UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

**FORM 10-Q**

 

(Mark One)
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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE** |
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|  
**SECURITIES EXCHANGE ACT OF 1934**

 
 

For the quarterly period ended March 31, 2005

 

or

 

o

**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 :

333-57103

 

 

Mack-Cali Realty, L.P.

(Exact name of registrant as specified in its charter)

 

Delaware

 

22-3315804

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

 

 

11 Commerce Drive, Cranford, New Jersey

 

07016-3501

(Address of principal executive offices)

 

(Zip Code)

 

(908) 272-8000

(Registrant’s telephone number, including area code)

 

Not Applicable

(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 ninety (90) days.  YES  X  NO ___

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)  YES  X  NO ___

 

 

 

 

 

**MACK-CALI REALTY, L.P.**

 

**FORM 10-Q**

 

**INDEX**

 

**Part I**

**Financial Information**

**Page**

 

Item 1.

Financial Statements:

 

Consolidated Balance Sheets as of March 31, 2005

and December 31, 2004

4

 

Consolidated Statements of Operations for the three months 

ended March 31, 2005 and 2004

5

 

Consolidated Statement of Changes in Partners’ Capital for the

three months ended March 31, 2005

6

 

Consolidated Statements of Cash Flows for the three months

ended March 31, 2005 and 2004

7

 

Notes to Consolidated Financial Statements

8-34

 

Item 2.

Management’s Discussion and Analysis of Financial Condition

 
 
and Results of Operations

35-49

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

50

 

Item 4.

Controls and Procedures

50

 

**Part II**

**Other Information**

 

Item 1.

Legal Proceedings

51-52

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

53

 

Item 3.

Defaults Upon Senior Securities

53

 

Item 4.

Submission of Matters to a Vote of Security Holders

53

 

Item 5.

Other Information

53

 

Item 6.

Exhibits

53

 

**Signatures**

54****

 

 

2

 

 

 

**MACK-CALI REALTY, L.P.**

 

**Part I – Financial Information**

 

 

**Item 1.**

**Financial Statements**

 

The accompanying unaudited consolidated balance sheets, statements of operations, of changes in partners’ capital, and of cash flows and related notes thereto, have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission (“SEC”).  Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements.  The financial statements reflect all adjustments consisting only of normal, recurring adjustments, which are, in the opinion of management, necessary for a fair presentation for the interim periods.

 

The aforementioned financial statements should be read in conjunction with the notes to the aforementioned financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included in Mack-Cali Realty, L.P.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.

 

The results of operations for the three month periods ended March 31, 2005 are not necessarily indicative of the results to be expected for the entire fiscal year or any other period.

 

3

 

 

**MACK-CALI REALTY, L.P. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS***(in thousands, except per unit amounts)*

 

 

 

**ASSETS**

March 31,

2005

*(unaudited)***

 

December 31,

2004

Rental property

 

 

Land and leasehold interests

   $    628,346

   $    593,606

Buildings and improvements

3,504,083

3,296,789

Tenant improvements

258,081

262,626

Furniture, fixtures and equipment

7,383

7,938

 

4,397,893

4,160,959

Less – accumulated depreciation and amortization

(628,918)

(641,626)

 

3,768,975

3,519,333

Rental property held for sale, net

73,820

19,132

Net investment in rental property

3,842,795

3,538,465

Cash and cash equivalents

13,087

12,270

Investments in unconsolidated joint ventures

59,044

46,743

Unbilled rents receivable, net

85,828

82,586

Deferred charges and other assets, net

175,856

155,060

Restricted cash

9,545

10,477

Accounts receivable, net of allowance for doubtful accounts

 

 

of $1,215 and $1,235

7,057

4,564

 

 

 

Total assets

$4,193,212

$3,850,165

 

 

 

**LIABILITIES AND PARTNERS’ CAPITAL**

 

 

Senior unsecured notes 

$1,180,396

$1,031,102

Revolving credit facilities

310,000

107,000

Mortgages, loans payable and other obligations

558,540

564,198

Distributions payable

47,969

47,712

Accounts payable, accrued expenses and other liabilities

75,905

57,002

Rents received in advance and security deposits

50,728

47,938

Accrued interest payable

12,734

22,144

Total liabilities

2,236,272

1,877,096

 

 

 

Minority interest in consolidated joint ventures

--

11,103

 

 

 

Commitments and contingencies

 

 

 

 

 

**Partners’ capital:**

 

 

General Partner, 10,000 and 10,000 preferred units outstanding

24,836

24,836

Limited partners, 215,018 and 215,018 preferred unit outstanding

220,547

220,547

General Partner 61,514,061 and 61,038,875 common units outstanding

1,515,035

1,520,275

Limited partners, 7,616,447 and 7,657,428 common units outstanding

196,522

196,308

Total partners’ capital

1,956,940

1,961,966

 

 

 

Total liabilities and partners’ capital

$4,193,212

$3,850,165

 

 

 

 

 

 

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

 

 

4

 

 

 

 

**MACK-CALI REALTY, L.P. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS***(in thousands, except per unit amounts) (unaudited)*

 

 

Three Months Ended

March 31,

**REVENUES**

2005

2004

Base rents

$133,141

$121,068

Escalations and recoveries from tenants

18,412

15,197

Parking and other

1,896

3,473

Total revenues

153,449

139,738

 

 

 

**EXPENSES**

 

 

Real estate taxes 

19,117

16,358

Utilities

11,949

11,033

Operating services

21,378

17,336

General and administrative

7,427

6,397

Depreciation and amortization

35,807

29,714

Interest expense

28,398

29,037

Interest income

(64)

(720)

Total expenses

124,012

109,155

Income from continuing operations before

 

 

equity in earnings of unconsolidated joint ventures

29,437

30,583

Minority interest in consolidated joint ventures

(74)

--

Equity in earnings of unconsolidated joint ventures, net

(312)

177

Gain on sale of investment in unconsolidated joint ventures

35

720

Income from continuing operations

29,086

31,480

Discontinued operations:

 

 

Income from discontinued operations

1,460

2,682

Realized gains (losses) and unrealized losses on

 

 

disposition of rental property, net

(897)

--

Total discontinued operations, net

563

2,682

Net income

29,649

34,162

Preferred unit distributions

(4,409)

(4,409)

Net income available to common unitholders

$    25,240

$  29,753

 

 

 

**Basic earnings per common unit:******

 

 

Income from continuing operations

$         0.36

$      0.40

Discontinued operations

             0.01

          0.04

Net income available to common unitholders

$         0.37

$      0.44

 

 

 

**Diluted earnings per common unit:******

 

 

