2015 Annual Report
New York • Washington, D.C. • San Francisco
(cid:38)(cid:43)(cid:36)(cid:44)(cid:53)(cid:48)(cid:36)(cid:49)(cid:15)(cid:3) (cid:38)(cid:40)(cid:50)(cid:3) (cid:9)(cid:3) (cid:51)(cid:53)(cid:40)(cid:54)(cid:44)(cid:39)(cid:40)(cid:49)(cid:55)(cid:183) (cid:54)(cid:3) (cid:48)(cid:40)(cid:54)(cid:54)(cid:36)(cid:42)(cid:40)
Dear Shareholders,
We completed our first full year as a public company surpassing many of the goals we set out to achieve at the beginning of
2015. Our portfolio of high-quality Class A office properties is located in some of the most sought after markets of New York,
Washington, D.C. and San Francisco. Our accomplishments, since the completion of our historic IPO, have positioned us to
generate meaningful long-term growth for our shareholders. Specifically in 2015, we accomplished the following:
• Significantly exceeded our 2015 leasing goal of 1.0 million square feet by nearly 40% – leasing approximately 1.4 million
square feet, bringing our portfolio-wide leased occupancy to 95.3%, up 140 basis points from the prior year;
• Achieved very strong positive mark-to-markets of 16.0% on a GAAP basis and 15.6% on a cash basis;
• Completed a $1.0 billion refinancing of 1633 Broadway at an all-in rate of 3.6%, bringing the weighted average interest
cost of our debt portfolio to 4.4%, down nearly 100 basis points from the prior year; and
• Acquired the remaining 35.8% of 31 West 52nd Street that we did not previously own.
Leasing
Leasing is the heart of our business, and we have done a terrific job at it. Since our IPO in November 2014, we have leased over
1.9 million square feet in 80 transactions. Five of these transactions, or nearly 700,000 square feet, were for “large-block”
space of over 100,000 square feet. Our trophy portfolio contains large-block space, and this space takes time to lease. As we
have always said, our leasing activity is “lumpy” and consistently weighted more toward the end of the year, with over 45% of
our 2015 leasing occurring in the fourth quarter…and we expect the same this year. All this leasing progress has not only
increased our overall leased occupancy by 320 basis points since our IPO, but also tremendously “de-risked” our lease
maturities. As a result, on average, we have 4.6% of square footage rolling per year for the next five years, with no more than
5.5% in any given year.
While we are thrilled about our 2015 leasing volume, we are just as excited about the meaningful positive mark-to-markets we
achieved across our portfolio, thereby “locking-in” much of the significant embedded growth in our portfolio. In 2015, San
Francisco led the way. We own the single best-located asset in San Francisco, One Market Plaza. During 2015, we leased an
aggregate of 269,000 square feet at One Market Plaza in 16 transactions at a weighted average initial rent of $87.64 per
square foot generating mark-to-markets of 53.8% on a GAAP basis and 51.3% on a cash basis. Seven of the transactions here
had starting rents at $100.00 or more per square foot. Great job by our leasing team, who remain razor-focused on our
upcoming vacancies at 1633 Broadway, 1301 Avenue of the Americas and 31 West 52nd Street (vacancy we created). This is
undoubtedly some of the best “tower” space in our portfolio, and we remain confident in our ability to lease it successfully.
Capital Allocation
On October 1, 2015, we acquired the remaining 35.8% ownership interest that we did not previously own in 31 West 52nd
Street from our joint venture partner for $230 million in cash and the assumption of $148 million of our partner’s share of
property level debt. This was a strategic acquisition and provides some insight into the way we manage our portfolio.
Immediately after acquiring our partner’s interest and gaining 100% control of the asset, we entered into an agreement with a
tenant that occupied the top five floors in the building aggregating 110,000 square feet (15% of the asset) to vacate the space
early and move onto two floors in the “middle” of 1633 Broadway. This transaction enabled us to not only lease vacant space at
1633 Broadway at market rents, but also helped us unlock a significant mark-to-market opportunity at 31 West 52nd Street
that otherwise would not have been available to us for another 10 years. Essentially, we created the vacancy here and should
be able to capture the value of that space in the near future. Working our assets to create opportunities such as this is one of
the many ways we look to unlock value.
We have owned and operated a “best-in-class” real estate portfolio of assets for over 20 years, through various
cycles, and we evaluate all options when allocating capital. We will continue to remain disciplined as we pursue
opportunities, with one goal in mind…creating long-term value for our shareholders.
Balance Sheet
We continued to embrace a prudent financial strategy in 2015, making decisive moves to strengthen our balance
sheet. In December 2015, we completed a $1.0 billion refinancing of 1633 Broadway, well ahead of the December
2016 maturity of the prior $926.3 million loan. The new loan bears interest at LIBOR plus 175 basis points and
was swapped for an all-in fixed rate of 3.6%, approximately 180 basis points lower than the previous loan.
This refinancing not only helped us reduce our interest cost and elongate our debt maturities, but also gives us
additional financial flexibility as it contains an “earn-out” provision providing access to an additional $250.0 million
of borrowing capacity (after the achievement of certain performance hurdles) if needed.
We ended the year with $924.0 million in liquidity, comprised of $144.0 million in cash and $780.0 of undrawn
capacity under our revolving credit facility. Our leverage metrics remain conservative, and we will continue to
monitor the state of the capital markets and evaluate opportunities to refinance maturities well in advance of
expirations.
Sustainability
We value and take sustainability seriously…and so do our tenants and investors. Our efforts are industry leading and
we are recognized for it.
As a result of our efforts, we were recently honored with three Pinnacle Awards by the Building Owners and
Managers Association of New York (“BOMA New York”) for our industry-leading approach to sustainability, tenant
service and property management. These awards speak volumes to the quality of our hardworking team and their
dedication always to go above and beyond to deliver exceptional results. With these three awards, we now have
received BOMA-affiliated awards in all three of our high barrier-to-entry, supply-constrained submarkets.
The Paramount Team
Our “best-in-class” portfolio is only matched by our “best-in-class” senior management team, which we continue
to cultivate and develop…and it remains one of the most seasoned in the business. We have worked together,
on average, for over 16 years and have an average of 27 years of industry experience.
Sincerely,
Albert Behler
Chairman, CEO & President
CORPOR ATE HIGHLIGHTS
Total Square Footage
1.4 Million sq ft
Portfolio Details
Leased Square Footage
1.4 Million sq ft
Overall Leased Occupancy
95.3%
Cash Re-Leasing Spread
15.6%
December 2015 Annualized Rent
New York
71.7%
Washington, D.C.
13.0%
San Francisco
15.3%
DC
SF
NY
Total Portfolio Leased Percentage
Cumulative Lease Expiration Exposure
Over Future Years in Square Feet – IPO vs. Current
95.3%
94.6%
94.8%
93.9%
92.1%
O
92.9%
+ 3 2 0 b ps sin ce IP
90.7%
90.7%
2,352,681
3
8
.
8
%
R
e
d
u
1,439,712
c
ti
o
n
1,927,087
4
2
.
1
%
R
e
d
u
1,116,617
c
ti
o
n
858,747
3
3
4
4
.
.
4
4
%
%
563,320
R
R
e
e
d
d
u
u
c
c
ti
ti
o
o
n
n
1Q
2Q
3Q
(IPO)
4Q
1Q
2Q
3Q
4Q
2015
2016
2015-2016
2016-2017
2015-2017
2016-2018
Next Full Year of Lease
Expirations
Next Two Full Years of
Lease Expirations
Next Three Full Years of
Lease Expirations
2014
2015
At IPO
Current
New York - 95.7% Leased
Washington, D.C. - 90.3% Leased
San Francisco - 98.4% Leased
Property
Leased %
1633 Broadway
92.7%
1325 Avenue of the Americas
96.5%
1301 Avenue of the Americas
97.0%
900 Third Avenue
712 Fifth Avenue
31 West 52nd Street
Property
Waterview
2099 Pennsylvania Avenue
1899 Pennsylvania Avenue
Liberty Place
425 Eye Street
96.0%
98.5%
100.0%
Leased %
98.9%
62.0%
88.8%
80.1%
96.5%
Property
Leased %
One Market Plaza
98.4%
SUSTAINABILIT Y HIGHLIGHTS
Energy Star Ratings
Designated an “Energy Star Leader”
Entire portfolio registered and energy usage monitored online.
88
84
83
75
71
69
97
97
88
86
81
92
900 Third
Avenue
1325
AofA
712 Fifth
Avenue
31 West
52nd
1633
Broadway
1301
AofA
Waterview
425 Eye
Street
2099 Penn.
Avenue
1899 Penn.
Avenue
Liberty
Place
One Market
Plaza
Avg. Energy Star Score at Initial Benchmarking (71)
Avg. Energy Star Score Current (84)
Leed Certification (1)
All properties either certified or on target to receive certification.
LEED
(cid:42)(cid:82)(cid:79)(cid:71)(cid:3)(cid:38)(cid:72)(cid:85)(cid:87)(cid:76)(cid:262)(cid:72)(cid:71)
LEED
(cid:38)(cid:72)(cid:85)(cid:87)(cid:76)(cid:262)(cid:72)(cid:71)
LEED
(cid:54)(cid:76)(cid:79)(cid:89)(cid:72)(cid:85)(cid:3)(cid:38)(cid:72)(cid:85)(cid:87)(cid:76)(cid:262)(cid:72)(cid:71)
(cid:47)(cid:40)(cid:40)(cid:39)(cid:3)(cid:42)(cid:82)(cid:79)(cid:71)(cid:3)(cid:38)(cid:72)(cid:85)(cid:87)(cid:76)(cid:262)(cid:72)(cid:71)
(cid:47)(cid:40)(cid:40)(cid:39)(cid:3)(cid:54)(cid:76)(cid:79)(cid:89)(cid:72)(cid:85)(cid:3)(cid:38)(cid:72)(cid:85)(cid:87)(cid:76)(cid:262)(cid:72)(cid:71)
(cid:47)(cid:40)(cid:40)(cid:39)(cid:3)(cid:38)(cid:72)(cid:85)(cid:87)(cid:76)(cid:262)(cid:72)(cid:71)
5
5
2
1Note: 2099 Pennsylvania Avenue does not yet qualify for certain designations and ratings given current occupancy level.
425 Eye Street has 2 designations. Gold for “Core and Shell” and Silver for “Commercial Interiors.”
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(cid:95) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended: December 31, 2015
OR
(cid:134) 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: 001-36746
PARAMOUNT GROUP, INC.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
1633 Broadway, Suite 1801, New York, NY
(Address of principal executive offices)
32-0439307
(IRS Employer
Identification No.)
10019
(Zip Code)
Registrant’s telephone number, including area code: (212) 237-3100
Securities registered pursuant to section 12(b) of the Act:
Title of each class
Common Stock, $0.01 par value per share
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act:
Title of each class
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. YES (cid:95) NO (cid:133)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. YES (cid:133) NO (cid:95)
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 (cid:95) NO (cid:133)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). (cid:95) Yes (cid:133) No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is
not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:95)
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Large Accelerated Filer
Non-Accelerated Filer
(cid:95)(cid:3)
(cid:133) (Do not check if smaller reporting company) Smaller Reporting Company
Accelerated Filer
(cid:134)(cid:3)
(cid:134)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES (cid:133) NO (cid:95)
As of February 15, 2016, there were 212,112,137 shares of the registrant’s common stock outstanding.
As of June 30, 2015, the aggregate market value of the 178,596,340 shares of common stock held by non-affiliates of the Registrant
was $3,064,713,000 based on the June 30, 2015 closing share price of our common stock of $17.16 per share on the New York Stock
Exchange.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Stockholders’ Meeting (which is scheduled to be held on May 19, 2016) to be filed
within 120 days after the end of the registrant’s fiscal year are incorporated by reference in Part III of this Annual Report on Form 10-
K.
This Annual Report on Form 10-K includes financial statements required under Rule 3-09 of Regulation S-X, for 712 Fifth Avenue,
L.P.
Item
Part I.
Financial Information
Page Number
Table of Contents
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business ..........................................................................................................................................
Risk Factors ....................................................................................................................................
Unresolved Staff Comments ...........................................................................................................
Properties ........................................................................................................................................
Legal Proceedings ...........................................................................................................................
Mine Safety Disclosures .................................................................................................................
Part II.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities ......................................................................................................................
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Selected Financial Data ...................................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations ..........
Quantitative and Qualitative Disclosures about Market Risk .........................................................
Financial Statements and Supplementary Data ...............................................................................
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.........
Controls and Procedures .................................................................................................................
Other Information ...........................................................................................................................
Part III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance (1) ..........................................................
Executive Compensation (1) ............................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters (1) .................................................................................................................................
Certain Relationships and Related Transactions, and Director Independence (1) ............................
Principal Accounting Fees and Services (1) .....................................................................................
Part IV.
Item 15.
Exhibits and Financial Statement Schedules ...................................................................................
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12
32
33
39
39
40
43
46
72
74
121
121
123
123
123
123
123
123
124
(1) These items are omitted in whole or in part because the registrant will file a definitive Proxy Statement pursuant to Regulation
14A under the Securities Exchange Act of 1934 with the Securities and Exchange Commission no later than 120 days after
December 31, 2015, portions of which are incorporated by reference herein.
3
Forward-Looking Statements
We make statements in this Annual Report on Form 10-K that are considered “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934,
as amended, or the Exchange Act, which are usually identified by the use of words such as “anticipates,” “believes,” “estimates,”
“expects,” “intends,” “may,” “plans,” “projects,” “seeks,” “should,” “will,” and variations of such words or similar expressions. We
intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995 and are including this statement for purposes of complying with those safe harbor
provisions. These forward-looking statements reflect our current views about our plans, intentions, expectations, strategies and
prospects, which are based on the information currently available to us and on assumptions we have made. Although we believe that
our plans, intentions, expectations, strategies and prospects as reflected in or suggested by those forward-looking statements are
reasonable, we can give no assurance that the plans, intentions, expectations or strategies will be attained or achieved. Furthermore,
actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks
and factors that are beyond our control including, without limitation:
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unfavorable market and economic conditions in the United States and globally and in New York City, Washington, D.C. and
San Francisco;
risks associated with our high concentrations of properties in New York City, Washington, D.C. and San Francisco;
risks associated with ownership of real estate;
decreased rental rates or increased vacancy rates;
the risk we may lose a major tenant;
limited ability to dispose of assets because of the relative illiquidity of real estate investments;
intense competition in the real estate market that may limit our ability to acquire attractive investment opportunities and
increase the costs of those opportunities;
insufficient amounts of insurance;
uncertainties and risks related to adverse weather conditions, natural disasters and climate change;
risks associated with actual or threatened terrorist attacks;
exposure to liability relating to environmental and health and safety matters;
high costs associated with compliance with the Americans with Disabilities Act;
failure of acquisitions to yield anticipated results;
risks associated with real estate activity through our joint ventures and private equity real estate funds;
general volatility of the capital and credit markets and the market price of our common stock;
exposure to litigation or other claims;
loss of key personnel;
risks associated with security breaches through cyber attacks or cyber intrusions and other significant disruptions of our
information technology (IT) networks and related systems;
risks associated with our substantial indebtedness;
failure to refinance current or future indebtedness on favorable terms, or at all;
failure to meet the restrictive covenants and requirements in our existing debt agreements;
4
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fluctuations in interest rates and increased costs to refinance or issue new debt;
risks associated with variable rate debt, derivatives or hedging activity;
risks associated with future sales of our common stock by our continuing investors or the perception that our continuing
investors intend to sell substantially all of the shares of our common stock that they hold;
risks associated with the market for our common stock;
failure to qualify as a REIT;
compliance with REIT requirements, which may cause us to forgo otherwise attractive opportunities or liquidate certain of
our investments; or
any of the other risks included in this Annual Report on Form 10-K, including those set forth under the heading “Risk
Factors.”
Accordingly, there is no assurance that our expectations will be realized. Except as otherwise required by the U.S. federal
securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking
statement contained herein (or elsewhere) to reflect any change in our expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement is based. The reader should review carefully our financial statements and the
notes thereto, as well as Item 1A entitled “Risk Factors” in this report.
5
ITEM 1.
BUSINESS
General
PART I
Paramount Group, Inc. (“Paramount”) is a fully-integrated real estate investment trust (“REIT”) focused on owning, operating,
managing, acquiring and redeveloping high-quality, Class A office properties in select central business district submarkets of New
York City, Washington, D.C. and San Francisco. We conduct our business through, and substantially all our interests are held by,
Paramount Group Operating Partnership LP, a Delaware limited partnership (the “Operating Partnership”). We are the sole general
partner of, and owned approximately 80.4% of the Operating Partnership as of December 31, 2015. As of December 31, 2015, our
portfolio consisted of 12 Class A office properties aggregating approximately 10.4 million square feet that was 95.3% leased and
90.3% occupied. All references to “we,” “us,” “our,” the “Company” and “Paramount” refer to Paramount Group, Inc. and its
consolidated subsidiaries, including the Operating Partnership.
We were incorporated in Maryland as a corporation on April 14, 2014 to continue the business of our Predecessor, as defined
below, and did not have any meaningful operations until the acquisition of substantially all of the assets of our Predecessor and assets
of the Property Funds, as defined below, that it controlled, as well as the interests of unaffiliated third parties in certain properties. Our
properties were acquired through a series of Formation Transactions (the “Formation Transactions”) concurrently with our initial
public offering of 150,650,000 common shares at a public offering price of $17.50 per share on November 24, 2014 (the “Offering”).
Our Competitive Strengths
We believe that we distinguish ourselves from other owners and operators of office properties through the following competitive
strengths:
(cid:120) Premier Portfolio of High-Quality Office Properties in the Most Desirable Submarkets. We have assembled a premier
portfolio of Class A office properties located exclusively in carefully selected submarkets of New York City, Washington,
D.C. and San Francisco. Our submarkets are among the strongest commercial real estate submarkets in the United States for
office properties due to a combination of their high barriers to entry, constrained supply, strong economic characteristics and
a deep pool of prospective tenants in various industries that have demonstrated a strong demand for high-quality office space.
Our markets are international business centers, characterized by a broad tenant base with a highly educated workforce, a
mature and functional transportation infrastructure and an overall amenity rich environment. These markets are home to a
diverse range of large and growing enterprises in a variety of industries, including financial services, media and entertainment,
consulting, legal and other professional services, technology, as well as federal government agencies. As a result of the above
factors, the submarkets in which we are invested have generally outperformed the broader markets in which they are located.
(cid:120) Deep Relationships with Diverse, High Credit-Quality Tenant Base. We have long-standing relationships with high-
quality tenants, including Allianz Global Investors, LP, Barclays Capital, Inc., Clifford Chance LLP, Commerzbank AG,
Credit Agricole Corporate & Investment Bank, The Corporate Executive Board Company, Deloitte & Touche, LLP,
Showtime Networks Inc., TD Bank, N.A., Warner Music Group, Google Inc. and the U.S. Federal Government.
(cid:120) Strong Internal Growth Prospects. We have substantial embedded rent growth within our portfolio as a result of the strong
historical and projected future rental rate growth within our submarkets, contractual fixed rental rate increases included in our
leases and incremental rent from the lease-up of our portfolio. Our portfolio occupancy was 90.3% as of December 31, 2015;
we believe this presents us with a meaningful growth opportunity as we lease-up our portfolio given the strong office market
fundamentals in our target markets.
(cid:120) Demonstrated Acquisition and Operational Expertise. Over the past nearly 20 years, we have developed and refined our
highly successful real estate investment strategy. We have a proven reputation as a value-enhancing, hands-on operator of
Class A office properties. We target opportunities with a value-add component, where we can leverage our operating
expertise, deep tenant relationships, and proactive approach to asset and property management. In certain instances, we may
acquire properties with existing or expected future vacancy or with significant value embedded in existing below-market
leases, which we will be able to mark-to-market over time. Even fully leased properties from time to time present us with
value-enhancing opportunities which we have been able to capitalize on in the past.
6
(cid:120) Value-Add Renovation and Repositioning and Development Capabilities. We have expertise in renovating, repositioning
and developing office properties. We have historically acquired well-located assets that have either suffered from a need for
physical improvement to upgrade the property to Class A space, have been underperforming due to a lack of a coherent
leasing and branding strategy or have been under-managed and could be immediately enhanced by our hands-on approach.
We are experienced in upgrading, renovating and modernizing building lobbies, corridors, bathrooms, elevator cabs and base
building systems and updating antiquated spaces to include new ceilings, lighting and other amenities. We have also
successfully aggregated and are continuing to combine smaller spaces to offer larger blocks of space, including multiple
floors, which are attractive to larger, high credit-quality tenants. We believe that the post-renovation quality of our buildings
and our hands-on asset and property management approach attract high credit-quality tenants and allow us to increase our
cash flow.
(cid:120) Seasoned and Committed Management Team with Proven Track Record. Our senior management team, led by Albert
Behler, our Chairman, Chief Executive Officer and President, has been in the commercial real estate industry for an average
of 27 years, and has worked at our company for an average of 14 years. Our senior management team is highly regarded in
the real estate community and has extensive relationships with a broad range of brokers, owners, tenants and lenders. We
have developed relationships that enable us to secure high credit-quality tenants on attractive terms and provide us with
potential off-market acquisition opportunities. We believe that our proven acquisition and operating expertise enables us to
gain advantages over our competitors through superior acquisition sourcing, focused leasing programs, active asset and
property management and first-class tenant service.
(cid:120) Conservative Balance Sheet. Over the past several decades, we have built strong relationships with numerous lenders,
investors and other capital providers. Our financing track record and depth of relationships provide us with significant
financial flexibility and capacity to fund future growth in both good and bad economic environments. We have a strong
capital structure that supports this flexibility and growth. As of December 31, 2015, our pro rata net debt to enterprise value
was 34.5% and we had $143.9 million of cash and cash equivalents and a $1.0 billion revolving credit facility, with $20
million drawn as of December 31, 2015.
(cid:120) Proven Investment Management Business. We have a successful investment management business, where we serve as the
general partner and property manager of certain private equity real estate funds for institutional investors and high-net-worth
individuals. We have also entered into a number of joint ventures with institutional investors, high-net-worth individuals and
other sophisticated real estate investors through which we and our funds have invested in real estate properties. We expect
our investment management business to be a complementary part of our overall real estate investment business.
Objectives and Strategy
Our primary business objective is to enhance shareholder value by increasing cash flow from operations. The strategies we intend
to execute to achieve this objective include:
(cid:120) Leasing available vacant space;
(cid:120) Releasing expiring space;
(cid:120) Maintaining a disciplined acquisition strategy focused on owning and operating Class A office properties in select central
business district submarkets of New York City, Washington, D.C. and San Francisco;
(cid:120) Redeveloping and repositioning properties to increase returns;
(cid:120) Proactively manage our portfolio to increase occupancy and rental rates; and
(cid:120) Refinancing existing above market debt.
Significant Tenants
None of our tenants accounted for more than 10% of total revenues in the year ended December 31, 2015.
7
Segments
Upon completion of the Offering and Formation Transactions, we acquired substantially all of the assets of our Predecessor, and
substantially all of the assets of the Property Funds, that it controlled. Our business, following the Formation Transactions, is
comprised of one reportable segment. We have determined that our properties have similar economic characteristics to be aggregated
into one reportable segment (operating, leasing and managing office properties). Our determination was based, in part, on our method
of internal reporting.
Our Predecessor historically operated an integrated business that consisted of three reportable segments, (i) Owned Properties, (ii)
Managed Funds and (iii) a Management Company. The Owned Properties segment consisted of properties in which our Predecessor
had a direct or indirect ownership interest, other than properties that it owned through its private equity real estate funds. The
Managed Funds segment consisted of the private equity real estate funds. In addition, our Predecessor included a Management
Company that performed property management and asset management services and certain general and administrative level functions,
including legal and accounting, as a separate reportable segment. See Note 25, Segments to our combined consolidated financial
statements for further information on our and our Predecessor’s reportable segments.
Employees
As of December 31, 2015, we had 319 employees, including 83 corporate employees and 236 on-site building and property
management personnel. Certain of our employees are covered by collective bargaining agreements.
Insurance
We carry commercial general liability coverage on our properties, with limits of liability customary within the industry. Similarly,
we are insured against the risk of direct and indirect physical damage to our properties including coverage for the perils of floods,
earthquakes and windstorms. Our policies also cover the loss of rental income during an estimated reconstruction period. Our policies
reflect limits and deductibles customary in the industry and specific to the buildings and portfolio. We also obtain title insurance
policies when acquiring new properties. We currently have coverage for losses incurred in connection with both domestic and foreign
terrorist-related activities. While we do carry commercial general liability insurance, property insurance and terrorism insurance with
respect to our properties, these policies include limits and terms we consider commercially reasonable. In addition, there are certain
losses (including, but not limited to, losses arising from known environmental conditions or acts of war) that are not insured, in full or
in part, because they are either uninsurable or the cost of insurance makes it, in our belief, economically impractical to maintain such
coverage. Should an uninsured loss arise against us, we would be required to use our own funds to resolve the issue, including
litigation costs. We believe the policy specifications and insured limits are adequate given the relative risk of loss, the cost of the
coverage and industry practice and, in consultation with our insurance advisors, we believe the properties in our portfolio are
adequately insured.
Competition
The leasing of real estate is highly competitive in markets in which we operate. We compete with numerous acquirers,
developers, owners and operators of commercial real estate, many of which own or may seek to acquire or develop properties similar
to ours in the same markets in which our properties are located. The principal means of competition are rent charged, location,
services provided and the nature and condition of the facility to be leased. In addition, we face competition from other real estate
companies including other REITs, private real estate funds, domestic and foreign financial institutions, life insurance companies,
pension trusts, partnerships, individual investors and others that may have greater financial resources or access to capital than we do or
that are willing to acquire properties in transactions which are more highly leveraged or are less attractive from a financial viewpoint
than we are willing to pursue. If our competitors offer space at rental rates below current market rates, below the rental rates we
currently charge our tenants, in better locations within our markets or in higher quality facilities, we may lose potential tenants and we
may be pressured to reduce our rental rates below those we currently charge in order to retain tenants when our tenants’ leases expire.
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Environmental and Related Matters
Under various federal, state and/or local laws, ordinances and regulations, as a current or former owner or operator of real
property, we may be liable for costs and damages resulting from the presence or release of hazardous substances, waste, or petroleum
products at, on, in, under or from such property, including costs for investigation or remediation, natural resource damages, or third-
party liability for personal injury or property damage. These laws often impose liability without regard to whether the owner or
operator knew of, or was responsible for, the presence or release of such materials, and the liability may be joint and several. Some of
our properties have been or may be impacted by contamination arising from current or prior uses of the property or adjacent properties
for commercial, industrial or other purposes. Such contamination may arise from spills of petroleum or hazardous substances or
releases from tanks used to store such materials. We also may be liable for the costs of remediating contamination at off-site disposal
or treatment facilities when we arrange for disposal or treatment of hazardous substances at such facilities, without regard to whether
we comply with environmental laws in doing so. The presence of contamination or the failure to remediate contamination on our
properties may adversely affect our ability to attract and/or retain tenants, and our ability to develop or sell or borrow against those
properties. In addition to potential liability for cleanup costs, private plaintiffs may bring claims for personal injury, property damage
or for similar reasons. Environmental laws also may create liens on contaminated sites in favor of the government for damages and
costs it incurs to address such contamination. Moreover, if contamination is discovered on our properties, environmental laws may
impose restrictions on the manner in which that property may be used or how businesses may be operated on that property.
Some of our properties may be adjacent to or near other properties used for industrial or commercial purposes or that have
contained or currently contain underground storage tanks used to store petroleum products or other hazardous or toxic substances.
Releases from these properties could impact our properties. While certain properties contain or contained uses that could have or have
impacted our properties, we are not aware of any liabilities related to environmental contamination that we believe will have a
material adverse effect on our operations.
In addition, our properties are subject to various federal, state and local environmental and health and safety laws and regulations.
Noncompliance with these environmental and health and safety laws and regulations could subject us or our tenants to liability. These
liabilities could affect a tenant’s ability to make rental payments to us. Moreover, changes in laws could increase the potential costs of
compliance with such laws and regulations or increase liability for noncompliance. This may result in significant unanticipated
expenditures or may otherwise materially and adversely affect our operations, or those of our tenants, which could in turn have a
material adverse effect on us. We sometimes require our tenants to comply with environmental and health and safety laws and
regulations and to indemnify us for any related liabilities in our leases with them. But in the event of the bankruptcy or inability of any
of our tenants to satisfy such obligations, we may be required to satisfy such obligations. We are not presently aware of any instances
of material noncompliance with environmental or health and safety laws or regulations at our properties, and we believe that we
and/or our tenants have all material permits and approvals necessary under current laws and regulations to operate our properties.
As the owner or operator of real property, we may also incur liability based on various building conditions. For example,
buildings and other structures on properties that we currently own or operate or those we acquire or operate in the future contain, may
contain, or may have contained, asbestos-containing material (“ACM”). Environmental and health and safety laws require that ACM
be properly managed and maintained and may impose fines or penalties on owners, operators or employers for noncompliance with
those requirements. These requirements include special precautions, such as removal, abatement or air monitoring, if ACM would be
disturbed during maintenance, renovation or demolition of a building, potentially resulting in substantial costs. In addition, we may be
subject to liability for personal injury or property damage sustained as a result of releases of ACM into the environment. We are not
presently aware of any material liabilities related to building conditions, including any instances of material noncompliance with
asbestos requirements or any material liabilities related to asbestos. In addition, our properties may contain or develop harmful mold
or suffer from other indoor air quality issues, which could lead to liability for adverse health effects or property damage or costs for
remediation. When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the
moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or
irritants. Indoor air quality issues can also stem from inadequate ventilation, chemical contamination from indoor or outdoor sources,
and other biological contaminants such as pollen, viruses and bacteria. Indoor exposure to airborne toxins or irritants above certain
levels can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the
presence of significant mold or other airborne contaminants at any of our properties could require us to undertake a costly remediation
program to contain or remove the mold or other airborne contaminants from the affected property or increase indoor ventilation. In
addition, the presence of significant mold or other airborne contaminants could expose us to liability from our tenants, employees of
our tenants or others if property damage or personal injury occurs. We are not presently aware of any material adverse indoor air
quality issues at our properties.
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Americans with Disabilities Act (“ADA”)
Our properties must comply with Title III of the ADA to the extent that such properties are “public accommodations” as defined
by the ADA. The ADA may require removal of structural barriers to access by persons with disabilities in certain public areas of our
properties where such removal is readily achievable. We believe the existing properties are in substantial compliance with the ADA
and that we will not be required to make substantial capital expenditures to address the requirements of the ADA. However,
noncompliance with the ADA could result in imposition of fines or an award of damages to private litigants. The obligation to make
readily achievable accommodations is an ongoing one, and we will continue to assess our properties and make alterations as
appropriate in this respect.
Legal Proceedings
From time to time, we are a party to various claims and routine litigation arising in the ordinary course of business. We do not
believe that the results of any such claims or litigation, individually or in the aggregate, will have a material adverse effect on our
business, financial position, results of operations or cash flows.
