Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

x        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2008

 

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: 1-13199

 


 

SL GREEN REALTY CORP.

(Exact name of registrant as specified in its charter)

 

Maryland

 

13-3956775

(State or other jurisdiction of
incorporation or organization)

 

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

 

420 Lexington Avenue, New York, New York 10170

(Address of principal executive offices) (Zip Code)

 

(212) 594-2700

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES x     NO o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

 

(Do not check if a smaller reporting company)

 

 

The number of shares outstanding of the registrant’s common stock, $0.01 par value, was 58,150,140 as of July 31, 2008.

 

 

 



Table of Contents

 

SL GREEN REALTY CORP.

 

INDEX

 

 

 

 

PAGE

PART I.

FINANCIAL INFORMATION

 

 

 

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2008 (unaudited) and December 31, 2007

 

3

 

 

 

Condensed Consolidated Statements of Income for the three and six months ended June 30, 2008 and 2007 (unaudited)

 

4

 

 

 

Condensed Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2008 (unaudited)

 

5

 

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007 (unaudited)

 

6

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

7

 

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

33

 

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

49

 

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

 

49

 

 

 

 

PART II.

OTHER INFORMATION

 

50

 

 

 

 

ITEM 1.

 LEGAL PROCEEDINGS

 

50

 

 

 

 

ITEM 1A.

RISK FACTORS

 

50

 

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

51

 

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

51

 

 

 

 

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

51

 

 

 

 

ITEM 5.

OTHER INFORMATION

 

51

 

 

 

 

ITEM 6.

EXHIBITS

 

51

 

 

 

 

SIGNATURES

 

52

 

2



Table of Contents

 

PART I.         FINANCIAL INFORMATION

 

ITEM 1.        Financial Statements
 

SL Green Realty Corp.

Condensed Consolidated Balance Sheets

(Amounts in thousands, except per share data)

 

 

 

June 30,
2008

 

December 31,
2007

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Commercial real estate properties, at cost:

 

 

 

 

 

Land and land interests

 

$

1,483,798

 

$

1,436,569

 

Building and improvements

 

6,005,030

 

5,924,626

 

Building leasehold and improvements

 

1,250,378

 

1,249,093

 

Property under capital lease

 

12,208

 

12,208

 

 

 

8,751,414

 

8,622,496

 

Less: accumulated depreciation

 

(484,087

)

(381,510

)

 

 

8,267,327

 

8,240,986

 

Assets held for sale

 

 

41,568

 

Cash and cash equivalents

 

53,567

 

45,964

 

Restricted cash

 

101,788

 

105,475

 

Tenant and other receivables, net of allowance of $13,241 and $13,932 in 2008 and 2007, respectively

 

39,351

 

49,015

 

Related party receivables

 

11,682

 

13,082

 

Deferred rents receivable, net of allowance of $13,470 and $13,400 in 2008 and 2007, respectively

 

158,049

 

136,595

 

Structured finance investments, net of discount of $26,571 and $30,783 in 2008 and 2007, respectively

 

839,826

 

805,215

 

Investments in unconsolidated joint ventures

 

1,132,329

 

1,438,123

 

Deferred costs, net

 

141,285

 

134,354

 

Other assets

 

404,383

 

419,701

 

Total assets

 

$

11,149,587

 

$

11,430,078

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Mortgage notes payable

 

$

2,867,305

 

$

2,844,644

 

Revolving credit facility

 

644,500

 

708,500

 

Term loan and unsecured notes

 

1,793,668

 

2,069,938

 

Accrued interest payable and other liabilities

 

40,867

 

45,194

 

Accounts payable and accrued expenses

 

130,897

 

180,898

 

Deferred revenue/gain

 

789,525

 

819,022

 

Capitalized lease obligation

 

16,621

 

16,542

 

Deferred land leases payable

 

17,468

 

16,960

 

Dividend and distributions payable

 

51,803

 

52,077

 

Security deposits

 

33,595

 

35,021

 

Junior subordinate deferrable interest debentures held by trusts that issued trust preferred securities

 

100,000

 

100,000

 

Total liabilities

 

6,486,249

 

6,888,796

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

Minority interest in operating partnership

 

88,931

 

82,007

 

Minority interests in other partnerships

 

626,903

 

632,400

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

Series C preferred stock, $0.01 par value, $25.00 liquidation preference, 6,300 issued and outstanding at June 30, 2008 and December 31, 2007, respectively

 

151,981

 

151,981

 

Series D preferred stock, $0.01 par value, $25.00 liquidation preference, 4,000 issued and outstanding at June 30, 2008 and December 31, 2007, respectively

 

96,321

 

96,321

 

Common stock, $0.01 par value 160,000 shares authorized and 60,397 and 60,071 issued and outstanding at June 30, 2008 and December 31, 2007, respectively (including 2,114 and 1,312 treasury shares at June 30, 2008 and December 31, 2007, respectively)

 

604

 

601

 

Additional paid-in-capital

 

2,960,245

 

2,931,887

 

Treasury stock at cost

 

(218,775

)

(150,719

)

Accumulated other comprehensive (loss) income

 

(7,576

)

4,943

 

Retained earnings

 

964,704

 

791,861

 

Total stockholders’ equity

 

3,947,504

 

3,826,875

 

Total liabilities and stockholders’ equity

 

$

11,149,587

 

$

11,430,078

 

 

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

 

3



Table of Contents

 

SL Green Realty Corp.

Condensed Consolidated Statements of Income

(Unaudited, and amounts in thousands, except per share data)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Revenues

 

 

 

 

 

 

 

 

 

Rental revenue, net

 

$

200,760

 

$

171,907

 

$

402,155

 

$

319,044

 

Escalation and reimbursement

 

31,101

 

29,284

 

62,225

 

56,478

 

Preferred equity and investment income

 

18,375

 

27,432

 

39,681

 

49,141

 

Other income

 

55,541

 

23,188

 

73,983

 

113,065

 

Total revenues

 

305,777

 

251,811

 

578,044

 

537,728

 

Expenses

 

 

 

 

 

 

 

 

 

Operating expenses (including approximately $3,405, $6,977 (2008) and $3,961, $6,978 (2007) paid to affiliates)

 

56,949

 

53,022

 

110,999

 

99,487

 

Real estate taxes

 

34,076

 

33,716

 

67,904

 

63,329

 

Ground rent

 

7,826

 

7,766

 

16,075

 

15,031

 

Interest

 

73,833

 

62,595

 

152,351

 

120,186

 

Amortization of deferred financing costs

 

1,663

 

9,242

 

3,709

 

12,543

 

Depreciation and amortization

 

56,580

 

43,310

 

112,028

 

79,370

 

Marketing, general and administrative

 

32,407

 

24,131

 

60,389

 

58,376

 

Total expenses

 

263,334

 

233,782

 

523,455

 

448,322

 

Income from continuing operations before equity in net income of unconsolidated joint ventures, gain on sale, minority interest and discontinued operations

 

42,443

 

18,029

 

54,589

 

89,406

 

Equity in net income from unconsolidated joint ventures

 

17,822

 

12,059

 

37,247

 

21,413

 

Income from continuing operations before gain on sale, minority interest and discontinued operations

 

60,265

 

30,088

 

91,836

 

110,819

 

Equity in net gain on sale of interest in unconsolidated joint ventures/ real estate

 

93,481

 

 

93,481

 

31,509

 

Minority interest in other partnerships

 

(4,191

)

(4,655

)

(10,169

)

(8,578

)

Minority interest in operating partnership attributable to continuing operations

 

(5,716

)

(997

)

(6,505

)

(5,194

)

Income from continuing operations

 

143,839

 

24,436

 

168,643

 

128,556

 

Net income from discontinued operations, net of minority interest

 

 

4,508

 

70

 

8,090

 

Gain on sale of discontinued operations, net of minority interest

 

 

241,906

 

105,986

 

286,600

 

Net income

 

143,839

 

270,850

 

274,699

 

423,246

 

Preferred stock dividends

 

(4,969

)

(4,969

)

(9,938

)

(9,938

)

Net income available to common stockholders

 

$

138,870

 

$

265,881

 

$

264,761

 

$

413,308

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

Net income from continuing operations before gain on sale and discontinued operations

 

$

0.84

 

$

0.33

 

$

1.18

 

$

1.49

 

Net income from discontinued operations, net of minority interest

 

 

0.08

 

 

0.14

 

Gain on sale of discontinued operations, net of minority interest

 

 

4.06

 

1.81

 

4.92

 

Gain on sale of unconsolidated joint ventures/ real estate

 

1.54

 

 

1.54

 

0.54

 

Net income available to common stockholders

 

$

2.38

 

$

4.47

 

$

4.53

 

$

7.09

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

Net income from continuing operations before gain on sale and discontinued operations

 

$

0.84

 

$

0.32

 

$

1.18

 

$

1.48

 

Net income from discontinued operations, net of minority interest

 

 

0.08

 

 

0.14

 

Gain on sale of discontinued operations, net of minority interest

 

 

3.98

 

1.80

 

4.81

 

Gain on sale of unconsolidated joint ventures/ real estate

 

1.53

 

 

1.53

 

0.50

 

Net income available to common stockholders

 

$

2.37

 

$

4.38

 

$

4.51

 

$

6.93

 

 

 

 

 

 

 

 

 

 

 

Dividends per share

 

$

0.7875

 

$

0.70

 

$

1.575

 

$

1.40

 

Basic weighted average common shares outstanding

 

58,329

 

59,513

 

58,406

 

58,258

 

Diluted weighted average common shares and common share equivalents outstanding

 

61,014

 

63,275

 

61,120

 

62,215

 

 

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

 

4



Table of Contents

 

SL Green Realty Corp.

