Dispositions for the year ended December 31, 2009 included the sale of two assets. On May 1, 2009, the Partnership sold the retail property in Roswell, Georgia, resulting in net proceeds of $9.7 million to the Partnership. On November 10, 2009, the Partnership sold an outparcel at the retail property in Dunn, North Carolina, resulting in net proceeds of $0.4 million to the Partnership.
The Partnership recognized a loss on real estate investments sold attributable to the general partners’ controlling interests of approximately $4.3 million for the year ended December 31, 2009, compared with no gain/(loss) on real estate investments sold attributable to the general partners’ controlling interest for the prior year. The Partnership recorded a net unrealized loss attributable to the general partners’ controlling interest of approximately $41.7 million for the year ended December 31, 2009, compared with a net unrealized loss attributable to the general partners’ controlling interest of approximately $44.2 million for the prior year. The net unrealized loss attributable to the general partners’ controlling interest of approximately $41.7 million for the year ended December 31, 2009 was primarily attributable to valuation declines in every sector primarily due to increased investment rates suggesting an industry-wide repricing. Investment rates include direct and terminal capitalization rates, and discount rates, which reflect investors’ yield requirements on investments. The increase in investment rates was caused by the national economic downturn, frozen credit markets, weakening market fundamentals, and deteriorated demand for commercial real estate. The components of these valuation losses are discussed below by investment type.
Net investment income attributable to the general partners’ controlling interest for the Partnership’s office properties was approximately $2.5 million for the year ended December 31, 2009, a decrease of approximately $1.4 million from the prior year. The decrease in net investment income attributable to the general partners’ controlling interest for the year ended December 31, 2009 was primarily the result of (a) a $0.8 million decrease at the property in Brentwood, Tennessee due to a decrease in occupancy and free rent given to the largest existing tenant; and (b) a $0.7 million decrease at the property in Lisle, Illinois due to a decrease in occupancy. These decrease were partially offset by an increase in net investment income attributable to the general partners’ controlling interest at the property in Beaverton, Oregon due to increased contract rents.
The office properties owned by the Partnership recorded a net unrealized loss attributable to the general partners’ controlling interest of approximately $15.6 million during the year ended December 31, 2009, compared with a net unrealized loss attributable to the general partners’ controlling interest of approximately $6.7 million for the prior year. The net unrealized loss attributable to the general partners’ controlling interest of approximately $15.6 million for the year ended December 31, 2009 was primarily due to increased investment rates and more conservative market leasing assumptions across the office sector that caused each property to decline in value. Specifically, this contributed to the net unrealized losses attributable to the general partners’ controlling interest of approximately $2.6 million and $3.2 million at the properties in Beaverton, Oregon and Brentwood, Tennessee, respectively. In addition, prolonged free rent and significant leasing costs associated with the renewal of the property’s largest tenant at the property in Brentwood, Tennessee resulted in decreased cash flows, which contributed to its net unrealized loss attributable to the general partners’ controlling interest of approximately $6.0 million. Finally, at the office property in Lisle, Illinois, notification from the property’s largest tenant of its intent to vacate upon lease expiration in January 2009 resulted in decreased projected cash flows, which contributed to its net unrealized loss attributable to the general partners’ controlling interest of approximately $3.8 million.
Net investment income attributable to the general partners’ controlling interest for the Partnership’s apartment properties was approximately $2.7 million for the year ended December 31, 2009, a decrease of approximately $0.5 million from the prior year. The decrease in net investment income attributable to the general partners’ controlling interest for the year ended December 31, 2009 was primarily due to decreased contract rents and increased concessions at the apartment properties in Raleigh, North Carolina; Austin, Texas; and Charlotte, North Carolina.
The apartment properties owned by the Partnership recorded a net unrealized loss attributable to the general partners’ controlling interest of approximately $9.7 million for the year ended December 31, 2009, compared with a net unrealized loss attributable to the general partners’ controlling interest of approximately $12.3 million for the prior year. The net unrealized loss attributable to the general partners’ controlling interest for the year ended December 31, 2009 was primarily due to increased investment rates and more conservative market leasing assumptions across the apartment sector that caused each property to decline in value.
(1) The Roswell, Georgia retail property was sold on May 1, 2009, which is reflected as a realized gain/(loss).
The retail properties owned by the Partnership recorded a net recognized and unrealized loss attributable to the general partners’ controlling interest of approximately $17.0 million for the year ended December 31, 2009, compared with a net unrealized loss attributable to the general partners’ controlling interest of approximately $23.9 million for the prior year. The net unrealized loss attributable to the general partners’ controlling interest for the year ended December 31, 2009 was primarily due to increased investment rates and more conservative market leasing assumptions across the retail sector based on declining retail property fundamentals and decreased national consumption, which caused each property to decline in value. The net recognized and unrealized loss attributable to the general partners’ controlling interest was also partially attributable to the $4.5 million loss recorded at the retail property in Roswell, Georgia upon sale on May 1, 2009.