Executive Office
Our principal executive offices are located at 1633 Broadway, Suite 1801, New York, NY 10019; telephone (212) 237-3100.
Available Information
Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to
these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, are available free of charge on our website
(www.paramount-group.com) as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities
and Exchange Commission (“SEC”). You may also obtain our reports by accessing the EDGAR database at the SEC’s website at
http://www.sec.gov or copies of these documents are also available directly from us, free of charge upon written request to Investor
Relations, 1633 Broadway, Suite 1801, New York, NY 10019; telephone (212) 237 - 3100. Also available on our website are copies of
our (i) Nominating and Corporate Governance Committee Charter, (ii) Corporate Governance Guidelines, (iii) Compensation
Committee Charter, (iv) Code of Business Conduct and Ethics, (v) Audit Committee Charter and (vi) Stockholder Communication
Policy. In the event of any changes to these items, revised copies will be made available on our website.
Supplemental Tax Disclosures – Updates to REIT Rules
The “Protecting Americans from Tax Hikes Act of 2015” (the “PATH Act”) was enacted on December 18, 2015 and contains
several provisions pertaining to REIT qualification and taxation, which are briefly summarized below:
(cid:120) For taxable years beginning after December 31, 2015, the PATH Act expands the exclusion of certain hedging income from
the REIT gross income tests to include income from hedges or previously acquired hedges that a REIT entered into to
manage risk associated with liabilities or property that have been extinguished or disposed.
(cid:120) For taxable years beginning before January 1, 2018, no more than 25% of the value of our assets may consist of stock or
securities of one or more taxable REIT subsidiaries. For taxable years beginning after December 31, 2017, the PATH Act
reduces this limit to 20%. As of December 31, 2015, the securities we own in our taxable REIT subsidiaries do not, in the
aggregate, exceed 20% of the total value of our assets.
(cid:120) For taxable years beginning after December 31, 2015, for purposes of the REIT asset tests, the PATH Act provides that debt
instruments issued by publicly traded REITs will constitute “real estate assets.” However, unless such a debt instrument is
secured by a mortgage or otherwise would have qualified as a real estate asset under prior law, (i) interest income and gain
from such a debt instrument is not qualifying income for purposes of the 75% gross income test and (ii) all such debt
instruments may represent no more than 25% of the value of our total assets.
(cid:120) For taxable years beginning after December 31, 2015, certain obligations secured by a mortgage on both real property and
personal property will be treated as a qualifying real estate asset and give rise to qualifying income for purposes of the 75%
gross income test if the fair market value of such personal property does not exceed 15% of the total fair market value of all
such property.
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(cid:120) A 100% excise tax is imposed on “redetermined TRS service income,” which is income of a taxable REIT subsidiary
attributable to services provided to, or on behalf of, its associated REIT and which would otherwise be increased on
distribution, apportionment, or allocation under Section 482 of the Code.
(cid:120) For distributions made in taxable years beginning after December 31, 2014, the preferential dividend rules no longer apply to
us.
(cid:120) Additional exceptions to the rules under the Foreign Investment in Real Property Tax Act (“FIRPTA”) were introduced for
non-U.S. persons that constitute “qualified shareholders” (within the meaning of Section 897(k)(3) of the Code) or “qualified
foreign pension funds” (within the meaning of Section 897(l)(2) of the Code).
(cid:120) After February 16, 2016, the FIRPTA withholding rate under Section 1445 of the Code for dispositions of U.S. real property
interests is increased from 10% to 15%.
(cid:120) The PATH Act increases from 5% to 10% the maximum stock ownership of the REIT that a non-U.S. shareholder may have
held to avail itself of the FIRPTA exception for shares regularly traded on an established securities market.
(cid:120) For assets we acquired from a C corporation in a carry-over basis transaction, the PATH Act permanently reduces the
recognition period during which we could be subject to corporate tax on any built-in gains recognized on the sale of such
assets from 10 years to 5 years.
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ITEM 1A. RISK FACTORS
Set forth below are the risks that we believe are material to our investors. This section contains forward-looking statements. You
should refer to the explanation of the qualifications and limitations on forward-looking statements beginning on page 3.
Risks Related to Real Estate
Unfavorable market and economic conditions in the United States and globally and in the specific markets or submarkets
where our properties are located could adversely affect occupancy levels, rental rates, rent collections, operating expenses, and the
overall market value of our assets, impair our ability to sell, recapitalize or refinance our assets and have an adverse effect on our
results of operations, financial condition and our ability to make distributions to our stockholders.
Unfavorable market conditions in the areas in which we operate and unfavorable economic conditions in the United States and
globally may significantly affect our occupancy levels, rental rates, rent collections, operating expenses, the market value of our assets
and our ability to strategically acquire, dispose, recapitalize or refinance our properties on economically favorable terms or at all. Our
ability to lease our properties at favorable rates may be adversely affected by increases in supply of office space in our markets and is
dependent upon overall economic conditions, which are adversely affected by, among other things, job losses and unemployment
levels, recession, stock market volatility and uncertainty about the future. Some of our major expenses, including mortgage payments
and real estate taxes, generally do not decline when related rents decline. We expect that any declines in our occupancy levels, rental
revenues and/or the values of our buildings would cause us to have less cash available to pay our indebtedness, fund necessary capital
expenditures and to make distributions to our stockholders, which could negatively affect our financial condition and the market value
of our securities. Our business may be affected by the volatility and illiquidity in the financial and credit markets, a general global
economic recession and other market or economic challenges experienced by the real estate industry or the U.S. economy as a whole.
Our business may also be adversely affected by local economic conditions, as all of our revenues are derived from properties located
in New York City, Washington, D.C. and San Francisco. Factors that may affect our occupancy levels, our rental revenues, our net
operating income, or NOI, our funds from operations and/or the value of our properties include the following, among others:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
downturns in global, national, regional and local economic conditions;
declines in the financial condition of our tenants, many of which are financial, legal and other professional firms, which may
result in tenant defaults under leases due to bankruptcy, lack of liquidity, operational failures or other reasons;
the inability or unwillingness of our tenants to pay rent increases;
significant job losses in the financial and professional services industries, which may decrease demand for our office space,
causing market rental rates and property values to be impacted negatively;
an oversupply of, or a reduced demand for, Class A office space;
changes in market rental rates in our markets; and
economic conditions that could cause an increase in our operating expenses, such as increases in property taxes (particularly
as a result of increased local, state and national government budget deficits and debt and potentially reduced federal aid to
state and local governments), utilities, insurance, compensation of on-site associates and routine maintenance.
All of our properties are located in New York City, Washington, D.C. and San Francisco, and adverse economic or regulatory
developments in these areas could negatively affect our results of operations, financial condition and ability to make distributions
to our stockholders.
All of our properties are located in New York City, in particular midtown Manhattan, as well as Washington, D.C. and San
Francisco. As a result, our business is dependent on the condition of the economy in those cities, which may expose us to greater
economic risks than if we owned a more geographically diverse portfolio. We are susceptible to adverse developments in the New
York City, Washington, D.C. and San Francisco economic and regulatory environments (such as business layoffs or downsizing,
industry slowdowns, relocations of businesses, increases in real estate and other taxes, costs of complying with governmental
regulations or increased regulation). Such adverse developments could materially reduce the value of our real estate portfolio and our
rental revenues, and thus adversely affect our ability to service current debt and to pay dividends to stockholders.
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We are subject to risks inherent in ownership of real estate.
Real estate cash flows and values are affected by a number of factors, including competition from other available properties and
our ability to provide adequate property maintenance and insurance and to control operating costs. Real estate cash flows and values
are also affected by such factors as government regulations (including zoning, usage and tax laws), interest rate levels, the availability
of financing, property tax rates, utility expenses, potential liability under environmental and other laws and changes in environmental
and other laws.
A significant portion of our revenue is generated from three properties.
As of December 31, 2015, three of our properties, 1633 Broadway, 1301 Avenue of the Americas and One Market Plaza, together
accounted for approximately 61.7% of our total revenue. Our results of operations and cash available for distribution to our
stockholders would be adversely affected if any of these properties were materially damaged or destroyed. Additionally, our results of
operations and cash available for distribution to our stockholders would be adversely affected if a significant number of our tenants at
these properties experienced a downturn in their business, which may weaken their financial condition and result in their failure to
make timely rental payments, defaulting under their leases or filing for bankruptcy.
We may be unable to renew leases, lease currently vacant space or vacating space on favorable terms or at all as leases expire,
which could adversely affect our financial condition, results of operations and cash flow.
As of December 31, 2015, the vacancy rate of our portfolio was 4.7%. In addition, 5.5% of the square footage of the properties in
our portfolio will expire by the end of 2016. We cannot assure you that the expiring leases will be renewed or that our properties will
be re-leased at rental rates equal to or above current rental rates. If the rental rates of our properties decrease, our existing tenants do
not renew their leases or we do not re-lease a significant portion of our available and soon-to-be-available space, our financial
condition, results of operations, cash flow, market value of common stock and our ability to satisfy our principal and interest
obligations and to make distributions to our stockholders would be adversely affected.
We are exposed to risks associated with property redevelopment and repositioning that could adversely affect us, including our
financial condition and results of operations.
To the extent that we continue to engage in redevelopment and repositioning activities with respect to our properties, we will be
subject to certain risks, which could adversely affect us, including our financial condition and results of operations. These risks
include, without limitation, (i) the availability and pricing of financing on favorable terms or at all; (ii) the availability and timely
receipt of zoning and other regulatory approvals; (iii) the potential for the fluctuation of occupancy rates and rents at redeveloped
properties, which may result in our investment not being profitable; (iv) start up, repositioning and redevelopment costs may be higher
than anticipated; and (v) cost overruns and untimely completion of construction (including risks beyond our control, such as weather
or labor conditions, or material shortages). These risks could result in substantial unanticipated delays or expenses and could prevent
the initiation or the completion of redevelopment activities, any of which could have an adverse effect on our financial condition,
results of operations, cash flow, the market value of our common stock and ability to satisfy our principal and interest obligations and
to make distributions to our stockholders.
We may be required to make rent or other concessions and/or significant capital expenditures to improve our properties in
order to retain and attract tenants, which could adversely affect us, including our financial condition, results of operations and
cash flow.
In the event that there are adverse economic conditions in the real estate market and demand for office space decreases, with
respect to our current vacant space and upon expiration of leases at our properties, we may be required to increase tenant improvement
allowances or concessions to tenants, accommodate increased requests for renovations, build-to-suit remodeling and other
improvements or provide additional services to our tenants, all of which could negatively affect our cash flow. In addition, a few of
our existing properties are pre-war office properties, which may require frequent and costly maintenance in order to retain existing
tenants or attract new tenants in sufficient numbers. If the necessary capital is unavailable, we may be unable to make these significant
capital expenditures. This could result in non-renewals by tenants upon expiration of their leases and our vacant space remaining
untenanted, which could adversely affect our financial condition, results of operations, cash flow and market value of our common
stock.
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We depend on significant tenants in our office portfolio, which could cause an adverse effect on us, including our results of
operations and cash flow, if any of our significant tenants were adversely affected by a material business downturn or were to
become bankrupt or insolvent.
Our rental revenue depends on entering into leases with and collecting rents from tenants. As of December 31, 2015, our six
largest tenants together represented 25.2% of our total portfolio’s annualized rent. As of December 31, 2015, The Corporate Executive
Board Company, Barclays Capital, Inc., Allianz Global Investors LP, Clifford Chance LLP, Credit Agricole Corporate & Investment
Bank and Commerzbank AG leased an aggregate of 2,376,755 rentable square feet of office space at four of our office properties,
representing approximately 22.9% of the total rentable square feet in our portfolio. General and regional economic conditions may
adversely affect our major tenants and potential tenants in our markets. Our major tenants may experience a material business
downturn, which could potentially result in a failure to make timely rental payments and/or a default under their leases. In many cases,
through tenant improvement allowances and other concessions, we have made substantial up front investments in the applicable leases
that we may not be able to recover. In the event of a tenant default, we may experience delays in enforcing our rights and may also
incur substantial costs to protect our investments.
The bankruptcy or insolvency of a major tenant or lease guarantor may adversely affect the income produced by our properties
and may delay our efforts to collect past due balances under the relevant leases and could ultimately preclude collection of these sums
altogether. If a lease is rejected by a tenant in bankruptcy, we would have only a general unsecured claim for damages that is limited
in amount and which may only be paid to the extent that funds are available and in the same percentage as is paid to all other holders
of unsecured claims.
If any of our significant tenants were to become bankrupt or insolvent, suffer a downturn in their business, default under their
leases, fail to renew their leases or renew on terms less favorable to us than their current terms, our results of operations and cash flow
could be adversely affected.
Real estate investments are relatively illiquid and may limit our flexibility.
Equity real estate investments are relatively illiquid, which may tend to limit our ability to react promptly to changes in economic
or other market conditions. Our ability to dispose of assets in the future will depend on prevailing economic and market conditions.
Our inability to sell our properties on favorable terms or at all could have an adverse effect on our sources of working capital and our
ability to satisfy our debt obligations. In addition, real estate can at times be difficult to sell quickly at prices we find acceptable. The
Internal Revenue Code of 1986, as amended (the (“Code”), also imposes restrictions on REITs, which are not applicable to other types
of real estate companies, on the disposal of properties. Furthermore, we will be subject to U.S. federal income tax at the highest
regular corporate rate, which is currently 35%, on certain built-in gain recognized in connection with a taxable disposition of a number
of our properties for a period of up to 5 years following the completion of the Formation Transactions, which may make an otherwise
attractive disposition opportunity less attractive or even impractical. These potential difficulties in selling real estate in our markets
may limit our ability to change or reduce the office buildings in our portfolio promptly in response to changes in economic or other
conditions.
Competition could limit our ability to acquire attractive investment opportunities and increase the costs of those opportunities,
which may adversely affect us, including our profitability and impede our growth.
We compete with numerous commercial developers, real estate companies and other owners of real estate for office buildings for
acquisition and pursuing buyers for dispositions. We expect that other real estate investors, including insurance companies, private
equity funds, sovereign wealth funds, pension funds, other REITs and other well-capitalized investors will compete with us to acquire
existing properties and to develop new properties. Our markets are each generally characterized by high barriers-to-entry to
construction and limited land on which to build new office space, which contributes to the competition we face to acquire existing
properties and to develop new properties in these markets. This competition could increase prices for properties of the type we may
pursue and adversely affect our profitability and impede our growth.
We are subject to losses that are either uninsurable, not economically insurable or that are in excess of our insurance
coverage.
Our San Francisco properties are located in the general vicinity of active earthquake faults. Our New York City and Washington,
D.C. properties are located in areas that could be subject to windstorm losses. Insurance coverage for earthquakes and windstorms can
be costly because of limited industry capacity. As a result, we may experience shortages in desired coverage levels if market
conditions are such that insurance is not available or the cost of insurance makes it, in our belief, economically impractical to maintain
such coverage. In addition, our New York City, Washington, D.C. and other properties may be subject to a heightened risk of terrorist
attacks. We carry commercial general liability insurance, property insurance and both domestic and foreign terrorism insurance with
respect to our properties with limits and on terms we consider commercially reasonable. We cannot assure you, however, that our
insurance coverage will be sufficient or that any uninsured loss or liability will not have an adverse effect on our business and our
financial condition and results of operations in the event of a catastrophic loss event. See “Business – Insurance.”
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We carry both domestic and foreign terrorism insurance as an inclusion in our property policies for which our carriers may rely,
in part for foreign acts of terrorism, on support from the federal government’s Terrorism Risk Insurance Program Reauthorization Act
of 2015 (“TRIPRA”). TRIPRA expires on December 31, 2020 and we can provide no assurance that it will be extended further or the
impact of modifications or nonrenewal will have on our terrorism insurance coverage and rates.
We are subject to risks from natural disasters such as earthquakes and severe weather.
Natural disasters and severe weather such as earthquakes, tornadoes, hurricanes or floods may result in significant damage to our
properties. The extent of our casualty losses and loss in operating income in connection with such events is a function of the severity
of the event and the total amount of exposure in the affected area. When we have geographic concentration of exposures, a single
catastrophe (such as an earthquake, especially in the San Francisco Bay Area) or destructive weather event (such as a hurricane,
especially in New York City or Washington, D.C. area) affecting a region may have a significant negative effect on our financial
condition and results of operations. As a result, our operating and financial results may vary significantly from one period to the next.
Our financial results may be adversely affected by our exposure to losses arising from natural disasters or severe weather. We also are
exposed to risks associated with inclement winter weather, particularly in the Northeast states in which many of our properties are
located, including increased need for maintenance and repair of our buildings.
Climate change may adversely affect our business.
To the extent that climate change does occur, we may experience extreme weather and changes in precipitation and temperature,
all of which may result in physical damage or a decrease in demand for our properties located in the areas affected by these conditions.
Should the impact of climate change be material in nature or occur for lengthy periods of time, our financial condition or results of
operations would be adversely affected. In addition, changes in federal and state legislation and regulation on climate change could
result in increased capital expenditures to improve the energy efficiency of our existing properties in order to comply with such
regulations.
Actual or threatened terrorist attacks may adversely affect our ability to generate revenues and the value of our properties.
We have significant investments in large metropolitan markets that have been or may be in the future the targets of actual or
threatened terrorism attacks, including New York City, Washington, D.C. and San Francisco. As a result, some tenants in these
markets may choose to relocate their businesses to other markets or to lower-profile office buildings within these markets that may be
perceived to be less likely targets of future terrorist activity. This could result in an overall decrease in the demand for office space in
these markets generally or in our properties in particular, which could increase vacancies in our properties or necessitate that we lease
our properties on less favorable terms or both. In addition, future terrorist attacks in these markets could directly or indirectly damage
our properties, both physically and financially, or cause losses that materially exceed our insurance coverage. As a result of the
foregoing, our ability to generate revenues and the value of our properties could decline materially. See also “-We are subject to losses
that are either uninsurable, not economically insurable or that are in excess of our insurance coverage.”
We may become subject to liability relating to environmental and health and safety matters, which could have an adverse
effect on us, including our financial condition and results of operations.
Under various federal, state and/or local laws, ordinances and regulations, as a current or former owner or operator of real
property, we may be liable for costs and damages resulting from the presence or release of hazardous substances, waste, or petroleum
products at, on, in, under or from such property, including costs for investigation or remediation, natural resource damages, or third-
party liability for personal injury or property damage. These laws often impose liability without regard to whether the owner or
operator knew of, or was responsible for, the presence or release of such materials, and the liability may be joint and several. Some of
our properties have been or may be impacted by contamination arising from current or prior uses of the property or from adjacent
properties used for commercial, industrial or other purposes. Such contamination may arise from spills of petroleum or hazardous
substances or releases from tanks used to store such materials. We also may be liable for the costs of remediating contamination at off-
site disposal or treatment facilities when we arrange for disposal or treatment of hazardous substances at such facilities, without regard
to whether we comply with environmental laws in doing so. The presence of contamination or the failure to remediate contamination
on our properties may adversely affect our ability to attract and/or retain tenants and our ability to develop or sell or borrow against
those properties. In addition to potential liability for cleanup costs, private plaintiffs may bring claims for personal injury, property
damage or for similar reasons. Environmental laws also may create liens on contaminated sites in favor of the government for
damages and costs it incurs to address such contamination. Moreover, if contamination is discovered on our properties, environmental
laws may impose restrictions on the manner in which that property may be used or how businesses may be operated on that property.
See “Business -Environmental and Related Matters.”
In addition, our properties are subject to various federal, state and local environmental and health and safety laws and regulations.
Noncompliance with these environmental and health and safety laws and regulations could subject us or our tenants to liability. These
liabilities could affect a tenant’s ability to make rental payments to us. Moreover, changes in laws could increase the potential costs of
compliance with such laws and regulations or increase liability for noncompliance. This may result in significant unanticipated
expenditures or may otherwise adversely affect our operations, or those of our tenants, which could in turn have an adverse effect on
us.
15
As the owner or operator of real property, we may also incur liability based on various building conditions. For example,
buildings and other structures on properties that we currently own or operate or those we acquire or operate in the future contain, may
contain, or may have contained ACM. Environmental and health and safety laws require that ACM be properly managed and
maintained and may impose fines or penalties on owners, operators or employers for non-compliance with those requirements. These
requirements include special precautions, such as removal, abatement or air monitoring, if ACM would be disturbed during
maintenance, renovation or demolition of a building, potentially resulting in substantial costs. In addition, we may be subject to
liability for personal injury or property damage sustained as a result of exposure to ACM or releases of ACM into the environment.
In addition, our properties may contain or develop harmful mold or suffer from other indoor air quality issues. Indoor air quality
issues also can stem from inadequate ventilation, chemical contamination from indoor or outdoor sources, and other biological
contaminants such as pollen, viruses and bacteria. Indoor exposure to airborne toxins or irritants can be alleged to cause a variety of
adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold or other
airborne contaminants at any of our properties could require us to undertake a costly remediation program to contain or remove the
mold or other airborne contaminants or to increase ventilation. In addition, the presence of significant mold or other airborne
contaminants could expose us to liability from our tenants or others if property damage or personal injury occurs.
We cannot assure you that costs or liabilities incurred as a result of environmental issues will not affect our ability to make
distributions to our stockholders or that such costs, liabilities, or other remedial measures will not have an adverse effect on our
financial condition and results of operations.
We may incur significant costs complying with the Americans with Disabilities Act of 1990, (the “ADA”), and similar laws,
which could adversely affect us, including our future results of operations and cash flow.
Under the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. We
have not conducted a recent audit or investigation of all of our properties to determine our compliance with the ADA. If one or more
of our properties were not in compliance with the ADA, then we could be required to incur additional costs to bring the property into
compliance. We cannot predict the ultimate amount of the cost of compliance with the ADA or similar laws. Substantial costs incurred
to comply with the ADA and any other legislation could adversely affect us, including our future results of operations and cash flow.
Our option property is subject to various risks and we may not acquire it.
We have entered into an option to acquire 60 Wall Street, New York, New York. 60 Wall Street is exposed to many of the same
risks that may affect the other properties in our portfolio. The terms of the option agreement relating to 60 Wall Street were not
determined by arm’s-length negotiations, and such terms may be less favorable to us than those that may have been obtained through
negotiations with third parties. It may become economically unattractive to exercise our option with respect to 60 Wall Street. These
risks could cause us to decide not to exercise our option to purchase this property in the future.
We may be unable to identify and successfully complete acquisitions and, even if acquisitions are identified and completed,
including potentially the option property, we may fail to successfully operate acquired properties, which could adversely affect us
and impede our growth.
Our ability to identify and acquire properties on favorable terms and successfully operate or redevelop them may be exposed to
significant risks. Agreements for the acquisition of properties are subject to customary conditions to closing, including completion of
due diligence investigations and other conditions that are not within our control, which may not be satisfied. In this event, we may be
unable to complete an acquisition after incurring certain acquisition-related costs. In addition, if mortgage debt is unavailable at
reasonable rates, we may be unable to finance the acquisition on favorable terms in the time period we desire, or at all, including
potentially the option property. We may spend more than budgeted to make necessary improvements or renovations to acquired
properties and may not be able to obtain adequate insurance coverage for new properties. Further, acquired properties may be located
in new markets where we may face risks associated with a lack of market knowledge or understanding of the local economy, lack of
business relationships in the area and unfamiliarity with local governmental and permitting procedures. We may also be unable to
integrate new acquisitions into our existing operations quickly and efficiently, and as a result, our results of operations and financial
condition could be adversely affected. Any delay or failure on our part to identify, negotiate, finance and consummate such
acquisitions in a timely manner and on favorable terms, or operate acquired properties to meet our financial expectations, could
impede our growth and have an adverse effect on us, including our financial condition, results of operations, cash flow and the market
value of our securities.
16
Should we decide at some point in the future to expand into new markets, we may not be successful, which could adversely
affect our financial condition, results of operations, cash flow and market value of our securities.
If opportunities arise, we may explore acquisitions of properties in new markets. Each of the risks applicable to our ability to
acquire and integrate successfully and operate properties in our current markets is also applicable in new markets. In addition, we will
not possess the same level of familiarity with the dynamics and market conditions of the new markets we may enter, which could
adversely affect the results of our expansion into those markets, and we may be unable to build a significant market share or achieve
our desired return on our investments in new markets. If we are unsuccessful in expanding into new markets, it could adversely affect
our financial condition, results of operations, cash flow, the market value of our securities and ability to satisfy our principal and
interest obligations and to make distributions to our stockholders.
We are subject to risks involved in real estate activity through joint ventures and private equity real estate funds.
We have in the past, are currently and may in the future acquire and own properties in joint ventures and private equity real estate
funds with other persons or entities when we believe circumstances warrant the use of such structures. We manage and consolidate
into our combined consolidated financial statements, investments of certain private equity real estate funds in which we are the general
partner. As of December 31, 2015, these real estate fund investments had an aggregate fair value of $416.4 million. Joint venture and
fund investments involve risks, including: the possibility that our partners might refuse to make capital contributions when due; that
we may be responsible to our partners for indemnifiable losses; that our partners might at any time have business or economic goals
that are inconsistent with ours; and that our partners may be in a position to take action or withhold consent contrary to our
recommendations, instructions or requests. We and our respective joint venture partners may each have the right to trigger a buy-sell
or forced sale arrangement, which could cause us to sell our interest, or acquire our partner’s interest, or to sell the underlying asset, at
a time when we otherwise would not have initiated such a transaction, without our consent or on unfavorable terms. In some instances,
joint venture and fund partners may have competing interests in our markets that could create conflicts of interest. These conflicts may
include compliance with the REIT requirements, and our REIT status could be jeopardized if any of our joint ventures or funds does
not operate in compliance with the REIT requirements. Further, our joint venture and fund partners may fail to meet their obligations
to the joint venture or fund as a result of financial distress or otherwise, and we may be forced to make contributions to maintain the
value of the property. We will review the qualifications and previous experience of any co-venturers or partners, although we do not
expect to obtain financial information from, or to undertake independent investigations with respect to, prospective co-venturers or
partners. To the extent our partners do not meet their obligations to us or our joint ventures or funds or they take action inconsistent
with the interests of the joint venture or fund, we may be adversely affected.
Our joint venture partners in 712 Fifth Avenue and One Market Plaza have forced sale rights as a result of which we may be
forced to sell these assets to third parties at times or prices that may not be favorable to us.
Our partners in the joint ventures that own 712 Fifth Avenue and One Market Plaza have forced sale rights pursuant to which,
after a specified period, each may require us either to purchase the property or attempt to sell the property to a third party. With
respect to 712 Fifth Avenue, beginning six years after the completion of the Offering and any time thereafter, our joint venture partner
may exercise a forced sale right by delivering a written notice to us designating the sales price and other material terms and conditions
upon which our joint venture partner desires to cause a sale of the property. Upon receipt of such sales notice, we will have the
obligation either to attempt to sell the property to a third party for not less than 95.0% of the designated sales price or to elect to
purchase the interest of our joint venture partner for cash at a price equal to the amount our joint venture partner would have received
if the property had been sold for the designated sales price (and the joint venture paid any applicable financing breakage costs, transfer
taxes, brokerage fees and marketing costs, prepaid all liquidated liabilities of the joint venture and distributed the balance). With
respect to One Market Plaza, at any time on or after March 31, 2021, our joint venture partner may exercise a forced sale right. Upon
exercise of this right, we and our joint venture partner have 60 days to negotiate a mutually agreeable transaction regarding the
property. If we cannot mutually agree upon a transaction, then we will work together in good faith to market the property in a
commercially reasonable manner and neither we nor our joint venture partner will be allowed to bid on the property. If our joint
venture partner, after consultation with us and a qualified broker, finds a third-party bid for the property acceptable, then the joint
venture will cause the property to be sold. As a result of these forced sale rights, our joint venture partners could require us either to
purchase their interests at an agreed upon price or to sell the properties held by our joint ventures to third parties. In the case of One
Market Plaza, our joint venture partner could force us to sell this property to a third party on terms it deems acceptable. The exercise
of these rights could adversely impact our company by requiring us to sell one or more of these properties to third parties at times or
prices that may not be favorable to us.
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Contractual commitments with existing private equity real estate funds may limit our ability to acquire properties directly in
the near term.
Paramount Group Real Estate Fund VII, LP and its parallel fund (“Fund VII”), is one of our private equity real estate funds and is
actively engaged in acquisition activities. In connection with the formation of Fund VII, we agreed that we would make all
investments that meet its stated investment objectives through Fund VII (provided that Fund VII is able to participate in the
investment and subject to our ability to co-invest), until July 18, 2017, unless we, as the general partner of Fund VII, choose to extend
it until July 18, 2018. Because of the exclusivity requirements of Fund VII, we may be required to acquire properties through this fund
that we otherwise would have acquired through our operating partnership, which may prevent our operating partnership from
acquiring attractive investment opportunities and adversely affect our growth prospects. Alternatively, we may choose to co-invest
with Fund VII as a joint venture partner to the extent it is determined that it is in the best interest of Fund VII. In connection with any
property that we co-invest in with Fund VII, Fund VII will have the authority, subject to our consent in limited circumstances, to make
most of the decisions in connection with such property. Such authority in connection with a co-investment could subject us to the
applicable risks described above.
Paramount Group Real Estate Fund VIII, LP (“Fund VIII”), is one of our private equity real estate funds that completed its initial
closing in November 2014, with $485,000,000 in capital commitments and is targeting approximately $750,000,000 in capital
commitments. Fund VIII is actively engaged in pursuing a diversified portfolio of real estate and real estate-related assets and
companies primarily consisting of acquiring and/or issuing loans to real estate and real estate-related companies or investing in their
preferred equity. We expect that, subject to certain prior rights granted to other of our private equity real estate funds, we would make
all investments that meet Fund VIII’s stated investment objectives through Fund VIII (provided that Fund VIII is able to participate in
the investment and subject to our right to co-invest), until the end of the fund’s investment period, which will end three years after the
fund’s final closing. Given that the fund conducted its initial closing in November 2014, and a final closing is expected to take place
approximately 18 months later, the fund’s investment period would end during mid-2019, unless we, as the general partner of Fund
VIII, choose to extend it an additional year. However, we have the option (but not the obligation) of participating in each of
Fund VIII’s investments in debt and preferred equity for up to 25% of the total investment and in each of Fund VIII’s equity
investments for up to 50% of the total investment, and may, where it is attractive to us and determined to be in the best interest of
Fund VIII, acquire greater percentages of a given investment opportunity. Because of the limited exclusivity requirements of Fund
VIII, we may be required to acquire assets partially through this fund that we otherwise would have acquired solely through our
operating partnership, which may prevent our operating partnership from acquiring attractive investment opportunities and adversely
affect our growth prospects. In connection with certain assets that we co-invest in with Fund VIII, specifically those where Fund VIII
owns a majority of the joint venture it is expected that Fund VIII will have the authority, subject to our consent in limited
circumstances, to make most of the decisions in connection with such asset. Such authority in connection with a co-investment could
subject us to the applicable risks described above. As of December 31, 2015, Fund VIII had an aggregate of $580,200,000 of
committed capital, of which $166,560,000 has been invested.