Income from continuing operations

$         0.36

$      0.40

Discontinued operations

                --

          0.04

Net income available to common unitholders

$         0.36

$      0.44

 

 

 

Distributions declared per common unit

$         0.63

$      0.63

 

 

 

Basic weighted average units outstanding

         68,807

67,594

 

 

 

Diluted weighted average units outstanding

         69,273

      68,276

 

 

 

 

 

 

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

 
 

 

5

 

 

**MACK-CALI REALTY CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS’ CAPITAL**

**For the Three Months Ended March 31, 2005***(in thousands) (unaudited)*

 

 

 

General

Limited

General

Limited

General

Limited

General

Limited

 

 

Partner

Partners

Partner

Partners

Partner

Partners

Partner

Partners

 

 

Preferred

Preferred

Common

Common

Preferred

Preferred

Common

Common

 

 

Units

Units

Units

Units

Unitholders

Unitholders

Unitholders

Unitholders

Total

Balance at January 1, 2005

10

215

61,039

7,616

$24,836

$220,547

$1,520,275

$196,308

$1,961,966

Net income

--

--

--

--

500

3,909

22,443

2,797

29,649

Distributions

--

--

--

--

(500)

(3,909)

(38,766)

(4,793)

(47,968)

Redemption of limited

 

 

 

 

 

 

 

 

 

partner common units for

 

 

 

 

 

 

 

 

 

shares of common stock

--

--

22

(22)

--

--

576

(576)

--

Issuance of limited

 

 

 

 

 

 

 

 

 

partner common units

--

--

--

63

--

--

--

2,786

2,786

Units issued under

 

 

 

 

 

 

 

 

 

Dividend Reinvestment and

 

 

 

 

 

 

 

 

 

Stock Purchase Plan

--

--

2

--

--

--

88

--

88

Contributions – proceeds

 

 

 

 

 

 

 

 

 

from stock

 

 

 

 

 

 

 

 

 

options exercised

--

--

337

--

--

--

9,544

--

9,544

Stock options expense

--

--

--

--

--

--

37

--

37

Deferred compensation

 

 

 

 

 

 

 

 

 

plan for directors

--

--

--

--

--

--

78

--

78

Issuance of Restricted

 

 

 

 

 

 

 

 

 

Stock Awards

--

--

114

--

--

--

--

--

--

Amortization of stock

 

 

 

 

 

 

 

 

 

compensation

--

--

--

--

--

--

760

--

760

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2005

10

215

61,514

7,657

$24,836

$220,547

$1,515,035

$196,522

$1,956,940

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

6

 

 

**MACK-CALI REALTY, L.P. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS***(in thousands) (unaudited)*

 

 

Three Months Ended

March 31,

**CASH FLOWS FROM OPERATING ACTIVITIES**

2005

2004

Net income

$   29,649

$  34,162

Adjustments to reconcile net income to net cash provided by

 

 

operating activities:

 

 

Depreciation and amortization

35,807

29,714

Depreciation and amortization on discontinued operations

393

1,409

Stock options expense

37

49

Amortization of stock compensation

760

722

Amortization of deferred financing costs and debt discount

892

1,105

Equity in earnings of unconsolidated joint ventures, net

312

(177)

Gain on sale of investment in unconsolidated joint venture

(35)

(720)

Realized gains (losses) and unrealized losses on disposition

 

 

of rental property

897

--

Minority interest in consolidated joint venture

74

--

Changes in operating assets and liabilities:

 

 

Increase in unbilled rents receivable, net

(3,329)

(3,037)

Increase in deferred charges and other assets, net

(10,665)

(8,090)

(Increase) decrease in accounts receivable, net

(2,493)

1,039

Increase in accounts payable, accrued expenses and other

 

 

liabilities

3,796

3,393

Increase in rents received in advance and security deposits

2,790

2,616

Decrease in accrued interest payable

(9,410)

(11,676)

 

 

 

Net cash provided by operating activities

$   49,475

$  50,509

 

 

 

**CASH FLOWS FROM INVESTING ACTIVITIES******

 

 

Additions to rental property and related intangibles

$(356,416)

$ (16,024)

Investment in unconsolidated joint ventures

(15,254)

(13,326)

Distributions from unconsolidated joint ventures

--

1,705

Proceeds from sale of investment in unconsolidated joint venture

2,676

720

Acquisition of minority interest in consolidated joint venture

(7,713)

--

Proceeds from sales of rental property

20,126

--

Funding of note receivable

--

(4,619)

Decrease in restricted cash

932

293

 

 

 

Net cash used in investing activities

$(355,649)

$  (31,251)

 

 

 

**CASH FLOWS FROM FINANCING ACTIVITIES******

 

 

Proceeds from senior unsecured notes

$ 149,078

$ 202,363

Borrowings from revolving credit facility

396,000

154,000

Repayment of senior unsecured notes

--

(300,000)

Repayment of revolving credit facility

(193,000)

(124,000)

Repayment of mortgages, loans payable and other obligations

(5,596)

(1,396)

Payment of financing costs

(1,323)

(1,898)

Proceeds from stock options exercised

9,544

28,283

Proceeds from stock warrants exercised

--

2,863

Payment of distributions

(47,712)

(46,873)

 

 

 

Net cash provided by (used in) financing activities

$ 306,991

$ (86,658)

 

 

 

Net increase (decrease)  in cash and cash equivalents

$         817

$ (67,400)

Cash and cash equivalents, beginning of period

             12,270

78,375

 

 

 

Cash and cash equivalents, end of period

$      13,087

$  10,975

 

 

 

 

 

 

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

 

 

 

 

7

 

 

**MACK-CALI REALTY, L.P. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS***(dollars in thousands, except per share/unit amounts)*

 

**1.**

**ORGANIZATION AND BASIS OF PRESENTATION**

 

**ORGANIZATION**
Mack-Cali Realty, L.P., a Delaware limited partnership, together with its subsidiaries (the “Operating Partnership,”) was formed on May 31, 1994 to conduct the business of leasing, management, acquisition, development, construction and tenant-related services for its sole general partner, Mack-Cali Realty Corporation and its subsidiaries (the “Corporation” or “General Partner”).  The Operating Partnership, through its operating divisions and subsidiaries, including the Mack-Cali property-owning partnerships and limited liability companies (collectively, the “Property Partnerships”) is the entity through which all of the General Partner’s operations are conducted.

 

The General Partner is a fully integrated, self-administered, self-managed real estate investment trust (“REIT”).  The General Partner controls the Operating Partnership as its sole general partner, and owned an 88.9 percent and 88.9 percent common unit interest in the Operating Partnership as of March 31, 2005 and December 31, 2004, respectively.