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited, and amounts in thousands, except per share data)

 

 

 

Series C
Preferred

 

Series D
Preferred

 

Common Stock

 

Additional
Paid-

 

Treasury

 

Accumulated
Other
Comprehensive

 

Retained

 

 

 

Comprehensive

 

 

 

Stock

 

Stock

 

Shares

 

Par Value

 

In-Capital

 

Stock

 

Income

 

Earnings

 

Total

 

Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2007

 

$

151,981

 

$

96,321

 

58,759

 

$

601

 

$

2,931,887

 

$

(150,719

)

$

4,943

 

$

791,861

 

$

3,826,875

 

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

274,699

 

274,699

 

$

274,699

 

Net unrealized loss on derivative instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

(893

)

 

 

(893

)

(893

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SL Green’s share of joint venture net unrealized loss on derivative instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,626

)

 

 

(11,626

)

(11,626

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,938

)

(9,938

)

 

 

Redemption of units and DRIP proceeds

 

 

 

 

 

1

 

 

 

160

 

 

 

 

 

 

 

160

 

 

 

Deferred compensation plan & stock award, net

 

 

 

 

 

130

 

1

 

398

 

 

 

 

 

 

 

399

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of deferred compensation plan

 

 

 

 

 

 

 

 

 

20,855

 

 

 

 

 

 

 

20,855

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from stock options exercised

 

 

 

 

 

195

 

2

 

6,945

 

 

 

 

 

 

 

6,947

 

 

 

Treasury stock-at cost

 

 

 

 

 

(802

)

 

 

 

 

(68,056

)

 

 

 

 

(68,056

)

 

 

Cash distribution declared ($1.575 per common share of which none represented a return of capital for federal income tax purposes)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(91,918

)

(91,918

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2008

 

$

151,981

 

$

96,321

 

58,283

 

$

604

 

$

2,960,245

 

$

(218,775

)

$

(7,576

)

$

964,704

 

$

3,947,504

 

$

262,180

 

 

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

 

5


 

 


Table of Contents

 

SL Green Realty Corp.

Condensed Consolidated Statements of Cash Flows

(Unaudited, and amounts in thousands, except per share data)

 

 

 

Six Months

 

 

 

Ended June 30,

 

 

 

2008

 

2007

 

Operating Activities

 

 

 

 

 

Net income

 

$

274,699

 

$

423,246

 

Adjustment to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

115,737

 

96,026

 

Gain on sale of discontinued operations

 

(110,232

)

(299,180

)

Equity in net income from unconsolidated joint ventures

 

(37,247

)

(21,413

)

Equity in net gain on sale of unconsolidated joint ventures

 

(93,481

)

(31,509

)

Distributions of cumulative earnings from unconsolidated joint ventures/ real estate

 

48,374

 

22,227

 

Minority interests

 

20,922

 

26,707

 

Deferred rents receivable

 

(21,524

)

(23,518

)

Other non-cash adjustments

 

5,983

 

22,212

 

Changes in operating assets and liabilities:

 

 

 

 

 

Restricted cash – operations

 

504

 

(13,025

)

Tenant and other receivables

 

7,001

 

(8,801

)

Related party receivables

 

1,499

 

(3,748

)

Deferred lease costs

 

(17,883

)

(11,288

)

Other assets

 

(7,585

)

14,722

 

Accounts payable, accrued expenses and other liabilities

 

(52,048

)

57,935

 

Deferred revenue and land lease payable

 

2,879

 

(1,122

)

Net cash provided by operating activities

 

137,598

 

249,471

 

Investing Activities

 

 

 

 

 

Acquisitions of real estate property

 

(67,751

)

(4,045,585

)

Proceeds from Asset Sale

 

 

1,964,914

 

Additions to land, buildings and improvements

 

(65,241

)

(39,111

)

Escrowed cash – capital improvements/acquisition deposits

 

3,089

 

123,146

 

Investments in unconsolidated joint ventures

 

(18,767

)

(192,827

)

Distributions in excess of cumulative earnings from unconsolidated joint ventures

 

416,370

 

74,743

 

Net proceeds from disposition of real estate/ partial interest in property

 

152,933

 

441,419

 

Other investments

 

(16,132

)

(63,075

)

Structured finance and other investments net of repayments/participations

 

(58,505

)

(220,480

)

Net cash provided by (used in) investing activities

 

345,996

 

(1,956,856

)

Financing Activities

 

 

 

 

 

Proceeds from mortgage notes payable

 

35,826

 

809,914

 

Repayments of mortgage notes payable

 

(13,166

)

(118,724

)

Proceeds from revolving credit facility, term loan and unsecured notes

 

592,518

 

2,352,503

 

Repayments of revolving credit facility and term loan

 

(933,167

)

(1,754,313

)

Proceeds from stock options exercised

 

7,108

 

10,507

 

Purchases of treasury stock

 

(68,056

)

(40,368

)

Minority interest in other partnerships

 

6,691

 

524,011

 

Dividends and distributions paid

 

(101,856

)

(85,420

)

Deferred loan costs and capitalized lease obligation

 

(1,889

)

(27,603

)

Net cash (used in) provided by financing activities

 

(475,991

)

1,670,507

 

Net increase (decrease) in cash and cash equivalents

 

7,603

 

(36,878

)

Cash and cash equivalents at beginning of period

 

45,964

 

117,178

 

Cash and cash equivalents at end of period

 

$

53,567

 

$

80,300

 

 

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

 

6



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2008

 

1.  Organization and Basis of Presentation

 

SL Green Realty Corp., also referred to as the Company or SL Green, a Maryland corporation, and SL Green Operating Partnership, L.P., or the operating partnership, a Delaware limited partnership, were formed in June 1997 for the purpose of combining the commercial real estate business of S.L. Green Properties, Inc. and its affiliated partnerships and entities.  The operating partnership received a contribution of interest in the real estate properties, as well as 95% of the economic interest in the management, leasing and construction companies which are referred to as the Service Corporation.  The Company has qualified, and expects to qualify in the current fiscal year, as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Code, and operates as a self-administered, self-managed REIT.  A REIT is a legal entity that holds real estate interests and, through payments of dividends to stockholders, is permitted to reduce or avoid the payment of Federal income taxes at the corporate level.  Unless the context requires otherwise, all references to “we,” “our” and “us” means the Company and all entities owned or controlled by the Company, including the operating partnership.

 

Substantially all of our assets are held by, and our operations are conducted through, the operating partnership.  The Company is the sole managing general partner of the operating partnership.  As of June 30, 2008, minority investors held, in the aggregate, a 3.86% limited partnership interest in the operating partnership.

 

On January 25, 2007, we completed the acquisition, or the Reckson Merger, of all of the outstanding shares of common stock of Reckson Associates Realty Corp., or Reckson, pursuant to the terms of the Agreement and Plan of Merger, dated as of August 3, 2006, as amended, the Merger Agreement, among SL Green, Wyoming Acquisition Corp., or Wyoming, Wyoming Acquisition GP LLC, Wyoming Acquisition Partnership LP, Reckson and Reckson Operating Partnership, L.P., or ROP. Pursuant to the terms of the Merger Agreement, each of the issued and outstanding shares of common stock of Reckson were converted into (i) $31.68 in cash, (ii) 0.10387 of a share of the common stock, par value $0.01 per share, of SL Green and (iii) a prorated dividend in an amount equal to approximately $0.0977 in cash. We also assumed an aggregate of approximately $226.3 million of Reckson mortgage debt, approximately $287.5 million of Reckson convertible public debt and approximately $967.8 million of Reckson public unsecured notes.  ROP is a subsidiary of our operating partnership.