We share control of some of our properties with other investors and may have conflicts of interest with those investors.
While we make all operating decisions for certain of our joint ventures and private equity real estate funds, we are required to
make other decisions jointly with other investors who have interests in the relevant property or properties. For example, the approval
of certain of the other investors may be required with respect to operating budgets, including leasing decisions and refinancing,
encumbering, expanding or selling any of these properties, as well as bankruptcy decisions. We might not have the same interests as
the other investors in relation to these decisions or transactions. Accordingly, we might not be able to favorably resolve any of these
issues, or we might have to provide financial or other inducements to the other investors to obtain a favorable resolution.
In addition, various restrictive provisions and third-party rights provisions, such as consent rights to certain transactions, apply to
sales or transfers of interests in our properties owned in joint ventures. Consequently, decisions to buy or sell interests in properties
relating to our joint ventures may be subject to the prior consent of other investors. These restrictive provisions and third-party rights
may preclude us from achieving full value of these properties because of our inability to obtain the necessary consents to sell or
transfer these interests.
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Risks Related to Our Business and Operations
Capital and credit market conditions may adversely affect our access to various sources of capital or financing and/or the cost
of capital, which could impact our business activities, dividends, earnings and common stock price, among other things.
In periods when the capital and credit markets experience significant volatility, the amounts, sources and cost of capital available
to us may be adversely affected. We primarily use third-party financing to fund acquisitions and to refinance indebtedness as it
matures. As of December 31, 2015, including debt of our unconsolidated joint ventures, we had $3.232 billion of total debt ($2.650
billion on a pro rata basis), substantially all of which was asset level debt, and we have $980 million of available borrowing capacity,
including amounts reserved for letters of credit, under our revolving credit facility. If sufficient sources of external financing are not
available to us on cost effective terms, we could be forced to limit our acquisition, development and redevelopment activity and/or
take other actions to fund our business activities and repayment of debt, such as selling assets, reducing our cash dividend or paying
out less than 100% of our taxable income. To the extent that we are able and/or choose to access capital at a higher cost than we have
experienced in recent years (reflected in higher interest rates for debt financing or a lower stock price for equity financing) our
earnings per share and cash flow could be adversely affected. In addition, the price of our common stock may fluctuate significantly
and/or decline in a high interest rate or volatile economic environment. If economic conditions deteriorate, the ability of lenders to
fulfill their obligations under working capital or other credit facilities that we may have in the future may be adversely impacted.
We may from time to time be subject to litigation, including litigation arising from the Formation Transactions, which could
have an adverse effect on our financial condition, results of operations, cash flow and trading price of our common stock.
We are a party to various claims and routine litigation arising in the ordinary course of business. Some of these claims or others,
to which we may be subject from time to time, including claims arising specifically from the Formation Transactions, may result in
defense costs, settlements, fines or judgments against us, some of which are not, or cannot be, covered by insurance. Payment of any
such costs, settlements, fines or judgments that are not insured could have an adverse impact on our financial position and results of
operations. Should any litigation arise in connection with the Formation Transactions, we would contest it vigorously. In addition,
certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which
could adversely impact our results of operations and cash flow, expose us to increased risks that would be uninsured, and/or adversely
impact our ability to attract officers and directors.
We may be subject to unknown or contingent liabilities related to properties or businesses that we acquire for which we may
have limited or no recourse against the sellers.
Assets and entities that we have acquired or may acquire in the future may be subject to unknown or contingent liabilities for
which we may have limited or no recourse against the sellers. Unknown or contingent liabilities might include liabilities for clean-up
or remediation of environmental conditions, claims of customers, vendors or other persons dealing with the acquired entities, tax
liabilities and other liabilities whether incurred in the ordinary course of business or otherwise. In the future we may enter into
transactions with limited representations and warranties or with representations and warranties that do not survive the closing of the
transactions, in which event we would have no or limited recourse against the sellers of such properties. While we usually require the
sellers to indemnify us with respect to breaches of representations and warranties that survive, such indemnification is often limited
and subject to various materiality thresholds, a significant deductible or an aggregate cap on losses.
As a result, there is no guarantee that we will recover any amounts with respect to losses due to breaches by the sellers of their
representations and warranties. In addition, the total amount of costs and expenses that we may incur with respect to liabilities
associated with acquired properties and entities may exceed our expectations, which may adversely affect our business, financial
condition and results of operations. Finally, indemnification agreements between us and the sellers typically provide that the sellers
will retain certain specified liabilities relating to the assets and entities acquired by us. While the sellers are generally contractually
obligated to pay all losses and other expenses relating to such retained liabilities, there can be no guarantee that such arrangements
will not require us to incur losses or other expenses as well.
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We depend on key personnel, including Albert Behler, our Chairman, Chief Executive Officer and President, and the loss of
services of one or more members of our senior management team, or our inability to attract and retain highly qualified personnel,
could adversely affect our business.
There is substantial competition for qualified personnel in the real estate industry and the loss of our key personnel could have an
adverse effect on us. Our continued success and our ability to manage anticipated future growth depend, in large part, upon the efforts
of key personnel, particularly Albert Behler, our Chairman, Chief Executive Officer and President, who has extensive market
knowledge and relationships and exercises substantial influence over our acquisition, redevelopment, financing, operational and
disposition activity. Among the reasons that Albert Behler is important to our success is that he has a national, regional and local
industry reputation that attracts business and investment opportunities and assists us in negotiations with financing sources and
industry personnel. If we lose his services, our business and investment opportunities and our relationships with such financing
sources and industry personnel could diminish.
Many of our other senior executives also have extensive experience and strong reputations in the real estate industry, which aid us
in identifying or attracting investment opportunities and negotiating with sellers of properties. The loss of services of one or more
members of our senior management team, or our inability to attract and retain highly qualified personnel, could adversely affect our
business, diminish our investment opportunities and weaken our relationships with lenders, business partners and industry participants,
which could negatively affect our financial condition, results of operations and cash flow.
We face risks associated with security breaches through cyber attacks, cyber intrusions or otherwise, as well as other
significant disruptions of our information technology (IT) networks and related systems.
We face risks associated with security breaches, whether through cyber attacks or cyber intrusions over the Internet, malware,
computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization,
and other significant disruptions of our IT networks and related systems. The risk of a security breach or disruption, particularly
through cyber attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally
increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Our IT
networks and related systems are essential to the operation of our business and our ability to perform day-to-day operations (including
managing our building systems) and, in some cases, may be critical to the operations of certain of our tenants. Although we make
efforts to maintain the security and integrity of these types of IT networks and related systems, and we have implemented various
measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be
effective or that attempted security breaches or disruptions would not be successful or damaging. Even the most well protected
information, networks, systems and facilities remain potentially vulnerable because the techniques used in such attempted security
breaches evolve and generally are not recognized until launched against a target, and in some cases are designed not to be detected
and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security
barriers or other preventative measures, and thus it is impossible for us to entirely mitigate this risk.
A security breach or other significant disruption involving our IT networks and related systems could:
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disrupt the proper functioning of our networks and systems and therefore our operations and/or those of certain of our
tenants;
result in misstated financial reports, violations of loan covenants, missed reporting deadlines and/or missed permitting
deadlines;
result in our inability to properly monitor our compliance with the rules and regulations regarding our qualification as a
REIT;
result in the loss, theft or misappropriation of our property;
result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of, proprietary, confidential,
sensitive or otherwise valuable information of ours or others, which others could use to compete against us or which could
expose us to damage claims by third-parties for disruptive, destructive or otherwise harmful purposes and outcomes;
result in our inability to maintain the building systems relied upon by our tenants for the efficient use of their leased space;
require significant management attention and resources to remedy any damages that result;
subject us to claims for breach of contract, damages, credits, penalties or termination of leases or other agreements; or
damage our reputation among our tenants and investors generally.
Any or all of the foregoing could have a material adverse effect on our results of operations, financial condition and cash flows.
20
Changes in accounting pronouncements could adversely affect our operating results, in addition to the reported financial
performance of our tenants.
Uncertainties posed by various initiatives of accounting standard-setting by the Financial Accounting Standards Board and the
Securities and Exchange Commission, which create and interpret applicable accounting standards for U.S. companies, may change the
financial accounting and reporting standards or their interpretation and application of these standards that govern the preparation of
our financial statements. Proposed changes include, but are not limited to, changes in lease accounting and the adoption of accounting
standards likely to require the increased use of “fair-value” measures.
These changes could have a material impact on our reported financial condition and results of operations. In some cases, we could
be required to apply a new or revised standard retroactively, resulting in potentially material restatements of prior period financial
statements. Similarly, these changes could have a material impact on our tenants’ reported financial condition or results of operations
or could affect our tenants’ preferences regarding leasing real estate.
Extensive regulation of our investment management businesses affects our activities and creates the potential for significant
liabilities and penalties, and increased regulatory focus could result in additional burdens on this business.
Our investment management business is subject to extensive regulation, including periodic examinations and investigations, by
governmental agencies in the jurisdictions in which we operate or raise capital. These authorities have regulatory powers dealing with
many aspects of our investment management business, including the authority to grant, and in specific circumstances to cancel,
permissions to carry on particular activities. These regulations are extensive, complex and require substantial management time and
attention. In particular, two of our subsidiaries, Paramount Group Real Estate Advisor LLC and Paramount Group Real Estate
Advisor II, LP, are registered with the U.S. Securities and Exchange Commission (“SEC”) as investment advisers under the U.S.
Investment Advisers Act of 1940 (the “Advisers Act”), and may in the future be registered as managers of alternative investment
funds under the Alternative Investment Fund Managers Directive, 2011/61/EU, and various local European laws implementing this
directive (collectively, the “AIFMD”). Such registration results in certain aspects of our investment management business being
supervised by the SEC and, in the future, subject to notification of sales activities for one or more of our managed funds in Germany
or other countries, the Bundesanstalt fuer Finanzdiensleistungsaufsicht, Germany’s Federal Financial Supervisory Authority (“BaFin”),
or other foreign regulators. The Advisers Act, in particular, requires registered investment advisers to comply with numerous
obligations, including compliance, record-keeping, operating and marketing requirements, disclosure obligations and limitations on
certain activities. Investment advisers also owe fiduciary duties to their clients. These regulatory and fiduciary obligations may result
in increased costs or administrative burdens or otherwise adversely impact our business, including by preventing us from
recommending investment opportunities that otherwise meet the respective investment criteria of us or our funds.
Many of these regulators, including U.S. and foreign government agencies, as well as state securities commissions, are also
empowered to conduct investigations and administrative proceedings that can result in fines, compensatory payments, suspensions of
personnel, changes in policies, procedures or disclosure or other sanctions, including censure, the issuance of cease-and-desist orders,
the suspension or expulsion of an investment adviser from registration or memberships or the commencement of a civil or criminal
lawsuit against us or our personnel. Moreover, the financial services industry generally is presently the subject of heightened scrutiny,
and the SEC has specifically focused on private equity fund managers. In that regard, the SEC’s list of examination priorities includes,
among other things, collection of fees and allocation of expenses, marketing and valuation practices, allocation of investment
opportunities, and appropriate management of other conflicts of interest such as related party sales, loans or coinvestments, by these
fund managers. We may, from time to time, be subject to requests for information or informal or formal investigations by the SEC and
other regulatory authorities, and, in the current environment, even historical practices that have been previously examined are being
revisited. Even if an investigation or proceeding does not result in a sanction or the sanction imposed against us or our personnel by a
regulator is small in monetary amount, the adverse publicity relating to the investigation, proceeding or imposition of these sanctions
could harm our reputation and cause us to lose existing clients or fail to gain new investors.
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Risks Related to Our Organization and Structure
The ability of stockholders to control our policies and effect a change of control of our company is limited by certain
provisions of our charter and bylaws and by Maryland law.
There are provisions in our charter and bylaws that may discourage a third party from making a proposal to acquire us, even if
some of our stockholders might consider the proposal to be in their best interests. These provisions include the following:
Our charter authorizes our board of directors, without stockholder approval, to amend our charter to increase or decrease the
aggregate number of authorized shares of stock, to authorize us to issue additional shares of our common stock or preferred stock and
to classify or reclassify unissued shares of our common stock or preferred stock and thereafter to authorize us to issue such classified
or reclassified shares of stock. We believe these charter provisions provide us with increased flexibility in structuring possible future
financings and acquisitions and in meeting other needs that might arise. The additional classes or series, as well as the additional
authorized shares of our common stock, are available for issuance without further action by our stockholders, unless such action is
required by applicable law or the rules of any stock exchange or automated quotation system on which our securities are listed or
traded. Although our board of directors does not currently intend to do so, it could authorize us to issue a class or series of stock that
could, depending upon the terms of the particular class or series, delay, defer or prevent a transaction or a change of control of our
company that might involve a premium price for holders of our common stock or that our common stockholders otherwise believe to
be in their best interests.
In order to qualify as a REIT, not more than 50% in value of our outstanding stock may be owned, directly or indirectly, by five
or fewer individuals (as defined in the Code to include certain entities such as private foundations) at any time during the last half of
any taxable year. In order to help us qualify as a REIT, our charter generally prohibits any person or entity from actually owning or
being deemed to own by virtue of the applicable constructive ownership provisions, (i) more than 6.50% (in value or in number of
shares, whichever is more restrictive) of the outstanding shares of our common stock or (ii) more than 6.50% in value of the aggregate
of the outstanding shares of all classes and series of our stock, in each case, excluding any shares of our stock not treated as
outstanding for U.S. federal income tax purposes. We refer to these restrictions as the “ownership limits.” These ownership limits may
prevent or delay a change in control and, as a result, could adversely affect our stockholders’ ability to realize a premium for their
shares of our common stock. In connection with the Formation Transactions and the concurrent private placement to certain members
of the Otto family and their affiliates, our board of directors granted waivers to the lineal descendants of Professor Dr. h.c. Werner
Otto, their spouses and controlled entities to own up to 22.0% of our outstanding common stock in the aggregate (which can be
automatically increased to an amount greater than 22.0% to the extent that their aggregate ownership exceeds such percentage solely
as a result of a repurchase by the company of its common stock). The term the “Otto family” refers to the lineal descendants and the
surviving former spouse of the late Professor Dr. h.c. Werner Otto.
In addition, certain provisions of the Maryland General Corporation Law, or MGCL, may have the effect of inhibiting a third
party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide the
holders of shares of our common stock with the opportunity to realize a premium over the then-prevailing market price of such shares,
including the Maryland business combination and control share provisions.
As permitted by the MGCL, our board of directors adopted a resolution exempting any business combinations between us and any
other person or entity from the business combination provisions of the MGCL. Our bylaws provide that this resolution or any other
resolution of our board of directors exempting any business combination from the business combination provisions of the MGCL may
only be revoked, altered or amended, and our board of directors may only adopt any resolution inconsistent with any such resolution
(including an amendment to that bylaw provision), which we refer to as an opt in to the business combination provisions, with the
affirmative vote of a majority of the votes cast on the matter by holders of outstanding shares of our common stock. In addition, as
permitted by the MGCL, our bylaws contain a provision exempting from the control share acquisition provisions of the MGCL any
and all acquisitions by any person of shares of our stock. This bylaw provision may be amended, which we refer to as an opt in to the
control share acquisition provisions, only with the affirmative vote of a majority of the votes cast on such an amendment by holders of
outstanding shares of our common stock.
Title 3, Subtitle 8 of the MGCL permits our board of directors, without stockholder approval and regardless of what is currently
provided in our charter or bylaws, to implement certain takeover defenses, including adopting a classified board or increasing the vote
required to remove a director. Such takeover defenses may have the effect of inhibiting a third party from making an acquisition
proposal for us or of delaying, deferring or preventing a change in control of us under the circumstances that otherwise could provide
our common stockholders with the opportunity to realize a premium over the then current market price.
In addition, the provisions of our charter on the removal of directors and the advance notice provisions of our bylaws, among
others, could delay, defer or prevent a transaction or a change of control of our company that might involve a premium price for
holders of our common stock or otherwise be in their best interest.
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Each item discussed above may delay, deter or prevent a change in control of our company, even if a proposed transaction is at a
premium over the then-current market price for our common stock. Further, these provisions may apply in instances where some
stockholders consider a transaction beneficial to them. As a result, our stock price may be negatively affected by these provisions.
Our board of directors may change our policies without stockholder approval.
Our policies, including any policies with respect to investments, leverage, financing, growth, debt and capitalization, are
determined by our board of directors or those committees or officers to whom our board of directors may delegate such authority. Our
board of directors also establishes the amount of any dividends or other distributions that we pay to our stockholders. Our board of
directors or the committees or officers to which such decisions are delegated have the ability to amend or revise these and our other
policies at any time without stockholder vote. Accordingly, our stockholders are not entitled to approve changes in our policies, and,
while not intending to do so, we may adopt policies that may have an adverse effect on our financial condition and results of
operations.
Conflicts of interest may exist or could arise in the future between the interests of our stockholders and the interests of holders
of common units, which may impede business decisions that could benefit our stockholders.
Conflicts of interest may exist or could arise in the future as a result of the relationships between us and our affiliates, on the one
hand, and our operating partnership or any of its partners, on the other. Our directors and officers have duties to our company under
Maryland law in connection with their management of our company. At the same time, we have duties and obligations to our
operating partnership and its limited partners under Delaware law as modified by the partnership agreement of our operating
partnership in connection with the management of our operating partnership as the sole general partner. The limited partners of our
operating partnership expressly acknowledge that the general partner of our operating partnership acts for the benefit of our operating
partnership, the limited partners and our stockholders collectively. When deciding whether to cause our operating partnership to take
or decline to take any actions, the general partner will be under no obligation to give priority to the separate interests of (i) the limited
partners of our operating partnership (including, without limitation, the tax interests of our limited partners, except as provided in a
separate written agreement) or (ii) our stockholders. Nevertheless, the duties and obligations of the general partner of our operating
partnership may come into conflict with the duties of our directors and officers to our company and our stockholders.
If there are deficiencies in our disclosure controls and procedures or internal control over financial reporting, we may be
unable to accurately present our financial statements, which could materially and adversely affect us, including our business,
reputation, results of operations, financial condition or liquidity.
As a publicly-traded company, we are required to report our financial statements on a consolidated basis. Effective internal
controls are necessary for us to accurately report our financial results. Section 404 of the Sarbanes-Oxley Act of 2002 requires us to
evaluate and report on our internal control over financial reporting and have our independent registered public accounting firm issue
an opinion with respect to the effectiveness of our internal control over financial reporting. There can be no guarantee that our internal
control over financial reporting will be effective in accomplishing all control objectives all of the time. Furthermore, as we grow our
business, our internal controls will become more complex, and we may require significantly more resources to ensure our internal
controls remain effective. Deficiencies, including any material weakness, in our internal control over financial reporting which may
occur in the future could result in misstatements of our results of operations that could require a restatement, failing to meet our public
company reporting obligations and causing investors to lose confidence in our reported financial information. These events could
materially and adversely affect us, including our business, reputation, results of operations, financial condition or liquidity.
We may have assumed unknown liabilities in connection with the Formation Transactions, which, if significant, could
adversely affect our business.
As part of the Formation Transactions, we (through corporate acquisitions and contributions to our operating partnership)
acquired the properties and assets of our predecessor and certain other assets, subject to existing liabilities, some of which may be
unknown. Unknown liabilities might include liabilities for cleanup or remediation of undisclosed environmental conditions, claims of
tenants, vendors or other persons dealing with such entities prior to the Offering (that had not been asserted or threatened prior to the
Offering), tax liabilities, and accrued but unpaid liabilities incurred in the ordinary course of business. Any unknown or unquantifiable
liabilities that we assumed in connection with the Formation Transactions for which we have no or limited recourse could adversely
affect us. See “—We may become subject to liability relating to environmental and health and safety matters, which could have an
adverse effect on us, including our financial condition and results of operations” as to the possibility of undisclosed environmental
conditions potentially affecting the value of the properties in our portfolio.
23
Risks Related to Our Indebtedness and Financing
We have a substantial amount of indebtedness that may limit our financial and operating activities and may adversely affect
our ability to incur additional debt to fund future needs.
We have a substantial amount of indebtedness. Payments of principal and interest on borrowings may leave us with insufficient
cash resources to operate our properties, fully implement our capital expenditure, acquisition and redevelopment activities, or meet the
REIT distribution requirements imposed by the Code. Our level of debt and the limitations imposed on us by our debt agreements
could have significant adverse consequences, including the following:
(cid:121)
require us to dedicate a substantial portion of cash flow from operations to the payment of principal, and interest on,
indebtedness, thereby reducing the funds available for other purposes;
(cid:121) make it more difficult for us to borrow additional funds as needed or on favorable terms, which could, among other things,
adversely affect our ability to meet operational needs;
(cid:121)
force us to dispose of one or more of our properties, possibly on unfavorable terms (including the possible application of the
100% tax on income from prohibited transactions, discussed below in “U.S. Federal Income Tax Considerations”) or in
violation of certain covenants to which we may be subject;
(cid:121)
subject us to increased sensitivity to interest rate increases;
(cid:121) make us more vulnerable to economic downturns, adverse industry conditions or catastrophic external events;
(cid:121)
(cid:121)
(cid:121)
limit our ability to withstand competitive pressures;
limit our ability to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our
original indebtedness;
reduce our flexibility in planning for or responding to changing business, industry and economic conditions; and/or
(cid:121) place us at a competitive disadvantage to competitors that have relatively less debt than we have.
If any one of these events were to occur, our financial condition, results of operations, cash flow and trading price of our common
stock could be adversely affected. Furthermore, foreclosures could create taxable income without accompanying cash proceeds, which
could hinder our ability to meet the REIT distribution requirements imposed by the Code.
We may not have sufficient cash flow to meet the required payments of principal and interest on our debt or to pay
distributions on our shares at expected levels.
In the future, our cash flow could be insufficient to meet required payments of principal and interest or to pay distributions on our
shares at expected levels. In this regard, we note that in order for us to continue to qualify as a REIT, we are required to make annual
distributions generally equal to at least 90% of our taxable income, computed without regard to the dividends paid deduction and
excluding net capital gain. In addition, as a REIT, we are subject to U.S. federal income tax to the extent that we distribute less than
100% of our taxable income (including capital gains) and are subject to a 4% nondeductible excise tax on the amount by which our
distributions in any calendar year are less than a minimum amount specified by the Code. These requirements and considerations may
limit the amount of our cash flow available to meet required principal and interest payments.
If we are unable to make required payments on indebtedness that is secured by a mortgage on our property, the asset may be
transferred to the lender with a consequent loss of income and value to us, including adverse tax consequences related to such a
transfer.
Our debt agreements include restrictive covenants, requirements to maintain financial ratios and default provisions which
could limit our flexibility, our ability to make distributions and require us to repay the indebtedness prior to its maturity.
The mortgages on our properties contain customary negative covenants that, among other things, limit our ability, without the
prior consent of the lender, to further mortgage the property and to reduce or change insurance coverage. Additionally, our debt
agreements contain customary covenants that, among other things, restrict our ability to incur additional indebtedness and, in certain
instances, restrict our ability to engage in material asset sales, mergers, consolidations and acquisitions, and restrict our ability to make
capital expenditures. These debt agreements, in some cases, also subject us to guarantor and liquidity covenants and our revolving
credit facility will, and other future debt may, require us to maintain various financial ratios. Some of our debt agreements contain
certain cash flow sweep requirements and mandatory escrows, and our property mortgages generally require certain mandatory
prepayments upon disposition of underlying collateral. Early repayment of certain mortgages may be subject to prepayment penalties.
24
Variable rate debt is subject to interest rate risk that could increase our interest expense, increase the cost to refinance and
increase the cost of issuing new debt.
As of December 31, 2015, $321.8 million of our outstanding consolidated debt was subject to instruments which bear interest at
variable rates, and we may also borrow additional money at variable interest rates in the future. Unless we have made arrangements
that hedge against the risk of rising interest rates, increases in interest rates would increase our interest expense under these
instruments, increase the cost of refinancing these instruments or issuing new debt, and adversely affect cash flow and our ability to
service our indebtedness and make distributions to our stockholders, which could adversely affect the market price of our common
stock.
We may, in a manner consistent with our qualification as a REIT, seek to manage our exposure to interest rate volatility by using
interest rate hedging arrangements that involve risk, such as the risk that counterparties may fail to honor their obligations under these
arrangements, and that these arrangements may not be effective in reducing our exposure to interest rate changes. Moreover, there can
be no assurance that our hedging arrangements will qualify for hedge accounting or that our hedging activities will have the desired
beneficial impact on our results of operations. Should we desire to terminate a hedging agreement, there could be significant costs and
cash and other collateral requirements involved to fulfill our obligation under the hedging agreement. Failure to hedge effectively
against interest rate changes may adversely affect our results of operations.
Mortgage debt obligations expose us to the possibility of foreclosure, which could result in the loss of our investment in a
property or group of properties subject to mortgage debt.
Incurring mortgage and other secured debt obligations increases our risk of property losses because defaults on indebtedness
secured by properties may result in foreclosure actions initiated by lenders and ultimately our loss of the property securing any loans
for which we are in default. Any foreclosure on a mortgaged property or group of properties could adversely affect the overall value of
our portfolio of properties. For tax purposes, a foreclosure of any of our properties that is subject to a nonrecourse mortgage loan
would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If
the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income
on foreclosure, but would not receive any cash proceeds, which could hinder our ability to meet the distribution requirements
applicable to REITs under the Code.
25
Risks Related to Our Common Stock
The market price and trading volume of our common stock may be volatile.
The trading price of our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate and
cause significant price variations to occur. Some of the factors that could negatively affect our share price or result in fluctuations in
the price or trading volume of our common stock include:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
actual or anticipated variations in our quarterly operating results or dividends;
changes in our funds from operations, NOI or income estimates;
publication of research reports about us or the real estate industry;
increases in market interest rates that lead purchasers of our shares to demand a higher yield;
changes in market valuations of similar companies;
adverse market reaction to any additional debt we incur in the future;
additions or departures of key management personnel;
actions by institutional stockholders;
speculation in the press or investment community;
the realization of any of the other risk factors presented in this Form 10-K;
the extent of investor interest in our securities;
the general reputation of REITs and the attractiveness of our equity securities in comparison to other equity securities,
including securities issued by other real estate-based companies;
our underlying asset value;
investor confidence in the stock and bond markets, generally;
changes in tax laws;
future equity issuances;
failure to meet income estimates;
failure to meet and maintain REIT qualifications; and
general market and economic conditions.
In the past, securities class-action litigation has often been instituted against companies following periods of volatility in the price
of their common stock. This type of litigation could result in substantial costs and divert our management’s attention and resources,
which could have an adverse effect on our financial condition, results of operations, cash flow and trading price of our common stock.
26
The market value of our common stock may decline due to the large number of our shares eligible for future sale.
The market value of our common stock could decline as a result of sales of a large number of shares of our common stock in the
market or upon exchange of common units, or the perception that such sales could occur. These sales, or the possibility that these sales
may occur, also might make it more difficult for us to sell shares of our common stock in the future at a time and at a price that we
deem appropriate.
As of December 31, 2015, a significant number of our outstanding shares of our common stock are held by our continuing
investors and their affiliates who acquired shares in the Formation Transactions and the concurrent private placements. These shares
of common stock are “restricted securities” within the meaning of Rule 144 under the Securities Act and may not be sold in the
absence of registration under the Securities Act unless an exemption from registration is available, including the exemptions contained
in Rule 144. All of these shares of our common stock are eligible for future sale and certain of such shares held by our continuing
investors have registration rights pursuant to registration rights agreements that we have entered into with those investors. Pursuant to
the registration rights agreement we entered into with members of the Otto family and certain affiliated entities receiving shares of our
common stock in the Formation Transactions and concurrent private placements, the parties to this agreement have the right to
demand that we register the resale and/or facilitate an underwritten offering of their shares; provided that the demand relates to shares
having a market value of at least $40.0 million and that such parties may not make more than two such demands in any consecutive
12-month period.
Upon the request of one or more parties owning at least 1.0% of our total outstanding common stock, we have agreed to file a
shelf registration statement registering the offering and sale of such parties’ registrable securities on a delayed or continuous basis, or
a resale shelf registration statement, and maintain the effectiveness of the resale shelf registration statement for as long as the
securities registered thereunder continue to qualify as registrable securities. In addition, limited partners of our operating partnership,
other than us, have the right to require our operating partnership to redeem part or all of their 46,601,137 common units for cash,
based upon the value of an equivalent number of shares of our common stock at the time of the election to redeem, or, at our election,
shares of our common stock on a one-for-one basis. The related shares of common stock or securities convertible into, exchangeable
for, exercisable for, or repayable with common stock will be available for sale or resale, as the case may be, and such sales or resales,
or the perception of such sales or resales, could depress the market price for our common stock.
In connection with the registration rights agreement we entered into with the continuing investors who received common units in
the Formation Transactions, on December 14, 2015, we filed a shelf registration statement with the SEC to register the primary
issuance of the shares of our common stock that they may receive in exchange for their common units. We are required to maintain the
effectiveness of this shelf registration statement for as long as the securities registered thereunder continue to qualify as registrable
securities. Furthermore, to the extent a holder transfers more than 50% of the common stock or common units that it received in
connection with the Formation Transactions within two years of the completion of the Offering, the holder generally will be required
to bear additional New York City and State real property transfer taxes attributable to such holder based on the holder’s transfer.
Future issuances of debt securities and equity securities may negatively affect the market price of shares of our common stock
and, in the case of equity securities, may be dilutive to existing stockholders.
Our charter provides that we may issue up to 900,000,000 shares of our common stock, $0.01 par value per share, and up to
100,000,000 shares of preferred stock, $0.01 par value per share. Moreover, under Maryland law and our charter, our board of
directors has the power to increase the aggregate number of shares of stock or the number of shares of stock of any class or series that
we are authorized to issue without stockholder approval. Similarly, the partnership agreement of our operating partnership authorizes
us to issue an unlimited number of additional common units, which may be exchangeable for shares of our common stock. In addition,
share equivalents are available for future issuance under the 2014 Equity Incentive Plan (with full value awards counting as one share
equivalent and options counting as one-half of a share equivalent).
In the future, we may issue debt or equity securities or incur other financial obligations, including stock dividends and shares that
may be issued in exchange for common units and equity plan shares/units. Upon liquidation, holders of our debt securities and other
loans and preferred stock will receive a distribution of our available assets before common stockholders. We are not required to offer
any such additional debt or equity securities to existing stockholders on a preemptive basis. Therefore, additional common stock
issuances, directly or through convertible or exchangeable securities (including common units and convertible preferred units),
warrants or options, will dilute the holdings of our existing common stockholders and such issuances or the perception of such
issuances may reduce the market price of shares of our common stock. Any convertible preferred units would have, and any series or
class of our preferred stock would likely have a preference on distribution payments, periodically or upon liquidation, which could
eliminate or otherwise limit our ability to make distributions to common stockholders.