 

The General Partner’s business is the ownership of interests in and operation of the Operating Partnership, and all of the General Partner’s expenses are incurred for the benefit of the Operating Partnership.  The General Partner is reimbursed by the Operating Partnership for all expenses it incurs relating to the ownership and operation of the Operating Partnership.

 

As of March 31, 2005, the Operating Partnership owned or had interests in 270 properties plus developable land (collectively, the “Properties”).  The Properties aggregate approximately 30.4 million square feet, which are comprised of 162 office buildings and 97 office/flex buildings, totaling approximately 30.0 million square feet (which include one office building and one office/flex building aggregating 538,000 square feet owned by unconsolidated joint ventures in which the Operating Partnership has investment interests), six industrial/warehouse buildings totaling approximately 387,400 square feet, two retail properties totaling approximately 17,300 square feet, one hotel (which is owned by an unconsolidated joint venture in which the Operating Partnership has an investment interest) and two parcels of land leased to others.  The Properties are located in seven states, primarily in theNortheast, plus the District of Columbia.

 

**BASIS OF PRESENTATION**

The accompanying consolidated financial statements include all accounts of the Operating Partnership and its majority-owned and/or controlled subsidiaries.  See Investments in Unconsolidated Joint Ventures in Note 2 for the Operating Partnership’s treatment of unconsolidated joint venture interests.  Intercompany accounts and transactions have been eliminated.

 

The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

 

Certain reclassifications have been made to prior period amounts in order to conform with current period presentation.

 

 

**2.**

**SIGNIFICANT ACCOUNTING POLICIES**

 

***Rental***

***Property***

Rental properties are stated at cost less accumulated depreciation and amortization.  Costs directly related to the acquisition, development and construction of rental properties are capitalized.  Capitalized development and construction costs include pre-construction costs essential to the development of the property, development and construction costs, interest, property taxes, insurance, salaries and other project costs incurred during the period of 

 

 

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development.  Included in total rental property is construction and development in-progress of $95,414 and $86,916 (including land of $55,114 and $53,705) as of March 31, 2005 and December 31, 2004, respectively. Ordinary repairs and maintenance are expensed as incurred; major replacements and betterments, which improve or extend the life of the asset, are capitalized and depreciated over their estimated useful lives.  Fully-depreciated assets are removed from the accounts. 

 

The Operating Partnership considers a construction project as substantially completed and held available for occupancy upon the completion of tenant improvements, but no later than one year from cessation of major construction activity (as distinguished from activities such as routine maintenance and cleanup).  If portions of a rental project are substantially completed and occupied by tenants, or held available for occupancy, and other portions have not yet reached that stage, the substantially completed portions are accounted for as a separate project.  The Operating Partnership allocates costs incurred between the portions under construction and the portions substantially completed and held available for occupancy, and capitalizes only those costs associated with the portion under construction.

 

Properties are depreciated using the straight-line method over the estimated useful lives of the assets.  The estimated useful lives are as follows:

 

Leasehold interests

Remaining lease term

Buildings and improvements

5 to 40 years

Tenant improvements

The shorter of the term of the

 

related lease or useful life

Furniture, fixtures and equipment

5 to 10 years

 

Upon acquisition of rental property, the Operating Partnership estimates the fair value of acquired tangible assets, consisting of land, building and improvements, and identified intangible assets and liabilities, generally consisting of the fair value of (i) above and below market leases, (ii) in-place leases and (iii) tenant relationships.  The Operating Partnership allocates the purchase price to the assets acquired and liabilities assumed based on their relative fair values.  In estimating the fair value of the tangible and intangible assets acquired, the Operating Partnership considers information obtained about each property as a result of its due diligence and marketing and leasing activities, and utilizes various valuation methods, such as estimated cash flow projections utilizing appropriate discount and capitalization rates, estimates of replacement costs net of depreciation,and available market information.  The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant.  

 

Above-market and below-market lease values for acquired properties are recorded based on the present value, (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases.  The capitalized above-market lease values are amortized as a reduction of base rental revenue over the remaining term of the respective leases, and the capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any below-marketfixed rate renewal options of the respective leases.

 

Other intangible assets acquired include amounts for in-place lease values and tenant relationship values, which are based on management’s evaluation of the specific characteristics of each tenant’s lease and the Operating Partnership’s overall relationship with the respective tenant.  Factors to be considered by management in its analysis of in-place lease values include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases.  In 

 

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estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions.  In estimating costs to execute similar leases, management considers leasing commissions, legal and other related expenses.  Characteristics considered by management in valuing tenant relationships include the nature and extent of the Operating Partnership’s existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals.  The value of in-place leases are amortized to expense over the remaining initial terms of the respective leases.  The value of tenant relationship intangibles are amortized to expense over the anticipated life of the relationships.

 

On a periodic basis, management assesses whether there are any indicators that the value of the Operating Partnership’s real estate properties may be impaired.  A property’s value is impaired only if management’s estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property is less than the carrying value of the property.  To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the property over the fair value of the property.  The Operating Partnership’s estimates of aggregate future cash flows expected to be generated by each property are based on a number of assumptions that are subject to economic and market uncertainties including, among others, demand for space, competition for tenants, changes in market rental rates, and costs to operate each property.As these factors are difficult to predict and are subject to future events that may alter management’s assumptions, the future cash flows estimated by management in its impairment analyses may not be achieved.  Management does not believe that the value of any of the Operating Partnership’s rental properties is impaired.

 

***Rental Property***

***Held for Sale and***

***Discontinued***

***Operations***

When assets are identified by management as held for sale, the Operating Partnership discontinues depreciating the assets and estimates the sales price, net of selling costs, of such assets.  If, in management’s opinion, the net sales price of the assets which have been identified as held for sale is less than the net book value of the assets, a valuation allowance is established.  Properties identified as held for sale and/or sold are presented in discontinued operations for all periods presented.  See Note 6 – Discontinued Operations.

 

If circumstances arise that previously were considered unlikely and, as a result, the Operating Partnership decides not to sell a property previously classified as held for sale, the property is reclassified as held and used.  A property that is reclassified is measured and recorded individually at the lower of (a) its carrying amount before the property was classified as held for sale, adjusted for any depreciation (amortization) expense that would have been recognized had the property been continuously classified as held and used, or (b) the fair value at the date of the subsequent decision not to sell. 

 

***Investments in***

***Unconsolidated***

***Joint Ventures, Net***

The Operating Partnership accounts for its investments in unconsolidated joint ventures for which Financial Accounting Standards Board (“FASB”) Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”) does not apply, under the equity method of accounting as the Operating Partnership exercises significant influence, but does not control these entities.  These investments are recorded initially at cost, as Investments in Unconsolidated Joint Ventures, and subsequently adjusted for equity in earnings and cash contributions and distributions.