 

On January 25, 2007, we completed the sale, or Asset Sale, of certain assets of ROP to an asset purchasing venture led by certain of Reckson’s former executive management, or the Buyer, for a total consideration of approximately $2.0 billion. SL Green caused ROP to transfer the following assets to the Buyer in the Asset Sale: (1) certain real property assets and/or entities owning such real property assets, in either case, of ROP and 100% of certain loans secured by real property, all of which are located in Long Island, New York; (2) certain real property assets and/or entities owning such real property assets, in either case, of ROP located in White Plains and Harrison, New York; (3) all of the real property assets and/or entities owning 100% of the interests in such real property assets, in either case, of ROP located in New Jersey; (4) the entity owning a 25% interest in Reckson Australia Operating Company LLC, Reckson’s Australian management company (including its Australian licensed responsible entity), and other related entities, and ROP and ROP subsidiaries’ rights to and interests in, all related contracts and assets, including, without limitation, property management and leasing, construction services and asset management contracts and services contracts; (5) the direct or indirect interest of Reckson in Reckson Asset Partners, LLC, an affiliate of RSVP and all of ROP’s rights in and to certain loans made by ROP to Frontline Capital Group, the bankrupt parent of Reckson Strategic Venture Partners, LLC, or RSVP, and other related entities, which were purchased by a 50/50 joint venture comprised of the buyer and an affiliate of SL Green; (6) a 50% participation interest in certain loans made by a subsidiary of ROP that are secured by four real property assets located in Long Island, New York; and (7) 100% of certain loans secured by real property located in White Plains and New Rochelle, New York.

 

As of June 30, 2008, we owned the following interests in commercial office properties in the New York Metro area, primarily in midtown Manhattan, a borough of New York City, or Manhattan.  Our investments in the New York Metro area also include investments in Brooklyn, Queens, Long Island, Westchester County, Connecticut and New Jersey, which are collectively known as the Suburban assets:

 

Location

 

Ownership

 

Number of
Properties

 

Square Feet

 

Weighted Average
Occupancy 
(1)

 

Manhattan

 

Consolidated properties

 

22

 

14,290,200

 

97.9

%

 

 

Unconsolidated properties

 

8

 

9,429,000

 

94.8

%

 

 

 

 

 

 

 

 

 

 

Suburban

 

Consolidated properties

 

30

 

4,925,800

 

90.3

%

 

 

Unconsolidated properties

 

6

 

2,941,700

 

94.4

%

 

 

 

 

66

 

31,586,700

 

95.4

%

 


(1)

 

The weighted average occupancy represents the total leased square feet divided by total available rentable square feet.

 

7



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2008

 

We also own investments in eight retail properties encompassing approximately 400,212 square feet, two development properties encompassing approximately 363,000 square feet and two land interests.  In addition, we manage three office properties owned by third parties and affiliated companies encompassing approximately 1.0 million rentable square feet.

 

As of June 30, 2008, we also owned approximately 15.8% of the outstanding common stock of Gramercy Capital Corp. (NYSE: GKK), or Gramercy, as well as 78.4 units, or 78.4%, of the Class B limited partner interest in Gramercy’s operating partnership.  See Note 6.

 

Partnership Agreement

 

In accordance with the partnership agreement of the operating partnership, or the operating partnership agreement, we allocate all distributions and profits and losses in proportion to the percentage ownership interests of the respective partners.  As the managing general partner of the operating partnership, we are required to take such reasonable efforts, as determined by us in our sole discretion, to cause the operating partnership to distribute sufficient amounts to enable the payment of sufficient dividends by us to avoid any Federal income or excise tax at the Company level. Under the operating partnership agreement each limited partner will have the right to redeem units of limited partnership interest for cash, or if we so elect, shares of our common stock on a one-for-one basis.  In addition, we are prohibited from selling 673 First Avenue before August 2009, under certain circumstances.

 

Basis of Quarterly Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included.  The 2008 operating results for the period presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.  These financial statements should be read in conjunction with the financial statements and accompanying notes included in our annual report on Form 10-K for the year ended December 31, 2007.

 

The balance sheet at December 31, 2007 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

 

2.  Significant Accounting Policies

 

Principles of Consolidation

 

The consolidated financial statements include our accounts and those of our subsidiaries, which are wholly-owned or controlled by us or entities which are variable interest entities in which we are the primary beneficiary under the Financial Accounting Standards Board, or FASB, Interpretation No. 46R, or FIN 46R, “Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51.”  See Note 5, Note 6 and Note 7.  Entities which we do not control and entities which are variable interest entities, but where we are not the primary beneficiary are accounted for under the equity method.  We consolidate variable interest entities in which we are determined to be the primary beneficiary.  The interest that we do not own is included in “Minority Interests in Other Partnerships” on the balance sheet.  All significant intercompany balances and transactions have been eliminated.

 

In June 2005, the FASB ratified the consensus in EITF Issue No. 04-5, or EITF 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights,” which provides guidance in determining whether a general partner controls a limited partnership. EITF 04-5 states that the general partner in a limited partnership is presumed to control that limited partnership. The presumption may be overcome if the limited partners have either (1) the substantive ability to dissolve the limited partnership or otherwise remove the general partner without cause or (2) substantive participating rights, which provide the limited partners with the ability to effectively participate in significant decisions that would be expected to be made in the ordinary course of the limited partnership’s business and thereby preclude the general partner from exercising unilateral control over the partnership.

 

We consolidate our investment in 919 Third Avenue as we own a 51% controlling interest.

 

If we retain an interest in the buyer and provide certain guarantees we account for such transaction as a profit-sharing arrangement. For transactions treated as profit-sharing arrangements, we record a profit-sharing obligation for the amount of equity contributed by the other partner and continue to keep the property and related accounts recorded on our books.  Any debt assumed by the buyer would continue to be recorded on our books.  The results of operations of the property, net of expenses other than depreciation (net operating

 

8



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2008

 

income), are allocated to the other partner for its percentage interest and reflected as “co-venture expense” in our consolidated financial statements.  In future periods, a sale is recorded and profit is recognized when the remaining maximum exposure to loss is reduced below the amount of gain deferred.

 

Investment in Commercial Real Estate Properties

 

In accordance with SFAS No. 141, “Business Combinations,” we allocate the purchase price of real estate to land and building and, if determined to be material, intangibles, such as the value of above-, below- and at-market leases and origination costs associated with the in-place leases.  We depreciate the amount allocated to building and other intangible assets over their estimated useful lives, which generally range from three to 40 years and from one to 14 years, respectively.  The values of the above- and below-market leases are amortized and recorded as either an increase (in the case of below-market leases) or a decrease (in the case of above-market leases) to rental income over the remaining term of the associated lease, which range from one to 14 years.  The value associated with in-place leases are amortized over the expected term of the associated lease, which includes an estimated probability of the lease renewal, and its estimated term, which range from one to 14 years.  If a tenant vacates its space prior to the contractual termination of the lease and no rental payments are being made on the lease, any unamortized balance of the related intangible will be written off.  The tenant improvements and origination costs are amortized as an expense over the remaining life of the lease (or charged against earnings if the lease is terminated prior to its contractual expiration date).  We assess fair value of the leases based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information.  Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market/economic conditions that may affect the property.

 

As a result of our evaluations, under SFAS No. 141, of acquisitions made, we recognized an increase of approximately $4.0 million, $9.8 million, $0.6 million and $1.3 million in rental revenue for the three and six months ended June 30, 2008 and 2007, respectively, for the amortization of aggregate below-market rents in excess of above-market leases and a reduction in lease origination costs, resulting from the allocation of the purchase price of the applicable properties.  We recognized a reduction in interest expense for the amortization of the above-market rate mortgage of approximately $1.7 million, $3.4 million, $1.6 million and $2.7 million for the three and six months ended June 30, 2008 and 2007, respectively.

