
March 4, 2016
March 18, 2016
$
0.10

$
25,992

 
 
 
Total
$
0.34

$
88,452


K. Stock-Based Compensation
During the nine months ended September 30, 2017, the Company granted 26,112 stock options, 672,876 shares of restricted stock and 243,571 performance shares under the Company’s 1994 Stock Plan. The stock options had a grant-date fair value of $4.79, which was computed using the Black-Scholes option-pricing model using the following assumptions: expected term of 5.5 years, expected volatility of 25.1%, risk-free interest rate of 2.12%, and expected dividend yield of 1.69%. The exercise price of the options is $21.83, the closing price of the underlying Class A common stock on the date of grant. The restricted stock had a weighted average grant-date fair value of $21.85 per share, based on the closing price of the Class A common stock on the respective dates of grant. The performance shares had a grant-date fair value of $24.91 per share, which was computed using a Monte Carlo simulation.
At September 30, 2017, $210,000 of unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 6 months, $16,125,000 of unrecognized compensation cost related to restricted stock is expected to be recognized over a weighted-average period of 23 months, and $7,228,000 of unrecognized compensation cost related to performance shares is expected to be recognized over a weighted-average period of 19 months.
The following table summarizes stock-based compensation costs and related deferred income tax benefit recognized in the financial statements:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
2016
 
2017
2016
 
(in thousands)
Stock option costs
$
126

$
205

 
$
463

$
731

Restricted stock costs
4,494

3,439

 
13,440

11,367

Performance share costs
2,633

2,496

 
7,391

7,213

Total stock-based compensation costs
7,253

6,140

 
21,294

19,311

Less amount capitalized into qualifying real estate projects
(2,101
)
(1,592
)
 
(6,401
)
(4,151
)
Amount charged to operating expenses
5,152

4,548

 
14,893

15,160

Depreciation expense on capitalized stock-based compensation
216

202

 
665

621

Total stock-based compensation expense
$
5,368

$
4,750

 
$
15,558

$
15,781

Deferred income tax benefit
$
152

$
136

 
$
429

$
457

The amount of grant-date fair value expensed immediately for awards granted to retirement-eligible grantees during the nine months ended September 30, 2017 and 2016 was $867,000 and $1,166,000, respectively.
In connection with the vesting of restricted stock and performance shares during the nine months ended September 30, 2017 and 2016, the Company repurchased 252,161 shares and 385,380 shares, respectively, of Class A common stock to satisfy the employees’ related minimum statutory tax withholding requirements. Shares repurchased during the nine months ended September 30, 2017 and 2016 were returned to unissued shares with an aggregate cost basis of $5,598,000 and $7,825,000, respectively.

23

Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)


L. Write-Offs of Abandoned Development Projects and Demolition Costs
The Company reviews each project under development to determine whether it is probable the project will be developed. If management determines the project will not be developed, its project costs and other related expenses are written off as an abandoned development project cost. The Company abandons projects under development for a number of reasons, including, but not limited to, changes in local market conditions, increases in construction or financing costs or third party challenges related to entitlements or public financing. The Company recorded no write-offs of abandoned development projects and demolition costs during the three months ended September 30, 2017 and $1,596,000 during the nine months ended September 30, 2017. The Company incurred $10,058,000 as write-offs of abandoned development projects and demolition costs during the three and nine months ended September 30, 2016.
The Company incurred $1,179,000 and $1,926,000 as write-offs of abandoned development projects and demolition costs of unconsolidated entities during the three and nine months ended September 30, 2017, which is included in equity in earnings and primarily represents non-capitalizable demolition costs at a redevelopment property. The Company incurred no write-offs of abandoned development projects and demolition costs of unconsolidated entities for the three and nine months ended September 30, 2016.

M. Impairment of Real Estate and Impairment of Unconsolidated Entities
Impairment of Real Estate
The Company reviews its real estate for impairment whenever events or changes indicate its carrying value may not be recoverable. In determining whether the carrying costs are recoverable from estimated future undiscounted cash flows, the Company uses various assumptions including future estimated net operating income, estimated holding periods, risk of foreclosure and estimated cash proceeds upon the disposition of the asset. If the carrying costs are not recoverable, the Company records an impairment charge to reduce the carrying value to estimated fair value. The assumptions used to estimate fair value, which are based on current information, are Level 2 or 3 inputs. If the conditions deteriorate or if plans regarding the assets change, additional impairment charges may occur in future periods.
The following table summarizes the Company’s impairment of real estate included in continuing operations:
 