 

FIN 46 provides guidance on the identification of entities for which control is achieved through means other than voting rights (“variable interest entities” or “VIEs”) and the determination of which business enterprise should consolidate the VIE (the “primary 

 

10

 

 

 

beneficiary”).  Generally, FIN 46 applies when either (1) the equity investors (if any) lack one or more of the essential characteristics of a controlling financial interest, (2) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support or (3) the equity investors have voting rights that are not proportionate to their economic interests and the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest.  The Operating Partnership adopted FIN 46 in 2003.  The effect of adoption was not material. 

 

The Operating Partnership has evaluated its joint ventures with regards to FIN 46.  As of March 31, 2005, the Operating Partnership has identified its Meadowlands Xanadu joint venture with the Mills Corporation as a VIE, but is not consolidating such venture as the Operating Partnership is not the primary beneficiary.  Disclosure about this VIE is included in Note 4 – Investments in Unconsolidated Joint Ventures.

 

On a periodic basis, management assesses whether there are any indicators that the value of the Operating Partnership’s investments in unconsolidated joint ventures may be impaired.  An investment is impaired only if management’s estimate of the value of the investment is less than the carrying value of the investment, and such decline in value is deemed to be other than temporary.  To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the investment over the value of the investment.  Management does not believe that the value of any of the Operating Partnership’s investments in unconsolidated joint ventures is impaired.  See Note 4 – Investments in Unconsolidated Joint Ventures.

 

***Cash and Cash***

***Equivalents***

All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents.

 

***Deferred***

***Financing Costs***

Costs incurred in obtaining financing are capitalized and amortized on a straight-line basis, which approximates the effective interest method, over the term of the related indebtedness. Amortization of such costs is included in interest expense and was $892 and $1,105 for the three months ended March 31, 2005 and 2004, respectively.

 

***Deferred***

***Leasing Costs***

Costs incurred in connection with leases are capitalized and amortized on a straight-line basis over the terms of the related leases and included in depreciation and amortization.  Unamortized deferred leasing costs are charged to amortization expense upon early termination of the lease. Certain employees of the Operating Partnership are compensated for providing leasing services to the Properties.  The portion of such compensation, which is capitalized and amortized, approximated $957 and $1,475 for the three months ended March 31, 2005 and 2004, respectively.

 

***Derivative***

***Instruments***

The Operating Partnership measures derivative instruments, including certain derivative instruments embedded in other contracts, at fair value and records them as an asset or liability, depending on the Operating Partnership’s rights or obligations under the applicable derivative contract.  For derivatives designated and qualifying as fair value hedges, the changes in the fair value of both the derivative instrument and the hedged item are recorded in earnings.  For derivatives designated as cash flow hedges, the effective portions of the derivative are reported in other comprehensive income (“OCI”) and are subsequently reclassified into earnings when the hedged item affects earnings. Changes in fair value of derivative instruments not designated as hedging and ineffective portions of hedges are recognized in earnings in the affected period.

 

 

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***Revenue***

***Recognition***

Base rental revenue is recognized on a straight-line basis over the terms of the respective leases. Unbilled rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with the lease agreements.  Above-market and below-market lease values for acquired properties are recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed-rate renewal options for below-market leases.  The capitalized above-marketlease values for acquired properties are amortized as a reduction of base rental revenue over the remaining term of the respective leases, and the capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any below-market fixed-rate renewal options of the respective leases.  Parking and other revenue includes income from parking spaces leased to tenants, income from tenants for additional services arranged for the Operating Partnership, income from tenants for early lease terminations and income from managing and/or leasing properties for third parties.  Escalations and recoveries are received from tenants for certain costs as provided in the lease agreements.  These costs generally include real estate taxes, utilities, insurance, common area maintenance and other recoverable costs.  See Note 14 – Tenant Leases.

 

***Allowance for***

***Doubtful Accounts***

Management periodically performs a detailed review of amounts due from tenants to determine if accounts receivable balances are impaired based on factors affecting the collectibility of those balances.  Management’s estimate of the allowance for doubtful accounts requires management to exercise significant judgment about the timing, frequency and severity of collection losses, which affects the allowance and net income.

 

***Income and***

***Other Taxes***

The Operating Partnership is a partnership and, as a result, all income and losses of the partnership are allocated to the partners for inclusion in their respective income tax returns.  Accordingly, no provision or benefit for income taxes has been made in the accompanying financial statements.

 

***Earnings***

***Per Unit***

The Operating Partnership presents both basic and diluted earnings per unit (“EPU”).  Basic EPU excludes dilution and is computed by dividing net income available to common unitholders by the weighted average number of units outstanding for the period.  Diluted EPU reflects the potential dilution that could occur if securities or other contracts to issue common units were exercised or converted into common units, where such exercise or conversion would result in a lower EPU amount.

 

***Distributions***

***Payable***

The distributions payable at March 31, 2005 represents distributions payable to preferred unitholders (10,000 Series C preferred units), common unitholders (69,190,389 common units) and preferred distributions payable to preferred unitholders (215,018 Series B preferred units) for all such holders of record as of April 5, 2005 with respect to the first quarter 2005.  The first quarter 2005 Series C preferred unit distributions of $50.00 per preferred unit, common unit distributions of $0.63 per common unit, as well as the first quarter 2005 Series B preferred unit distributions of $18.1818 per preferred unit, were approved by the Corporation’s Board of Directors on March 24, 2005.  The Series C preferred unit distributions payable were paid on April 15, 2005.  The common and Series B preferred unit distributions payable were paid on April 18, 2005.

 

 

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The distributions payable at December 31, 2004 represents distributions payable to preferred unitholders (10,000 Series B preferred units) common unitholders (68,734,472 common units) and preferred distributions payable to preferred unitholders (215,018 Series B preferred units) for all such holders of record as of January 5, 2005 with respect to the fourth quarter 2004.  The fourth quarter 2004 Series C preferred unit distributions of $50.00 per preferred unit, common unit distributions of $0.63 per common unit, as well as the fourth quarter 2004 Series B preferred unit distributions of $18.1818 per preferred unit, were approved by the Corporation’s Board of Directors on December 7, 2004.  The Series C preferred unit distribution and common and Series B preferred unit distributions payable were paid on January 18, 2005.

 

***Costs Incurred***

***For Preferred***

***Stock Issuances***

Costs incurred in connection with the Corporation’s preferred stock issuances are reflected as a reduction of General Partner’s capital.