 

The following summarizes our identified intangible assets (acquired above-market leases and in-place leases) and intangible liabilities (acquired below-market leases).  Amounts in thousands:

 

 

 

June 30,
2008

 

December 31,
2007

 

Identified intangible assets (included in other assets):

 

 

 

 

 

Gross amount

 

$

236,594

 

$

236,594

 

Accumulated amortization

 

(32,007

)

(9,970

)

Net

 

$

204,587

 

$

226,624

 

 

 

 

 

 

 

Identified intangible liabilities (included in deferred revenue):

 

 

 

 

 

Gross amount

 

$

480,770

 

$

480,770

 

Accumulated amortization

 

(52,113

)

(20,271

)

Net

 

$

428,657

 

$

460,499

 

 

Income Taxes

 

We are taxed as a REIT under Section 856(c) of the Code.  As a REIT, we generally are not subject to Federal income tax.  To maintain our qualification as a REIT, we must distribute at least 90% of our REIT taxable income to our stockholders and meet certain other requirements.  If we fail to qualify as a REIT in any taxable year, we will be subject to Federal income tax on our taxable income at regular corporate rates.  We may also be subject to certain state, local and franchise taxes.  Under certain circumstances, Federal income and excise taxes may be due on our undistributed taxable income.

 

Pursuant to amendments to the Code that became effective January 1, 2001, we have elected, and may in the future, elect to treat certain of our existing or newly created corporate subsidiaries as taxable REIT subsidiaries, or a TRS.  In general, a TRS of ours may perform non-customary services for our tenants, hold assets that we cannot hold directly and generally may engage in any real estate or non-real estate related business.  Our TRSs’ generate income, resulting in Federal income tax liability for these entities.  Our TRSs’ recorded approximately none and $0.9 million in Federal, state and local tax expense during the six months ended June 30, 2008 and 2007, respectively, of which $0.6 million and $0.8 million, respectively, had been paid.

 

9



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2008

 

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” or FIN 48. This interpretation, among other things, creates a two-step approach for evaluating uncertain tax positions. Recognition (step one) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two) determines the amount of benefit that more-likely-than-not will be realized upon settlement. Derecognition of a tax position that was previously recognized would occur when a company subsequently determines that a tax position no longer meets the more-likely-than-not threshold of being sustained. FIN 48 specifically prohibits the use of a valuation allowance as a substitute for derecognition of tax positions, and it has expanded disclosure requirements.  The adoption of FIN 48 on January 1, 2007 had no impact on our consolidated financial statements.

 

Stock-Based Employee Compensation Plans

 

We have a stock-based employee compensation plan, described more fully in Note 13.  We account for this plan under SFAS No. 123-R, “Shared Based Payment,” revised, or SFAS No. 123-R.  We adopted SFAS No. 123, “Accounting from Stock-Based Compensation” on January 1, 2003, prior to which we applied Accounting Principals Board Opinion No. 25, “Accounting for Stock Issued to Employees.”

 

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable.  In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility.  Because our plan has characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in our opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options.

 

Compensation cost for stock options, if any, is recognized ratably over the vesting period of the award.  Our policy is to grant options with an exercise price equal to the quoted closing market price of our stock on the grant date.  Awards of stock or restricted stock are expensed as compensation on a current basis over the benefit period.

 

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for grants during the six months ended June 30, 2008 and 2007.

 

 

 

2008

 

2007

 

Dividend yield

 

3.39

%

2.1

%

Expected life of option

 

5 years

 

5 years

 

Risk-free interest rate

 

3.41

%

4.61

%

Expected stock price volatility

 

22.41

%

21.48

%

 

Earnings Per Share

 

We present both basic and diluted earnings per share, or EPS.  Basic EPS excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, where such exercise or conversion would result in a lower EPS amount.  This also includes units of limited partnership interest.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

Concentrations of Credit Risk

 

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash investments, structured finance investments and accounts receivable.  We place our cash investments in excess of insured amounts with high quality financial institutions.  The collateral securing our structured finance investments is primarily located in the New York Metro area. (See Note 5). We perform ongoing credit evaluations of our tenants and require certain tenants to provide security deposits or letters of credit.  Though these security deposits and letters of credit are insufficient to meet the total value of a tenant’s lease obligation, they are a measure of good faith and a source of funds to offset the economic costs associated with lost rent and the costs associated with re-tenanting the space.  Although the properties in our real estate portfolio are primarily located in Manhattan, we also have properties located in Brooklyn, Queens, Long Island, Westchester County, Connecticut and New Jersey.  The tenants located in our buildings operate in various industries.  Other than one tenant who accounts for approximately 9.6% of our annualized rent, no other tenant in

 

10



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2008

 

our portfolio accounts for more than 5.9% of our annualized rent, including our share of joint venture annualized rent, at June 30, 2008.  Approximately 7%, 6%, 6%, 6% and 6% of our annualized rent, including our share of joint venture annualized rent, was attributable to 1221 Avenue of the Americas, 1515 Broadway, 420 Lexington Avenue, 1185 Avenue of the Americas and One Madison Avenue, respectively, for the quarter ended June 30, 2008.  Two borrowers accounted for more than 10.0% of the revenue earned on structured finance investments during the three months ended June 30, 2008.

 

Reclassification

 

Certain prior year balances have been reclassified to conform with the current year presentation in order to comply with SFAS No. 144 for discontinued operations presentation.

 

New Accounting Pronouncements

 

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements”, or SFAS No. 157. SFAS No. 157 provides guidance for using fair value to measure assets and liabilities. This statement clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing the asset or liability. SFAS No. 157 establishes a fair value hierarchy, giving the highest priority to quoted prices in active markets and the lowest priority to unobservable data. SFAS No. 157 applies whenever other standards require assets or liabilities to be measured at fair value. This statement is effective in fiscal years beginning after November 15, 2007. The adoption of this standard on January 1, 2008 did not have a material effect on our consolidated financial statements.  In February 2008, the FASB delayed the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities to fiscal year beginning after November 15, 2008.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 allows entities to voluntarily choose, at specified election dates, to measure many financial assets (as well as certain nonfinancial instruments that are similar to financial instruments) at fair value (the “fair value option”). The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is elected for an instrument, the statement specifies that all subsequent changes in fair value for that instrument shall be reported in earnings (or another performance indicator for entities such as not-for profit organizations that do not report earnings). Upon initial adoption, SFAS No. 159 provides entities with a one-time chance to elect the fair value option for existing eligible items. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007.  We did not make the election to measure financial assets at fair value and therefore, adoption of this standard did not have an effect on our consolidated financial statements.

 

In March 2008, the FASB issued SFAS No. 161, or SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.” SFAS No. 161 requires entities to provide greater transparency about (a) how and why and entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, results of operations, and cash flows.  SFAS No. 161 is effective on January 1, 2009.  We do not expect this statement to have a material impact on our consolidated financial statements.

 

In May 2008, the FASB issued FASB Staff Position No. APB 14-1, or FSP 14-1, “Accounting for Convertible Debt Instruments that may be Settled in Cash upon Conversion.” FSP 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s nonconvertible debt borrowing rate. FSP 14-1 will significantly affect the accounting for instruments commonly referred to as Instruments B and C in EITF No. 90-19, “Convertible Bonds with Issuer Option to Settle for Cash upon Conversion,” which is nullified by FSP 14-1, and any other convertible debt instruments that require or permit settlement in any combination of cash and shares at the issuer’s option, such as those sometimes referred to as “Instrument X.” FSP 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008. We are currently evaluating the impact the adoption of this standard will have on our consolidated financial statements.

 

3.  Property Acquisitions

 

In February 2008, we, through our joint venture with Jeff Sutton, acquired the properties located at 182 Broadway and 63 Nassau Street for approximately $30.0 million in the aggregate.  These properties are located adjacent to 180 Broadway which we acquired in August 2007.  As part of the acquisition we also closed on a $31.0 million loan which bears interest at 225 basis points over the 30-day LIBOR.  The loan has a three-year term and two one-year extensions.  We drew down $21.1 million at the closing to pay the balance of the acquisition costs.

 

During the second quarter of 2008, we, through a joint venture with NYSTERS, acquired various interests in the fee positions at 919 Third Avenue for approximately $32.8 million.  As a result, our joint venture controls the entire fee position.

 

11



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2008

 

Pro Forma

 

The following table (in thousands, except per share amounts) summarizes, on an unaudited pro forma basis, our combined results of operations for the six months ended June 30, 2007 as though the Reckson Merger and the acquisition of the 45% interest in One Madison Avenue were completed on January 1, 2007.  The supplemental pro forma operating data is not necessarily indicative of what the actual results of operations would have been assuming the transactions had been completed as set forth above, nor do they purport to represent our results of operations for future periods.