27
Risks Related to Our Status as a REIT
Failure to qualify or to maintain our qualification as a REIT would have significant adverse consequences to the value of our
common stock.
We elected to be treated as a REIT commencing with our taxable year ended December 31, 2014. The Code generally requires
that a REIT distribute at least 90% of its taxable income (without regard to the dividends paid deduction and excluding net capital
gains) to stockholders annually, and a REIT must pay tax at regular corporate rates to the extent that it distributes less than 100% of its
taxable income (including capital gains) in a given year. In addition, a REIT is required to pay a 4% nondeductible excise tax on the
amount, if any, by which the distributions it makes in a calendar year are less than the sum of 85% of its ordinary income, 95% of its
capital gain net income and 100% of its undistributed income from prior years. To avoid entity-level U.S. federal income and excise
taxes, we anticipate distributing at least 100% of our taxable income annually.
We believe that we have been and are organized, and have operated and will continue to operate, in a manner that will allow us to
qualify as a REIT commencing with our taxable year ended December 31, 2014. However, we cannot assure you that we have been
and are organized and have operated or will continue to operate as such. This is because qualification as a REIT involves the
application of highly technical and complex provisions of the Code as to which there may only be limited judicial and administrative
interpretations and involves the determination of facts and circumstances not entirely within our control. We have not requested and
do not intend to request a ruling from the Internal Revenue Service, or the IRS, that we qualify as a REIT. The complexity of the Code
provisions and of the applicable Treasury Regulations is greater in the case of a REIT that, like us, acquired assets from taxable C
corporations in tax-deferred transactions and holds its assets through one or more partnerships. Moreover, in order to qualify as a
REIT, we must meet, on an ongoing basis, various tests regarding the nature and diversification of our assets and our income, the
ownership of our outstanding stock, the absence of inherited retained earnings from non-REIT periods and the amount of our
distributions. Our ability to satisfy the asset tests depends upon our analysis of the characterization and fair market values of our
assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our
compliance with the REIT gross income and quarterly asset requirements also depends upon our ability to manage successfully the
composition of our gross income and assets on an ongoing basis. Future legislation, new regulations, administrative interpretations or
court decisions may significantly change the tax laws or the application of the tax laws with respect to qualification as a REIT for U.S.
federal income tax purposes or the U.S. federal income tax consequences of such qualification. Accordingly, it is possible that we may
not meet the requirements for qualification as a REIT.
If, with respect to any taxable year, we fail to maintain our qualification as a REIT, we would not be allowed to deduct
distributions to stockholders in computing our taxable income. If we were not entitled to relief under the relevant statutory provisions,
we would also be disqualified from treatment as a REIT for the four subsequent taxable years. If we fail to qualify as a REIT, we
would be subject to entity-level income tax, including any applicable alternative minimum tax, on our taxable income at regular
corporate tax rates. As a result, the amount available for distribution to holders of our common stock would be reduced for the year or
years involved, and we would no longer be required to make distributions to our stockholders. In addition, our failure to qualify as a
REIT could impair our ability to expand our business and raise capital, and adversely affect the value of our common stock.
We may owe certain taxes notwithstanding our qualification as a REIT.
Even if we qualify as a REIT, we will be subject to certain U.S. federal, state and local taxes on our income and property, on
taxable income that we do not distribute to our stockholders, on net income from certain “prohibited transactions,” and on income
from certain activities conducted as a result of foreclosure. We may, in certain circumstances, be required to pay an excise or penalty
tax (which could be significant in amount) in order to utilize one or more relief provisions under the Code to maintain our
qualification as a REIT. In addition, we expect to provide certain services that are not customarily provided by a landlord, hold
properties for sale and engage in other activities (such as a portion of our management business) through one or more taxable REIT
subsidiaries (“TRSs”), and the income of those subsidiaries will be subject to U.S. federal income tax at regular corporate rates.
Furthermore, to the extent that we conduct operations outside of the United States, our operations would subject us to applicable
foreign taxes, regardless of our status as a REIT for U.S. tax purposes.
In the case of assets we acquired on a tax-deferred basis from certain corporations controlled by the Otto family and Wilhelm von
Finck (which we collectively refer to as the “family corporations”) as part of the Formation Transactions, we are subject to U.S.
federal income tax, sometimes called the “sting tax,” at the highest regular corporate tax rate, which is currently 35%, on all or a
portion of the gain recognized from a taxable disposition of any such assets occurring within the 5-year period following the
acquisition date, to the extent of the asset’s built-in gain based on the fair market value of the asset on the acquisition date in excess of
our initial tax basis in the asset. Additionally, depending upon the location of the asset acquired on a tax deferred basis there may be
additional “sting tax” imposed on a state and local level. Gain from a sale of such an asset occurring after the 5-year period ends will
not be subject to this sting tax. We currently do not expect to dispose of any asset if the disposition would result in the imposition of a
material sting tax liability under the above rules. We cannot, however, assure you that we will not change our plans in this regard.
28
As part of the Formation Transactions, we also acquired assets of the family corporations through mergers, stock acquisition and
similar transactions. As a result of those acquisitions, we inherited any liability for the unpaid taxes of the family corporations for
periods prior to the acquisitions. In each case, our acquisition of assets was intended to qualify as a tax-deferred acquisition for the
family corporation so that none of the corporations recognized gain or loss for U.S. federal income tax purposes in the Formation
Transactions. If for any reason our acquisition of a family corporation’s assets failed to qualify for tax-deferred treatment, the
corporation generally would recognize gain for U.S. federal income tax purposes to the extent that the fair market value of our stock
(and any cash) issued in exchange for the stock of the family corporation or the corporation’s assets, plus debt assumed, exceeded the
corporation’s adjusted tax basis in its assets. We would inherit the resulting tax liability of the family corporation. In several of the
Formation Transactions, the acquired family corporation would have recognized gain for U.S. federal income tax purposes unless the
acquisition qualified as a tax-deferred “reorganization” within the meaning of Section 368(a) of the Code. The requirements of tax-
deferred reorganizations are complex, and it is possible that the IRS could interpret the applicable law differently and assert that one or
more of the acquisitions failed to qualify as a reorganization under Section 368(a) of the Code. Moreover, under the “investment
company” rules under Section 368 of the Code, certain of the acquisitions could be taxable if the acquired corporation was an
“investment company” under such rules. If any such acquisition failed to qualify for tax-free reorganization treatment we would incur
significant U.S. federal income tax liability.
Our Operating Partnership has, and various predecessor partnerships whose assets were acquired in the Formation Transactions,
have, limited partners that are non-U.S. persons. Such non-U.S. persons are subject to a variety of U.S. withholding taxes, including
with respect to certain aspects of the Formation Transactions, withholding taxes that the relevant partnership must remit to the U.S.
Treasury. A partnership that fails to remit the full amount of withholding taxes is liable for the amount of the under withholding, as
well as interest and potential penalties. As a successor to certain of the private equity real estate funds controlled by our predecessor,
our operating partnership could be responsible if the private equity real estate funds failed to properly withhold for prior periods.
Although we believe that we and our predecessor partnerships have complied and will comply with the applicable withholding
requirements, the determination of the amounts to be withheld is a complex legal determination, depends on provisions of the Code
and the applicable Treasury Regulations that have little guidance and the treatment of certain aspects of the Formation Transactions
under the withholding rules may be uncertain. Accordingly, we may interpret the applicable law differently from the IRS and the IRS
may seek to recover additional withholding taxes from us.
Our property taxes could increase due to property tax rate changes or reassessment, which could impact our cash flow.
Even if we qualify as a REIT for U.S. federal income tax purposes, we are required to pay state and local taxes on our properties.
The real property taxes on our properties may increase as property tax rates change or as our properties are assessed or reassessed by
taxing authorities. Therefore, the amount of property taxes we pay in the future may increase substantially from what we have paid in
the past and such increases may not be covered by tenants pursuant to our lease agreements. If the property taxes we pay increase, our
financial condition, results of operations, cash flow, per share trading price of our common stock and our ability to satisfy our
principal and interest obligations and to make distributions to our stockholders could be adversely affected.
If our operating partnership is treated as a corporation for U.S. federal income tax purposes, we will cease to qualify as a
REIT.
We believe our operating partnership qualifies and will continue to qualify as a partnership for U.S. federal income tax purposes.
Assuming that it qualifies as a partnership for U.S. federal income tax purposes, our operating partnership will not be subject to U.S.
federal income tax on its income. Instead, its partners, including us, generally are required to pay tax on their respective allocable
share of our operating partnership’s income. No assurance can be provided, however, that the IRS will not challenge our operating
partnership’s status as a partnership for U.S. federal income tax purposes, or that a court would not sustain such a challenge. For
example, our operating partnership would be treated as a corporation for U.S. federal income tax purposes if it were deemed to be a
“publicly traded partnership” and less than 90% of its income consisted of “qualified income” under the Code. If the IRS were
successful in treating our operating partnership as a corporation for U.S. federal income tax purposes, we would fail to meet the gross
income tests and certain of the asset tests applicable to REITs and, therefore, cease to qualify as a REIT, and our operating partnership
would become subject to U.S. federal, state and local income tax. The payment by our operating partnership of income tax would
reduce significantly the amount of cash available to our partnership to satisfy obligations to make principal and interest payments on
its debt and to make distribution to its partners, including us.
29
There are uncertainties relating to our distribution of non-REIT earnings and profits.
To qualify as a REIT, we must not have any non-REIT accumulated earnings and profits, as measured for U.S. federal income tax
purposes, at the end of any REIT taxable year. Such non-REIT earnings and profits generally would have included any accumulated
earnings and profits of the corporations acquired by us (or whose assets we acquired) in the Formation Transactions. We believe that
we have operated, and intend to continue to operate, so that we have not had and will not have any earnings and profits accumulated in
a non-REIT year at the end of any taxable year. However, the determination of the amounts of any such non-REIT earnings and profits
is a complex factual and legal determination, especially in the case of corporations, such as the corporations acquired in our formation
transactions that have been in operation for many years. In addition, certain aspects of the computational rules are not completely
clear. Thus, we cannot guarantee that the IRS will not assert that we had accumulated non-REIT earnings as of the end of 2014 or a
subsequent taxable year. If it is subsequently determined that we had any accumulated non-REIT earnings and profits as of the end of
our first taxable year as a REIT or at the end of any subsequent taxable year, we could fail to qualify as a REIT beginning with the
applicable taxable year. Pursuant to Treasury Regulations, however, so long as our failure to comply with the prohibition on non-REIT
earnings and profits was not due to fraud with intent to evade tax, we could cure such failure by paying an interest charge on 50% of
the amount of accumulated non-REIT earnings and profits and by making a special distribution of accumulated non-REIT earnings
and profits. We intend to utilize such cure provisions if ever required to do so. The amount of any such interest charge could be
substantial.
Dividends payable by REITs generally do not qualify for reduced tax rates applicable to non-corporate taxpayers.
The maximum U.S. federal income tax rate for certain qualified dividends payable to U.S. stockholders that are individuals, trusts
and estates generally is 20%. Dividends payable by REITs, however, are generally not eligible for the reduced rates and therefore may
be subject to a 39.6% maximum U.S. federal income tax rate on ordinary income when paid to such stockholders. Although the
reduced U.S. federal income tax rate applicable to dividend income from regular corporate dividends does not adversely affect the
taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate dividends could cause
investors who are individuals, trusts and estates or are otherwise sensitive to these lower rates to perceive investments in REITs to be
relatively less attractive than investments in the stock of non-REIT corporations that pay dividends, which could adversely affect the
value of the shares of REITs, including our common stock.
Complying with the REIT requirements may cause us to forego otherwise attractive opportunities or liquidate certain of our
investments.
To qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, among other things, the
sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of
our stock. We may be required to make distributions to our stockholders at disadvantageous times or when we do not have funds
readily available for distribution. Thus, compliance with the REIT requirements may, for instance, hinder our ability to make certain
otherwise attractive investments or undertake other activities that might otherwise be beneficial to us and our stockholders, or may
require us to borrow or liquidate investments in unfavorable market conditions and, therefore, may hinder our investment
performance.
As a REIT, at the end of each calendar quarter, at least 75% of the value of our assets must consist of cash, cash items,
government securities and qualified real estate assets. The remainder of our investments in securities (other than cash, cash items,
government securities, securities issued by a TRS and qualified real estate assets) generally cannot include more than 10% of the
outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In
addition, in general, no more than 5% of the value of our total assets (other than cash, cash items, government securities, securities
issued by a TRS and qualified real estate assets) can consist of the securities of any one issuer, no more than 25% (for taxable years
beginning before January 1, 2018) or 20% (for taxable years beginning on or after January 1, 2018) of the value of our total assets can
be represented by securities of one or more TRSs. Further, even though for taxable years beginning after December 31, 2015, debt
instruments issued by a publicly traded REIT that are not secured by a mortgage on real property are qualifying real estate assets, no
more than 25% of the value of our total assets can be represented by such assets. After meeting these requirements at the close of a
calendar quarter, if we fail to comply with these requirements at the end of any subsequent calendar quarter, we must correct the
failure within 30 days after the end of the calendar quarter or qualify for certain other statutory relief provisions to avoid losing our
REIT qualification. As a result, we may be required to liquidate from our portfolio otherwise attractive investments. These actions
could have the effect of reducing our income and amounts available for distribution to our stockholders.
30
We may be subject to a 100% penalty tax on any prohibited transactions that we enter into, or may be required to forego
certain otherwise beneficial opportunities in order to avoid the penalty tax on prohibited transactions.
If we are found to have held, acquired or developed property primarily for sale to customers in the ordinary course of business,
we may be subject to a 100% “prohibited transactions” tax under U.S. federal tax laws on the gain from disposition of the property
unless the disposition qualifies for one or more safe harbor exceptions for properties that have been held by us for at least two years
and satisfy certain additional requirements (or the disposition is made through a TRS and, therefore, is subject to corporate U.S.
federal income tax).
Under existing law, whether property is held primarily for sale to customers in the ordinary course of a trade or business is a
question of fact that depends on all the facts and circumstances. We intend to hold, and, to the extent within our control, to have any
joint venture to which our operating partnership is a partner hold, properties for investment with a view to long-term appreciation, to
engage in the business of acquiring, owning, operating and developing the properties, and to make sales of our properties and other
properties acquired subsequent to the date hereof as are consistent with our investment objectives (and to hold investments that do not
meet these criteria through a TRS). Based upon our investment objectives, we believe that overall, our properties (other than certain
interests we intend to hold through a TRS) should not be considered property held primarily for sale to customers in the ordinary
course of business. However, it may not always be practical for us to comply with one of the safe harbors, and, therefore, we may be
subject to the 100% penalty tax on the gain from dispositions of property if we otherwise are deemed to have held the property
primarily for sale to customers in the ordinary course of business.
The potential application of the prohibited transactions tax could cause us to forego potential dispositions of property or to forego
other opportunities that might otherwise be attractive to us, or to hold investments or undertake such dispositions or other
opportunities through a TRS, which would generally result in corporate income taxes being incurred.
REIT distribution requirements could adversely affect our liquidity and adversely affect our ability to execute our business
plan.
In order to maintain our qualification as a REIT and to meet the REIT distribution requirements, we may need to modify our
business plans. Our cash flow from operations may be insufficient to fund required distributions, for example, as a result of
differences in timing between our cash flow, the receipt of income for accounting principles generally accepted in the United States of
America (“GAAP”) purposes and the recognition of income for U.S. federal income tax purposes, the effect of non-deductible capital
expenditures, the creation of reserves, payment of required debt service or amortization payments, or the need to make additional
investments in qualifying real estate assets. The insufficiency of our cash flow to cover our distribution requirements could require us
to (i) sell assets in adverse market conditions, (ii) borrow on unfavorable terms, (iii) distribute amounts that would otherwise be
invested in future acquisitions or capital expenditures or used for the repayment of debt, (iv) pay dividends in the form of “taxable
stock dividends” or (v) use cash reserves, in order to comply with the REIT distribution requirements. As a result, compliance with the
REIT distribution requirements could adversely affect the market value of our common stock. The inability of our cash flow to cover
our distribution requirements could have an adverse impact on our ability to raise short- and long-term debt or sell equity securities. In
addition, if we are compelled to liquidate our assets to repay obligations to our lenders or make distributions to our stockholders, we
may be subject to a 100% tax on any resultant gain if we sell assets that are treated as property held primarily for sale to customers in
the ordinary course of business, and, in the case of some of our properties, we may be subject to an entity-level sting tax.
The ability of our board of directors to revoke our REIT qualification without stockholder approval may cause adverse
consequences to our stockholders.
Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our
stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to be a REIT, we will
not be allowed a deduction for dividends paid to stockholders in computing our taxable income and will be subject to U.S. federal
income tax at regular corporate rates and state and local taxes, which may have adverse consequences on our total return to our
stockholders.
Our ability to provide certain services to our tenants may be limited by the REIT rules, or may have to be provided through a
TRS.
As a REIT, we generally cannot provide services to our tenants other than those that are customarily provided by landlords, nor
can we derive income from a third party that provides such services. If we forego providing such services to our tenants, we may be at
a disadvantage to competitors who are not subject to the same restrictions. However, we can provide such non-customary services to
tenants or share in the revenue from such services if we do so through a TRS, though income earned through the TRS will be subject
to corporate income taxes.
31
Although our use of TRSs may partially mitigate the impact of meeting certain requirements necessary to maintain our
qualification as a REIT, there are limits on our ability to own and enter into transactions with TRSs, and a failure to comply with
the limits would jeopardize our REIT qualification and may result in the application of a 100% excise tax.
A REIT may own up to 100% of the stock of one or more TRSs. A TRS may hold assets and earn income that would not be
qualifying assets or income if held or earned directly by a REIT. Both the subsidiary and the REIT must jointly elect to treat the
subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the
stock will automatically be treated as a TRS. Overall, no more than 25% (for taxable periods beginning before January 1, 2018) or
20% (for taxable years beginning on or after January 1, 2018) of the value of a REIT’s assets may consist of securities of one or more
TRSs. In addition, rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject
to an appropriate level of corporate taxation. Rules also impose a 100% excise tax on certain transactions between a TRS and its
parent REIT that are treated as not being conducted on an arm’s-length basis.
We intend to jointly elect with one or more companies for those companies to be treated as our TRS under the Code for U.S.
federal income tax purposes. These companies and any other TRSs that we form will pay U.S. federal, state and local income tax on
their taxable income, and their after-tax net income will be available for distribution to us but is not required to be distributed to us
unless necessary to maintain our REIT qualification. Although we will monitor the aggregate value of the securities of such TRSs and
intend to conduct our affairs so that such securities will represent less than 25% (for taxable periods beginning before January 1, 2018)
or 20% (for taxable years beginning on or after January 1, 2018) of the value of our total assets, there can be no assurance that we will
be able to comply with the TRS limitation in all market conditions.
Recent legislation may alter who bears the liability in the event any subsidiary partnership (such as our operating partnership)
is audited and an adjustment is assessed.
Congress recently revised the rules applicable to federal income tax audits of partnerships (such as our operating partnership) and
the collection of any tax resulting from any such audits or other tax proceedings, generally for taxable years beginning after December
31, 2017. Under the new rules, the partnership itself may be liable for a hypothetical increase in partner-level taxes (including interest
and penalties) resulting from an adjustment of partnership tax items on audit, regardless of changes in the composition of the partners
(or their relative ownership) between the year under audit and the year of the adjustment. The new rules also include an elective
alternative method under which the additional taxes resulting from the adjustment are assessed from the affected partners, subject to a
higher rate of interest than otherwise would apply. Many questions remain as to how the new rules will apply, especially with respect
to partners that are REITs, and it is not clear at this time what effect this new legislation will have on us. However, these changes
could increase the federal income tax, interest, and/or penalties otherwise borne by us in the event of a federal income tax audit of a
subsidiary partnership.
Possible legislative, regulatory or other actions could adversely affect our stockholders and us.
The rules dealing with U.S. federal, state and local income taxation are constantly under review by persons involved in the
legislative process and by the IRS and the U.S. Treasury Department. Changes to tax laws (which changes may have retroactive
application) could adversely affect our stockholders or us. In recent years, many such changes have been made and changes are likely
to continue to occur in the future. We cannot predict whether, when, in what form, or with what effective dates, tax laws, regulations
and rulings may be enacted, promulgated or decided, which could result in an increase in our, or our stockholders’, tax liability or
require changes in the manner in which we operate in order to minimize increases in our tax liability. A shortfall in tax revenues for
states and municipalities in which we operate may lead to an increase in the frequency and size of such changes. If such changes
occur, we may be required to pay additional taxes on our assets or income and/or be subject to additional restrictions. These increased
tax costs could, among other things, adversely affect our financial condition, the results of operations and the amount of cash available
for the payment of dividends. Stockholders are urged to consult with their own tax advisors with respect to the impact that recent
legislation may have on their investment and the status of legislative, regulatory or administrative developments and proposals and
their potential effect on their investment in our shares.
ITEM 1B. UNRESOLVED STAFF COMMENTS
There are no unresolved comments from the staff of the Securities and Exchange Commission as of the date of this Annual Report
on Form 10-K.
32
ITEM 2.
PROPERTIES
Our Portfolio Summary
As of December 31, 2015, our portfolio consisted of 12 Class A office properties aggregating approximately 10.4 million square
feet that was 95.3% leased and 90.3% occupied. The table below presents an overview of our portfolio as of December 31, 2015.
(cid:3)
(cid:3)(cid:3)(cid:3)
(cid:3)(cid:3) (cid:3)(cid:3)
(cid:3)(cid:3)
(cid:3)(cid:3) (cid:3)(cid:3)
(cid:3) (cid:3)(cid:3)
(cid:3)(cid:3)
(cid:3)(cid:3)(cid:3) (cid:3)(cid:3)
(cid:3)(cid:3)
(cid:3)
Annualized Rent (4)
Property
Submarket
New York City:
%
Ownership Square Feet (1)
%(cid:3)
Leased(2)(cid:3)(cid:3)
%(cid:3)
Occupied(3) (cid:3)(cid:3)
Amount
Per
Square
Foot (5)
1633 Broadway ............................. West Side
1301 Avenue of the Americas ....... Sixth Ave./Rock Center
1325 Avenue of the Americas ....... Sixth Ave./Rock Center
31 West 52nd Street ...................... Sixth Ave./Rock Center
900 Third Avenue .......................... East Side
712 Fifth Avenue ........................... Madison/Fifth Avenue
100.0%
100.0%
100.0%
100.0%
100.0%
50.0%
Subtotal / Weighted Average ......
2,643,065 92.7%
1,767,992 97.0%
814,892 96.5%
786,647 100.0%
596,270 96.0%
543,341 98.5%
7,152,207 95.7%
83.5 % $ 141,165,000 $ 69.60
85.5 % 112,348,000 75.04
94.2 % 49,875,000 67.27
100.0 % 60,298,000 79.09
95.2 % 41,479,000 73.79
98.5 % 55,658,000 104.52
89.1 % 460,823,000 75.36
Washington, D.C.:
Waterview ..................................... Rosslyn, VA
425 Eye Street ............................... East End
2099 Pennsylvania Avenue ........... CBD
1899 Pennsylvania Avenue ........... CBD
Liberty Place ................................. East End
Subtotal / Weighted Average ......
San Francisco:
100.0%
100.0%
100.0%
100.0%
100.0%
647,243 98.9%
380,090 96.5%
208,636 62.0%
192,481 88.8%
174,205 80.1%
1,602,655 90.3%
98.9 % 34,086,000 51.41
90.1 % 15,292,000 45.72
62.0 % 10,034,000 77.32
88.8 % 13,471,000 79.85
80.1 % 10,872,000 76.52
88.8 % 83,755,000 58.31
One Market Plaza .......................... South Financial District
49.0%
1,611,125 98.4%
97.2 % 98,006,000 63.63
Total / Weighted Average ..............
10,365,987 95.3%
90.3 % $ 642,584,000 $ 70.71
(1) Represents the remeasured square feet, which includes an aggregate of 164,742 square feet of either REBNY or BOMA
remeasurement adjustments that are not reflected in current leases.
(2) Represents the percentage of square feet that is leased, including signed leases not yet commenced.
(3) Represents the percentage of space for which we have commenced rental revenue in accordance with GAAP.
(4) Represents the end of the period monthly base rent plus escalations in accordance with the lease terms, multiplied by 12.
(5) Excludes square feet and revenue from parking, storage, theater, signage and roof space.
33
Tenant Diversification
As of December 31, 2015, our properties were leased to a diverse base of tenants. Our tenants represent a broad array of
industries, including financial services, media and entertainment, consulting, legal and other professional services, technology and
federal government agencies. The following table sets forth information regarding the 10 largest tenants in our portfolio based on
annualized rent as of December 31, 2015.
Lease
Expiration(1)(cid:3)
Square Feet
Occupied
% of Total
Square Feet
Annualized Rent (1)(cid:3)
Amount
Per Square Foot
% of
Annualized Rent
Jan-2028
Dec-2020
Jan-2031 (2)
Jun-2024
Tenant
The Corporate Executive Board
Company .................................
Barclays Capital, Inc. ...................
Allianz Global Investors, LP........
Clifford Chance LLP ...................
Credit Agricole Corporate &
Investment Bank .....................
Commerzbank AG ....................... May-2016 (3)
Apr-2025
Google Inc. ..................................
Deloitte & Touche, LLP .............. Mar-2016
WMG Acquisition Corp. (Warner
Music Group) ..........................
Chadbourne & Parke LLP ............
Jul-2029
Sep-2034
Feb-2023
625,062
497,418
326,457 (2)
328,992
311,291
287,535 (3)
275,822
212,052
293,487
203,102
$ 32,048,000
$
29,071,000
6.0%
4.8%
3.1% 26,170,000
3.2%
25,510,000
24,726,000
24,271,000
3.0%
2.8%
2.7% 17,495,000
2.0%
16,735,000
2.8%
2.0%
16,311,000
15,884,000
51.27
58.44
80.16
77.54
79.43
84.41
63.43
78.92
55.58
78.21
5.0%
4.5%
4.1%
4.0%
3.8%
3.8%
2.7%
2.6%
2.5%
2.5%
(1) Represents the end of the period monthly base rent plus escalations in accordance with the lease terms, multiplied by 12.
(2) 5,546 of the square feet leased expires in December 2016.
(3) As of December 31, 2015, 144,712 of this square footage has been leased to other tenants pursuant to signed leases that are
expected to commence following the May 2016 expiration.
Industry Diversification
The following table sets forth information relating to tenant diversification by industry in our portfolio based on annualized rent
as of December 31, 2015.
Industry
Legal Services ......................................................
Financial Services - Commercial and Investment
Banking ...........................................................
Financial Services - All other ...............................
Technology and Media .........................................
Retail ....................................................................
Insurance ..............................................................
Accounting ...........................................................
Real Estate ...........................................................
Government..........................................................
Other ....................................................................
Square Feet
Occupied
1,782,122
1,726,657
1,396,171
1,433,307
321,436
338,399
275,263
205,835
316,700
1,385,376
% of Occupied
Square Feet
19.4% $
18.8%
15.2%
15.6%
3.5%
3.7%
3.0%
2.2%
3.5%
15.1%
Annualized Rent (1)(cid:3) (cid:3)(cid:3)
131,355,000
124,469,000
112,087,000
89,537,000
28,326,000
26,869,000
20,718,000
15,677,000
14,677,000
78,869,000
% of
Annualized Rent
20.4%
19.4%
17.4%
14.0%
4.4%
4.2%
3.2%
2.4%
2.3%
12.3%
(1) Represents the end of the period monthly base rent plus escalations in accordance with the lease terms, multiplied by 12.
34
Lease Expirations
The following table sets forth a summary schedule of the lease expirations for leases in place as of December 31, 2015 for each of
the 10 calendar years beginning with the year ending December 31, 2015, at the properties in our portfolio. The information set forth
in the table assumes that tenants exercise no renewal options and no early termination rights.
Year of(cid:3)
Lease Expiration (3)
Month to Month
Square Feet of Expiring
Leases
Amount
5,593
$
631,000
$
Per Square Foot (2)(cid:3)
(cid:3)(cid:3)
104.08
Annualized Rent (1)
(cid:3)(cid:3)
1Q 2016
2Q 2016
3Q 2016
4Q 2016
Total 2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
Thereafter
9,111
366,010
160,772
27,427
563,320
553,297
323,095
500,762
465,698
1,521,322
531,263
670,462
682,055
465,438
3,300,647
911,000
30,019,000
11,675,000
2,045,000
44,650,000
40,453,000
25,631,000
37,617,000
32,852,000
89,931,000
35,346,000
53,101,000
53,564,000
34,118,000
223,413,000
100.00
81.49
72.65
76.28
79.02
73.75
79.20
75.50
79.17
59.99
73.97
79.70
78.99
73.43
67.23
% of
Annualized Rent
0.1%
0.1%
4.5%
1.7%
0.3%
6.6%
6.0%
3.8%
5.6%
4.9%
13.4%
5.3%
7.9%
8.0%
5.1%
33.3%
(1) Represents the end of the period monthly base rent plus escalations in accordance with the lease terms, multiplied by 12.
(2) Excludes square feet and revenue from parking, storage, theater, signage and roof space.
(3) Leases that expire on the last day of any given period are treated as occupied and are reflected as expiring space in the following
period.
Our portfolio contains a number of large buildings in select central business district submarkets, which often involve large users
occupying multiple floors for relatively long terms. Accordingly, the re-lease or renewal of one or more large leases may have a
material positive or negative impact on average base rent, tenant improvement and leasing commission costs in a given period. Tenant
improvement costs include expenditures for general improvements related to installing a tenant. Leasing commission costs are
similarly subject to significant fluctuations depending upon the anticipated revenue to be received under the leases and the length of
leases being signed. Our ability to re-lease space subject to expiring leases will impact our results of operations and is affected by
economic and competitive conditions in our markets and by the desirability of our individual properties.
As of December 31, 2015, the vacancy rate of our portfolio was 4.7%. In addition approximately 568,913 square feet (including
month-to-month tenants), or 5.5% of the square footage of our portfolio is scheduled to expire during the year ending December 31,
2016, which represents approximately 6.7% of our annualized rent.
35
Real Estate Fund Investments
We have an investment management business, where we serve as the general partner of real estate funds for institutional investors
and high net-worth individuals. The following is a summary of our ownership in these funds and the funds’ ownership in the
underlying investments.
Property Funds
The purpose of the Property Funds is to invest in office buildings and related facilities primarily in New York City and San
Francisco. As of December 31, 2015, the Property Funds were comprised of (i) Paramount Group Real Estate Fund II, L.P. (“Fund
II”), (ii) Paramount Group Real Estate Fund III, L.P. (“Fund III”), (iii) Paramount Group Real Estate Fund VII, L.P. (“Fund VII”) and
(iv) Paramount Group Real Estate Fund VII-H, L.P. (“Fund VII-H”).