 

***Stock***

***Compensation***

The Operating Partnership accounts for stock options and restricted stock awards granted prior to 2002 using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,  “Accounting for Stock Issued to Employees,” and related Interpretations (“APB No. 25”).  Under APB No. 25, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Corporation’s stock at the date of grant over the exercise price of the option granted.  Compensation cost for stock options is recognized ratably over the vesting period.  The Corporation’s policy is to grant options with an exercise price equal to the quoted closing market price of the Corporation’s stock on the business day preceding the grant date.  Accordingly, no compensation cost has been recognized under theCorporation’s stock option plans for the granting of stock options made prior to 2002.  Restricted stock awards granted prior to 2002 are valued at the vesting dates of such awards with compensation cost for such awards recognized ratably over the vesting period.

 

In 2002, the Operating Partnership adopted the provisions of FASB No. 123, which requires, on a prospective basis, that the estimated fair value of restricted stock (“Restricted Stock Awards”) and stock options at the grant date be amortized ratably into expense over the appropriate vesting period. For the three months ended March 31, 2005 and 2004, the Operating Partnership recorded restricted stock and stock options expense of $797 and $771, respectively.  FASB No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, was issued in December 2002 and amends FASB No. 123, Accounting for Stock Based Compensation.  FASB No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock based compensation.  In addition, this Statement amends the disclosure requirements of FASB No. 123 to requireprominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.  FASB No. 148 disclosure requirements are presented as follows:

 

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The following table illustrates the effect on net income and earnings per unit if the fair value based method had been applied to all outstanding and unvested stock awards in each period:

 

 

 

Three Month Ended

March 31,

 

 

2005

2004

 

 

 

 

Basic EPU

Basic EPU

Net income, as reported

 

$29,649

$34,162

Add:       Stock-based compensation expense included in

 

 

 

reported net income

 

797

771

Deduct:  Total stock-based compensation expense determined 

 

 

 

under fair value based method for all awards

 

(933)

(999)

Pro forma net income

 

29,513

33,934

Deduct:  Preferred unit distributions

 

(4,409)

(4,409)

Pro forma net income available to common unitholders – 

 

 

 

basic

 

$25,104

$29,525

 

 

 

 

Earnings Per Unit:

 

 

 

Basic – as reported

 

       $    0.37

       $    0.44

Basic – pro forma

 

       $    0.37

       $    0.44

 

 

 

 

Diluted – as reported

 

       $    0.36

       $    0.44

Diluted – pro forma

 

       $    0.36

       $    0.43

 

 

**3.**

**REAL ESTATE PROPERTY TRANSACTIONS**

 

**Property Acquisitions**

The Operating Partnership acquired the following office properties during the three months ended March 31, 2005:

 

 

 

 

 

 

Investment by

AquisitionsDate

Property/Address

Location

# of Bldgs.

Rentable Square Feet

Operating Partnership (a)

03/02/05

101 Hudson Street (b)

Jersey City, Hudson County, NJ

1

1,246,283

$330,233

03/29/05

23 Main Street (b) (c)

Holmdel, Monmouth County, NJ

1

350,000

23,880

 

 

 

 

 

Total Property Acquisitions:

 

2

1,596,283

$354,113

 

 

 

 

 

(a)    Amounts are as of March 31, 2005.

(b)   Transaction was funded primarily through borrowing on the Operating Partnership’s revolving credit facility.

(c)    In addition to its initial investment, the Operating Partnership presently intends to make additional investments related to the property of approximately $12,122.

 

**Property Sales**

The Operating Partnership sold the following office properties during the three months ended March 31, 2005:

 

Sale

 

 

# of

Rentable

Net Sales

Net Book

Realized

Date

Property/Address

Location

Bldgs.

Square Feet

Proceeds

Value

Gain/(Loss)

02/04/05

210 South 16th Street

Omaha, Douglas County, Nebraska

1

318,224

$  8,464

$  8,210

$254

02/11/05

1122 Alma Road

Richardson, Dallas County, Texas

1

82,576

2,075

2,344

(269)

02/15/05

3 Skyline Drive 

Hawthorne, Westchester County, New York

1

75,668

9,587

8,856

731

 

 

 

 

 

 

 

Total Office Property Sales:

 

3

476,468

$20,126

$19,410

$716

 ****

 

 

 

 

 

 

 

 

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**4.**

**INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES**

 

The debt of the Operating Partnership’s unconsolidated joint ventures aggregating $122,969 as of March 31, 2005 is non-recourse to the Operating Partnership, except for customary exceptions pertaining to such matters as intentional misuse of funds, environmental conditions and material misrepresentations, and except as otherwise indicated below.

 

**MEADOWLANDS XANADU**

On November 25, 2003, the Operating Partnership and affiliates of The Mills Corporation (“Mills”) entered into a joint venture to form Meadowlands Mills/Mack-Cali Limited Partnership (“Meadowlands Venture”) for the purpose of developing a $1.3 billion family entertainment, recreation and retail complex with an office and hotel component to be built at the Meadowlands sports complex in East Rutherford, New Jersey (“Meadowlands Xanadu”).  Meadowlands Xanadu’s approximately 4.76 million-square-foot complex is expected to feature a family entertainment, recreation and retail destination comprising five themed zones: sports; entertainment; children’s education; fashion; and food and home, in addition to four office buildings, aggregating approximately 1.8 million square feet, and a 520-room hotel.

 

On December 3, 2003, the Meadowlands Venture entered into a redevelopment agreement (the “Redevelopment Agreement”) with the New Jersey Sports and Exposition Authority (“NJSEA”) for the redevelopment of the area surrounding the Continental Airlines Arena in East Rutherford, New Jersey and the construction of the Meadowlands Xanadu project.  The Redevelopment Agreement provides for a 75-year ground lease and requires the joint venture to pay the NJSEA a $160,000 development rights fee and   fixed rent over the term.  Fixed rent will be in the amount of $1 per year for the first 15 years, increasing to $7,500 from the 16th to the 18th years, increasing to $8,447 in the 19th year, increasing to $8,700 in the 20thyear, increasing to $8,961 in the 21st year, then to $9,200 in the 23rd to 26th years, with additional increases over the remainder of the term, as set forth in the ground lease.  The ground lease also allows for the potential for participation rent payments by the venture, as described in the ground lease agreement.  A First Amendment to the Redevelopment Agreement and the ground lease, itself, were signed on October 5, 2004.  The Meadowlands Venture received all necessary permits and approvals from the NJSEA and U.S. Army Corps of Engineers in March 2005 and commenced construction in the same month.  As a condition to the commencement of work to fill wetlands pursuant to the permit issued by the U.S. Army Corps of Engineers and pursuant to the Redevelopment Agreement, as amended, the MeadowlandsVenture conveyed certain vacant land, known as the Empire Tract, to a conservancy trust.  Pursuant to the First Amendment to the Redevelopment Agreement, upon the NJSEA’s receipt of the $160,000 development rights fee, it will make a payment to the Meadowlands Venture of $26,800 for the Empire Tract.  In March 2005, after receiving the permits and approvals required to commence construction of the project, and as a requirement of the NJSEA to allow commencement of construction, the Meadowlands Venture paid $50,000 into escrow, to be applied toward the development rights fee.