 

 

 

2007

 

Pro forma revenues

 

$

600,059

 

Pro forma net income

 

$

404,956

 

Pro forma earnings per common share-basic

 

$

6.83

 

Pro forma earnings per common share and common share equivalents-diluted

 

$

6.66

 

Pro forma common shares-basic

 

59,292

 

Pro forma common share and common share equivalents-diluted

 

63,420

 

 

4.  Property Dispositions and Assets Held for Sale

 

In January 2008, we sold the fee interest in 440 Ninth Avenue for approximately $160.0 million, excluding closing costs.  The property is approximately 339,000 square feet.  We recognized a gain on sale of approximately $106.0 million.

 

At June 30, 2008, discontinued operations included the results of operations of real estate assets sold prior to that date.  This included 110 East 42nd Street, which was sold in June 2007, 292 Madison Avenue, which was sold in August 2007, 470 Park Avenue South, which was sold in November 2007 and 440 Ninth Avenue, which was sold in January 2008.

 

The following table summarizes income from discontinued operations (net of minority interest) and the related realized gain on sale of discontinued operations (net of minority interest) for the three and six months ended June 30, 2008 and 2007 (in thousands).

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Revenues

 

 

 

 

 

 

 

 

 

Rental revenue

 

$

 

$

11,411

 

$

796

 

$

23,668

 

Escalation and reimbursement revenues

 

 

2,421

 

(249

)

4,920

 

Other income

 

 

56

 

1

 

104

 

Total revenues

 

 

13,888

 

548

 

28,692

 

Operating expense

 

 

4,418

 

319

 

9,363

 

Real estate taxes

 

 

2,013

 

156

 

4,236

 

Ground rent

 

 

 

 

 

Interest

 

 

1,208

 

 

2,535

 

Depreciation and amortization

 

 

1,553

 

 

4,113

 

Total expenses

 

 

9,192

 

475

 

20,247

 

Income from discontinued operations

 

 

4,696

 

73

 

8,445

 

Gain on disposition of discontinued operations

 

 

251,950

 

110,232

 

299,180

 

Minority interest in operating partnership

 

 

(10,232

)

(4,249

)

(12,935

)

Income from discontinued operations, net of minority interest

 

$

 

$

246,414

 

$

106,056

 

$

294,690

 

 

5.  Structured Finance Investments

 

During the six months ended June 30, 2008 and 2007, our structured finance and preferred equity investments (net of discounts) increased approximately $77.0 million and $375.2 million, respectively, due to originations and accretion of discounts.  In addition, in 2007 we assumed approximately $136.9 million of structured finance investments as part of the Reckson Merger.  There were approximately $42.4 million and $295.4 million in repayments, participations and loan loss reserves during those periods, respectively, which offset the increases in structured finance investments.

 

12


 


Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2008

 

Preferred equity and investment income consists of the following (in thousands):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

Preferred Equity and Investment income

 

$

17,653

 

$

23,854

 

$

36,801

 

$

43,153

 

Interest income

 

722

 

3,578

 

2,880

 

5,988

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

18,375

 

$

27,432

 

$

39,681

 

$

49,141

 

 

As of June 30, 2008 and December 31, 2007, we held the following structured finance investments, excluding preferred equity investments, with an aggregate weighted average current yield of approximately 10.0% (in thousands):

 

Loan
Type

 

Gross
Investment

 

Senior
Financing

 

2008
Principal
Outstanding

 

2007
Principal
Outstanding

 

Initial
Maturity
Date

 

Other Loan (1)

 

$

3,500

 

$

15,000

 

$

3,500

 

$

3,500

 

September 2021

 

Mezzanine Loan (1) (2)

 

85,000

 

225,000

 

93,919

 

92,286

 

December 2020

 

Mezzanine Loan (1) (6)

 

 

 

 

28,500

 

August 2008

 

Mezzanine Loan (1)

 

60,000

 

205,000

 

58,259

 

58,173

 

February 2016

 

Mezzanine Loan (1)

 

25,000

 

200,000

 

25,000

 

25,000

 

May 2016

 

Mezzanine Loan (1)

 

35,000

 

165,000

 

38,264

 

38,201

 

October 2016

 

Mezzanine Loan (1) (3)

 

75,000

 

4,200,000

 

67,142

 

64,822

 

December 2016

 

Other Loan (1) (7)

 

15,000

 

 

15,201

 

15,000

 

May 2011

 

Whole Loan (3)

 

9,815

 

30,000

 

9,968

 

9,815

 

February 2009

 

Mezzanine Loan (1) (2) (4)

 

25,000

 

318,919

 

27,742

 

27,742

 

November 2009

 

Mezzanine Loan

 

16,000

 

90,000

 

15,657

 

15,645

 

August 2017

 

Mezzanine Loan (3)

 

41,398

 

210,000

 

39,561

 

38,986

 

August 2008

 

Mezzanine Loan (3)(8)

 

12,500

 

357,616

 

10,250

 

12,500

 

September 2009

 

Other Loan (1)

 

1,000

 

 

1,000

 

1,000

 

January 2010

 

Other Loan

 

500

 

 

500

 

500

 

December 2009

 

Junior participation (1)(9)

 

14,189

 

 

7,938

 

9,938

 

April 2008

 

Mezzanine Loan (1) (2)

 

67,000

 

1,139,000

 

71,755

 

67,903

 

March 2017

 

Mezzanine Loan (3)

 

23,145

 

365,000

 

24,018

 

23,145

 

July 2009

 

Mezzanine Loan (3)

 

44,733

 

1,060,000

 

46,245

 

44,733

 

August 2009

 

Mezzanine Loan (3) (10)

 

22,644

 

7,316,674

 

22,219

 

22,644

 

June 2009

 

Junior Participation (1)

 

37,500

 

477,500

 

37,500

 

37,500

 

January 2014

 

Junior Participation (1) (5)

 

4,000

 

44,000

 

3,869

 

3,884

 

August 2010

 

Junior Participation (1)

 

11,000

 

53,000

 

11,000

 

11,000

 

November 2009

 

Junior Participation (1) (5)

 

21,000

 

115,000

 

20,711

 

21,000

 

November 2009

 

Junior Participation (11)

 

12,000

 

61,250

 

10,875

 

12,000

 

June 2010

 

Junior Participation

 

9,948

 

45,936

 

5,528

 

6,864

 

December 2010

 

Junior Participation (12)

 

50,000

 

1,863,400

 

49,965

 

 

March 2010

 

Mezzanine Loan

 

15,000

 

185,000

 

15,000

 

 

May 2011

 

 

 

$

736,872

 

$

18,742,295

 

$

732,586

 

$

692,281

 

 

 

 


(1)

 

This is a fixed rate loan.

(2)

 

The difference between the pay and accrual rates is included as an addition to the principal balance outstanding.

(3)

 

Gramercy holds a pari passu interest in this asset.

(4)

 

This loan has been in default since December 2007. We are pursuing our remedies and expect to recover the full value of our investment.

(5)

 

This is an amortizing loan.

(6)

 

We took title to the underlying property in January 2008.

(7)

 

The original loan which was scheduled to mature in February 2010 was replaced with two loans which mature in May 2011. The total principal balance remained unchanged.

(8)

 

We recorded a loan loss reserve of $2.25 million against this loan.

(9)

 

We are in discussions with the borrower to settle the loan. Our partner holds a $12.2 million pair-pasu interest in this loan. We recorded a loan loss reserve of $2.0 million against this loan.

(10)

 

We recorded a loan loss reserve of $1.0 million against this loan.

(11)

 

This loan was extended for two years to June 2010.

(12)

 

Gramercy is the borrower under this loan.

 

13



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2008

 

Preferred Equity Investments

 

As of June 30, 2008 and December 31, 2007, we held the following preferred equity investments, with an aggregate weighted average current yield of approximately 9.7% (in thousands):

 

Type

 

Gross
Investment

 

Senior
Financing

 

2008
Amount
Outstanding

 

2007
Amount
Outstanding

 

Initial
Mandatory
Redemption

 

Preferred equity (1) (2)

 

$

 

$

 

$

 

$

3,694

 

July 2014

 

Preferred equity (1)

 

15,000

 

2,350,000

 

15,000

 

15,000

 

February 2015

 

Preferred equity (1) (3)

 

51,000

 

224,000

 

51,000

 

51,000

 

February 2014

 

Preferred equity (1)

 

7,000

 

75,000

 

7,000

 

7,000

 

August 2015

 

Preferred equity (4)

 

34,120

 

196,740

 

27,240

 

29,240

 

March 2010

 

Preferred equity (1)

 

7,000

 

 

7,000

 

7,000

 

June 2009

 

 

 

$

114,120

 

$

2,845,740

 

$

107,240

 

$

112,934

 

 

 

 


(1)  This is a fixed rate investment.

