During the year ended December 31, 2008, the Partnership spent approximately $3.7 million on capital improvements to various existing properties. Approximately $1.2 million was associated with the renovation of the hotel property in Lake Oswego, Oregon; approximately $0.7 million funded renovation and tenant improvements costs at the office property in Lisle, Illinois; approximately $0.7 million contributed to interior renovations at one of the office properties in Brentwood, Tennessee; and approximately $0.4 million financed tenant improvements at the retail property in Dunn, North Carolina. The remaining $0.7 million was associated with minor capital improvements and transaction costs associated with leasing expenses related to other properties in the Partnership. Additionally, $6.3 million of capital improvements was funded at the retail property in Ocean City, Maryland through the aforementioned third party loan.
The following is a comparison of the Partnership’s results of operations for the years ended December 31, 2008, and 2007.
Net investment income for the year ended December 31, 2007 reflects partial period results for the Austin, Texas apartment property acquired on May 8, 2007.
Net investment income for the year ended December 31, 2007 reflects partial period results for the Charlotte, North Carolina apartment property acquired on September 6, 2007.
The Kansas City, Kansas retail property was sold on June 29, 2007 but certain post-closing adjustments were recognized during the year ended December 31, 2008. Net investment income for the year ended 2007 reflectspartial period results to the June 29, 2007 sale.
Net investment income for the Partnership’s retail properties was approximately $6.1 million for the year ended December 31, 2008, a decrease of approximately $0.9 million from the prior year. The decrease was primarily due to (a) the allowance for accrued income that was deemed uncollectible at the retail property in Westminster, MD; (b) increased vacancy at the Roswell, Georgia retail property; (c) lost rent related to the Kansas City, Kansas retail property sold on June 29, 2007; and (d) a one-time occurrence related to bad debt expense at the retail property in Dunn, North Carolina. Partially offsetting these losses was an increase in net investment income at the property in Ocean City, Maryland due to completion of renovation and increased occupancy.
The retail properties owned by the Partnership recorded a net unrealized loss of approximately $23.9 million for the year ended December 31, 2008, compared with a net realized and unrealized loss of approximately $2.4 million for the prior year. The net unrealized loss for the year ended December 31, 2008 was primarily due to increased investment rates across the retail sector based on declining national consumption, which caused each property to decline in value. The aggregate net unrealized loss was also partially attributable to the $10.6 million loss recorded at the retail property in Roswell, Georgia, which is consistent with the most recent offers received in connection with the continued sale efforts of the property.
The Partnership sold its industrial property on February 7, 2007. Therefore no net investment income was received for the year ended December, 2008, reflecting a minimal decrease from the prior year.
Net investment income for the Partnership’s hotel property was approximately $1.2 million for the year ended December 31, 2008, reflecting a decrease of $0.1 million from the prior year due to lost occupancy.
The hotel property owned by the Partnership recorded an unrealized loss of approximately $1.3 million for the year ended December 31, 2008, compared with an unrealized gain of approximately $2.4 million for the prior year. The unrealized loss for the year ended December 31, 2008 reflects increased investment rates and decreased average daily rate growth projections.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and requires additional disclosures about fair value measurements. This statement does not require any new fair value measurements, but the application of this statement could change current practices in determining fair value. Adoption did not change the methodology used to fair value our real estate investments.
In December 2007, FASB issued SFAS No. 141 (revised 2007) (“SFAS 141R”), “Business Combinations”, and SFAS No. 160, “Non-controlling interests in Consolidated Financial Statements, an Amendment to ARB No. 51” (“SFAS 160”). SFAS 141R expands the definition of a business and redefines the acquisition date in a merger and acquisition transaction. It significantly modifies the existing SFAS 141, including changes to acquisition related contingent consideration, pre-acquisition contingencies, non-controlling interest, restructuring costs, in-process R&D, goodwill and partial acquisition. SFAS 160 requires the non-controlling interest to be reported as a separate component of equity. It also changes the allocation of losses and accounting in step acquisitions. The provisions in SFAS 160 should be applied prospectively except for the presentation and disclosure requirements, which are required retrospectively for all periods presented. SFAS 141R and SFAS 160 are effective for the acquisitions closing after the first annual reporting period beginning after December 15, 2008. The Partnership is currently reviewing the provisions in SFAS 141R and SFAS 160, and assessing whether the changes would be material to its financial statements upon adoption.
In general fair value estimates are based upon property appraisal reports prepared by independent real estate appraisers (members of the Appraisal Institute or an equivalent organization) within a reasonable amount of time following acquisition of the real estate and no less frequently than annually thereafter. The Chief Real Estate Appraiser of Prudential Investment Management, Inc. (“PIM”), which is an indirectly owned subsidiary of Prudential Financial, Inc. (“PFI”), is responsible to assure that the valuation process provides independent and reasonable property fair value estimates. An unaffiliated third party has been appointed by PIM to assist the Chief Real Estate Appraiser in maintaining and monitoring the independence and the accuracy of the appraisal process. The fair value of real estate investments does not reflect the transaction sale costs, which may be incurred upon disposition of the real estate investments.
In general, the input values used in the appraisal process are unobservable, therefore unless indicated otherwise; real estate investments are classified as Level 3 under SFAS 157 fair value hierarchy.
As described above, the estimated fair value of real estate and real estate related assets is determined through an appraisal process. There continues to be significant disruptions in the global capital, credit and real estate markets. These disruptions have led to, among other things, a significant decline in the volume of transaction activity, in the fair value of many real estate and real estate related investments, and a significant 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 and 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, 2008 and December 31, 2007.