 

The Operating Partnership and Mills own a 20 percent and 80 percent interest, respectively, in the Meadowlands Venture.  These interests were subject to certain participation rights by The New York Giants, which were subsequently terminated in April 2004.  The joint venture agreement required the Operating Partnership to make an equity contribution up to a maximum of $32,500, which it fulfilled in April 2005.  Pursuant to the joint venture agreement, Mills has received subordinated capital credit in the venture of approximately $118,000, which represents certain costs incurred by Mills in connection with the Empire Tract prior to the creation of the Meadowlands Venture.  The joint venture agreement requires Mills to contribute the balance of the capital required to complete the entertainment phase, subject to certain limitations.  The Operating Partnership will receive a nine percent preferred return on itsequity investment, only after Mills receives a nine percent preferred return on its equity investment.  Residual returns, subject to participation by other parties, will be in proportion to each partner’s respective percentage interest.

 

Mills will develop, lease and operate the entertainment phase of the Meadowlands Xanadu project.  The joint venture agreement provides the Operating Partnership an option to cause the Meadowlands Venture to form component ventures for the future development of the office and hotel phases, which the Operating Partnership will develop, lease and operate.  The Operating Partnership will own an 80 percent interest and Mills will own a 20 percent interest in such component ventures.  The agreement provides for the first office or hotel component ventures to be formed no later than four years after the grand opening of the entertainment phase, and requires that all component ventures for the office and hotel phases be formed no later than 10 years from such date, but does not 

 

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require that any or all components be developed.  However, under the Meadowlands Venture agreement, Mills has the ability to accelerate such formation schedule, subject to certain conditions.  Should the Operating Partnership fail to meet the time schedule described above for the formation of the component ventures, the Operating Partnership will forfeit its rights to cause the Meadowlands Venture to form additional component ventures.  If this occurs, Mills will have the ability to develop the additional phases, subject to the Operating Partnership’s right to participate, or to cause the Meadowlands Venture to sell such components to a third party, subject to a sales price limitation of 95 percent of the value that would have been the amount necessary to form such component ventures.

 

Commencing three years after the opening of the entertainment, recreation and retail phase of the Meadowlands Xanadu project, either Mills or the Operating Partnership may sell its partnership interest to a third party subject to the following provisions: 

 

**•**

Mills has certain “drag-along” rights and the Operating Partnership has certain “tag-along” rights in connection with such sale of interest to a third party; and

**•**

Mills has a right of first refusal with respect of a sale by the Operating Partnership of its partnership interests.

 

In addition, commencing on the sixth anniversary of the opening, the Operating Partnership may cause Mills to purchase, and Mills may cause the Operating Partnership to sell to Mills, all of the Operating Partnership’s partnership interests at a price based on the fair market value of the project.  Notwithstanding the exercise by Mills or the Operating Partnership of any of the foregoing rights with respect to the sale of the Operating Partnership’s partnership interest to Mills or a third party, the Operating Partnership will retain its right to component ventures for the future development of the office and hotel phases.

 

On February 12, 2003, the New Jersey Sports and Exposition Authority selected The Mills Corporation and the Operating Partnership to redevelop the Continental Airlines Arena site (“Arena Site”) for mixed uses, including retail.  In March 2003, Hartz Mountain Industries, Inc., or Hartz, filed a lawsuit in the Superior Court of New Jersey, Law Division, for Bergen County, seeking to enjoin the New Jersey Sports and Exposition Authority, or NJSEA, from entering into a contract with Mills and the Operating Partnership for the redevelopment of the Continental Arena site.  In May 2003, the court denied Hartz’s request for an injunction and dismissed its suit for failure to exhaust administrative remedies.  In June 2003, the NJSEA held hearings on Hartz’s protest, and on a parallel protest filed by another rejected developer, Westfield, Inc., or Westfield.  On September 10, 2003,the NJSEA ruled against Hartz’s and Westfield’s protests, and on May 14, 2004, the Appellate Division of the Superior Court of New Jersey rejected Hartz’s contention that the NJSEA lacks statutory authority to allow retail development of its property.  The Supreme Court of New Jersey has declined to review the Appellate Division’s decision.  Hartz, Westfield and four taxpayers (the “Braha Appellants”) have also filed appeals from the NJSEA’s final decision based on other grounds.  In a separate action commenced in January 2004, Hartz and Westfield also appealed the NJSEA’s approval and execution of the formal redevelopment agreement with the Meadowlands Venture.  Several appeals filed by Hartz, Westfield and others, including certain environmental groups, that challenge certain approvals received by the Meadowlands Venture from the NJSEA, the New Jersey Meadowlands Commission and the New Jersey Department of Environmental Protectionremain pending before the Appellate Division.   The Appellate Division, in a decision rendered on November 24, 2004, completed its review of Hartz’s Open Public Records Act appeal and the remand proceeding it earlier ordered and upheld the findings of the Law Division in the remand proceeding.  The Supreme Court of New Jersey has declined to review the Appellate Division’s decision.  The NJSEA held further hearings on December 15 and 16, 2004, at Hartz’s request to review certain additional facts in support of its bid protest.  The Hearing Officer rendered his Supplemental Report and Recommendation to the NJSEA on March 4, 2005, finding no merit in the protests presented by Hartz and Westfield.  The NJSEA accepted the Supplemental Report and Recommendation on March 30, 2005 and Hartz has appealed that decision to the Appellate Division.  Hartz has also filed an application with the Appellate Division seeking an Order staying the construction of theMeadowlands Xanadu project, which officially commenced on March 24, 2005, and on April 27, 2005, the Braha Appellants filed a separate appeal with the Appellate Division also challenging the NJSEA’s decision to allow construction to begin and seeking an Order staying the construction of the Meadowlands Xanadu project.  The Appellate Division has not made any determinations with respect to these appeals.  On April 5, 2005 the New York Football Giants filed a Verified Complaint seeking an emergency order halting construction pending a final decision on its contention that construction of the Meadowlands Xanadu project violates its lease agreements with the NJSEA.  The Superior Court of New Jersey, Chancery Division, has scheduled a hearing on that application for May 6, 2005.  On March 18, 2005, the U.S. Army Corps of Engineers issued a permit to the Meadowlands 