(2)  This loan was repaid in May 2008.

(3)  Gramercy holds a mezzanine loan on the underlying asset.

(4)  We recorded a loan loss reserve of $2.0 million against this loan.

 

At June 30, 2008 and December 31, 2007, all structured finance investments, other than as noted above, were performing in accordance with the terms of the loan agreements.

 

6.  Investment in Unconsolidated Joint Ventures

 

We have investments in several real estate joint ventures with various partners, including The Rockefeller Group International Inc., or RGII, The City Investment Fund, or CIF, SITQ Immobilier, a subsidiary of Caisse de depot et placement du Quebec, or SITQ, a fund managed by JP Morgan Investment Management, or JP Morgan, Prudential Real Estate Investors, or Prudential, Onyx Equities, or Onyx, The Witkoff Group, or Witkoff, Credit Suisse Securities (USA) LLC, or Credit Suisse, Mack-Cali Realty Corporation, or Mack-Cali, Jeff Sutton, or Sutton, and Gramercy, as well as private investors. As we do not control these joint ventures, we account for them under the equity method of accounting.

 

We assess the accounting treatment for each joint venture on a stand-alone basis. This includes a review of each joint venture or partnership LLC agreement to determine which party has what rights and whether those rights are protective or participating under EITF 04-5 and EITF 96-16. In situations where our minority partner approves the annual budget, receives a detailed monthly reporting package from us, meets with us on a quarterly basis to review the results of the joint venture, reviews and approves the joint venture’s tax return before filing, and approves all leases that cover more than a nominal amount of space relative to the total rentable space at each property we do not consolidate the joint venture as we consider these to be substantive participation rights. Our joint venture agreements also contain certain protective rights such as the requirement of partner approval to sell, finance or refinance the property and the payment of capital expenditures and operating expenditures outside of the approved budget or operating plan.

 

In May 2008, we, along with our joint venture partner SITQ, closed on the sale of the 39-story, 670,000 square foot Class A office tower located at 1250 Broadway in Manhattan for $310.0 million. We recognized an incentive distribution of approximately $25.0 million in addition to our share of the gain on sale of approximately $93.5 million.

 

14



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2008

 

The table below provides general information on each joint venture as of June 30, 2008 (in thousands):

 

Property

 

Partner

 

Ownership
Interest

 

Economic
Interest

 

Square
Feet

 

Acquired

 

Acquisition
Price 
(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1221 Avenue of the Americas (2)

 

RGII

 

45.00

%

45.00

%

2,550

 

12/03

 

$

1,000,000

 

1515 Broadway (3)

 

SITQ

 

55.00

%

68.45

%

1,750

 

05/02

 

$

483,500

 

100 Park Avenue

 

Prudential

 

49.90

%

49.90

%

834

 

02/00

 

$

95,800

 

379 West Broadway

 

Sutton

 

45.00

%

45.00

%

62

 

12/05

 

$

19,750

 

Mack-Green joint venture

 

Mack-Cali

 

48.00

%

48.00

%

900

 

05/06

 

$

127,500

 

21 West 34th Street (4)

 

Sutton

 

50.00

%

50.00

%

30

 

07/05

 

$

22,400

 

800 Third Avenue (5)

 

Private Investors

 

47.34

%

47.34

%

526

 

12/06

 

$

285,000

 

521 Fifth Avenue

 

CIF

 

50.10

%

50.10

%

460

 

12/06

 

$

240,000

 

One Court Square

 

JP Morgan

 

30.00

%

30.00

%

1,402

 

01/07

 

$

533,500

 

1604-1610 Broadway (6)

 

Onyx/Sutton

 

45.00

%

63.00

%

30

 

11/05

 

$

4,400

 

1745 Broadway (7)

 

Witkoff/SITQ

 

32.26

%

32.26

%

674

 

04/07

 

$

520,000

 

1 and 2 Jericho Plaza

 

Onyx/Credit Suisse

 

20.26

%

20.26

%

640

 

04/07

 

$

210,000

 

2 Herald Square (8)

 

Gramercy

 

55.00

%

55.00

%

354

 

04/07

 

$

225,000

 

885 Third Avenue (9)

 

Gramercy

 

55.00

%

55.00

%

607

 

07/07

 

$

317,000

 

16 Court Street

 

CIF

 

35.00

%

35.00

%

318

 

07/07

 

$

107,500

 

The Meadows

 

Onyx

 

25.00

%

25.00

%

582

 

09/07

 

$

111,500

 

388 and 390 Greenwich Street (10)

 

SITQ

 

50.60

%

50.60

%

2,600

 

12/07

 

$

1,575,000

 

27-29 West 34th Street (11)

 

Sutton

 

50.00

%

50.00

%

41

 

01/06

 

$

30,000

 

 


(1)

 

Acquisition price represents the actual or implied purchase price for the joint venture.

(2)

 

We acquired our interest from The McGraw-Hill Companies, or MHC. MHC is a tenant at the property and accounted for approximately 15.6% of the property’s annualized rent at June 30, 2008. We do not manage this joint venture.

(3)

 

Under a tax protection agreement established to protect the limited partners of the partnership that transferred 1515 Broadway to the joint venture, the joint venture has agreed not to adversely affect the limited partners’ tax positions before December 2011. One tenant, whose leases end between 2008 and 2015, represents approximately 84.5% of this joint venture’s annualized rent at June 30, 2008.

(4)

 

Effective November 2006, we deconsolidated this investment. As a result of the recapitalization of the property, we were no longer the primary beneficiary under FIN 46(R). Both partners had the same amount of equity at risk and neither partner controlled the joint venture.

(5)

 

We invested approximately $109.5 million in this asset through the origination of a loan secured by up to 47% of the interests in the property’s ownership, with an option to convert the loan to an equity interest. Certain existing members have the right to re-acquire approximately 4% of the property’s equity.

(6)

 

Effective April 1, 2007, we deconsolidated this investment. As a result of the recapitalization of the property, we were no longer the primary beneficiary under FIN 46(R). Both partners had the same amount of equity at risk and neither partner controlled the joint venture.

(7)

 

We have the ability to syndicate our interest down to 14.79%.

(8)

 

We, along with Gramercy, together as tenants-in-common, acquired a fee interest in 2 Herald Square. The fee interest is subject to a long-term operating lease.

(9)

 

We, along with Gramercy, together as tenants-in-common, acquired a fee and leasehold interest in 885 Third Avenue. The fee and leasehold interests are subject to a long-term operating lease.

(10)

 

The property is subject to a 13-year triple-net lease arrangement with a single tenant.

(11)

 

Effective May 1, 2008, we deconsolidated this investment. As a result of the recapitalization of the property, we were no longer the primary beneficiary under FIN 46(R). Both partners had the same amount of equity at risk and neither partner controlled the joint venture.

 

15



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2008

 

We finance our joint ventures with non-recourse debt. The first mortgage notes payable collateralized by the respective joint venture properties and assignment of leases at June 30, 2008 and December 31, 2007, respectively, are as follows (in thousands):

 

Property

 

Maturity
date

 

Interest
rate 
(1)

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

1221 Avenue of the Americas (2)

 

12/2010

 

4.19

%

$

170,000

 

$

170,000

 

1250 Broadway (3)

 

08/2008

 

4.49

%

$

 

$

115,000

 

1515 Broadway (4)

 

11/2008

 

4.30

%

$

625,000

 

$

625,000

 

100 Park Avenue

 

11/2015

 

6.52

%

$

175,000

 

$

175,000

 

379 West Broadway

 

01/2010

 

6.73

%

$

20,750

 

$

20,750

 

Mack-Green joint venture (5)

 

08/2014

 

5.48

%

$

102,264

 

$

102,385

 

21 West 34th Street

 

12/2016

 

5.75

%

$

100,000

 

$

100,000

 

800 Third Avenue

 

07/2017

 

6.00

%

$

20,910

 

$

20,910

 

521 Fifth Avenue

 

04/2011

 

3.68

%

$

140,000

 

$

140,000

 

One Court Square

 

12/2010

 

4.91

%

$

315,000

 

$

315,000

 

2 Herald Square

 

04/2017

 

5.36

%

$

191,250

 

$

191,250

 

1604-1610 Broadway

 

03/2012

 

5.66

%

$

27,000

 

$

27,000

 

1745 Broadway

 

01/2017

 

5.68

%

$

340,000

 

$

340,000

 

1 and 2 Jericho Plaza

 

03/2017

 

5.65

%

$

163,750

 

$

163,750

 

885 Third Avenue

 

07/2017

 

6.26

%

$

267,650

 

$

267,650

 

The Meadows

 

09/2012

 

3.98

%

$

81,454

 

$

81,265

 

388 and 390 Greenwich Street (6)

 

12/2017

 

5.15

%

$

1,138,379

 

$

560,000

 

16 Court Street

 

10/2010

 

4.21

%

$

81,920

 

$

81,629

 

27-29 West 34th Street (7)

 

05/2011

 

4.59

%

$

34,096

 

$

 

 


(1)

 

Interest rate represents the effective all-in weighted average interest rate for the quarter ended June 30, 2008.