The Partnership adopted the FASB interpretation guidance on accounting for uncertainty in income taxes as of January 1, 2007. This interpretation prescribes a comprehensive model for how a partnership should recognize, measure, present, and disclose in its financial statements uncertain tax positions that a partnership has taken or expects to take on a tax return. The adoption of this guidance had no effect on the financial position and result of operations of the Partnership.
In September 2006, the FASB issued authoritative guidance for fair value measurements. This guidance defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and requires additional disclosures related to fair value measurements. This guidance does not require any new fair value measurements, but the application of this guidance could change current practices in determining fair value. This guidance is effective for fiscal years beginning after November 15, 2007 with early adoption permitted. The Partnership’s adoption effective January 1, 2008 did not have any material effect on the Partnership’s financial position and result of operations. Please refer to Notes 2D and 5 for details.
In December 2007, FASB revised authoritative guidance for business combinations, which expands the definition of a business and redefines the acquisition date in a merger and acquisition transaction. It significantly modifies the existing guidance for business combinations, including changes to acquisition related contingent consideration, preacquisition contingencies, noncontrolling interest, restructuring costs, in-process R&D, goodwill and partial acquisition. This guidance is effective for acquisitions closing after the first annual reporting period beginning after December 15, 2008. The Partnership’s adoption of this guidance effective January 1, 2009 did not have a material effect on the Partnership’s consolidated financial position or results of operations, but may have an effect on the accounting for future business combinations.
In December 2007, FASB revised the accounting, presentation and disclosure for noncontrolling interests in consolidated financial statements. This revised guidance requires noncontrolling interests to be reported as a separate component of equity. It also changes the allocation of losses and accounting in step acquisitions. The provisions in this revision should be applied prospectively except for the presentation and disclosure requirements, which are required retrospectively for all periods presented. After the initial adoption, any retained noncontrolling equity investment as a result of a deconsolidation must be measured at fair value at the date of the deconsolidation. This guidance is effective for the annual periods beginning after December 15, 2008. Pursuant to the Partnership’s adoption on January 1, 2009 of the revised guidance, the Partnership is presenting its noncontrolling interests as equity for all periods presented in the financial statements. Noncontrolling interests, previously reported as a liability, are now required to be reported as a separate component of equity on the balance sheet, and totaled $4.9 million December 31, 2008. In addition, net income (loss) attributable to the noncontrolling interest, which was previously reported as an expense and reflected within Net Investment Income is now reported as a separate amount below
In April 2009, the FASB issued authoritative guidance on determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. This guidance also amends the disclosure requirements in interim and annual periods. This guidance is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009. The Partnership’s early adoption of this guidance effective January 1, 2009 did not have a material effect on the Partnership’s consolidated financial position or results of operations.
In September 2009, the FASB issued updated guidance for the fair value measurement of investments in certain entities that calculate net asset value per share including certain alternative investments such as hedge funds, private equity funds, and venture capital funds. This guidance allows companies to determine the fair value of such investments using net asset value (“NAV”) as a practical expedient if the fair value of the investment is not readily determinable and the investee entity issues financial statements in accordance with measurement principles for investment companies. Use of this practical expedient is prohibited if it is probable the investment will be sold at something other than NAV. This guidance also requires new disclosures for each major category of alternative investments. It is effective for the first annual or interim reporting period ending after December 15, 2009,
The purpose of an appraisal is to estimate the fair value of real estate as of a specific date. In accordance with FASB authoritative guidance on fair value measurements and disclosures, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The estimate of fair value is based on the conventional approaches to value, all of which require the exercise of subjective judgment. The three approaches are: (1) current cost of reproducing the real estate less deterioration and functional and economic obsolescence; (2) discounting a series of income streams and reversion at a specific yield or by directly capitalizing a single year income estimate by an appropriate factor; and (3) value indicated by recent sales of comparable real estate in the market. In the reconciliation of these three approaches, the independent appraiser uses one or a combination of them, to come up with the approximated value for the type of real estate in the market.
As described above, the estimated fair value of real estate and real estate related assets is generally determined through an appraisal process. Recent disruptions in the global capital, credit and real estate markets have led to, among other things a decline in the volume of transaction activity, in the fair value of many real estate and real estate related investments, and a contraction in short-term and long-term debt and equity funding sources. The decline in liquidity and prices of real estate and real estate related investments, as well as the availability of observable transaction data and inputs, may have made it more difficult to determine the fair value of such investments. As a result, these estimated fair values may vary significantly from the prices at which the real estate investments would sell, since market prices of real estate investments can only be determined by negotiation between a willing buyer and seller. These differences could be material to the financial statements. Although the estimated fair values represent subjective estimates, management believes these estimated fair values are reasonable approximations of market prices and the aggregate estimated value of investments in real estate is fairly presented as of December 31, 2009 and December 31, 2008.