 

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Venture to authorize the filling of 7.69 acres of wetlands and other waters of the United States in connection with the Meadowlands Xanadu project.  On March 30, 2005 the Sierra Club, the New Jersey Public Interest Research Group, Citizen Lobby, Inc. and the New Jersey Environmental Federation filed a complaint in the United States District Court for the District of New Jersey, challenging the Corps’ decision to issue the permit to the Meadowlands Venture and seeking to set aside the permit and remand the matter to the Corps for further proceedings consistent with the National Environmental Policy Act and the Clean Water Act.  The complaint also stated that the plaintiffs were seeking a preliminary injunction to halt the filling activities authorized by the Corps’ permit pending the resolution of the plaintiffs’ claims on the merits.The complaint names both the Corps and the Meadowlands Venture as defendants.  Answers to the complaint must be filed by June 13, 2005.  It is expected that the parties will file cross motions for summary judgment later this year. 

 

The Operating Partnership believes that the Meadowlands Venture’s proposal and the planned project comply with applicable laws, and the Meadowlands Venture intends to continue its vigorous defense of its rights under the executed Redevelopment Agreement and recently executed Ground Lease.  Although there can be no assurance, the Operating Partnership does not believe that the pending appeals will have any material affect on its ability to develop the Meadowlands Xanadu project.

 

**HPMC**

On July 21, 1998, the Operating Partnership entered into a joint venture with HCG Development, L.L.C. and Summit Partners I, L.L.C. to form HPMC Development Partners II, L.P. (formerly known as HPMC Lava Ridge Partners, L.P.).  HPMC Development Partners II, L.P.’s efforts have focused on three development projects, commonly referred to as Lava Ridge, Pacific Plaza I & II and Stadium Gateway.

 

The Operating Partnership has a 50 percent ownership interest and HCG Development, L.L.C. and Summit Partners I, L.L.C. (both of which are not affiliated with the Operating Partnership) collectively have a 50 percent ownership interest in HPMC Development Partners II, L.P.  Significant terms of the applicable partnership agreements, among other things, call for the Operating Partnership to provide 80 percent and HCG Development, L.L.C. and Summit Partners I, L.L.C. to collectively provide 20 percent of the development equity capital.  As the Operating Partnership has agreed to fund development equity capital disproportionate to its ownership interest, it was granted a preferred return of 10 percent on its invested capital as a priority.  Profits and losses are allocated to the partners based upon the priority of distributions specified in the respective agreements and entitle the Operating Partnership to apreferred return, as well as 50 percent of residual profits above the preferred returns.  Equity in earnings recognized by the Operating Partnership consists of preferred returns and the Operating Partnership’s equity in earnings (loss) after giving effect to the payment of such preferred returns.

 

**Lava Ridge**

Lava Ridge is an office complex comprised of three two-story buildings, aggregating 183,200 square feet, located in Roseville, California, which was constructed and placed in service by the venture.  On May 30, 2002, the venture sold the office complex for approximately $31,700.

 

**Stadium Gateway**

Stadium Gateway is a development joint venture project, located in Anaheim, California between HPMC Development Partners II, L.P. and a third-party entity.  The venture constructed a six-story, 273,194 square foot office building, which commenced initial operations in January 2002.  On April 1, 2003, the venture sold the office property for approximately $52,500.

 

**Pacific Plaza I & II**

Pacific Plaza I & II is a two-phase development joint venture project, located in Daly City, California between, HPMC Development Partners II, L.P. and a third-party entity.  Phase I of the project, which commenced initial operations in August 2001, consists of a nine-story office building, aggregating 364,384 square feet.  Phase II, which comprises a three-story retail and theater complex, commenced initial operations in June 2002.  On August 27, 2004, the venture sold the Pacific Plaza I & II complex for approximately $143,000.  The Operating Partnership performed management services for the property while it was owned by the venture and recognized $0 and $89 in fees for such services in the three months ended March 31, 2005 and 2004, respectively.

 

 

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**G&G MARTCO (Convention Plaza)**

The Operating Partnership holds a 50 percent interest in G&G Martco, which owns Convention Plaza, a 305,618 square foot office building, located in San Francisco, California.  The venture has a mortgage loan with a $43,880 balance at March 31, 2005 collateralized by its office property.  The loan also provides the venture the ability to increase the balance of the loan up to an additional $3,896 for the funding of qualified leasing costs.  The loan bears interest at a rate of the London Inter-Bank Offered Rate (“LIBOR”) (2.87 percent at March 31, 2005) plus 162.5 basis points and matures in August 2006.  The Operating Partnership performs management and leasing services for the property owned by the joint venture and recognized $34 and $36 in fees for such services in the three months ended March 31, 2005 and 2004, respectively.

 

**PLAZA VIII AND IX ASSOCIATES, L.L.C./AMERICAN FINANCIAL EXCHANGE L.L.C.**

On May 20, 1998, the Operating Partnership entered into a joint venture with Columbia Development Company, L.L.C. (“Columbia”) to form American Financial Exchange L.L.C.  The venture was formed to acquire land for future development, located on the Hudson River waterfront in Jersey City, New Jersey, adjacent to the Operating Partnership’s Harborside Financial Center office complex.  Among other things, the partnership agreement provides for a preferred return on the Operating Partnership’s invested capital in the venture, in addition to the Operating Partnership’s proportionate share of the venture’s profit, as defined in the agreement.  The joint venture acquired land on which it initially constructed a parking facility.  In the fourth quarter 2000, the joint venture started construction of Plaza 10, a 577,575 square foot office building, which was 100 percent pre-leased toCharles Schwab & Co. Inc. (“Schwab”) for a 15-year term, on certain of the land owned by the venture.  The lease agreement with Schwab obligated the venture, among other things, to deliver space to the tenant by required timelines and offers expansion options, at the tenant’s election. 

 

On September 29, 2003, the Operating Partnership sold its interest in AFE, in which it held a 50 percent interest, and received approximately $162,145 in net sales proceeds from the transaction, which the Operating Partnership used primarily to repay outstanding borrowings under its revolving credit facility.  Following completion of the sale of its interest, the Operating Partnership no longer has any remaining obligations to Schwab.

 

In advance of the transaction, AFE distributed its interests in Plaza VIII and IX Associates, L.L.C., which owned the undeveloped land currently used as a parking facility, to its then partners, the Operating Partnership and Columbia.  The Operating Partnership and Columbia subsequently entered into a new joint venture to own and manage the undeveloped land and related parking operations through Plaza VIII and IX Associates, L.L.C.  The Operating Partnership and Columbia each hold a 50 percent interest in the new venture.