(2)

 

This loan has an interest rate based on the 30-day LIBOR plus 75 basis points. $65.0 million of this loan has been hedged through December 2010. The hedge fixed the LIBOR rate at 4.8%.

(3)

 

The interest only loan carried an interest rate of 120 basis points over the 30-day LIBOR, but was reduced to 80 basis points over the 30-day LIBOR in December 2006. The loan is subject to one one-year as-of-right renewal extension. The joint venture extended this loan for one year. This loan was repaid in May 2008 in connection with the sale of the property.

(4)

 

The interest only loan carries an interest rate of 90 basis points over the 30-day LIBOR. The mortgage is subject to two one-year as-of-right renewal options. The joint venture extended this loan for one year.

(5)

 

Comprised of $91.2 million variable rate debt that matures in May 2009 and $11.1 million fixed rate debt that matures in August 2014. Gramercy provided the variable rate debt.

(6)

 

Comprised of a $576.0 million mortgage and a $562.4 million mezzanine loan, both of which are fixed rate loans except for $16.0 million of the mortgage which is floating.

(7)

 

This construction loan facility has a committed amount of $55.0 million.

 

We act as the operating partner and day-to-day manager for all our joint ventures, except for 1221 Avenue of the Americas, Mack-Green, 800 Third Avenue, 1 and 2 Jericho Plaza and The Meadows. We are entitled to receive fees for providing management, leasing, construction supervision and asset management services to our joint ventures. We earned approximately $4.2 million, $8.9 million, $2.5 million and $5.5 million from these services for the three and six months ended June 30, 2008 and 2007, respectively. In addition, we have the ability to earn incentive fees based on the ultimate financial performance of certain of the joint venture properties.

 

Gramercy Capital Corp.

 

In April 2004, we formed Gramercy.  Gramercy is an integrated commercial real estate specialty finance and property investment company.  Gramercy’s commercial real estate finance business, which operates under the name Gramercy Finance, focuses on the direct origination and acquisition of whole loans, subordinate interests in whole loans, mezzanine loans, preferred equity, commercial mortgage backed securities and other real estate related securities.  Gramercy’s property investment business, which operates under the name Gramercy Realty, focuses on the acquisition and management of commercial properties net leased primarily to financial institutions and affiliated users throughout the United States.  Gramercy qualified as a REIT for federal income tax purposes and expects to qualify for its current fiscal year.  During the term of the origination agreement between Gramercy and us, we have the right to purchase up to 25% of the shares in any future offering of Gramercy’s common stock in order to maintain our percentage ownership interest in Gramercy.  At June 30, 2008, we held 8,119,370 shares, or approximately 15.8% of Gramercy’s common stock representing a total investment at book value of approximately $149.9 million.  The market value of our common stock investment in Gramercy was approximately $94.1 million at June 30, 2008.

 

16



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2008

 

Gramercy is a variable interest entity, but we are not the primary beneficiary.  Due to the significant influence we have over Gramercy, we account for our investment under the equity method of accounting.

 

In connection with Gramercy’s initial public offering, GKK Manager LLC, or the Manager, an affiliate of ours, entered into a management agreement with Gramercy, which provided for an initial term through December 2007, with automatic one-year extension options and certain termination rights.  In April 2006, we and Gramercy entered into an amended and restated management agreement, and Gramercy’s board of directors approved, among other things, an extension of the management agreement through December 2009. The management agreement was further modified in September 2007.  Gramercy pays the Manager an annual management fee equal to 1.75% of their gross stockholders’ equity (as defined in the amended and restated management agreement), inclusive of trust preferred securities issued by Gramercy or its affiliates.  In addition, Gramercy also pays the Manager a collateral management fee (as defined in the amended management agreement).  In connection with any and all collateralized debt obligations, or CDO’s, except for the 2005 CDO, or other securitization vehicles formed, owned or controlled, directly or indirectly, by Gramercy, which provides for a collateral manager to be retained, the Manager with respect to such CDO’s and other securitization vehicles, receives management, service and similar fees equal to (i) 0.25% per annum of the principal amount outstanding of bonds issued by a managed transitional CDO that are owned by third-party investors unaffiliated with Gramercy or the Manager, which CDO is structured to own loans secured by transitional properties, (ii) 0.15% per annum of the book value of the principal amount outstanding of bonds issued by a managed non-transitional CDO that are owned by third-party investors unaffiliated with Gramercy or the Manager, which CDO is structured to own loans secured by non-transitional properties, (iii) 0.10% per annum of the principal amount outstanding of bonds issued by a static CDO that are owned by third party investors unaffiliated with Gramercy or the Manager, which CDO is structured to own non-investment grade bonds, and (iv) 0.05% per annum of the principal amount outstanding of bonds issued by a static CDO that are owned by third-party investors unaffiliated with Gramercy or the Manager, which CDO is structured to own investment grade bonds.  For the purposes of the management agreement, a “managed transitional” CDO means a CDO that is actively managed, has a reinvestment period and is structured to own debt collateral secured primarily by non-stabilized real estate assets that are expected to experience substantial net operating income growth, and a “managed non-transitional” CDO means a CDO that is actively managed, has a reinvestment period and is structured to own debt collateral secured primarily by stabilized real estate assets that are not expected to experience substantial net operating income growth. Both “managed transitional” and “managed non-transitional” CDO’s may at any given time during the reinvestment period of the respective vehicles invest in and own non-debt collateral (in limited quantity) as defined by the respective indentures.  In connection with the closing of Gramercy’s first CDO in July 2005, Gramercy entered into a collateral management agreement with the Manager. Pursuant to the collateral management agreement, the Manager has agreed to provide certain advisory and administrative services in relation to the collateral debt securities and other eligible investments securing the CDO notes.  The collateral management agreement provides for a senior collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.15% per annum of the net outstanding portfolio balance, and a subordinate collateral management fee, payable quarterly in accordance with the priority of payments as set forth in the indenture, equal to 0.25% per annum of the net outstanding portfolio balance.  Net outstanding portfolio balance is the sum of the (i) aggregate principal balance of the collateral debt securities, excluding defaulted securities, (ii) aggregate principal balance of all principal proceeds held as cash and eligible investments in certain accounts, and (iii) with respect to the defaulted securities, the calculation amount of such defaulted securities. As compensation for the performance of its obligations as collateral manager under the first CDO, Gramercy’s board of directors has allocated to the Manager the subordinate collateral management fee paid on securities not held by Gramercy.  The senior collateral management fee and balance of the subordinate collateral management fee is allocated to Gramercy.  For the three and six months ended June 30, 2008 and 2007 we received an aggregate of approximately $5.8 million, $10.0 million, $3.1 million and $5.8 million, respectively, in fees under the management agreement and $1.3 million, $2.6 million, $1.1 million and $2.2 million, respectively, under the collateral management agreement.  In 2008, we, as well as Gramercy, each formed special committees comprised solely of independent directors to consider whether the internalization of the Manager and/or amendment to the management agreement would be in the best interest of each company and its respective shareholders.

 

To provide an incentive for the Manager to enhance the value of Gramercy’s common stock, we, along with the other holders of Class B limited partnership interests in Gramercy’s operating partnership, are entitled to an incentive return payable through the Class B limited partner interests in Gramercy’s operating partnership, equal to 25% of the amount by which funds from operations (as defined in Gramercy’s amended and restated partnership agreement) plus certain accounting gains exceed the product of the weighted average stockholders’ equity of Gramercy multiplied by 9.5% (divided by four to adjust for quarterly calculations).  We will record any distributions on the Class B limited partner interests as incentive distribution income in the period when earned and when receipt of such amounts have become probable and reasonably estimable in accordance with Gramercy’s amended and restated partnership agreement as if such agreement had been terminated on that date.  We earned approximately $2.6 million, $5.1 million, $3.8 million and $6.6 million under this agreement for the three and six months ended June 30, 2008 and 2007, respectively.  Due to the control we have over the Manager, we consolidate the accounts of the Manager into ours.