On October 29, 2015, Fund VII and Fund VII-H completed the acquisition of 670 Broadway, a 75,945 square foot creative office
building located in Manhattan, for $112,000,000, comprised of $42,000,000 in cash and $70,000,000 of initial mortgage debt.
The following is a summary of the Property Funds, our ownership interests in these Funds and the Funds’ ownership interest in
the underlying investments, as of December 31, 2015.
As of December 31, 2015
One Market
Plaza
-
50 Beale Street
-
-
42.8 %
42.8 %
57.2 %
100.0 %
670 Broadway
-
-
100.0%
100.0%
-
100.0%
2.0%
-
2.0%
98.0% (1)
100.0%
Fund II ....................................
Fund III ...................................
Fund VII/VII-H ......................
Total Property Funds .................
Other Investors .......................
Total ..........................................
%
Ownership
60 Wall Street
10.0 %
3.1 %
7.2 %
46.3%
16.0%
-
62.3%
37.7%
100.0%
(1)
Includes a 49.0% direct ownership interest held by us.
36
Alternative Investment Funds
The purpose of the Alternative Investment Funds is to invest primarily in real estate related debt and preferred equity investments.
As of December 31, 2015, the Alternative Investment Funds had an aggregate of $580,200,000 of committed capital, of which, we
have invested $166,560,000.
The following is a summary of our ownership interests in the Alternative Investment Funds and the Funds’ underlying
investments, as of December 31, 2015.
(Amounts in thousands)
Fund/Investment
Investment Type
%
Ownership
Interest Rate
Initial Maturity
December 31, 2015
Fair Value as of
Fund VIII
26 Broadway (1) ............... (cid:3) Mezzanine Loan
1440 Broadway (2)............ (cid:3) Mezzanine Loan
700 Eighth Avenue (3) ...... (cid:3) Mortgage/Mezzanine Loans
Total Alternative Investment Funds ............................................
1.7%
1.7%
1.7%
8.3%
6.4%
6.4%
Jan-2022 $
Oct-2019
Dec-2016
$
46,678
40,619
80,317
167,614
(1) The loan is secured by the equity interests in the owner of 26 Broadway, an 836,000 square foot office building, located in the financial
district of Manhattan. The loan has a fixed interest rate and is subordinate to $220,000 of other debt.
(2) On September 30, 2015, Fund VIII closed on a $40,000 mezzanine loan secured by the equity interests in the owner of 1440 Broadway,
a 751,546 square foot office and retail property located in Manhattan. The loan bears interest at LIBOR plus 600 bps, has a one-year
extension option and is subordinate to $265,000 of other debt.
(3) On November 24, 2015, Fund VIII closed on a senior mortgage and mezzanine loan aggregating $80,000 secured by 700 Eighth Avenue, a
26,126 square foot retail property located in Manhattan. The loans bear interest at LIBOR plus 600 bps and have one-year extension options.
Additionally, on September 1, 2015, PGRESS and PGRESS-H redeemed their preferred equity investment in One Court Square
for $42,475,000, resulting in a realized gain on the investment of $7,455,000.
Residential Development Fund
The purpose of the Residential Development Fund (“Residential Fund”) is to construct a multifamily residential project in San
Francisco. As of December 31, 2015, the Residential Fund had an aggregate of $135,600,000 of committed capital, of which
$75,600,000 has been called and substantially invested.
Preferred Equity Investments
On December 16, 2015, we acquired PGRESS-A, which owned a 20% interest in a PGRESS Equity Holdings L.P., for $12,150,000.
PGRESS Equity Holdings L.P. owns certain preferred equity investments that are also owned by PGRESS and PGRESS-H (together with
PGRESS-A, the “PGRESS Funds”). Prior to our acquisition of PGRESS-A, we owned a 5.4% interest in the underlying investments held
by the PGRESS and PGRESS-H Funds, which were consolidated into our consolidated financial statements. These investments were
reflected as a component of “real estate fund investments” on our consolidated balance sheets and the income from these investments was
reflected as a component of “income from real estate fund investments” on our consolidated statements of income. Subsequent to our
acquisition of PGRESS-A, we are required to consolidate PGRESS Equity Holdings L.P. Accordingly, we reclassified the underlying
investments to “preferred equity investments” on our consolidated balance sheets and income from the investments is now reflected as a
component of “interest and other income (loss), net” on our consolidated statements of income.
The following is a summary of the preferred equity investments held by PGRESS Equity Holdings L.P.
(Amounts in thousands)
Preferred Equity Investment
470 Vanderbilt Avenue (1) ........................ (cid:3)
2 Herald Square (2) ................................... (cid:3)
Total Preferred Equity Investments ........
% Ownership
25.4%
25.4%
Dividend Rate
10.3%
10.3%
Initial Maturity
As of
December 31, 2015
Feb-2019 $
Apr-2017
$
35,305
18,636
53,941
(1) Represents a $33,750 preferred equity investment in a partnership that owns 470 Vanderbilt Avenue, a 650,000 square foot office
building located in Brooklyn, New York. The preferred equity has a dividend rate of 10.3%, of which 8.0% is being paid in cash through
February 2016 and will increase thereafter to 10.3% through maturity, and the unpaid portion accretes to the balance of the investment.
(2) Represents a $17,500 preferred equity investment in a partnership that owns 2 Herald Square, a 369,000 square foot office and retail
property in Manhattan. The preferred equity has a dividend rate of 10.3%, of which 7.0% is paid currently and the remainder accretes to
the balance of the investment. The preferred equity investment has two one-year extension options.
37
Other
60 Wall Street - Option Agreement
60 Wall Street is a 47-story, 1.6 million square foot Class-A office building located steps from the New York Stock Exchange in
the heart of New York’s financial district. It features a two-story retail arcade and enclosed park on the ground floor and serves as the
American headquarters of Deutsche Bank. The property is 100% net leased to Deutsche Bank through 2022 and Deutsche Bank has
five five-year renewal options to extend the lease term through 2047 and a contraction option on up to 174,420 rentable square feet
exercisable between June 2017 and June 2018.
In connection with the Formation Transactions, we entered into an option agreement with each of Fund II and Fund III pursuant
to which we will have the right to acquire their interests in the joint venture that owns 60 Wall Street. We will have the right to acquire
these interests at any time for up to two years after the completion of the Offering (i.e., through November 2016) at a purchase price
based on the fair market value of the property, subject to a minimum floor price, and the net value of the other assets and liabilities of
the joint venture on the date on which the option is exercised. In order to determine the fair market value of the property, we will
obtain three independent appraisals from nationally recognized valuation firms and the fair market value will be deemed to be the
average of the two highest appraisals; provided that the fair market value will be subject to a minimum floor price equal to 95% of the
appraised value of the property as of December 31, 2013. We will have the right to acquire these interests for either cash or shares of
our common stock, based on the then current market value. Our acquisition of these interests upon exercise of the option will be
subject to Fund II and Fund III obtaining all applicable consents or waivers, including the consent or waiver of any lenders or tenants
to the extent required. In addition, the purchase price will be increased to the extent we enter into any new lease or lease amendment at
the property within 90 days after the closing that would have resulted in the fair market value of the property increasing by more than
one percent if such lease or lease amendment had been in place as of the date of the appraisals used to determine the fair market value
of the property. If we were to exercise the option, we have agreed to provide our joint venture partner with the right to “tag-along” and
transfer their interests in the joint venture that owns 60 Wall Street at a purchase price based on the same valuation procedures
pursuant to which we would acquire each of Fund II’s and Fund III’s interests.
If we were to exercise the option and our joint venture partner did not exercise its right to tag-along, we would continue to act as
the general partner of the joint venture that is in charge of the property’s day-to-day operations. In the event we desire to transfer, sell
or assign any portion of our interest in the joint venture to a third party, our joint venture partner will have the right to elect to
purchase our interests subject to certain conditions. The partnership agreement contains a buy-sell provision, under which at any time,
we or the joint venture partner may deliver a notice designating the amount that we or the joint venture partner determines the market
value of the property to be. The party receiving a buy-sell notice will have the right to either purchase the entire partnership interest of
the partner delivering the buy-sell notice, or sell its entire partnership interest to the partner delivering the buy-sell notice, in each case
for cash at a price equal to the amount the selling partner would have received if the property had been sold for the amount listed in
the notice (with financing breakage costs and transfer taxes to be apportioned between the partners in accordance with their percentage
interests in the joint venture).
718 Fifth Avenue - Put Right
We manage 718 Fifth Avenue, a five-story building containing 19,050 square feet of prime retail space that is located on the
southwest corner of 56th Street and Fifth Avenue in New York. The property is one block south of one of the world’s most exclusive
commercial intersections (57th Street and Fifth Avenue). Rockefeller Center and Central Park are within walking distance, as are
numerous luxury hotels, museums and retail stores, including the Plaza Hotel, the Museum of Modern Art, Bergdorf Goodman and
Saks Fifth Avenue. The property serves as the flagship store of Harry Winston, a high-end American luxury jeweler and producer of
Swiss timepieces owned by The Swatch Group.
Prior to the Formation Transactions, an affiliate of our Predecessor owned a 25.0% interest in 718 Fifth Avenue (based on its
50.0% interest in a joint venture that held a 50.0% tenancy-in-common interest in the property). Prior to the completion of the
Formation Transactions, this interest was sold to its partner in the 718 Fifth Avenue joint venture, who is also our partner in the joint
venture that owns 712 Fifth Avenue, New York, New York. In connection with this sale, we granted our joint venture partner a put
right, pursuant to which the 712 Fifth Avenue joint venture would be required to purchase the entire direct or indirect interests held by
our joint venture partner or its affiliates in 718 Fifth Avenue at a purchase price equal to the fair market value of such interests. The
put right may be exercised at any time after the four-year anniversary of the sale of its interest in 718 Fifth Avenue (i.e., September 10,
2018) upon 12 months written notice with the actual purchase occurring no earlier than the five-year anniversary of such sale (i.e.,
September 10, 2019). If the put right is exercised and the 712 Fifth Avenue joint venture acquires the 50.0% tenancy-in-common
interest in the property that will be held by our joint venture partner following the sale of its interest to our joint venture partner, we
will own a 25.0% interest in 718 Fifth Avenue.
38
ITEM 3.
LEGAL PROCEEDINGS
From time to time, we are a party to various claims and routine litigation arising in the ordinary course of business. We do not
believe that the results of any such claims or litigation, individually or in the aggregate, will have a material adverse effect on our
business, financial position, results of operations or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
39
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol PGRE. The table below sets forth the
high and low sales prices of our common stock and dividends for the year ended December 31, 2015 and for the period from
November 19, 2014 through December 31, 2014:
(cid:3)
(cid:3)
Quarter Ended
March 31 .............................. $
June 30 .................................
September 30 .......................
December 31 ........................
(cid:3)(cid:3)(cid:3) (cid:3)(cid:3)
(cid:3)(cid:3)
Year Ended
December 31, 2015
(cid:3)(cid:3)
High
Low
20.21
19.73
18.35
18.56
(cid:3)(cid:3)
$
(cid:3)(cid:3)(cid:3) (cid:3)(cid:3)
17.66
16.97
15.65
16.50
(cid:3)
Dividends
$ 0.134 (1)
0.095
0.095
0.095 $
(cid:3) (cid:3)(cid:3)
(cid:3)(cid:3)
(cid:3)(cid:3)
Period from November 19, 2014
through December 31, 2014
Low
Dividends
High
19.68
(cid:3)(cid:3)
$
(cid:3)(cid:3)(cid:3) (cid:3)(cid:3)
17.49 $
(cid:3) (cid:3)(cid:3)
(cid:3)
0.00
(cid:3)
(1)
Includes the $0.039 cash dividend for the 38 day period following the completion of our initial public offering and the related
formation transactions, ending on December 31, 2014.
As of December 31, 2015, there were approximately 37 registered holders of record of our common stock. This figure does not
reflect the beneficial ownership of shares of our common stock held in nominee or “street” name.
Dividends
In order to maintain our qualification as a REIT under the Internal Revenue Code, we must distribute at least 90% of our taxable
income to shareholders. We intend to pay dividends on a quarterly basis to holders of our common stock. Any dividend distributions
we pay in the future will depend upon our actual results of operations, economic conditions and other factors that could differ
materially from our current expectations. Our actual results of operations will be affected by a number of factors; including the
revenue we receive from our properties, our operating expenses, interest expense, the ability of our tenants to meet their obligations
and unanticipated expenditures. Distributions declared by us will be authorized by our board of directors in its sole discretion out of
funds legally available and will be dependent upon a number of factors, including restrictions under applicable law, the capital
requirements of our company and the distribution requirements necessary to maintain our qualification as a REIT. See Item 1A, "Risk
Factors," and Item 7, "Management's Discussion and Analysis of Financial Conditions and Results of Operations," of this Annual
Report on Form 10-K, for information regarding the sources of funds used for dividends and for a discussion of factors, if any, which
may adversely affect our ability to make distributions to our shareholders.
On December 15, 2015, we declared a regular quarterly cash dividend of $0.095 per share of common stock for the fourth quarter
ending December 31, 2015 which was paid on January 15, 2016 to stockholders of record as of the close of business on December 31,
2015.
40
Performance Graph
The following graph is a comparison of the cumulative return of our common stock, the Standard & Poor’s 500 Index (the “S&P
500 Index”), the SNL Financials (“SNL”) Office REIT Index (the “SNL Office REIT Index”) and the National Association of Real
Estate Investment Trusts (“NAREIT”) All Equity Index (the “All Equity Index”). Since our 2015 Performance Plan, a multi-year
performance based equity compensation program, that was approved by the compensation committee of the board of directors on
April 1, 2015, compares the return of our common stock to the SNL Office REIT Index, we have added the SNL Office REIT Index to
the performance graph below. The graph assumes that $100 was invested on November 19, 2014 (the first trading day of our common
stock) in our common stock, the S&P 500 Index, the SNL Office REIT Index and the All Equity Index and that all dividends were
reinvested without the payment of any commissions. There can be no assurance that the performance of our stock will continue in line
with the same or similar trends depicted in the graph below.
Comparison of Cumulative Return
$110
$105
$100
$95
$90
November 19, 2014
December 31, 2014
December 31, 2015
Paramount Group, Inc.
S&P 500 Index
SNL Office REIT Index
All Equity Index
Paramount ............................................................................. $
S&P 500 Index ......................................................................
SNL Office REIT Index ........................................................
All Equity Index ....................................................................
November 19, 2014 December 31, 2014 December 31, 2015
101.95
102.12
105.01
107.03
100.00 $
100.00
100.00
100.00
102.26
100.72
104.09
104.09
$
41
Recent Sales of Unregistered Securities
None.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes certain information about our equity compensation plans as of December 31, 2015.
Plan Category
Equity compensation plans approved by stockholders ....
Equity compensation plans not approved by
stockholders .................................................................
Total ................................................................................
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
7,574,416 (1) $
Weighted-average
exercise price of
outstanding options,
warrants and rights
17.69
Number of securities remaining
available for future issuance
under equity compensation plans
(excluding securities reflected in
the first column of this table)(2)
(cid:3)
14,384,791
-
7,574,416 $
-
17.69
-
14,384,791
(1)
Includes an aggregate of 1,624,450 options, 1,001,808 long-term incentive plan units in our Operating Partnership ("LTIP
units") and 891,015 Performance Units that were granted pursuant to our 2014 Equity Incentive Plan (the "Plan") and
4,057,143 units that were granted as one-time Founders Grants that were granted outside of the Plan. The LTIP units and
performance units do not have an exercise price.
(2) Based on awards being granted as "Full Value Awards," as defined. If we were to grant "Not Full Value Awards," as defined
in the Plan, the number of securities remaining available for future issuance would be 28,769,582. See Note 18, Incentive
Compensation - Stock Based Compensation for more information.
Recent Purchases of Equity Securities
None.
42
ITEM 6.
SELECTED FINANCIAL DATA
Since the assets that we acquired from our Predecessor are no longer held by funds which qualify for investment company
accounting, we account for these assets following the Formation Transactions using consolidated historical cost accounting. As a
result, our consolidated financial statements following the Formation Transactions differ significantly from the combined consolidated
financial statements of our Predecessor. The following table sets forth selected financial and operating data for the year ended
December 31, 2015 and for the period from November 24, 2014 to December 31, 2014 and as of the end of such year and period. This
data should be read in conjunction with the combined consolidated financial statements and notes thereto included in “Item 8.
Financial Statements and Supplementary Data” and “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in this Annual Report on Form 10-K. This data may not be comparable to, or indicative of, future operating
results.
The Company
Year Ended
December 31, 2015
Period from
November 24, 2014
to December 31, 2014
(Amounts in thousands, except per share amounts)
REVENUES:
Rental income ....................................................................................................... $
Tenant reimbursement income .............................................................................
Fee and other income ............................................................................................
Total revenues .................................................................................................
EXPENSES:
Operating ..............................................................................................................
Depreciation and amortization ..............................................................................
General and administrative ...................................................................................
Acquisition and transaction related costs ..............................................................
Total expenses .................................................................................................
Operating income .......................................................................................................
Income from real estate fund investments ............................................................
Income from unconsolidated joint ventures ..........................................................
Unrealized gain on interest rate swaps .................................................................
Interest and other income (loss), net .....................................................................
Interest and debt expense ......................................................................................
Formation related costs .........................................................................................
Gain on consolidation of an unconsolidated joint venture ....................................
Net income before income taxes ................................................................................
Income tax expense ..............................................................................................
Net income .................................................................................................................
Less net (income) loss attributable to noncontrolling interests:
Consolidated joint ventures and funds ..................................................................
Operating Partnership ...........................................................................................
Net (loss) income attributable to common stockholders ....................................... $
Per Share Data:
Net (loss) income per common share - basic ........................................................ $
Net (loss) income per common share - diluted ..................................................... $
586,530 $
50,885
24,993
662,408
244,754
294,624
42,056
10,355
591,789
70,619
37,975
6,850
75,760
871
(168,366 )
-
-
23,709
(2,566 )
21,143
(26,632 )
1,070
(4,419 ) $
(0.02 ) $
(0.02 ) $
57,465
5,865
2,805
66,135
26,011
34,481
2,207
-
62,699
3,436
1,412
938
15,084
(179)
(43,743)
(143,437)
239,716
73,227
(505)
72,722
(1,488)
(13,926)
57,308
0.27
0.27
-
Dividends per common share ............................................................................... $ 0.419 (1)$
43
(Amounts in thousands)
Balance Sheet Data (as of end of period):
The Company
Year Ended
December 31, 2015
Period from
November 24, 2014
through
December 31, 2014
Total assets ............................................................................................................... $
Rental property, at cost .............................................................................................
Accumulated depreciation and amortization ............................................................
Debt ..........................................................................................................................
Total equity ...............................................................................................................
$
8,794,143
7,652,117
(243,089 )
2,961,524
5,310,550
9,030,441
7,530,239
(81,050)
2,852,287
5,554,953
Other Data:
Funds from operations attributable to common stockholders ("FFO") (2) ................. $
Core funds from operations attributable to common stockholders ("Core FFO") (3) ...
209,349
172,796
$
82,425
16,100
(1)
Includes the $0.039 cash dividend for the 38 day period following the completion of our initial public offering and the related
formation transactions, ending on December 31, 2014.
(2) FFO is a supplemental measure of our performance. We present FFO in accordance with the definition adopted by the National
Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as GAAP net income or loss adjusted to
exclude net gains from sales of depreciated real estate assets, impairment losses on depreciable real estate and depreciation and
amortization expense from real estate assets, including the pro rata share of such adjustments of unconsolidated joint ventures.
FFO is commonly used in the real estate industry to assist investors and analysts in comparing results of real estate companies
because it excludes the effect of real estate depreciation and amortization and net gains on sales, which are based on historical
costs and implicitly assume that the value of real estate diminishes predictably over time, rather than fluctuating based on existing
market conditions. For a reconciliation of net income to FFO see page 69.
(3) We present Core FFO as an alternative measure of our operating performance, which adjusts FFO for certain other items that we
believe enhance the comparability of our FFO across periods. Core FFO, when applicable, excludes the impact of acquisition,
transaction and formation related costs, unrealized gains or losses on interest rate swaps, severance costs and defeasance and debt
breakage costs, in order to reflect the Core FFO of our real estate portfolio and operations. In future periods, we may also exclude
other items from Core FFO that we believe may help investors compare our results. For a reconciliation of net income to Core
FFO see page 69.
44
The following table sets forth selected financial and operating data of our Predecessor for the period from January 1, 2014 to
November 23, 2014 and for the years ended December 31, 2013, 2012 and 2011 and as of the end of such period and years.
(Amounts in thousands)
REVENUES:
Period from
January 1, 2014
The Predecessor
Year Ended December 31,
to November 23, 2014
2013
2012
2011
Rental income ..............................................................
Tenant reimbursement income ....................................
Distributions from real estate fund investments ..........
Realized and unrealized gains, net ...............................
Fee and other income ...................................................
Total revenues ........................................................
$
EXPENSES:
Operating .....................................................................
Depreciation and amortization .....................................
General and administrative ..........................................
Profit sharing compensation ........................................
Other ............................................................................
Total expenses ........................................................
Operating income ..............................................................
Income from unconsolidated joint ventures .................
Unrealized (loss) gain on interest rate swaps ...............
Interest and other income, net ......................................
Interest and debt expense .............................................
Net income before income taxes .......................................
Income tax expense .....................................................
Net income ........................................................................
Net income attributable to noncontrolling interests ..........
Net income attributable to the Predecessor ..................
$
(Amounts in thousands)
Balance Sheet Data (as of end of period):
Total assets ..................................................................
Rental property, at cost ................................................
Accumulated depreciation and amortization ...............
Debt .............................................................................
Total equity ..................................................................
30,208 $
1,646
17,083
129,354
49,098
227,389
15,862
10,203
30,912
12,041
7,974
76,992
150,397
4,241
(673)
2,479
(28,585)
127,859
(18,461)
109,398
(87,888)
21,510 $
30,406 $
1,821
29,184
332,053
26,426
419,890
16,195
10,582
33,504
23,385
4,633
88,299
331,591
1,062
1,615
9,407
(29,807)
313,868
(11,029)
302,839
(286,325)
16,514 $
29,773 $
1,543
31,326
161,199
22,974
246,815
15,402
10,104
28,374
17,554
6,569
78,003
168,812
3,852
6,969
4,431
(37,342)
146,722
(6,984)
139,738
(137,443)
2,295 $
29,187
1,004
15,128
533,819
26,802
605,940
14,656
10,701
25,556
78,354
5,312
134,579
471,361
5,448
(273)
1,887
(34,497)
443,926
(42,973)
400,953
(347,075)
53,878
The Predecessor
Year Ended December 31,
2012
2011
2013
$
2,992,691 $
414,998
(57,689)
499,859
2,025,444
2,611,727 $
414,855
(48,425)
517,494
1,738,226
2,366,888
416,864
(39,637)
532,305
1,484,813
45
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated
financial statements and the combined consolidated financial statements of that of our Predecessor, including the related notes
included therein.
Overview
We are a fully-integrated real estate investment trust (“REIT”) focused on owning, operating, managing, acquiring and
redeveloping high-quality, Class A office properties in select central business district submarkets of New York City, Washington,
D.C. and San Francisco. We conduct our business through, and substantially all of our interests are held by, Paramount Group
Operating Partnership LP, a Delaware limited partnership (the “Operating Partnership”). We are the sole general partner of, and
owned approximately 80.4% of the Operating Partnership as of December 31, 2015.
We were incorporated in Maryland as a corporation on April 14, 2014 to continue the business of our Predecessor, as defined, and
did not have any meaningful operations until the acquisition of substantially all of the assets of our Predecessor and assets of the
Property Funds, as defined, that it controlled, as well as the interests of unaffiliated third parties in certain properties. Our properties
were acquired through a series of Formation Transactions (the “Formation Transactions”) concurrently with our initial public offering
of 150,650,000 common shares at a public offering price of $17.50 per share on November 24, 2014 (the “Offering”).
Objectives and Strategy
Our primary business objective is to enhance stockholder value by increasing cash flow from operations. The strategies we intend
to execute to achieve this objective include:
(cid:120) Leasing available vacant space;
(cid:120) Releasing expiring space;
(cid:120) Maintaining a disciplined acquisition strategy focused on owning and operating Class A office properties in select central
business district submarkets of New York City, Washington, D.C. and San Francisco;
(cid:120) Redeveloping and repositioning properties to increase returns;
(cid:120) Proactively managing our portfolio to increase occupancy and rental rates; and
(cid:120) Refinancing existing above market debt.
46
Acquisitions
On October 1, 2015, we acquired the remaining 35.8% equity interest that we did not previously own in 31 West 52nd Street from
our joint venture partner for approximately $230,000,000 in cash and the assumption of $148,000,000 of existing debt.
Real Estate Fund Investments
On September 1, 2015, Paramount Group Special Situations Fund, L.P. (“PGRESS”) and Paramount Group Special Situations
Fund-H, L.P. (“PGRESS-H”) redeemed their preferred equity investment in One Court Square for $42,475,000, resulting in a realized
gain on the investment of $7,455,000.
On September 30, 2015, Paramount Group Real Estate Fund VIII, L.P. (“Fund VIII”) made a $40,000,000 mezzanine loan
secured by the equity interests in the owner of 1440 Broadway, a 751,546 square foot office and retail property located in Manhattan.
The loan bears interest at LIBOR plus 600 bps, matures in October 2019 and has a one-year extension option. The loan is subordinate
to $265,000,000 of other debt.
On October 29, 2015, Paramount Group Real Estate Fund VII, L.P. (“Fund VII”) and Paramount Group Real Estate Fund VII-H,
L.P. (“Fund VII-H”) completed the acquisition of 670 Broadway, a 75,945 square foot creative office building located in Manhattan,
for $112,000,000, comprised of $42,000,000 in cash and $70,000,000 of initial mortgage debt.
On November 24, 2015, Fund VIII made a senior mortgage and mezzanine loan aggregating $80,000,000 secured by 700 Eighth
Avenue, a 26,126 square foot retail property located in Manhattan. The loans bear interest at LIBOR plus 600 bps, mature in
December 2016 and have one-year extension options.
Preferred Equity Investments
On December 16, 2015, we acquired PGRESS-A, which owned a 20% interest in a PGRESS Equity Holdings L.P., for
$12,150,000. PGRESS Equity Holdings L.P. owns certain preferred equity investments that are also owned by PGRESS and
PGRESS-H (together with PGRESS-A, the “PGRESS Funds”). Prior to our acquisition of PGRESS-A, we owned a 5.4% interest in
the underlying investments held by the PGRESS and PGRESS-H Funds, which were consolidated into our consolidated financial
statements. These investments were reflected as a component of “real estate fund investments” on our consolidated balance sheets and
the income from these investments was reflected as a component of “income from real estate fund investments” on our consolidated
statements of income. Subsequent to our acquisition of PGRESS-A, we are required to consolidate PGRESS Equity Holdings L.P.
Accordingly, we reclassified the underlying investments to “preferred equity investments” on our consolidated balance sheets and
income from the investments is now reflected as a component of “interest and other income (loss), net” on our consolidated statements
of income.
Financings and Refinancing
On December 1, 2015, we completed a $1.0 billion refinancing of 1633 Broadway, a 2.6 million square foot, office building
located on Broadway between 50th and 51st Streets in Manhattan. The new seven-year loan is interest only at LIBOR plus 175 basis
points and can be increased at our option, by $250,000,000 to $1.25 billion, until December 1, 2018, if certain performance hurdles
relating to the property are satisfied. The net proceeds from the refinancing were used to repay the existing $926,260,000 loan and
fund $42,011,000 of costs, primarily for swap breakage. The existing loan was scheduled to mature in December 2016 and had a
weighted average interest rate of 5.35%. We have entered into interest rate swap agreements, to fix the one-month LIBOR to a
weighted average rate of 1.84%. These swaps have maturity dates ranging between December 2020 and December 2022. The
weighted average interest rate on the $1.0 billion mortgage loan was 3.54% as of December 31, 2015.
47
Financial Results
Three Months Ended December 31, 2015
Net income attributable to common stockholders was $8,905,000, or $0.04 per diluted share, for the three months ended
December 31, 2015, compared to $57,308,000, or $0.27 per diluted share, for the period from November 24, 2014 to December 31,
2014. Funds from Operations (“FFO”) attributable to common stockholders was $61,559,000, or $0.29 per diluted share, for the three
months ended December 31, 2015, compared to $82,425,000, or $0.39 per diluted share, for the period from November 24, 2014 to
December 31, 2014. FFO includes the impact of certain “non-core” items that affect comparability, which are listed in the table below.
The aggregate of these items, net of amounts attributable to noncontrolling interests, increased FFO attributable to common
stockholders by $16,371,000, or $0.08 per diluted share, for the three months ended December 31, 2015, compared to $66,325,000, or
$0.31 per diluted share, for the period from November 24, 2014 to December 31, 2014. Core Funds from Operations (“Core FFO”)
attributable to common stockholders, which excludes the impact of these items, was $45,188,000, or $0.21 per diluted share, for the
three months ended December 31, 2015, compared to $16,100,000, or $0.08 per diluted share, for the period from November 24, 2014
to December 31, 2014. See “Non-GAAP Financial Measures – Funds from Operations (“FFO”) and Core Funds from Operations
(“Core FFO”).”
(Amounts in thousands, except per share amounts)
Non-core (income) expense:
Unrealized gain on interest rate swaps ..............................................................
Pro rata share of unrealized gain on interest rate swaps of
unconsolidated joint ventures .......................................................................
Acquisition, transaction and formation related costs ........................................
Gain on consolidation of an unconsolidated joint venture ................................
Defeasance and debt breakage ..........................................................................
Total non-core income............................................................................................
Less non-core income attributable to noncontrolling interests in:
Consolidated joint ventures and funds ..............................................................
Operating Partnership .......................................................................................
Non-core income attributable to common stockholders ...................................
Per diluted share ...................................................................................................
The Company
Three Months Ended
December 31, 2015
Period from
November 24, 2014
to December 31, 2014
$
(26,263 )
$
(15,084)
(1,065 )
523
-
-
(26,805 )
6,447
3,987
(16,371 )
(0.08 )
$
$
(643)
143,437
(239,716)
25,717
(86,289)
3,847
16,117
(66,325)
(0.31)
$
$
48
Year Ended December 31, 2015
Net loss attributable to common stockholders was $4,419,000, or $0.02 per diluted share, for the year ended December 31, 2015,
compared to net income of $57,308,000, or $0.27 per diluted share, for the period from November 24, 2014 to December 31, 2014.
FFO attributable to common stockholders was $209,349,000, or $0.99 per diluted share, for the year ended December 31, 2015,
compared to $82,425,000, or $0.39 per diluted share, for the period from November 24, 2014 to December 31, 2014. FFO includes the
impact of certain “non-core” items that affect comparability, which are listed in the table below. The aggregate of these items, net of
amounts attributable to noncontrolling interests, increased FFO attributable to common stockholders by $36,553,000, or $0.18 per
diluted share, for the year ended December 31, 2015, compared to $66,325,000, or $0.31 per diluted share, for the period from
November 24, 2014 to December 31, 2014. Core Funds from Operations (“Core FFO”) attributable to common stockholders, which
excludes the impact of these items, was $172,796,000, or $0.81 per diluted share, for the year ended December 31, 2015, compared to
$16,100,000, or $0.08 per diluted share, for the period from November 24, 2014 to December 31, 2014. See “Non-GAAP Financial
Measures – Funds from Operations (“FFO”) and Core Funds from Operations (“Core FFO”).”