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
 
2017
2016
2017
2016
 
 
(in thousands)
461 Dean Street (Apartment)
Brooklyn, New York
$
44,288

$

$
44,288

$

Regional Malls:
 
 
 
 
 
Shops at Northfield Stapleton
Denver, Colorado

68,821


68,821

Boulevard Mall
Amherst, New York

52,510


52,510

Shops at Wiregrass
Tampa, Florida



12,464

Office Buildings:
 
 
 
 
 
Post Office Plaza
Cleveland, Ohio

11,800


11,800

Illinois Science and Technology Park
Skokie, Illinois

7,900


7,900

Land inventory
Las Vegas, Nevada

1,230


1,230

Other



2,100

Total
$
44,288

$
142,261

$
44,288

$
156,825

During the three months ended September 30, 2017, the Company began the marketing process of 461 Dean Street. The initiation of the marketing process triggered management to update its undiscounted cash flow analysis, including its probability weighted estimated holding period. As a result, the estimated probability weighted undiscounted cash flows no longer exceeded the carrying value, requiring the Company to adjust the carrying value to its estimated fair value during the three months ended September 30, 2017. The Company has not entered into any agreements, and can not ensure a transaction can or will be consummated.
During the three months ended September 30, 2016, the Company’s Board of Directors authorized a process to review strategic alternatives for the Company’s retail portfolio and had begun discussions with certain strategic partners and other potential buyers for several of its retail assets. In connection with this review and discussions to date, the Company updated its impairment analysis on its retail assets, including increasing the likelihood of near-term sales. As a result, the estimated probability weighted undiscounted cash flows no longer exceeded the carrying value of the Shops at Northfield Stapleton and Boulevard Mall, requiring the Company to adjust the carrying value to their estimated fair value during the three months ended September 30, 2016. The Company completed the sale of Shops at Northfield Stapleton in October 2017.

24

Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

During the year ended December 31, 2015, the Company decided to pursue the partial sale, through a joint venture, of Shops at Wiregrass. At March 31, 2016, negotiations and buyer due diligence were substantially complete and closing of the transaction remained subject to receipt of a third party consent. The advanced status of the transaction at March 31, 2016 triggered management to further update its undiscounted cash flow analysis including its probability weighted estimated holding period. As a result, the estimated probability weighted undiscounted cash flows no longer exceeded the carrying value, requiring the Company to adjust the carrying value to its estimated fair value during the three months ended March 31, 2016. The Company received the third party consent and closed on the disposition of 49% of its equity interest in October 2016.
During the three months ended September 30, 2016, based on the loss of a potential tenant to fill a significant vacancy, the Company updated its undiscounted cash flow analysis including its probability weighted estimated holding period for Post Office Plaza office building. As a result, the estimated probability weighted undiscounted cash flows no longer exceeded the carrying value, requiring the Company to adjust the carrying value to its estimated fair value during the three months ended September 30, 2016. The Company closed on the sale of Post Office Plaza in August 2017.
During the three months ended September 30, 2016, the Company received a letter of intent for the operating assets at Illinois Science & Technology Park. Based on the letter of intent pricing, the Company updated its undiscounted cash flow analysis resulting in the estimated undiscounted cash flows no longer exceeding the carrying value of the assets, requiring the Company to adjust the carrying value to its estimated fair value during the three months ended September 30, 2016. The Company closed on the sale of Illinois Science & Technology Park in January 2017.
Impairment of Unconsolidated Entities
The Company reviews its portfolio of unconsolidated entities for other-than-temporary impairments whenever events or changes indicate its carrying value in the investments may be in excess of fair value. An equity method investment’s value is impaired if management’s estimate of its fair value is less than the carrying value and the difference is deemed to be other-than-temporary. In estimating fair value, assumptions that may be used include comparable sale prices, market discount rates, market capitalization rates and estimated future discounted cash flows specific to the geographic region and property type, all of which are considered Level 3 inputs. For recently opened properties, assumptions also include the timing of initial property lease up. In the event initial property lease up assumptions differ from actual results, estimated future discounted cash flows may vary, resulting in impairment charges in future periods.
The following table summarizes the Company’s other-than-temporary impairment of unconsolidated entities during the three and nine months ended September 30, 2017 and 2016:
 