 

**RAMLAND REALTY ASSOCIATES L.L.C. (One Ramland Road)**

On August 20, 1998, the Operating Partnership entered into a joint venture with S.B. New York Realty Corp. to form Ramland Realty Associates L.L.C.  The venture was formed to own, manage and operate One Ramland Road, a 232,000 square foot office/flex building and adjacent developable land, located in Orangeburg, New York.  In August 1999, the joint venture completed redevelopment of the property and placed the office/flex building in service.  The Operating Partnership holds a 50 percent interest in the joint venture.  The venture has a mortgage loan with a $14,936 balance at March 31, 2005 secured by its office/flex property.  The mortgage bears interest at a rate of LIBOR plus 175 basis points and matures in January 2007, with two one-year extension options, subject to certain conditions.

 

The Operating Partnership performs management, leasing and other services for the property owned by the joint venture and recognized $9 and $3 in fees for such services in the three months ended March 31, 2005 and 2004 respectively.

 

**ASHFORD LOOP ASSOCIATES L.P. (1001 South Dairy Ashford/2100 West Loop South)**

On September 18, 1998, the Operating Partnership entered into a joint venture with Prudential to form Ashford Loop Associates L.P. The venture was formed to own, manage and operate 1001 South Dairy Ashford, a 130,000 square foot office building acquired on September 18, 1998, and 2100 West Loop South, a 168,000 square foot office building acquired on November 25, 1998, both located in Houston, Texas.  The Operating Partnership held a 20 percent interest in the joint venture.  Included in depreciation and amortization in the results of operations for the fourth quarter 2004 for the joint venture was a valuation allowance of $24,575 on account of the carrying value of the venture’s assets exceeding the net realizable value as of December 31, 2004.  Included in the Operating Partnership’s equity in earnings (loss) of unconsolidated joint venture for the fourth quarter 2004 was a $4,915 loss 

 

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representing the Operating Partnership’s share of the valuation allowance.  On February 25, 2005, the Operating Partnership sold its interest in the venture to Prudential for $2,664 and recognized a gain on the sale of $35.

 

**SOUTH PIER AT HARBORSIDE – HOTEL DEVELOPMENT**

On November 17, 1999, the Operating Partnership entered into a joint venture with Hyatt Corporation (“Hyatt”) to develop a 350-room hotel on the South Pier at Harborside Financial Center, Jersey City, New Jersey, which was completed and commenced initial operations in July 2002.  The Operating Partnership owns a 50 percent interest in the venture.  

 

The venture had a mortgage loan with a commercial bank with a $62,902 balance at December 31, 2003 collateralized by its hotel property.  The debt bore interest at a rate of LIBOR plus 275 basis points, which was scheduled to mature in December 2003, and was extended through January 29, 2004.  On that date, the venture repaid the mortgage loan using the proceeds from a new $40,000 mortgage loan (with a balance as of March 31, 2005 of $39,942), collateralized by the hotel property, as well as capital contributions from the Operating Partnership and Hyatt of $10,750 each.  The new loan carries an interest rate of LIBOR plus 200 basis points and matures in February 2006.  The loan provides for three one-year extension options subject to certain conditions.  The final two one-year extension options require payment of a fee.  On May 25, 2004, the venture obtained a second mortgage loan with a commercial bank for$20,000 (with a balance as of March 31, 2005 of $14,000) collateralized by the hotel property, in which each partner, including the Operating Partnership, has severally guaranteed repayment of approximately $8,000.  The loan carries an interest rate of LIBOR plus 175 basis points and matures in February 2006.  The loan provides for three one-year extension options subject to certain conditions.  The final two one-year extension options require payment of a fee.  The proceeds from this loan were used to make distributions to the Operating Partnership and Hyatt in the amount of $10,000 each.  Additionally, the venture has an $8,000 loan (with a balance as of March 31, 2005 of $7,570) with the City of Jersey City, provided by the U.S. Department of Housing and Urban Development.  The loan currently bears interest at fixed rates ranging from 6.09 percent to 6.62 percent and matures in August 2020.  The Operating Partnership has posted an $8,000 letter of credit in support of this loan,$4,000 of which is indemnified by Hyatt.

 

**NORTH PIER AT HARBORSIDE – RESIDENTIAL DEVELOPMENT**

On April 3, 2001, the Operating Partnership sold its North Pier at Harborside Financial Center, Jersey City, New Jersey to an entity which planned on developing residential housing on the site.  At the time, the Operating Partnership received net sales proceeds of approximately $3,357 (which included a note receivable of $2,027 subsequently repaid in 2002), and recognized a gain of $439 from the transaction.  On March 31, 2004, the Operating Partnership received additional purchase consideration of $720, for which the Operating Partnership recorded a gain of $720 in gain on sale of investment in unconsolidated joint ventures for the three months ended March 31, 2004.

 

 

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**SUMMARIES OF UNCONSOLIDATED JOINT VENTURES**

The following is a summary of the financial position of the unconsolidated joint ventures in which the Operating Partnership had investment interests as of March 31, 2005 and December 31, 2004:

 

 

March 31, 2005

 

 

 

 

 

Plaza

 

 

 

 

 

Meadowlands

 

G&G

VIII & IX

Ramland

Ashford

Harborside

Combined

 

Xanadu

HPMC

Martco

Associates

Realty

Loop

South Pier

Total

**Assets:**

 

 

 

 

 

 

 

 

Rental property, net

$248,620

--

$   8,624

$12,474

$12,913

--

$78,293

$360,924

Other  assets

52,063

--

5,185

1,490

1,445

--

10,254

70,437

Total assets

$300,683

--

$ 13,809

$13,964

$14,358

--

$88,547

$431,361

**Liabilities and partners’/ members capital (deficit):**

 

 

 

 

 

 

 

 

Mortgages, loans payable and other obligations

$          --

--

$ 43,880

$        --

$14,936

--

$64,153

$122,969

Other liabilities

2,110

--

936

1,360

371

--

2,947

7,724

Partners’/members’ capital (deficit)

298,573

--

(31,007)

12,604

(949)

--

21,447

300,668

Total liabilities and partners’/members’ 

 

 

 

 

 

 

 

 

capital (deficit)

$300,683

--

$ 13,809

$13,964

$14,358

--

$88,547

$431,361

Operating Partnership’s investment in 

 

 

 

 

 

 

 

 

unconsolidated joint ventures, net

$  32,606

--

$   6,990

$  6,220

$        --

--

$13,228

$  59,044 |