(Amounts in thousands, except per share amounts)
Non-core (income) expense:
Unrealized gain on interest rate swaps ..............................................................
Transfer taxes due in connection with the sale of shares
by a former joint venture partner .................................................................
Acquisition, transaction and formation related costs ........................................
Severance costs .................................................................................................
Pro rata share of unrealized gain on interest rate swaps of
unconsolidated joint ventures .......................................................................
Gain on consolidation of an unconsolidated joint venture ................................
Defeasance and debt breakage ..........................................................................
Predecessor income tax true-up ........................................................................
Total non-core income............................................................................................
Less non-core income attributable to noncontrolling interests in:
Consolidated joint ventures and funds ..............................................................
Operating Partnership .......................................................................................
Non-core income attributable to common stockholders ...................................
Per diluted share ...................................................................................................
The Company
Year Ended
December 31, 2015
Period from
November 24, 2014
to December 31, 2014
$
(75,760 )
$
(15,084)
5,872
4,483
3,315
(2,112 )
-
721
(63,481 )
18,028
8,900
(36,553 )
(0.18 )
$
$
-
143,437
-
(643)
(239,716)
25,717
-
(86,289)
3,847
16,117
(66,325)
(0.31)
$
$
49
Portfolio Operations and Leasing Activity
As of December 31, 2015, our portfolio consisted of 12 Class A office properties aggregating approximately 10.4 million square
feet that was 95.3% leased.
During the three months ended December 31, 2015, we leased 647,828 square feet at a weighted average initial rent of $79.80 per
square foot. This leasing activity, offset by lease expirations during the three months, increased portfolio wide leased percentage by
240 basis points from September 30, 2015. Of the 647,828 square feet leased in the three months, 443,336 square feet represents
second generation space (space that has been vacant for less than twelve months) for which we achieved rental rate increases of 17.3%
on a cash basis and 19.4% on a GAAP basis. The weighted average lease term for leases signed during the three months was 13.0
years and tenant improvements and leasing commissions on these leases were $7.46 per square foot per annum, or 9.4% of initial rent.
The following table presents additional details on the leases signed during the three months ended December 31, 2015 and is not
intended to coincide with the commencement of rental revenue in accordance with accounting principles generally accepted in the
United States of America (“GAAP”).
Three Months Ended December 31, 2015
Total
New York
Total square feet leased ............................................
Pro rata share of total square feet leased:..................
Initial rent (1) ........................................................ $
Weighted average lease term (in years)...............
647,828
561,446
79.80
13.0
$
478,451
478,451
78.90
14.2
$
Tenant improvements and leasing commissions:
Per square foot .................................................... $
Per square foot per annum ................................... $
Percentage of initial rent .....................................
96.77
7.46
$
$
9.4%
107.03
7.54
$
$
9.6%
Rent concessions:
Average free rent period (in months) ..................
Average free rent period per annum (in months) ..
10.0
0.8
11.0
0.8
Second generation space:
Square feet .............................................................
Cash basis:
Initial rent (1) ........................................................ $
Prior escalated rent (2) .......................................... $
Percentage increase .............................................
GAAP basis:
Straight-line rent.................................................. $
Prior straight-line rent ......................................... $
Percentage increase .............................................
443,336
360,341
79.68
67.95
$
$
17.3%
80.75
67.61
$
$
19.4%
78.45
70.51
11.3%
79.83
70.51
13.2%
$
$
$
$
Washington,
D.C.
San Francisco
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
$
$
$
$
$
169,377
82,995
85.01
5.9
37.63
6.40
7.5%
3.9
0.7
82,995
85.01
56.81
49.6%
84.72
55.00
54.0%
(1) Represents the weighted average cash basis starting rent per square foot and does not include free rent or periodic step-ups in(cid:3)
rent.
(2) Represents the weighted average cash basis rents (including reimbursements) per square foot at expiration.(cid:3)
(3) The leasing statistics (excluding square feet leased) include the effect of a lease extension for the parking garage at
31 West 52nd Street.
(cid:3)
(cid:3)
50
During the year ended December 31, 2015, we leased 1,393,770 square feet at a weighted average initial rent of $78.48 per square
foot. This leasing activity, offset by lease expirations during the year, increased portfolio wide leased percentage by 140 basis points
from December 31, 2014. Of the 1,393,770 square feet leased in the year, 930,514 square feet represents second generation space
(space that has been vacant for less than twelve months) for which we achieved rental rate increases of 15.6% on a cash basis and 16.0%
on a GAAP basis. The weighted average lease term for leases signed during the year was 11.9 years and tenant improvements and
leasing commissions on these leases were $7.55 per square foot per annum, or 9.6% of initial rent.
The following table presents additional details on the leases signed during year ended December 31, 2015 and is not intended to
coincide with the commencement of rental revenue in accordance with GAAP.
Year Ended December 31, 2015
Total square feet leased .............................................
Pro rata share of square feet leased: ...........................
Initial rent (1) ......................................................... $
Weighted average lease term (in years)................
Total
1,393,770
1,220,654
New York
1,074,761
1,039,027
78.48 $
11.9
78.37 $
12.6
Washington,
D.C.
San Francisco
49,633
49,633
56.58
11.1
$
269,376
131,994
87.64
6.2
Tenant improvements and leasing commissions:
Per square foot ..................................................... $
Per square foot per annum .................................... $
Percentage of initial rent ......................................
89.71 $
7.55 $
9.6%
95.80 $
7.57 $
9.7%
$
92.63
8.35
$
14.8 %
Rent concessions:
Average free rent period (in months) ...................
Average free rent period per annum (in months) ...
9.6
0.8
10.4
0.8
10.3
0.9
40.70
6.60
7.5%
3.2
0.5
Second generation space:
Square feet ..............................................................
Cash basis:
Initial rent (1) ......................................................... $
Prior escalated rent (2) ........................................... $
Percentage increase ..............................................
GAAP basis:
Straight-line rent................................................... $
Prior straight-line rent .......................................... $
Percentage increase ..............................................
930,514
787,585
20,770
122,159
79.52 $
68.78 $
15.6%
79.60 $
68.62 $
16.0%
78.31 $
70.59 $
10.9%
78.54 $
70.95 $
10.7%
78.62
64.86
$
$
21.2 %
77.00
51.72
$
$
48.9 %
87.47
57.79
51.3%
86.85
56.48
53.8%
(1) Represents the weighted average cash basis starting rent per square foot and does not include free rent or periodic step-ups(cid:3)
in rent.
(2) Represents the weighted average cash basis rents (including reimbursements) per square foot at expiration.(cid:3)
(3) The leasing statistics (excluding square feet leased) include the effect of a lease extension for the parking garage at
31 West 52nd Street.
(cid:3)
51
Our Predecessor
Our Predecessor is not a legal entity but a combination of entities under common control as they were entities controlled by
members of the Otto Family that held various assets, including interests in (i) 15 private equity real estate funds controlled by our
Predecessor (which included nine primary funds and six parallel funds) (collectively, the “Funds”) that owned interests in 12
properties, (ii) a wholly-owned property, Waterview, in Rosslyn, Virginia and (iii) three partially owned properties in New York, NY.
Below is a summary of the 15 private equity real estate funds that were controlled by our Predecessor prior to the completion of
the Formation Transactions.
The following funds are collectively referred to herein as the “Property Funds”:
(cid:120) Paramount Group Real Estate Fund I, L.P. (“Fund I”)
(cid:120) Paramount Group Real Estate Fund II, L.P. (“Fund II”)
(cid:120) Paramount Group Real Estate Fund III, L.P. (“Fund III”)
(cid:120) Paramount Group Real Estate Fund IV, L.P. (“Fund IV”)
(cid:120) PGREF IV Parallel Fund (Cayman), L.P. (“Fund IV Cayman”)
(cid:120) Paramount Group Real Estate Fund V (CIP), L.P. (“Fund V CIP”)
(cid:120) Paramount Group Real Estate Fund V (Core), L.P. (“Fund V Core”)
(cid:120) PGREF V (Core) Parallel Fund (Cayman), L.P. (“Fund V Cayman”)
(cid:120) Paramount Group Real Estate Fund VII, LP (“Fund VII”)
(cid:120) Paramount Group Real Estate Fund VII-H, LP (“Fund VII-H”)
The following fund was formed to acquire, develop and manage the residential development project at 75 Howard Street:
(cid:120) Paramount Group Residential Development Fund, LP (“Residential Fund”)
The following funds are collectively referred to herein as the “Alternative Investment Funds”:
(cid:120) Paramount Group Real Estate Special Situations Fund, L.P. (“PGRESS”)
(cid:120) Paramount Group Real Estate Special Situations Fund–H, L.P. (“PGRESS–H”)
(cid:120) Paramount Group Real Estate Special Situations Fund–A, L.P. (“PGRESS–A”)
(cid:120) Paramount Group Real Estate Fund VIII, L.P. (“Fund VIII”)
The Property Funds and Residential Fund owned interests in the following properties:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
1633 Broadway, New York, NY
60 Wall Street, New York, NY
900 Third Avenue, New York, NY
31 West 52nd Street, New York, NY
1301 Avenue of the Americas, New York, NY
(cid:120) One Market Plaza, San Francisco, CA
(cid:120)
(cid:120)
50 Beale Street, San Francisco, CA
75 Howard Street, San Francisco, CA
(cid:120) Liberty Place, Washington, D.C.
(cid:120)
(cid:120)
(cid:120)
1899 Pennsylvania Avenue, Washington, D.C.
2099 Pennsylvania Avenue, Washington, D.C.
425 Eye Street, Washington, D.C.
52
Critical Accounting Policies
Rental Property
Rental property is carried at cost less accumulated depreciation and amortization. Betterments, major renovations and certain
costs directly related to the improvement of rental properties are capitalized. Maintenance and repair expenses are charged to expense
as incurred. Depreciation is recognized on a straight-line basis over estimated useful lives of the assets, which range from 5 to 40
years. Tenant improvements are amortized on a straight-line basis over the lives of the related leases, which approximate the useful
lives of the assets.
Upon the acquisition of real estate, we assess the fair value of acquired assets (including land, buildings and improvements,
identified intangibles, such as acquired above-market leases and acquired in-place leases) and acquired liabilities (such as acquired
below-market leases) and allocate the purchase price based on these assessments. We assess fair value 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 historical operating results, known trends, and market/economic conditions. We record
acquired intangible assets (including acquired above-market leases and acquired in-place leases) and acquired intangible liabilities
(including below-market leases) at their estimated fair value. We amortize acquired above and below-market leases as a decrease or
increase to rental income, respectively, over the lives of the respective leases. Amortization of acquired in-place leases is included as
a component of depreciation and amortization.
Our properties, including any related intangible assets, are individually reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment exists when the carrying amount
of an asset exceeds the aggregate projected future cash flows over the anticipated holding period on an undiscounted basis. An
impairment loss is measured based on the excess of the property’s carrying amount over its estimated fair value. Impairment analyses
are based on our current plans, intended holding periods and available market information at the time the analyses are prepared. If our
estimates of the projected future cash flows, anticipated holding periods, or market conditions change, our evaluation of impairment
losses may be different and such differences could be material to our combined consolidated financial statements. The evaluation of
anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates and capital
requirements that could differ materially from actual results. Plans to hold properties over longer periods decrease the likelihood of
recording impairment losses.
Variable Interest Entities and Investments in Unconsolidated Joint Ventures
We consolidate variable interest entities (“VIEs”) in which we are considered to be the primary beneficiary. VIEs are entities in
which the equity investors do not have sufficient equity at risk to finance their endeavors without additional financial support or that
the holders of the equity investment at risk do not have a controlling financial interest. The primary beneficiary is defined by the entity
having both of the following characteristics: (i) the power to direct the activities that, when taken together, most significantly impact
the VIE’s performance, and (ii) the obligation to absorb losses and right to receive the returns from the VIE that would be significant
to the VIE. For joint ventures that are not VIEs, we consolidate entities for which we have significant decision making control over
the joint ventures’ operations. Our judgment with respect to our level of influence or control of an entity involves the consideration of
various factors including the form of our ownership interest, our representation in the entity’s governance, the size of our investment,
estimates of future cash flows, our ability to participate in policy making decisions and the rights of the other investors to participate
in the decision making process and to replace us as manager and/or liquidate the joint venture, if applicable.
We account for investments under the equity method when the requirements for consolidation are not met, and we have
significant influence over the operations of the investee. Equity method investments are initially recorded at cost and subsequently
adjusted for our share of net income or loss and cash contributions and distributions each period. Investments accounted for under the
equity method are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the
investment may not be recoverable. An impairment loss is measured based on the excess of the carrying amount of an investment over
its estimated fair value. Impairment analyses are based on current plans, intended holding periods and available information at the
time the analyses are prepared.
Investments that do not qualify for consolidation or equity method accounting are accounted for on the cost method.
53
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required
payments under the lease agreements. We also maintain an allowance for deferred rent receivable. This receivable arises from
earnings recognized in excess of amounts currently due under the lease agreements. Management exercises judgment in establishing
these allowances and considers payment history and current credit status in developing these estimates.
Income Taxes
We operate and have been organized in conformity with the requirements for qualification and taxation as a REIT for U.S. federal
income tax purposes. So long as we qualify as a REIT, we generally will not be subject to U.S. federal income tax on our net income
that we distribute currently to our stockholders. In order to maintain our qualification as a REIT, we are required under the Internal
Revenue Code of 1986, as amended, to distribute at least 90% of our taxable income (without regard to the deduction for dividends
paid and excluding net capital gains) 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 U.S. federal income tax on our taxable income at regular corporate income tax rates. Even if we
qualify as a REIT, we may also be subject to certain state, local and franchise taxes. Under certain circumstances, U.S. federal income
and excise taxes may be due on our undistributed taxable income.
Derivative Instruments and Hedging Activities
We manage our market risk on variable rate debt by entering into interest rate swaps to fix the rate on all or a portion of the debt
for varying periods through maturity. These interest rate swaps are accounted for as derivative instruments and, pursuant to ASC 815,
are recorded on our balance sheet at fair value. Changes in the fair value of interest rate swaps are accounted for based on the hedging
relationship and their designation and qualification as either fair value hedges or cash flow hedges. Changes in the fair value of
interest rate swaps that are not designated as hedges are recognized in earnings. Changes in the fair value of interest rate swaps that
are designated as cash flow hedges are recognized in accumulated other comprehensive income (outside of earnings).
Revenue Recognition
Rental Income
Rental income includes base rents that each tenant pays in accordance with the terms of its respective lease and is reported on a
straight-line basis over the non-cancellable term of the lease, which includes the effects of rent steps and rent abatements under the
leases. We commence rental revenue recognition when the tenant takes possession of the leased space or controls the physical use of
the leased space and the leased space is substantially ready for its intended use. Differences between rental income recognized and
amounts due under the respective lease agreements are recorded as an increase or decrease to “deferred rent receivable.” Rental
income also includes the amortization of acquired above and below-market leases, net.
Tenant Reimbursement Income
Tenant reimbursement income includes revenue arising from tenant leases which provide for the recovery of all or a portion of the
operating expenses and real estate taxes of the property. This revenue is accrued in the same period as the expenses are incurred.
Fee and Other Income
Fee and other income includes management fees earned pursuant to contractual agreements. This revenue is recognized as the
related services are performed. Fee and other income also includes lease termination fees.
54
Segment Reporting
Upon completion of the Offering and Formation Transactions, we acquired substantially all of the assets of our Predecessor and
substantially all of the assets of the Property Funds that it controlled. Our business, following the Formation Transactions, is
comprised of one reportable segment. We have determined that our properties have similar economic characteristics to be aggregated
into one reportable segment (operating, leasing and managing office properties). Our determination was based, in part, on our method
of internal reporting. Our Predecessor historically operated an integrated business that consisted of three reportable segments, (i)
Owned Properties, (ii) Managed Funds and (iii) a Management Company. The Owned Properties segment consisted of properties in
which our Predecessor had a direct or indirect ownership interest, other than properties that it owned through its private equity real
estate funds. The Managed Funds segment consisted of the private equity real estate funds. In addition, our Predecessor included a
Management Company that performed property management and asset management services and certain general and administrative
level functions, including legal and accounting, as a separate reportable segment.
Recently Issued Accounting Literature
In May 2014, the FASB issued an update ("ASU 2014-09") Revenue from Contracts with Customers. ASU 2014-09 establishes a
single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most
of the existing revenue recognition guidance. ASU 2014-09 requires an entity to recognize revenue when it transfers promised goods
or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those
goods or services and also requires certain additional disclosures. ASU 2014-09 is effective for interim and annual reporting periods in
fiscal years that begin after December 15, 2017. We are currently evaluating the impact of the adoption of ASU 2014-09 on our
consolidated financial statements.
In June 2014, the FASB issued an update (“ASU 2014-12”) to ASC Topic 718, Compensation – Stock Compensation. ASU
2014-12 requires an entity to treat performance targets that can be met after the requisite service period of a share based award has
ended, as a performance condition that affects vesting. ASU 2014-12 is effective for interim and annual reporting periods in fiscal
years that begin after December 15, 2015. The adoption of this update on January 1, 2016 will not have a material impact on our
consolidated financial statements.
In February 2015, the FASB issued an update (“ASU 2015-02”) Amendments to the Consolidation Analysis to ASC Topic 810,
Consolidation. ASU 2015-02 modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting
interest entities, eliminates the presumption that a general partner should consolidate a limited partnership and affects the
consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party
relationships. ASU 2015-02 is effective for fiscal years that begin after December 15, 2015. The adoption of ASU 2015-02 on
January 1, 2016, will result in the deconsolidation of our Real Estate Fund investments, which qualify as investment companies
pursuant to Financial Services-Investment Companies (“ASC 946”), with the exception of the Residential Fund, which is carried at
historical cost.
In April 2015, the FASB issued an update (“ASU 2015-03”) Simplifying the Presentation of Debt Issuance Costs to ASC Topic
835, Interest – Imputation of Interest. ASU 2015-03 requires an entity to present debt issuance costs in the balance sheet as a direct
deduction from the related debt liability rather than as an asset. Amortization of debt issuance costs will continue to be reported as
interest expense. ASU 2015-03 is effective for interim and annual reporting periods in fiscal years that begin after December 15,
2015. In August 2015, the FASB issued an update (“ASU 2015-15”) Interest – Imputation of Interest (Subtopic 835-30):
Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to
SEC Paragraphs Pursuant to Staff Announcement at 18 June 2015 EITF Meeting. ASU 2015-15 clarifies the exclusion of line-of-
credit arrangements from the scope of ASU 2015-03. Therefore, debt issuance costs related to line-of-credit arrangements can be
deferred and presented as an asset that is subsequently amortized over the time of the line-of-credit arrangement, regardless of whether
there are any outstanding borrowings on the line-of-credit arrangement. The adoption of these updates on January 1, 2016 will not
have a material impact on our consolidated financial statements.
In September 2015, the FASB issued an update (“ASU 2015-16”) Simplifying the Accounting for Measurement-Period
Adjustments to ASC Topic 805, Business Combinations. ASU 2015-16 eliminates the requirement to retrospectively account for
adjustments made to provisional amounts recognized in a business combination. ASU 2015-16 is effective for interim and annual
reporting periods in fiscal years that begin after December 15, 2015. The adoption of this update on January 1, 2016 will not have a
material impact on our consolidated financial statements.
55
Results of Operations
The following pages summarize our consolidated results of operations for the year ended December 31, 2015 and the period from
November 24, 2014 to December 31, 2014 and the combined consolidated historical results of operations of our Predecessor for the
period from January 1, 2014 to November 23, 2014 and for the year ended December 31, 2013.
The acquisition of the properties from our Predecessor was accounted for as transactions among entities under common control.
However, since the assets that we acquired from our Predecessor are no longer held by funds which qualify for investment company
accounting, we account for these assets following the Formation Transactions using consolidated historical cost accounting. As a
result, our consolidated financial statements following the Formation Transactions differ significantly from, and are not comparable
with, the historical financial position and results of operations of our Predecessor.
Results of Operations – The Company – Year Ended December 31, 2015 Compared to the Period from November 24, 2014 to
December 31, 2014
(Amounts in thousands)
REVENUES:
Year Ended
December 31, 2015
The Company
Period from
November 24, 2014(cid:3) (cid:3)(cid:3)
to December 31, 2014
Change
Rental income ...................................................................................... $
Tenant reimbursement income ............................................................
Fee and other income ...........................................................................
Total revenues ................................................................................
586,530 $
50,885
24,993
662,408
57,465 $
5,865
2,805
66,135
EXPENSES:
Operating .............................................................................................
Depreciation and amortization .............................................................
General and administrative ..................................................................
Acquisition and transaction related costs .............................................
Total expenses ................................................................................
Operating income ......................................................................................
Income from real estate fund investments ...........................................
Income from unconsolidated joint ventures .........................................
Unrealized gain on interest rate swaps ................................................
Interest and other income (loss), net ....................................................
Interest and debt expense .....................................................................
Formation related costs ........................................................................
Gain on consolidation of an unconsolidated joint venture ...................
Net income before income taxes ...............................................................
Income tax expense .............................................................................
Net income ................................................................................................
Less net (income) loss attributable to noncontrolling interests:
Consolidated joint ventures and funds .................................................
Operating Partnership ..........................................................................
Net (loss) income attributable to common stockholders ...................... $
244,754
294,624
42,056
10,355
591,789
70,619
37,975
6,850
75,760
871
(168,366)
-
-
23,709
(2,566)
21,143
26,011
34,481
2,207
-
62,699
3,436
1,412
938
15,084
(179 )
(43,743 )
(143,437 )
239,716
73,227
(505 )
72,722
(26,632)
1,070
(4,419) $
(1,488 )
(13,926 )
57,308 $
529,065
45,020
22,188
596,273
218,743
260,143
39,849
10,355
529,090
67,183
36,563
5,912
60,676
1,050
(124,623)
143,437
(239,716)
(49,518)
(2,061)
(51,579)
(25,144)
14,996
(61,727)
56
Rental Income
Rental income for the year ended December 31, 2015 and for the period from November 24, 2014 to December 31, 2014
represents rental income from the 11 properties that we consolidate using historical cost accounting subsequent to the completion of
the Offering and the Formation Transactions. Rental income was $586,530,000 for the year ended December 31, 2015, compared to
$57,465,000 for the period from November 24, 2014 to December 31, 2014, an increase of $529,065,000. This increase was primarily
due to a full year’s results of operations in 2015, compared to a partial year in 2014.
Tenant Reimbursement Income
Tenant reimbursement income represents reimbursement income from tenants at the 11 properties that we consolidate using
historical cost accounting subsequent to the completion of the Offering and the Formation Transactions. Tenant reimbursement
income was $50,885,000 for the year ended December 31, 2015, compared to $5,865,000 for the period from November 24, 2014 to
December 31, 2014, an increase of $45,020,000. This increase was primarily due to a full year’s results of operations in 2015,
compared to a partial year in 2014.
Fee and Other Income
Fee and other income was $24,993,000 for the year ended December 31, 2015 and $2,805,000 for the period from November 24,
2014 to December 31, 2014, an increase of $22,188,000. This increase was primarily due to a full year’s results of operations in 2015,
compared to a partial year in 2014. The following table sets forth the details of fee and other income.
(Amounts in thousands)
Fee and other income
Property management fees ............................... $
Acquisition and disposition fees.......................
Construction fees ..............................................
Other fees .........................................................
Total fee income ....................................................
Other income (1) .....................................................
Total fee and other income.................................. $
The Company
Year Ended
December 31, 2015
Period from
November 24, 2014
to December 31, 2014
5,763
1,985
216
2,284
10,248
14,745
24,993
$
$
587
510
58
21
1,176
1,629
2,805
(1) Other income is primarily comprised of (i) tenant payments for items such as after hour heating and(cid:3)
cooling, freight elevator services and similar expenses and (ii) lease termination income.
Operating Expenses
Operating expenses for the year ended December 31, 2015 and for the period from November 24, 2014 to December 31, 2014
represent the operating expenses of the 11 properties that we consolidate using historical cost accounting subsequent to the completion
of the Offering and the Formation Transactions. Operating expenses were $244,754,000 for the year ended December 31, 2015,
compared to $26,011,000 for the period from November 24, 2014 to December 31, 2014, an increase of $218,743,000. This increase
was primarily due to a full year’s results of operations in 2015, compared to a partial year in 2014.
Depreciation and Amortization
Depreciation and amortization for the year ended December 31, 2015 and for the period from November 24, 2014 to December
31, 2014 represents depreciation and amortization on the 11 properties that we consolidate using historical cost accounting subsequent
to the completion of the Offering and the Formation Transactions. Depreciation and amortization was $294,624,000 for the year ended
December 31, 2015, compared to $34,481,000 for the period from November 24, 2014 to December 31, 2014, an increase of
$260,143,000. This increase was primarily due to a full year’s results of operations in 2015, compared to a partial year in 2014 and the
timing of the amortization of certain in-place leases.
57
General and Administrative Expenses
General and administrative expenses were $42,056,000 for the year ended December 31, 2015, compared to $2,207,000 for the
period from November 24, 2014 to December 31, 2014, an increase of $39,849,000. This increase was primarily due to a full year’s
results of operations in 2015, compared to a partial year in 2014. In addition, the year ended December 31, 2015 includes $7,000,000
of amortization of stock-based compensation expense. The following table sets forth the details of general and administrative
expenses.
The Company
(Amounts in thousands)
General and administrative expenses ............................. $
Mark-to-market of investments in our(cid:3)
deferred compensation plan (2) ...................................
Total general and administrative expenses................ $
(cid:3)(cid:3)
(cid:3)
(cid:3)
Year Ended
December 31, 2015
41,859 (1)(cid:3) $
Period from
November 24, 2014
to December 31, 2014
2,528
197
42,056 $
(cid:3)(cid:3) (cid:3)(cid:3)
(cid:3)
(321)
2,207
(1) Includes $3,315 of severance costs(cid:3)
(2) The change resulting from the mark-to-market of the deferred compensation plan liabilities is entirely offset by the
change in the mark-to-market of deferred compensation plan assets, which is included in interest and other income
(loss), net.
Acquisition and Transaction Related Costs
Acquisition and transaction related costs were $10,355,000 for the year ended December 31, 2015 and are primarily comprised of
legal and professional fees related to potential acquisitions and capital raising costs in connection with real estate fund investments.
Acquisition and transaction related costs for the year ended December 31, 2015 also includes $5,872,000 of transfer taxes incurred in
connection with the sale of shares by a former joint venture partner.
Income from Real Estate Fund Investments
Income from real estate fund investments for the year ended December 31, 2015 and for the period from November 24, 2014 to
December 31, 2014, represents income from the remaining private equity real estate funds that we consolidate. Income from real
estate fund investments was $37,975,000 for the year ended December 31, 2015, compared to $1,412,000 for the period from
November 24, 2014 to December 31, 2014, an increase of $36,563,000. This increase was primarily due to a full year’s results of
operations in 2015, compared to a partial year in 2014. In addition, the year ended December 31, 2015 includes $13,884,000 of
realized gains from the sale of certain fund investments and $18,401,000 of unrealized gains from the appreciation in value of certain
fund investments. The following table sets forth the details of income from real estate fund investments.
The Company
Year Ended
December 31, 2015
Period from
November 24, 2014
to December 31, 2014
3,334
565
2,769
50
13,406 $
1,132
12,274
11,955
(6,584)
20,330
37,975 $
-
(1,407)
1,412
(Amounts in thousands)
Investment income ...................................................... $
Investment expenses ....................................................
Net investment income .............................................
Net realized gains ........................................................
Previously recorded unrealized gains on exited
investments ..................................................................
Net unrealized gains (losses) .......................................
Income from real estate fund investments .............. $
58
Income from Unconsolidated Joint Ventures
Income from unconsolidated joint ventures was $6,850,000 for the year ended December 31, 2015, compared to $938,000 for the
period from November 24, 2014 to December 31, 2014, an increase of $5,912,000. This increase was primarily due to a full year’s
results of operations in 2015, compared to a partial year in 2014. The following table sets for the details of income from
unconsolidated joint ventures.
(Amounts in thousands)
Our share of Net Income:
712 Fifth Avenue ...........................................
Oder-Center, Germany (1) .............................. (cid:3)
%
Ownership at
December 31, 2015
Year Ended
December 31, 2015
Period from
November 24, 2014
to December 31, 2014
The Company
50.0% $
9.5%
$
6,734 $
116
6,850 $
938
-
938
(1) We account for our interest in Oder-Center on a one quarter lag basis.
Unrealized Gain on Interest Rate Swaps
Unrealized gain on interest rate swaps was $75,760,000 for the year ended December 31, 2015, compared to $15,084,000 for the
period from November 24, 2014 to December 31, 2014, an increase of $60,676,000, and represents the change in fair value of the
interest rate swap derivative instruments.
Interest and Other Income (Loss), net
Interest and other income (loss), net was income of $871,000 for the year ended December 31, 2015, compared to a loss of
$179,000 for the period from November 24, 2014 to December 31, 2014, an increase in income of $1,050,000. This increase was
primarily due to a full year’s results of operations in 2015, compared to a partial year in 2014. The following table sets forth the details
of interest and other income.
(Amounts in thousands)
Mark-to-market of investments in(cid:3)
our deferred compensation plan (1) .......................
Interest and other income........................................
Total interest and other income (loss)................. $
(cid:3)(cid:3)
$
(cid:3)
The Company
Year Ended
December 31, 2015
Period from
November 24, 2014
to December 31, 2014
197 $
674
871 $
(cid:3)
(cid:3)
(cid:3)
(321)
142 (cid:3)
(179) (cid:3)
(cid:3)
(1) The change resulting from the mark-to-market of the deferred compensation plan assets is entirely offset by the(cid:3)
change in the mark-to-market of deferred compensation plan liabilities, which is included in general and
administrative expenses.
Interest and Debt Expense
Interest and debt expense for the year ended December 31, 2015 and for the period from November 24, 2014 to December 31,
2014, represents interest cost on the properties that we consolidate using historical cost accounting subsequent to the completion of the
Offering and the Formation Transactions. Interest and debt expense was $168,366,000 for the year ended December 31, 2015,
compared to $43,743,000 for the period from November 24, 2014 to December 31, 2014, an increase of $124,623,000. This increase
was primarily due to a full year’s results of operations in 2015, compared to a partial year in 2014. Interest and debt expense also
includes $2,565,000 and $240,000 of amortization of deferred financing costs for the year ended December 31, 2015 and for the
period from November 24, 2014 to December 31, 2014, respectively. In addition, the period from November 24, 2014 to December
31, 2014 includes $25,717,000 of defeasance and debt breakage costs related to the Formation Transactions.