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
 
2017
2016
2017
2016
 
 
(in thousands)
Westchester’s Ridge Hill
Yonkers, New York
$
10,600

$

$
10,600

$

Pacific Park Brooklyn
Brooklyn, New York

299,300


299,300

Other

7,100


7,100

Total
$
10,600

$
306,400

$
10,600

$
306,400

During the three months ended September 30, 2017, the Company signed a definitive agreement for the sale of Westchester’s Ridge Hill, a regional mall in Yonkers, New York, to its partner. This triggered management to update its impairment analysis, including its estimated selling price. As a result, the estimated fair value no longer exceeded the carrying value, requiring the Company to adjust the carrying value to its estimated fair value during the three months ended September 30, 2017. See the Financial Condition and Liquidity section of the MD&A of this 10-Q for additional information regarding the definitive agreement to sell the Company’s regional mall portfolio.
Pacific Park Brooklyn is a 22 acre mixed-use project in Brooklyn, New York. On June 30, 2014, the Company entered into a joint venture with Greenland Atlantic Yards, LLC, a subsidiary of Shanghai-based Greenland Holding Group Company Limited (“Greenland”), to develop the project. Under the joint venture, Greenland acquired 70% of the project and agreed to co-develop the project with the Company, along with sharing in the entire project costs going forward in proportion to ownership interests. The joint venture was formed to execute on the remaining development rights, including the infrastructure and vertical construction of the residential units, but excluded Barclay’s Center and 461 Dean Street apartment community. Consistent with the approved master plan, the joint venture agreed to develop the remaining portion of Phase I and all of Phase II of the project, including the permanent rail yard. At the time of closing, the remaining portion of Phase I included seven buildings, totaling approximately 3.1 million square feet. Phase II consists of seven buildings totaling approximately 3.3 million square feet and further obligations to complete significant additional infrastructure improvements including a platform over the permanent rail yard.

25

Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

Upon closing of the partial sale on June 30, 2014, it was determined the Company was not the primary beneficiary of the joint venture and the entity was deconsolidated and subsequently accounted for under the equity method of accounting. The transaction resulted in net cash proceeds of $208,275,000. The basis of the investment at the time approximated fair value as supported by the sales price and underlying discounted cash flow model used by both parties to underwrite the transaction. Due to the nature of the project in terms of size, duration and complexity, the underlying discounted cash flow model included many estimates and assumptions of future events. Key estimates in the discounted cash flow model include horizontal infrastructure costs including, among other things, estimates of completing the permanent rail yard and the platform over the rail yard, rent growth in the rental buildings and sales prices for condominium buildings, trade costs for vertical construction, timing of starting vertical construction and opening buildings, terminal cap rates and the underlying discount rate.
The joint venture broke ground on the first affordable apartment community, 535 Carlton, in December, 2014. In mid-2015, the joint venture commenced construction on two more buildings, 38 Sixth Avenue, an affordable apartment building, and 550 Vanderbilt, a condominium building. From the formation of the joint venture in June 2014 through the quarter ended June 30, 2016, the Company reviewed the estimates and assumptions in the discounted cash flow model and updated them as necessary.
During the three months ended September 30, 2016, it became evident the occupancy and rental rate declines in the Brooklyn market were not temporary as a result of an increased supply of new rental product amplified by the sun-setting and the uncertainty around the 421 A real estate tax abatement program. Also the condominium market in New York had softened, causing the projected sale schedule for 550 Vanderbilt to be adjusted accordingly. Separately, the construction costs across the New York market continued to trend upward, resulting in increased estimated trade costs for certain infrastructure as well as vertical construction. As a result, during the three months ended September 30, 2016, as part of the Company’s formal strategic plan update, a decision was made to revise the overall project schedule for Pacific Park Brooklyn. Accordingly, the Company updated the discounted cash flow model to reflect the updated timing of the project schedule as well as the revenue, expense and cost assumptions. Based on the above, the estimated fair value of the investment no longer exceeded the carrying value. As a result, the Company recorded an other-than-temporary impairment of $299,300,000 during the three months ended September 30, 2016.
Impairment of Real Estate - Fair Value Information
The following table presents quantitative information about the significant unobservable inputs used to determine the fair value of the impairment of real estate for the nine months ended September 30, 2017 and 2016:
 
Quantitative Information about Level 3 Fair Value Measurements
 
Fair Value
Valuation Technique
Unobservable Input
Range of Input Values
 
(in thousands)
 
 
 
September 30, 2017
 
 
 
 
Impairment of real estate
$
152,575