 

17



Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2008

 

In May 2005, our Compensation Committee approved long-term incentive performance awards pursuant to which certain of our officers and employees, including some of whom are our senior executive officers, were awarded a portion of the interests previously held by us in the Manager as well as in the Class B limited partner interests in Gramercy’s operating partnership.  The vesting of these awards is dependent upon, among other things, tenure of employment and the performance of our investment in Gramercy.  These awards vested in May 2008.  We recorded compensation expense of approximately $0.4 million, $1.2 million, $0.7 million and $1.4 million for the three and six months ended June 30, 2008 and 2007, respectively, related to these awards.  The officers and employees who received the awards own 15.6 units, or 15.6%, of the Class B limited partner interests and 15.6% of the Manager.  During the second quarter of 2008, we acquired an additional 12.42% ownership interest in the Manager.  As a result, we own 78.4 units, or 78.4%, of the Class B limited partner interests and 78.4% of the Manager.

 

Gramercy is obligated to reimburse the Manager for its costs incurred under an asset servicing agreement and an outsourcing agreement between the Manager and us.  The asset servicing agreement, which was amended and restated in April 2006, provides for an annual fee payable to us of 0.05% of the book value of all Gramercy’s credit tenant lease assets and non-investment grade bonds and 0.15% of the book value of all other Gramercy assets.  We may reduce the asset-servicing fee for fees that Gramercy pays directly to outside servicers. The outsourcing agreement currently provides for a fee of $2.7 million per year, increasing 3% annually over the prior year. For the three and six months ended June 30, 2008 and 2007, the Manager received an aggregate of approximately $2.0 million, $3.3 million, $1.2 million and $2.3 million, respectively, under the outsourcing and asset servicing agreements.

 

All fees earned from Gramercy are included in other income in the Consolidated Statements of Income.

 

Effective May 1, 2005, Gramercy entered into a lease agreement with an affiliate of ours, for their corporate offices at 420 Lexington Avenue, New York, NY.  The lease is for approximately five thousand square feet with an option to lease an additional approximately two thousand square feet and carries a term of ten years with rents of approximately $249,000 per annum for year one rising to $315,000 per annum in year ten.

 

Gramercy holds tenancy-in-common interests along with us in 55 Corporate Drive, NJ, 2 Herald Square and 885 Third Avenue.  See Note 5 for information on our structured finance investments in which Gramercy also holds an interest.

 

An affiliate held an investment in Gramercy’s preferred stock with a book value of approximately $980,000 at June 30, 2008.

 

In April 2008, Gramercy completed the acquisition of American Financial Realty Trust, or AFR, in a transaction with a total value of approximately $3.3 billion. In addition, Gramercy assumed an aggregate of approximately $1.3 billion of AFR secured debt. We provided $50.0 million of financing as part of an $850.0 million loan to Gramercy in connection with this acquisition (See note 6).  As a result of this acquisition, the Gramercy board of directors awarded 644,787 restricted shares of Gramercy’s common stock to us, subject to a one-year vesting period, in respect of services rendered.  We recognized income of approximately $6.6 million from these shares, which was recorded in other income in the accompanying statements of income.

 

The condensed combined balance sheets for the unconsolidated joint ventures, including Gramercy, at June 30, 2008 and December 31, 2007, are as follows (in thousands):

 

 

 

June 30,
2008

 

December 31,
2007

 

Assets

 

 

 

 

 

Commercial real estate property, net

 

$

9,336,994

 

$

6,300,666

 

Structured finance investments

 

3,035,126

 

3,211,099

 

Other assets

 

1,890,424

 

1,203,259

 

Total assets

 

$

14,262,544

 

$

10,715,024

 

 

 

 

 

 

 

Liabilities and members’ equity

 

 

 

 

 

Mortgages payable

 

$

6,552,561

 

$

3,650,213

 

Other loans

 

3,097,787

 

3,085,342

 

Other liabilities

 

1,339,521

 

453,228

 

Members’ equity

 

3,272,675

 

3,526,241

 

Total liabilities and members’ equity

 

$

14,262,544

 

$

10,715,024

 

Company’s net investment in unconsolidated joint ventures

 

$

1,143,955

 

$

1,438,123

 

 

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Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2008

 

The condensed combined statements of operations for the unconsolidated joint ventures, including Gramercy, from acquisition date through June 30, 2008 and 2007, are as follows (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Total revenues

 

$

368,869

 

215,195

 

$

623,901

 

$

406,319

 

Operating expenses

 

111,715

 

44,256

 

165,905

 

86,418

 

Real estate taxes

 

30,717

 

19,797

 

50,847

 

39,994

 

Interest

 

130,978

 

89,005

 

226,120

 

165,364

 

Depreciation and amortization

 

57,064

 

27,925

 

92,834

 

50,750

 

Total expenses

 

330,474

 

180,983

 

535,706

 

342,526

 

Net income before gain on sale

 

$

38,395

 

$

34,212

 

$

88,195

 

$

63,793

 

Company’s equity in net income of unconsolidated joint ventures

 

$

17,822

 

$

12,059

 

$

37,247

 

$

21,413

 

 

7.  Investment in and Advances to Affiliates

 

Service Corporation

 

Income from management, leasing and construction contracts from third parties and joint venture properties is realized by the Service Corporation.  In order to maintain our qualification as a REIT, we, through our operating partnership, own 100% of the non-voting common stock (representing 95% of the total equity) of the Service Corporation.  Our operating partnership receives substantially all of the cash flow from the Service Corporation’s operations through dividends on its equity interest.  All of the voting common stock of the Service Corporation (representing 5% of the total equity) is held by our affiliate.  This controlling interest gives the affiliate the power to elect all directors of the Service Corporation.  Effective July 1, 2003, we consolidated the operations of the Service Corporation because it is considered to be a variable interest entity under FIN 46 and we are the primary beneficiary.  For the three and six months ended June 30, 2008 and 2007, the Service Corporation earned approximately $3.3 million, $7.0 million, $2.8 million and $6.3 million of revenue and incurred approximately $3.1 million, $5.9 million, $2.1 million and $4.7 million in expenses, respectively.  Effective January 1, 2001, the Service Corporation elected to be treated as a TRS.

 

All of the management, leasing and construction services with respect to the properties wholly-owned by us are conducted through SL Green Management LLC which is 100% owned by our Operating Partnership.

 

eEmerge

 

In May 2000, our operating partnership formed eEmerge, Inc., a Delaware corporation, or eEmerge.  eEmerge is a separately managed, self-funded company that provides fully-wired and furnished office space, services and support to businesses.

 

In March 2002, we acquired all the voting common stock of eEmerge Inc.  As a result, we control all the common stock of eEmerge.  Effective with the quarter ended March 31, 2002, we consolidated the operations of eEmerge.  Effective January 1, 2001, eEmerge elected to be taxed as a TRS.

 

In June 2000, eEmerge and Eureka Broadband Corporation, or Eureka, formed eEmerge.NYC LLC, a Delaware limited liability company, or ENYC, whereby eEmerge has a 95% interest and Eureka has a 5% interest in ENYC.  During the third quarter of 2006, ENYC acquired the interest held by Eureka.  As a result, eEmerge owns 100% of ENYC.  ENYC operates a 71,700 square foot fractional office suites business.  ENYC entered into a 10-year lease with our operating partnership for its 50,200 square foot premises, which is located at 440 Ninth Avenue, Manhattan.  ENYC entered into another 10-year lease with our operating partnership for its 21,500 square foot premises at 28 West 44th Street, Manhattan.  Allocations of net profits, net losses and distributions are made in accordance with the Limited Liability Company Agreement of ENYC.  Effective with the quarter ended March 31, 2002, we consolidated the operations of ENYC.

 

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Table of Contents

 

SL Green Realty Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2008

 

8.  Deferred Costs

 

Deferred costs at June 30, 2008 and December 31, 2007 consisted of the following (in thousands):

 

 

 

2008

 

2007

 

Deferred financing

 

$

68,453

 

$

66,659

 

Deferred leasing

 

148,088

 

133,512

 

 

 

216,541