59
Formation Related Costs
Formation related costs were $143,437,000 for the period from November 24, 2014 to December 31, 2014 and includes (i)
$71,000,000 of stock based compensation expense in connection with the one-time founders’ grants to executive officers and certain
other employees, (ii) $51,306,000 of transfer taxes and (iii) $21,131,000 of accounting, legal and other professional fees incurred in
connection with the Formations Transactions.
Gain on Consolidation of an Unconsolidated Joint Venture
Prior to the completion of the Offering and the Formation Transactions, our Predecessor owned a 50.0% interest in a joint venture
that owned 1325 Avenue of the Americas, which was accounted for under the equity method. The remaining 50.0% interest was held
by a third-party joint venture partner. As part of the Formation Transactions, we acquired the 50.0% interest held by our joint venture
partner for $130,381,000 payable in shares of our common stock. The purchase price took into account certain tax benefits to our
joint venture partner. The transaction was accounted for as a step acquisition in which we were required to re-measure our existing
50.0% ownership interest at fair value. As a result of the acquisition, we own 100.0% of the property and began consolidating the
accounts of the property into our consolidated financial statements from the date of acquisition. In connection therewith, we
recognized a $239,716,000 gain in the period from November 24, 2014 to December 31, 2014, comprised of (i) $175,917,000
representing the excess of the fair value of the property over the carrying amount of our investment in the property and (ii)
$63,799,000 representing a purchase gain.
Income Tax expense
Income tax expense was $2,566,000 for the year ended December 31, 2015, compared to $505,000 for the period from November
24, 2014 to December 31, 2014, an increase of $2,061,000. This increase was primarily due to a full year’s results of operations in
2015, compared to a partial year in 2014.
Net Income Attributable to Noncontrolling Interests in Consolidated Joint Ventures and Funds
Net income attributable to noncontrolling interest in consolidated joint ventures was $5,459,000 for the year ended December 31,
2015 compared to $1,353,000 for the period from November 24, 2014 to December 31, 2014, an increase of $4,106,000. Net income
attributable to noncontrolling interest in consolidated funds was $21,173,000 for the year ended December 31, 2015 compared to
$135,000, for the period from November 24, 2014 to December 31, 2014, an increase of $21,038,000. These increases were primarily
due to a full year’s result of operations in 2015, compared to a partial year in 2014.
The following table sets forth the details of interest and other income.
(Amounts in thousands)
Noncontrolling interest in consolidated joint ventures ........................................... $
Noncontrolling interest in funds .............................................................................
Total noncontrolling interests in consolidated joint ventures and funds ........ $
Net (Income) loss Attributable to Noncontrolling Interests in Operating Partnership
The Company
Year Ended
December 31, 2015
Period from
November 24, 2014
to December 31, 2014
5,459 $
21,173
26,632 $
1,353
135
1,488
Net (income) or loss attributable to noncontrolling interest in Operating Partnership represents net (income) or loss attributable to
the unitholders of the Operating Partnership. For the year ended December 31, 2015, we allocated a loss of $1,070,000 and for the
period from November 24, 2014 to December 31, 2014, we allocated income of $13,926,000 to the unitholders of the Operating
Partnership.
60
Results of Operations – The Predecessor - Period from January 1, 2014 to November 23, 2014 compared to Year Ended
December 31, 2013
The following table summarizes the consolidated results of operations of our Predecessor for the period from January 1, 2014 to
November 23, 2014, and for the year ended December 31, 2013.
(Amounts in thousands)
REVENUES:
Period from
January 1, 2014
The Predecessor
Year Ended
to November 23, 2014
December 31, 2013
Change
Rental income ......................................................................... $
Tenant reimbursement income ...............................................
Distributions from real estate fund investments .....................
Realized and unrealized gains, net ..........................................
Fee and other income ..............................................................
Total revenues ...................................................................
EXPENSES:
Operating ................................................................................
Depreciation and amortization ................................................
General and administrative .....................................................
Profit sharing compensation ...................................................
Other .......................................................................................
Total expenses ...................................................................
Operating income .........................................................................
Income from unconsolidated joint ventures ............................
Unrealized (loss) gain on interest rate swaps ..........................
Interest and other income, net .................................................
Interest and debt expense ........................................................
Net income before income taxes ..................................................
Income tax expense ................................................................
Net income ...................................................................................
Net income attributable to noncontrolling interests .....................
Net income attributable to the Predecessor ............................. $
Rental Income
30,208 $
1,646
17,083
129,354
49,098
227,389
15,862
10,203
30,912
12,041
7,974
76,992
150,397
4,241
(673)
2,479
(28,585)
127,859
(18,461)
109,398
(87,888)
21,510 $
30,406 $
1,821
29,184
332,053
26,426
419,890
16,195
10,582
33,504
23,385
4,633
88,299
331,591
1,062
1,615
9,407
(29,807 )
313,868
(11,029 )
302,839
(286,325 )
16,514 $
(198)
(175)
(12,101)
(202,699)
22,672
(192,501)
(333)
(379)
(2,592)
(11,344)
3,341
(11,307)
(181,194)
3,179
(2,288)
(6,928)
1,222
(186,009)
(7,432)
(193,441)
198,437
4,996
Rental income for the period from January 1, 2014 to November 23, 2014, and for the year ended December 31, 2013, represents
rental income from Waterview, the sole property for which direct property operations were reflected in the historical combined
consolidated financial statements of our Predecessor. Rental income was $30,208,000 for the period from January 1, 2014 to
November 23, 2014, compared to $30,406,000 for the year ended December 31, 2013, a decrease of $198,000. This decrease was
primarily due to a full year’s results of operations in 2013, compared to a partial year in 2014.
Tenant Reimbursement Income
Tenant reimbursement income for the period from January 1, 2014 to November 23, 2014, and for the year ended December 31,
2013, represents reimbursement income from tenants at Waterview, the sole property for which direct property operations are
reflected in the historical combined consolidated financial statements of our Predecessor. Tenant reimbursement income was
$1,646,000 for the period from January 1, 2014 to November 23, 2014, compared to $1,821,000 for the year ended December 31,
2013, a decrease of $175,000. This decrease was primarily due to a full year’s results of operations in 2013, compared to a partial year
in 2014.
Distributions from Real Estate Fund Investments
Distributions from real estate fund investments comprise distributions received from our private equity real estate funds and were
$17,083,000 for the period from January 1, 2014 to November 23, 2014, compared to $29,184,000 for the year ended
December 31, 2013, a decrease of $12,101,000. This decrease was primarily attributable to the elimination of distributions from 1633
Broadway as cash was retained in 2014 in order to fund leasing costs at the property.
61
Realized and Unrealized Gains, Net
Realized and unrealized gains, net were $129,354,000 for the period from January 1, 2014 to November 23, 2014, compared to
$332,053,000 for the year ended December 31, 2013, a decrease of $202,699,000. This decrease was primarily attributable to market
fundamentals in 2014 as compared to 2013. While market fundamentals continued to improve during 2014, they did so at a slower
pace as compared to 2013.
Fee and Other Income
Fee and other income was $49,098,000 for the period from January 1, 2014 to November 23, 2014, compared to $26,426,000 for
the year ended December 31, 2013, an increase of $22,672,000. The following table sets forth the details of fee and other income.
(Amounts in thousands)
Fee and other income
Property management fees ............................... $
Acquisition and disposition fees.......................
Construction fees ..............................................
Other fees .........................................................
Total fee and other income.................................. $
The Predecessor
Period from
January 1, 2014
to November 23, 2014
Year Ended
December 31, 2013
15,599
25,038
5,718
2,743
49,098
$
$
15,641
2,785
6,937
1,063
26,426
Operating Expenses
Operating expenses for the period from January 1, 2014 to November 23, 2014, and for the year ended December 31, 2013,
represents the operating expenses of Waterview, the sole property for which direct property operations are reflected in the historical
combined consolidated financial statements of our Predecessor, and the cost of operating and managing the portfolio of properties
owned by our Predecessor as well as the private real estate funds that it controlled. Operating expenses were $15,862,000 for the
period from January 1, 2014 to November 23, 2014, compared to $16,195,000 for the year ended December 31, 2013, a decrease of
$333,000. This decrease was primarily due to a full year’s results of operations in 2013, compared to a partial year in 2014.
Depreciation and Amortization
Depreciation and amortization for the period from January 1, 2014 to November 23, 2014, and for the year ended December 31,
2013, represents depreciation and amortization on Waterview, the sole property for which direct property operations are reflected in
the historical combined consolidated financial statements of our Predecessor. Depreciation and amortization was $10,203,000 for the
period from January 1, 2014 to November 23, 2014, compared to $10,582,000 for the year ended December 31, 2013, a decrease of
$379,000. This decrease was primarily due to a full year’s depreciation in 2013, compared to a partial year in 2014.
62
General and Administrative
General and administrative expenses were $30,912,000 for the period from January 1, 2014 to November 23, 2014, compared to
$33,504,000 for the year ended December 31, 2013, a decrease of $2,592,000. The following table sets forth the details of general and
administrative expenses.
(Amounts in thousands)
General and administrative expenses (1) ......................... $
Mark-to-market of investments in our(cid:3)
deferred compensation plans (2) .................................
Total general and administrative expenses................ $
The Predecessor
Period from
January 1, 2014
to November 23, 2014
Year Ended
December 31, 2013
29,206 $
1,706
30,912 $
27,972
5,532
33,504
(1) Primarily due to higher payroll costs(cid:3)
(2) The change resulting from the mark-to-market of the deferred compensation plan liabilities is entirely offset by the
change in the mark-to-market of deferred compensation plan assets, which is included in interest and other income,
net.(cid:3)
Profit Sharing Compensation
Profit sharing compensation represents a portion of fee income and real estate appreciation attributable to our Predecessor’s
private equity real estate fund business, which was payable to certain management employees through profit sharing arrangements.
These arrangements ceased upon completion of the Offering and the Formation Transactions. Profit sharing compensation was
$12,041,000 for the period from January 1, 2014 to November 23, 2014, compared to $23,385,000 for the year ended December 31,
2013, a decrease of $11,344,000. This decrease resulted primarily from decreases in unrealized gains on real estate investments held
through funds.
Other Expenses
Other expenses were $7,974,000 for the period from January 1, 2014 to November 23, 2014, compared to $4,633,000 for the year
ended December 31, 2013, an increase of $3,341,000. This increase resulted primarily from higher capital raising and formation costs
for our Predecessor’s private equity real estate fund business.
Income from Unconsolidated Joint Ventures
Income from unconsolidated joint ventures was $4,241,000 for the period from January 1, 2014 to November 23, 2014, compared
to $1,062,000 for the year ended December 31, 2013, an increase of $3,179,000. The following table sets for the details of income
from unconsolidated joint ventures.
(Amounts in thousands)
Our share of Net Income (Loss):
712 Fifth Avenue ...........................................
1325 Avenue of the Americas .......................
900 Third Avenue (1) ...................................... (cid:3)
%
Ownership at
November 23, 2014
Period from
January 1, 2014
to November 23, 2014
Year Ended
December 31, 2013
The Predecessor
50.0% $
50.0%
11.8%
$
4,141 $
100
-
4,241 $
2,612
(1,550)
-
1,062
(1) As of November 23, 2014, and December 31, 2013, our Predecessor's investment in 900 Third Avenue had a deficit balance and since our
Predecessor had no obligations to fund operating losses, it did not recognize any losses in excess of its investment balance. All unrecognized losses
were aggregated to offset future net income until all unrecognized losses were utilized.
63
Unrealized (Loss) Gain on Interest Rate Swaps
Unrealized (loss) gain on interest rate swaps was a loss of $673,000 for the period from January 1, 2014 to November 23, 2014,
compared to a gain of $1,615,000 for the year ended December 31, 2013, a decrease in income of $2,288,000. This decrease resulted
primarily from a decrease in interest rate indexes to which rates are tied. These interest rate swaps related to the debt of certain private
equity real estate funds that were controlled by our Predecessor.
Interest and Other Income, net
Interest and other income was $2,479,000 for the period from January 1, 2014 to November 23, 2014, compared to $9,407,000 for
the year ended December 31, 2013, a decrease of $6,928,000. The following table sets forth the details of interest and other income.
(Amounts in thousands)
Mark-to-market of investments in(cid:3)
our deferred compensation plans (1) .....................
Interest and other income (2)....................................
Total interest and other income ........................... $
(cid:3)(cid:3)
$
(cid:3)
The Predecessor
Period from
January 1, 2014
to November 23, 2014
Year Ended
December 31, 2013
1,706 $
773
2,479 $
(cid:3)
(cid:3)
(cid:3)
5,532
3,875
9,407 (cid:3)
(cid:3)
(1) The change resulting from the mark-to-market of the deferred compensation plan assets is entirely offset by the
change in the mark-to-market of deferred compensation plan liabilities, which is included in general and administrative
expenses.(cid:3)
(2) The decrease in interest and other income resulted primarily from interest income received in the year ended
December 31, 2013 from new investors in one of our private equity real estate funds in connection with their initial
capital contribution.(cid:3)
Interest and Debt Expense
Interest and debt expense included for the period from January 1, 2014 to November 23, 2014 and for the year ended December
31, 2013, related to interest incurred on the Waterview mortgage, the fund-level debt of the private equity real estate funds and
preferred equity in the joint venture holding 1633 Broadway. Interest expense was $28,585,000 for the period from January 1, 2014 to
November 23, 2014, compared to $29,807,000 for the year ended December 31, 2013, a decrease of $1,222,000. This decrease was
primarily due to a full year’s results of operations in 2013, compared to a partial year in 2014.
Income Tax Expense
Income tax expense was $18,461,000 for the period from January 1, 2014 to November 23, 2014, compared to $11,029,000 for
the year ended December 31, 2013, an increase of $7,432,000. This increase resulted primarily from previously deferred contingent
fees that were recognized in 2014.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests was $87,888,000 for the period from January 1, 2014 to November 23, 2014,
compared to $286,325,000 for the year ended December 31, 2013, a decrease of $198,437,000 and represents net income attributable
to the noncontrolling interests of the private equity real estate funds. The decrease resulted primarily from lower income from real
estate fund investments.
64
Liquidity and Capital Resources
Our primary sources of liquidity include existing cash balances, cash flow from operations and borrowings available under our
$1.0 billion revolving credit facility, which could be increased to $1.25 billion, subject to certain conditions. We expect that these
sources will provide adequate liquidity over the next 12 months for all anticipated needs, including scheduled principal and interest
payments on our outstanding indebtedness, existing and anticipated capital improvements, the cost of securing new and renewal
leases, dividends to stockholders and distributions to unitholders, and all other capital needs related to the operations of our business.
We anticipate that our long-term needs including debt maturities and the acquisition of additional properties will be funded by
operating cash flow, mortgage financings and/or re-financings, and the issuance of long-term debt or equity.
Although we may be able to anticipate and plan for certain of our liquidity needs, unexpected increases in uses of cash that are
beyond our control and which affect our financial condition and results of operations may arise, or our sources of liquidity may be
fewer than, and the funds available from such sources may be less than, anticipated or required.
Liquidity
As of December 31, 2015, we had $143,884,000 of cash and cash equivalents and $780,000,000 of borrowing capacity under our
revolving credit facility, net of $200,000,000, which has been reserved under a letter of credit.
On December 1, 2015, we completed a $1.0 billion refinancing of 1633 Broadway, a 2.6 million square foot, office building
located on Broadway between 50th and 51st Streets in Manhattan. The new seven-year loan is interest only at LIBOR plus 175 basis
points and can be increased at the Company’s option, by $250,000,000 to $1.25 billion, until December 1, 2018, if certain
performance hurdles relating to the property are satisfied. The net proceeds from the refinancing were used to repay the existing
$926,260,000 loan and fund $42,011,000 of costs, primarily for swap breakage. The existing loan was scheduled to mature in
December 2016 and had a weighted average interest rate of 5.35%.
As of December 31, 2015, our outstanding consolidated debt (including amounts outstanding under our revolving credit facility)
aggregated $2.962 billion. None of our debt matures in 2016 and $897,827,000 of our debt matures in 2017. We may refinance the
remainder of our maturing debt when it comes due or refinance or prepay it early depending on prevailing market conditions, liquidity
requirements and other factors. The amounts involved in connection with these transactions could be material to our consolidated
financial statements.
Dividend Policy
On December 15, 2015, we declared a regular quarterly cash dividend of $0.095 per share of common stock for the fourth quarter
ending December 31, 2015, which was paid on January 15, 2016 to stockholders of record as of the close of business on December 31,
2015. During 2015, we paid an aggregate of $85,458,000 in dividends to our common stockholders and common unitholders. These
dividends were paid utilizing the cash flow from operations. Our net cash flow from operations, as disclosed in our statement of cash
flows, was a negative $16,969,000 due to utilizing $127,743,000 of cash for real estate fund investments. However, this amount was
entirely funded by the limited partners of the real estate funds for which such investments were made. In accordance with GAAP,
amounts paid for real estate fund investments are disclosed within operating activities in our statement of cash flows as opposed to
investing activities, and the source of the funds for real estate fund investments are disclosed within financing activities as a
component of “contributions from noncontrolling interests.” Excluding real estate fund investments, which were fully funded by the
limited partners of our real estate funds, our net cash flow from operations was $110,774,000.
If we were to continue our current dividend policy for all of 2016, we would have to pay out approximately $101,000,000 to
common stockholders and unitholders during 2016.
65
Development and Redevelopment Expenditures
We have substantially completed the redevelopment of the lobby and retail space at One Market Plaza, including new entrances
along Spear, Steuart and Mission streets as well as public seating.
We are in the process of redeveloping the public plaza and below-grade retail space at 1633 Broadway. The project, which is
expected to be completed by the third quarter of 2016, is estimated to cost approximately $15,000,000, of which $8,683,000 has been
expended as of December 31, 2015.
Contractual Obligations
Below is a summary of our contractual obligations and commitments as of December 31, 2015.
(Amounts in thousands)
Notes and mortgages payable:
Less than
one year
Payments due by period
1-3
years
3-5
years
Total
Thereafter
Interest expense (1) ............................................................. $ 465,848
Principal repayment ........................................................... 2,941,524
20,905
27,543
Revolving credit facility (including interest expense) (1).........
Due to affiliates (including interest expense)(1) .......................
Loans payable to noncontrolling interests (including interest
expense)(1) ..........................................................................
Tenant obligations ...................................................................
Leasing commissions ..............................................................
Construction obligations .........................................................
119,069
109,212
5,179
20,799
Total (2) .............................................................................. $ 3,710,079
$ 136,301
1,441
313
139
$ 163,162
984,928
20,592
27,404
$ 104,860 $
941,611
-
-
61,525
1,013,544
-
-
-
104,997
5,179
20,799
$ 269,169
-
3,437
-
-
$ 1,199,523
-
778
-
-
119,069
-
-
-
$ 1,047,249 $ 1,194,138
(1)
Interest expense is calculated using contractual rates for fixed rate debt and the rates in effect as of December 31, 2015 for
variable rate debt.
(2) The total above does not include various standing or renewal service contracts with vendors related to our property
management.
Off Balance Sheet Arrangements
As of December 31, 2015, our unconsolidated joint ventures had $270,643,000 of outstanding indebtedness, of which our share
was $125,544,000. We do not guarantee the indebtedness of unconsolidated joint ventures other than providing customary
environmental indemnities and guarantees of specified non-recourse carve outs relating to specified covenants and representations;
however, we may elect to fund additional capital to a joint venture through equity contributions (generally on a basis proportionate to
our ownership interests), advances or partner loans in order to enable the joint venture to repay this indebtedness upon maturity.
Insurance
We carry commercial general liability coverage on our properties, with limits of liability customary within the industry. Similarly,
we are insured against the risk of direct and indirect physical damage to our properties including coverage for the perils of floods,
earthquakes and windstorms. Our policies also cover the loss of rental income during an estimated reconstruction period. Our policies
reflect limits and deductibles customary in the industry and specific to the buildings and portfolio. We also obtain title insurance
policies when acquiring new properties. We currently have coverage for losses incurred in connection with both domestic and foreign
terrorist-related activities. While we do carry commercial general liability insurance, property insurance and terrorism insurance with
respect to our properties, these policies include limits and terms we consider commercially reasonable. In addition, there are certain
losses (including, but not limited to, losses arising from known environmental conditions or acts of war) that are not insured, in full or
in part, because they are either uninsurable or the cost of insurance makes it, in our belief, economically impractical to maintain such
coverage. Should an uninsured loss arise against us, we would be required to use our own funds to resolve the issue, including
litigation costs. We believe the policy specifications and insured limits are adequate given the relative risk of loss, the cost of the
coverage and industry practice and, in consultation with our insurance advisors, we believe the properties in our portfolio are
adequately insured.
66
Other Commitments and Contingencies
We are a party to various claims and routine litigation arising in the ordinary course of business. Some of these claims or others,
to which we may be subject from time to time, including claims arising specifically from the Formation Transactions, may result in
defense costs, settlements, fines or judgments against us, some of which are not, or cannot be, covered by insurance. Payment of any
such costs, settlements, fines or judgments that are not insured could have an adverse impact on our financial position and results of
operations. Should any litigation arise in connection with the Formation Transactions, we would contest it vigorously. In addition,
certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which
could adversely impact our results of operations and cash flow, expose us to increased risks that would be uninsured and/or adversely
impact our ability to attract officers and directors.
The terms of our mortgage debt and certain side letters in place include certain restrictions and covenants which may limit, among
other things, certain investments, the incurrence of additional indebtedness and liens and the disposition or other transfer of assets and
interests in the borrower and other credit parties, and requires compliance with certain debt yield, debt service coverage and loan to
value ratios. In addition, our revolving credit facility contains representations, warranties, covenants, other agreements and events of
default customary for agreements of this type with comparable companies. As of December 31, 2015, we believe we are in
compliance with all of our covenants.
Inflation
Substantially all of our leases provide for separate real estate tax and operating expense escalations. In addition, many of the
leases provide for fixed base rent increases. We believe inflationary increases in expenses may be at least partially offset by the
contractual rent increases and expense escalations described above. We do not believe inflation has had a material impact on our
historical financial position or results of operations.
67
Cash Flows
As noted above, we no longer account for the assets that we acquired from the private equity real estate funds that our Predecessor
controlled under investment company accounting. Instead, we account for these assets using either consolidated historical cost
accounting or the equity method. Moving from investment company accounting to consolidated historical cost accounting or the
equity method resulted in a significant change in the classification of our cash flows. For example, the purchase and sale of
underlying investments by our private equity real estate funds that utilize investment company accounting are treated as an operating
activity and such purchases and sales are shown net of any related mortgage debt entered into upon acquisition or repaid upon sale.
Purchases and sales that we engage in directly or through our consolidated subsidiaries other than these funds are treated as investing
activities and any related mortgage debt entered into upon acquisition or repaid upon sale is treated as financing activities.
Furthermore, all other property-level debt activity relating to properties owned by these funds is currently treated as operating activity,
whereas debt activity engaged in directly or through our consolidated subsidiaries other than these funds is treated as financing
activity. In addition, the net income of our Predecessor currently reflects significant unrealized gains or losses relating to properties
owned by these funds. Any unrealized gains or losses are reversed to arrive at net cash flow provided by or used in operating
activities. Gains or losses arising from sales of properties owned by us directly or through our consolidated subsidiaries will only be
recognized by us when realized. The proceeds of such sales will be reflected in net cash provided by investing activities.
The Company
Cash and cash equivalents were $143,884,000 and $438,599,000, at December 31, 2015 and December 31, 2014, respectively, a
decrease of $294,715,000. The following table sets forth the changes in cash flow.
(Amount in thousands)
Net cash (used in) provided by:
Year Ended
December 31, 2015
November 24, 2014 to
December 31, 2014
Period from
Operating activities ................
Investing activities .................
Financing activities ................
$
$
(16,969)
(95,416)
(182,330)
(80,572 )
204,913
262,172
Operating Activities
Year Ended December 31, 2015 – We used $16,969,000 of cash for operating activities for the year ended December 31, 2015,
primarily due to the net change in operating assets and liabilities of $170,269,000, partially offset by net income before noncash
adjustments of $148,334,000 and distributions from unconsolidated joint ventures of $4,966,000. Noncash adjustments of
$127,191,000 were primarily comprised of depreciation and amortization, unrealized gain on interest rate swaps, straight-lining of
rental income and realized and net unrealized gains on real estate fund investments. The changes in operating assets and liabilities
were primarily due to net acquisition of real estate fund investments of $127,743,000 and additions to deferred charges of
$40,510,000.
Period from November 24, 2014 to December 31, 2014 – We used $80,572,000 of cash for operating activities for the period from
November 24, 2014 to December 31, 2014, primarily to fund real estate fund investments aggregating $51,362,000 and leasing costs
aggregating $13,181,000.
Investing Activities
Year Ended December 31, 2015 – We used $95,416,000 of cash for investing activities for the year ended December 31, 2015,
primarily due to additions to rental properties of $107,859,000, partially offset by a decrease in restricted cash of $12,424,000.
Period from November 24, 2014 to December 31, 2014 – We generated $204,913,000 of cash from investing activities for the
period from November 24, 2014 to December 31, 2014, primarily from cash received from properties in connection with the
Formation Transactions.
68
Financing Activities
Year Ended December 31, 2015 - We used $182,330,000 of cash for financing activities in the year ended December 31, 2015,
primarily due to the repayment of notes and mortgages payable of $927,633,000, the acquisition of noncontrolling interest in
consolidated joint ventures of $261,464,000, dividends paid to common stockholders and unitholders of $85,458,000, distributions to
noncontrolling interests of $56,636,000, the settlement of swap liabilities of $33,741,000 and debt issuance costs of $18,871,000,
partially offset by proceeds from notes and mortgages payable of $1,013,544,000, contributions from noncontrolling interests of
$167,929,000 and proceeds from our revolving credit facility of $20,000,000.
Period from November 24, 2014 to December 31, 2014 – We generated $262,172,000 of cash from financing activities for the
period from November 24, 2014 to December 31, 2014. Cash generated from financing activities during the period was primarily due
to the issuance and sale of common stock in connection with the Offering, substantially all of the proceeds of which were used toward
the repayment of debt assumed in the Formation Transactions and the defeasance of a mortgage note payable.
The Predecessor
Cash and cash equivalents were $52,086,000 and $307,161,000 at November 23, 2014 and December 31, 2013, respectively, a
decrease of $255,075,000 for the period from January 1, 2014 to November 23, 2014 and an increase of $2,183,000 during the year
ended December 31, 2013. The following table sets forth the changes in cash flow.
(Amount in thousands)
Net cash (used in) provided by:
Period from
January 1, 2014 to
November 23, 2014
Year Ended
December 31, 2013
Operating activities ....................................
Investing activities .....................................
Financing activities ....................................
$
(84,495) $
(64,330)
(106,250)
33,485
1,042
(32,344)
Operating Activities
Period from January 1, 2014 to November 23, 2014 Compared to Year Ended December 31, 2013 – Our Predecessor used
$84,495,000 of cash for operating activities during the period January 1, 2014 to November 23, 2014, compared to $33,485,000
generated during the year ended December 31, 2013, a decrease of $117,980,000. This decrease was primarily due to $31,061,000 for
net real estate fund investments in 2014 resulting from the purchase of a new asset and additional investments in existing assets and
changes in other operating assets and liabilities aggregating $87,542,000.
Investing Activities
Period from January 1, 2014 to November 23, 2014 Compared to Year Ended December 31, 2013 – Our Predecessor used
$64,330,000 of cash for investing activities during the period January 1, 2014 to November 23, 2014, compared to $1,042,000
provided during the year ended December 31, 2013, a decrease of $65,372,000. This decrease was primarily due to a $64,650,000
acquisition by a consolidated private equity fund, which utilizes historical cost accounting rather than investment company
accounting.
Financing Activities
Period from January 1, 2014 to November 23, 2014 Compared to Year Ended December 31, 2013 – Our Predecessor used
$106,250,000 of cash for financing activities during the period January 1, 2014 to November 23, 2014, compared to $32,344,000 used
during the year ended December 31, 2013, an increase of $73,906,000. This was primarily due to a decrease in net contributions from
noncontrolling interests aggregating $92,926,000, from $99,619,000 in 2013 to $6,693,000 in 2014.
69
Non-GAAP Financial Measures
We use and present NOI, Cash NOI, FFO and Core FFO, as supplemental measures of our performance. The summary below
describes our use of these measures, provides information regarding why we believe these measures are meaningful supplemental
measures of our performance and reconciles these measures from net income or loss, the most directly comparable GAAP measure.
Net Operating Income (“NOI”)
NOI is a metric we use to measure the operating performance of our property and consists of property-related revenue (which
includes rental revenue, tenant reimbursement income and certain other income) less operating expenses (which includes building
expenses such as cleaning, security, repairs and maintenance, utilities, property administration and real estate taxes). We also present
Cash NOI, which deducts from NOI, straight-line rent adjustments and the amortization of above and below-market leases, including
our share of such adjustments of unconsolidated joint ventures. In addition, we present our pro rata share of NOI and Cash NOI, which
represents our share of NOI and Cash NOI of consolidated and unconsolidated joint ventures, based on our percentage ownership in
the underlying assets. We use these metrics internally as performance measures and believe they provide useful information to
investors regarding our financial condition and results of operations because they reflect only those income and expense items that are
incurred at the property level. Other real estate companies may use different methodologies for calculating NOI and Cash NOI, and
accordingly, our presentation of NOI and Cash NOI may not be comparable to other real estate companies.
The following table presents a reconciliation of our net income to NOI and Cash NOI.
(Amounts in thousands)
Reconciliation of net income to NOI and Cash NOI:
The Company
Year Ended
December 31, 2015
Period from
November 24, 2014 to
December 31, 2014
Net income ..................................................................................................................
Add:
$
21,143
$
Depreciation and amortization ..................................................................................
General and administrative expenses ........................................................................
Interest and debt expense ..........................................................................................
Transfer taxes due in connection with the sale of shares by a former joint
venture partner .....................................................................................................
Acquisition, transaction and formation related costs ................................................
Income tax expense...................................................................................................
NOI of unconsolidated joint ventures .......................................................................
Less:
Income from real estate fund investments ................................................................
Income from unconsolidated joint ventures ..............................................................
Fee income ................................................................................................................
Unrealized gain on interest rate swaps ......................................................................
Interest and other income (loss), net .........................................................................
Gain on consolidation of unconsolidated joint ventures ...........................................
NOI ..............................................................................................................................
Less NOI attributable to noncontrolling interests in consolidated joint ventures ........
Pro rata share of NOI ................................................................................................
NOI ..............................................................................................................................
Less:
Straight-line rent adjustments ...................................................................................
Amortization of below-market leases, net ................................................................
Pro rata share of straight-line rent adjustments of unconsolidated joint
ventures ................................................................................................................
Cash NOI .....................................................................................................................
Less Cash NOI attributable to noncontrolling interests in consolidated joint ventures ...
Pro rata share of Cash NOI ......................................................................................
$
$
$
294,624
42,056
168,366
5,872
4,483
2,566
16,580
(37,975 )
(6,850 )
(10,248 )
(75,760 )
(871 )
-
423,986
(55,325 )
368,661
423,986
(69,522 )
(9,917 )
410
344,957
(36,616 )
308,341
$
$
$
72,722
34,481
2,207
43,743
-
143,437
505
1,680
-
(938)
(1,176)
(15,084)
179
(239,716)
42,040
(5,710)
36,330
42,040
(5,653)
(467)
(7)
35,913
(4,092)
31,821
70
Funds from Operations (“FFO”) and Core Funds from Operations (“Core FFO”)
FFO is a supplemental measure of our performance. We present FFO in accordance with the definition adopted by the National
Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as GAAP net income or loss adjusted to exclude net
gains from sales of depreciated real estate assets, impairment losses on depreciable real estate and depreciation and amortization
expense from real estate assets, including the pro rata share of such adjustments of unconsolidated joint ventures. FFO is commonly
used in the real estate industry to assist investors and analysts in comparing results of real estate companies because it excludes the
effect of real estate depreciation and amortization and net gains on sales, which are based on historical costs and implicitly assume that
the value of real estate diminishes predictably over time, rather than fluctuating based on existing market conditions. In addition, we
present Core FFO as an alternative measure of our operating performance, which adjusts FFO for certain other items that we believe
enhance the comparability of our FFO across periods. Core FFO, when applicable, excludes the impact of acquisition, transaction and
formation related costs, unrealized gain or losses on interest rate swaps, severance costs and defeasance and debt breakage costs, in
order to reflect the Core FFO of our real estate portfolio and operations. In future periods, we may also exclude other items from Core
FFO that we believe may help investors compare our results.
FFO and Core FFO are presented as supplemental financial measures and do not fully represent our operating performance. Other
REITs may use different methodologies for calculating FFO and Core FFO or use other definitions of FFO and Core FFO and,
accordingly, our presentation of these measures may not be comparable to other real estate companies. Neither FFO nor Core FFO is
intended to be a measure of cash flow or liquidity. Please refer to our financial statements, prepared in accordance with GAAP, for
purposes of evaluating our financial condition, results of operations and cash flows.
(Amounts in thousands, except per share amounts)
Reconciliation of net income to FFO and Core FFO:
Net income ............................................................................................................................. $
Real estate depreciation and amortization ..............................................................................
Pro rata share of real estate depreciation and amortization of unconsolidated joint ventures .....
FFO .........................................................................................................................................
Less FFO attributable to noncontrolling interests in:
Consolidated joint ventures and funds ..............................................................................
Operating Partnership .......................................................................................................
FFO attributable to common stockholders ......................................................................... $
Per diluted share ................................................................................................................... $
FFO ......................................................................................................................................... $
Non-core (income) expense:
Transfer taxes due in connection with the sale of shares by a former joint venture partner .....
Acquisition, transaction and formation related costs ...........................................................
Defeasance and debt breakage costs ....................................................................................
Predecessor income tax true-up ...........................................................................................
Severance costs ....................................................................................................................
Unrealized gain on interest rate swaps .................................................................................
Pro rata share of unrealized gain on interest rate swaps of unconsolidated joint ventures ...
Gain on consolidation of an unconsolidated joint venture ...................................................
Core FFO ................................................................................................................................
Less Core FFO attributable to noncontrolling interests in:
Consolidated joint ventures and funds ..............................................................................
Operating Partnership .......................................................................................................
Core FFO attributable to common stockholders ............................................................... $
Per diluted share ................................................................................................................... $
The Company
Year Ended
December 31, 2015
Period from
November 24, 2014 to
December 31, 2014
21,143
294,624
6,021
321,788
(61,479 )
(50,960 )
209,349
0.99
321,788
5,872
4,483
-
721
3,315
(75,760 )
(2,112 )
-
258,307
(43,451 )
(42,060 )
172,796
0.81
$
$
$
$
$
$
72,722
34,481
605
107,808
(5,353)
(20,030)
82,425
0.39
107,808
-
143,437
25,717
-
-
(15,084)
(643)
(239,716)
21,519
(1,506)
(3,913)
16,100
0.08
Reconciliation of weighted average shares outstanding:
Weighted average shares outstanding .....................................................................................
Effect of dilutive securities .....................................................................................................
Denominator for FFO per diluted share ..................................................................................
212,106,718
4,572
212,111,290
212,106,718
1,190
212,107,908
71
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and interest rates. Our future earnings, cash flows and fair
values relevant to financial instruments are dependent upon prevalent market interest rates. Our primary market risk results from our
indebtedness, which bears interest at both fixed and variable rates. We manage our market risk on variable rate debt by entering into
swap agreements to fix the rate on all or a portion of the debt for varying periods through maturity. This in turn, reduces the risks of
variability of cash flows created by variable rate debt and mitigates the risk of increases in interest rates. Our objective when
undertaking such arrangements is to reduce our floating rate exposure and we do not enter into hedging arrangements for speculative
purposes. Subject to maintaining our status as a REIT for Federal income tax purposes, we may utilize swap arrangements in the
future.
The following table summarizes our consolidated debt, the weighted average interest rates and the fair value as of December 31,
2015.
Rate
Property
Fixed Rate Debt
1633 Broadway(1) .............. (cid:3) 3.54% $
31 West 52nd Street(1) ........ (cid:3) 6.04%
900 Third Avenue(1) ........... (cid:3) 5.98%
Waterview ...................... 5.76%
1899 Pennsylvania Avenue .... 4.88%
Liberty Place ................... 4.50%
One Market Plaza(1) ........... (cid:3) 6.14%
Total Fixed Rate Debt ........ 5.01%
Variable Rate Debt
1633 Broadway ................ 2.15% $
31 West 52nd Street .......... 1.79%
900 Third Avenue ............. 1.69%
Revolving Credit Facility .... 1.54%
Total Variable Rate Debt .... 1.75% $
2016
2017
2018
2019
2020
Thereafter Total
Fair Value
-
$
- $
237,600
-
162,000
-
210,000
-
-
-
-
-
-
-
- $ 609,600 $
$
-
-
-
-
-
84,000
-
$
-
-
-
-
-
-
857,037
84,000 $ 857,037 $
- $ 1,000,000 $ 1,000,000 $1,000,194
233,896
-
158,103
-
217,993
-
92,890
89,116
85,952
-
821,444
-
89,116 $ 1,000,000 $ 2,639,753 $2,610,472
237,600
162,000
210,000
89,116
84,000
857,037
-
-
-
-
-
-
$
- $
175,890
-
112,337
-
-
-
- $ 288,227 $
$
-
-
-
20,000
20,000 $
$
-
-
-
-
- $
- $
-
-
-
- $
13,544 $
-
-
-
13,544 $
13,544 $
175,890
112,337
20,000
13,547
173,538
109,685
20,723
321,771 $ 317,493
Total Consolidated Debt ..... 4.66% $
(cid:3)(cid:3)(cid:3)(cid:3)
(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)
(1) All or a portion of this debt has been swapped from floating rate debt to fixed rate debt. See table below.
- $ 897,827 $ 104,000 $ 857,037 $
(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)
(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)
(cid:3)
(cid:3)
89,116 $ 1,013,544 $ 2,961,524 $2,927,965
(cid:3)
(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)
(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)
(cid:3)
(cid:3)
In addition to the above, our unconsolidated joint ventures had $270,643,000 of outstanding indebtedness as of December 31,
2015, of which our share was $125,544,000.
The following table summarizes our fixed rate debt that has been swapped from floating rate to fixed as of December 31, 2015.
Property
(Amounts in thousands)
One Market Plaza (1) ......... $
31 W 52nd Street (1) ..........
900 Third Avenue (1) .........
1633 Broadway (2) .............
1633 Broadway (2) .............
Notional
Amount
Effective Date
Maturity Date
Strike
Rate
Fair Value as of
December 31, 2015
840,000
237,600
162,000
1,000,000
400,000
Aug-2007 to Aug-2012
Dec-2007
Nov-2007
Dec 2015
Dec-2020
Aug-2017
Dec-2017
Nov-2017
Dec 2020 to Dec-2022
Dec-2021
5.02 % $
4.79 %
4.78 %
1.79 %
2.35 %
$
55,404
17,661
11,630
9,204
37
93,936
Total interest rate swap liabilities .......................................................................................................................
(1) Represents interest rate swaps not designated as hedges. Changes in the fair value of these swaps are recognized in earnings.
(2) Represents interest rate swaps designated as cash flow hedges. Changes in the fair value of these hedges are recognized in accumulated other
comprehensive income (outside of earnings).
72
The following table summarizes our pro rata share of total indebtedness and the effect to interest expense of a 100 basis point
increase in LIBOR.
(Amounts in thousands, except per share amount)
Pro rata share of consolidated debt:
Balance at
December 31,
2015
Weighted
Average
Interest Rate
2014
Effect of 1%
Increase in
Base Rates
Balance at
December 31,
Weighted
Average
Interest Rate
Variable rate ............................................................. $
Fixed rate (1) ..............................................................
$
321,771
2,202,664
2,524,435
1.75% $
4.79%
4.40% $
3,218 $
-
3,218 $
222,283
2,046,582
2,268,865
Pro rata share of debt of non-consolidated entities (non-
recourse):
Variable rate ............................................................. $
Fixed rate (1) ..............................................................
$
55,750
69,794
125,544
2.34% $
5.74%
4.23% $
558 $
-
558 $
10,750
112,500
123,250
1.49%
5.79%
5.37%
2.71%
5.65%
5.39%
Noncontrolling interests' share of above ............................
Total change in annual net income ....................................
Per diluted share .............................................................
(cid:3)(cid:3)
(1) Our fixed rate debt includes floating rate debt that has been swapped to fixed rate debt. See table above.
$
$
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(739 )
3,037
0.01
(cid:3)(cid:3)(cid:3)(cid:3)
73
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm ................................................................................................
Consolidated Balance Sheets as of December 31, 2015 and 2014 .......................................................................................
Consolidated Statements of Income of the Company for the year ended December 31, 2015 and for the period from
Page Number
75
76
November 24, 2014 to December 31, 2014 .....................................................................................................................
Combined Consolidated Statements of Income of the Predecessor for the period from January 1, 2014 to
November 23,2014 and for the year ended December 31, 2013 .....................................................................................
Consolidated Statements of Comprehensive Income of the Company for the year ended December 31, 2015 and for the
period from November 24, 2014 to December 31, 2014 .................................................................................................
Combined Consolidated Statements of Changes in Equity of the Company for year ended December 31, 2015 and for
the period from November 24, 2014 to December 31, 2014 and for the Predecessor for the period from January 1,
2014 to November 23, 2014 and for the year ended December 31, 2013 .......................................................................
Combined Consolidated Statements of Cash Flows of the Company for the year ended December 31, 2015 and for the
period from November 24, 2014 to December 31,2014 and for the Predecessor for the period from January 1, 2014
to November 23, 2014 and for the year ended December 31, 2013 ..............................................................................
Notes to Combined Consolidated Financial Statements of the Company and the Predecessor ..........................................
77
78
79
80
82
84
74
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Paramount Group, Inc.
New York, NY
We have audited the accompanying consolidated balance sheets of Paramount Group, Inc. (the Company or Successor) as of
December 31, 2015 and 2014, the related consolidated statements of income and comprehensive income for the year ended December
31, 2015 (Successor), and for the period from November 24, 2014 through December 31, 2014 (Successor), and the related combined
consolidated statements of changes in equity and cash flows or the year ended December 31, 2015 (Successor), and the related
combined consolidated statements of income, changes in equity and cash flows for the period from January 1, 2014 through
November 23, 2014 (Paramount Predecessor) and for the year ended December 31, 2013 (Paramount Predecessor). Our audits also
included the financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedules
are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and
financial statement schedules based on our audits.
`
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Paramount
Group, Inc. as of December 31, 2015 (Successor) and 2014 (Successor), and the results of their operations and their cash flows for the
year ended December 31, 2015 (Successor), for the period from November 24, 2014 through December 31, 2014 (Successor), for the
period from January 1, 2014 through November 23, 2014 (Paramount Predecessor), and for the year ended December 31, 2013
(Paramount Predecessor), in conformity with accounting principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company's internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control —
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report
dated February 25, 2016 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
New York, NY
February 25, 2016
75
PARAMOUNT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share amounts)
ASSETS
Rental property, at cost
The Company
December 31, 2015
December 31, 2014
Land .............................................................................................................................. $
Buildings and improvements ........................................................................................
Accumulated depreciation and amortization ......................................................................
Rental property, net ............................................................................................................
Real estate fund investments ..............................................................................................
Preferred equity investments ..............................................................................................
Investments in unconsolidated joint ventures ....................................................................
Cash and cash equivalents ..................................................................................................
Restricted cash ...................................................................................................................
Marketable securities .........................................................................................................
Deferred rent receivable .....................................................................................................
Accounts and other receivables, net of allowance of $365 and $333
2,042,071 $
5,610,046
7,652,117
(243,089 )
7,409,028
416,438
53,941
7,102
143,884
41,823
21,521
77,792
2,042,071
5,488,168
7,530,239
(81,050)
7,449,189
323,387
-
5,749
438,599
55,728
20,159
8,267
in 2015 and 2014, respectively .....................................................................................
10,844
7,692
Deferred charges, net of accumulated amortization of $15,961
and $10,859 in 2015 and 2014, respectively.................................................................
93,905
39,165
Intangible assets, net of accumulated amortization of $143,987 and $20,509 in
2015 and 2014, respectively .........................................................................................
Other assets ........................................................................................................................
Total assets ........................................................................................................................ $
511,207
6,658
8,794,143 $
669,385
13,121
9,030,441
LIABILITIES AND EQUITY
Notes and mortgages payable............................................................................................. $
Revolving credit facility .....................................................................................................
Due to affiliates ..................................................................................................................
Loans payable to noncontrolling interests ..........................................................................
Accounts payable and accrued expenses ............................................................................
Dividends and distributions payable ..................................................................................
Deferred income taxes .......................................................................................................
Interest rate swap liabilities ................................................................................................
Intangible liabilities, net of accumulated amortization of $41,931 and $3,757 in
2015 and 2014, respectively .........................................................................................
Other liabilities ...................................................................................................................
Total liabilities ...................................................................................................................
Commitments and contingencies
Paramount Group, Inc. equity:
Common stock $0.01 par value per share; authorized 900,000,000 shares; issued
and outstanding 212,112,137 and 212,106,718 shares in 2015 and 2014, respectively........
Additional paid-in-capital .............................................................................................
Earnings (less than) in excess of distributions ..............................................................
Accumulated other comprehensive loss .......................................................................
Paramount Group, Inc. equity ............................................................................................
Noncontrolling interests in:
Consolidated joint ventures and funds ..........................................................................
Operating Partnership (51,660,088 and 51,543,993 units outstanding in
2015 and 2014, respectively) ...................................................................................
Total equity ........................................................................................................................
Total liabilities and equity ............................................................................................... $
2,941,524 $
20,000
27,299
45,662
102,730
25,067
2,533
93,936
179,741
45,101
3,483,593
2,122
3,802,858
(36,120 )
(7,843 )
3,761,017
2,852,287
-
27,299
42,195
93,472
-
2,861
194,196
219,228
43,950
3,475,488
2,122
3,851,432
57,308
-
3,910,862
651,486
685,888
898,047
5,310,550
8,794,143 $
958,203
5,554,953
9,030,441
See notes to combined consolidated financial statements.
76
PARAMOUNT GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
REVENUES:
The Company
Year Ended
December 31, 2015
Period from
November 24, 2014
to December 31, 2014
Rental income ................................................................................................. $
Tenant reimbursement income .......................................................................
Fee and other income ......................................................................................
Total revenues ...........................................................................................
586,530 $
50,885
24,993
662,408
EXPENSES:
Operating ........................................................................................................
Depreciation and amortization ........................................................................
General and administrative .............................................................................
Acquisition and transaction related costs ........................................................
Total expenses ...........................................................................................
Operating income .................................................................................................
Income from real estate fund investments ......................................................
Income from unconsolidated joint ventures ....................................................
Unrealized gain on interest rate swaps ...........................................................
Interest and other income (loss), net ...............................................................
Interest and debt expense ................................................................................
Formation related costs ...................................................................................
Gain on consolidation of an unconsolidated joint venture ..............................
Net income before income taxes ..........................................................................
Income tax expense ........................................................................................
Net income ...........................................................................................................
Less net (income) loss attributable to noncontrolling interests:
Consolidated joint ventures and funds ............................................................
Operating Partnership .....................................................................................
Net (loss) income attributable to common stockholders ................................. $
244,754
294,624
42,056
10,355
591,789
70,619
37,975
6,850
75,760
871
(168,366 )
-
-
23,709
(2,566 )
21,143
(26,632 )
1,070
(4,419 ) $
57,465
5,865
2,805
66,135
26,011
34,481
2,207
-
62,699
3,436
1,412
938
15,084
(179)
(43,743)
(143,437)
239,716
73,227
(505)
72,722
(1,488)
(13,926)
57,308
(LOSS) INCOME PER COMMON SHARE - BASIC:
(Loss) Income per common share ................................................................... $
Weighted average shares outstanding .............................................................
(0.02 ) $
212,106,718
0.27
212,106,718
(LOSS) INCOME PER COMMON SHARE - DILUTED:
(Loss) Income per common share ................................................................... $
Weighted average shares outstanding .............................................................
(0.02 ) $
212,106,718
0.27
212,107,908
DIVIDENDS PER COMMON SHARE ...........................................................
0.419 (1)
-
(1)
Includes the $0.039 cash dividend for the 38 day period following the completion of our initial public offering and related
formation transactions and ended on December 31, 2014.
See notes to combined consolidated financial statements.
77
PARAMOUNT PREDECESSOR
COMBINED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands)
REVENUES:
Rental income ........................................................................................... $
Tenant reimbursement income .................................................................
Distributions from real estate fund investments .......................................
Realized and unrealized gains, net ............................................................
Fee and other income ................................................................................
Total revenues .....................................................................................
EXPENSES:
Operating ..................................................................................................
Depreciation and amortization ..................................................................
General and administrative .......................................................................
Profit sharing compensation .....................................................................
Other .........................................................................................................
Total expenses .....................................................................................
Operating income ...........................................................................................
Income from unconsolidated joint ventures ..............................................
Unrealized (loss) gain on interest rate swaps ............................................
Interest and other income, net ...................................................................
Interest and debt expense ..........................................................................
Net income before income taxes ....................................................................
Income tax expense ..................................................................................
Net income .....................................................................................................
Net income attributable to noncontrolling interests .......................................
Net income attributable to the Predecessor ............................................... $
The Predecessor
Period from
January 1, 2014
to November 23, 2014(cid:3)
Year Ended
December 31, 2013
30,208 $
1,646
17,083
129,354
49,098
227,389
15,862
10,203
30,912
12,041
7,974
76,992
150,397
4,241
(673 )
2,479
(28,585 )
127,859
(18,461 )
109,398
(87,888 )
21,510 $
30,406
1,821
29,184
332,053
26,426
419,890
16,195
10,582
33,504
23,385
4,633
88,299
331,591
1,062
1,615
9,407
(29,807)
313,868
(11,029)
302,839
(286,325)
16,514
See notes to combined consolidated financial statements.
78
PARAMOUNT GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
Net income ................................................................................................................. $
Other comprehensive loss:
Change in value of interest rate swaps..................................................................
Pro rata share of other comprehensive loss of
unconsolidated joint ventures ..........................................................................
Comprehensive income ..............................................................................................
Less comprehensive (income) loss attributable to noncontrolling
interests in:
Consolidated joint ventures and funds ..................................................................
Operating Partnership ...........................................................................................
Comprehensive (loss) income attributable to common stockholders................... $
The Company
Year Ended
December 31, 2015
Period from
November 24, 2014
to December 31, 2014
21,143 $
72,722
(9,241 )
(512 )
11,390
(26,632 )
2,980
(12,262 ) $
-
-
72,722
(1,488)
(13,926)
57,308
See notes to combined consolidated financial statements.
79
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PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOW
The Company
The Predecessor
(Amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................................................... $
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Year Ended
December 31, 2015
Period from
November 24, 2014
to December 31, 2014
Period from
January 1, 2014(cid:3)
to November 23, 2014
Year Ended
December 31, 2013
21,143 $
72,722 $
109,398 $
302,839
Depreciation and amortization ...............................................
Unrealized (gain) loss on interest rate swaps .........................
Straight-lining of rental income .............................................
Realized and unrealized (gains) losses on real
estate fund investments ....................................................
Amortization of below-market leases, net .............................
Amortization of stock based compensation expense ..............
Income from unconsolidated joint ventures ...........................
Other non-cash adjustments ...................................................
Distributions of income from unconsolidated
joint ventures ....................................................................
Amortization of deferred financing costs ...............................
Realized and unrealized losses (gains) on
marketable securities.........................................................
Defeasance cost in connection with the refinancing
of notes and mortgages payable ........................................
Gain on consolidation of an unconsolidated
joint venture ......................................................................
Stock-based compensation expense in connection
with Founders Grants ........................................................
Changes in operating assets and liabilities:
Restricted cash .................................................................
Real estate fund investments ............................................
Accounts and other receivables .......................................
Deferred charges ..............................................................
Other assets ......................................................................
Accounts payable and accrued expenses..........................
Profit sharing payables ....................................................
Deferred income taxes .....................................................
Other liabilities ................................................................
Net cash (used in) provided by operating activities .....................
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of, and additions to, rental properties ...................... $
Change in restricted cash .............................................................
Distributions of capital from unconsolidated joint ventures ........
Cash received from properties in connection with
the formation transactions .......................................................
Purchase of marketable securities ................................................
Proceeds from repayment of loan to management .......................
Investment in unconsolidated joint ventures ................................
Net cash (used in) provided by investing activities ......................
294,624
(75,760)
(69,522)
(21,201)
(9,917)
7,309
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5,824
4,966
2,565
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(107,859) $
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(64,330)
-
-
-
4,115
13,436
(4,724)
(600)
3,510
7,712
19,972
2,701
6,779
33,485
(147)
648
2,272
-
(2,731)
1,000
-
1,042
See notes to combined consolidated financial statements.
82
106,262
-
(6,643)
-
-
-
-
-
-
5,359
(120,599)
-
912
(32,344)
2,183
304,978
307,161
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOW – CONTINUED
The Company
The Predecessor
Period from
Year Ended
November 24, 2014
Period from
January 1, 2014(cid:3)
Year Ended
December 31, 2015 to December 31, 2014 to November 23, 2014 December 31, 2013
1,013,544 $
(927,633)
- $
(1,704,330)
- $
(2,827)
-
(17,635)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes and mortgages payable ............................... $
Repayment of notes and mortgages payable ................................
Acquisition of noncontrolling interest in consolidated joint
ventures........................................................................................
Contributions from noncontrolling interests ................................
Dividends paid to common stockholders and unitholders ............
Distributions to noncontrolling interests ......................................
Settlement of swap liabilities .......................................................
Proceeds from revolving credit facility ........................................
Debt issuance costs ......................................................................
Cash paid for equity interests in the formation transactions ........
Proceeds from the issuance of common stock .............................
Purchase of marketable securities in connection with
the defeasance of notes and mortgages payable ......................
Contribution from Predecessor shareholders ...............................
Distributions to Predecessor shareholders ...................................
Proceeds from loans payable to noncontrolling interests .............
Offering costs ..............................................................................
Net cash (used in) provided by financing activities .....................
(261,464)
167,929
(85,458)
(56,636)
(33,741)
20,000
(18,871)
-
-
-
-
-
-
-
(182,330)
57,843
-
(8,488)
(14,130)
-
(8,599)
(214,949)
2,590,599
(435,774)
-
-
-
-
262,172
272,721
-
(266,028)
-
-
-
-
-
-
23,688
(149,135)
39,075
(23,744)
(106,250)
Net (decrease) increase in cash and cash equivalents ..................
Cash and cash equivalents at beginning of period .......................
Cash and cash equivalents at end of period ................................. $
(294,715)
438,599
143,884 $
386,513
52,086
438,599 $
(255,075)
307,161
52,086 $
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash payments for interest ........................................................... $
Cash payments for income taxes, net of refunds .......................... $
NON-CASH TRANSACTIONS:
Dividends and distributions declared but not yet paid ................. $
Additions to real estate included in accounts payable
and accrued expenses ..............................................................
Change in value of interest rate swaps .........................................
(Purchases) sale of marketable securities .....................................
Write-off of fully amortized and/or depreciated assets ................
Increase (decrease) in assets, liabilities and noncontrolling
interests from the formation transactions:
Real estate, net ...................................................................
Real estate funds ................................................................
Investment in unconsolidated joint ventures ......................
Working capital, net of cash ..............................................
Intangible assets .................................................................
Notes and mortgages payable ............................................
Intangible liabilities ...........................................................
Preferred equity obligation ................................................
Profit sharing compensation payable .................................
Interest rate swap liabilities................................................
Marketable securities transferred in connection with
the defeasance of notes and mortgages payable ......................
Defeasance of notes and mortgages payable ................................
Reduction of equity for deferred offering costs ...........................
Debt assumed from affiliate .........................................................
159,186 $
2,798 $
23,728 $
- $
19,829 $
18,998 $
24,003
2,599
25,067 $
- $
- $
32,009
9,241
(1,481)
1,399
16,598
-
146
-
-
-
7,110
2,735
-
-
-
-
-
-
-
-
-
-
-
-
-
-
7,043,651
(2,045,922)
(18,264)
26,784
689,894
4,261,903
222,985
114,147
(57,296)
223,411
435,774
(420,784)
31,284
-
-
-
-
-
-
-
-
-
-
-
-
-
-
27,299
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
See notes to combined consolidated financial statements.
83
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business
As used in these consolidated and combined financial statements, unless indicated otherwise, all references to “we,” “us,” “our,”
the “Company,” and “Paramount” refer to Paramount Group, Inc. and its consolidated subsidiaries, including Paramount Group
Operating Partnership LP, upon completion of the Formation Transactions (as more fully described below) and the initial public
offering of common stock.
We are a fully-integrated real estate investment trust (“REIT”) focused on owning, operating, managing, acquiring and
redeveloping high-quality, Class A office properties in select central business district submarkets of New York City, Washington, D.C.
and San Francisco. As of December 31, 2015, our portfolio consisted of 12 Class A office properties aggregating approximately 10.4
million square feet.
We were incorporated in Maryland as a corporation on April 14, 2014 to continue the business of our Predecessor, as defined, and
did not have any meaningful operations until the acquisition of substantially all of the assets of our Predecessor and the assets of the
Property Funds, as defined, that it controlled, as well as the interests of unaffiliated third parties in certain properties. Our properties
were acquired through a series of Formation Transactions (the “Formation Transactions”) concurrently with our initial public offering
of 150,650,000 common shares at a public offering price of $17.50 per share on November 24, 2014 (the “Offering”).
We conduct our business through, and substantially all of our interests are held by, Paramount Group Operating Partnership LP, a
Delaware limited partnership (the “Operating Partnership”). We are the sole general partner of, and owned approximately 80.4% of,
the Operating Partnership as of December 31, 2015.
Our Predecessor
Our Predecessor is not a legal entity but a combination of entities under common control as they were entities controlled by
members of the Otto Family that held various assets, including interests in (i) 15 private equity real estate funds controlled by our
Predecessor (which included nine primary funds and six parallel funds) (collectively, the “Funds”) that owned interests in 12
properties, (ii) a wholly-owned property, Waterview, in Rosslyn, Virginia and (iii) three partially owned properties in New York, NY
(See Note 6, Investments in Unconsolidated Joint Ventures).
Below is a summary of the 15 private equity real estate funds that were controlled by our Predecessor prior to the completion of
the Formation Transactions.
The following funds are collectively referred to herein as the “Property Funds”:
(cid:120) Paramount Group Real Estate Fund I, L.P. (“Fund I”)
(cid:120) Paramount Group Real Estate Fund II, L.P. (“Fund II”)
(cid:120) Paramount Group Real Estate Fund III, L.P. (“Fund III”)
(cid:120) Paramount Group Real Estate Fund IV, L.P. (“Fund IV”)
(cid:120) PGREF IV Parallel Fund (Cayman), L.P. (“Fund IV Cayman”)
(cid:120) Paramount Group Real Estate Fund V (CIP), L.P. (“Fund V CIP”)
(cid:120) Paramount Group Real Estate Fund V (Core), L.P. (“Fund V Core”)
(cid:120) PGREF V (Core) Parallel Fund (Cayman), L.P. (“Fund V Cayman”)
(cid:120) Paramount Group Real Estate Fund VII, LP (“Fund VII”)
(cid:120) Paramount Group Real Estate Fund VII-H, LP (“Fund VII-H”)
84
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
The following fund was formed to acquire, develop and manage the residential development project at 75 Howard Street:
(cid:120) Paramount Group Residential Development Fund, LP (“Residential Fund”)
The following funds are collectively referred to herein as the “Alternative Investment Funds”:
(cid:120) Paramount Group Real Estate Special Situations Fund, L.P. (“PGRESS”)
(cid:120) Paramount Group Real Estate Special Situations Fund–H, L.P. (“PGRESS–H”)
(cid:120) Paramount Group Real Estate Special Situations Fund–A, L.P. (“PGRESS–A”)
(cid:120) Paramount Group Real Estate Fund VIII, L.P. (“Fund VIII”)
The Property Funds and Residential Fund owned interests in the following properties:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
1633 Broadway, New York, NY
60 Wall Street, New York, NY
900 Third Avenue, New York, NY
31 West 52nd Street, New York, NY
1301 Avenue of the Americas, New York, NY
(cid:120) One Market Plaza, San Francisco, CA
(cid:120)
(cid:120)
50 Beale Street, San Francisco, CA
75 Howard Street, San Francisco, CA
(cid:120) Liberty Place, Washington, D.C.
(cid:120)
(cid:120)
(cid:120)
1899 Pennsylvania Avenue, Washington, D.C.
2099 Pennsylvania Avenue, Washington, D.C.
425 Eye Street, Washington, D.C.
2.
Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying consolidated and combined financial statements include the accounts of Paramount and its consolidated
subsidiaries, including the Operating Partnership. These consolidated and combined financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America (“GAAP”) which requires us to make
estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could
differ from those estimates. All significant inter-company amounts have been eliminated.
Our Predecessor’s combined financial statements included all the accounts of our Predecessor, including its interests in (i) the
Funds, (ii) Waterview and (iii) the three partially-owned properties. Our Predecessor evaluated each of the Funds pursuant to the
control model of Accounting Standards Codification (“ASC”) 810-20, Consolidation—Control of Partnerships and Similar Entities
and concluded that based on its rights and responsibilities as the sole managing member of the general partner it should consolidate
each of the Funds. With the exception of the Residential Fund, which is carried at historical cost, each of the Funds qualify as
investment companies pursuant to Financial Services—Investment Companies (“ASC 946”); accordingly, the underlying real estate
investments are carried at fair value, which was retained in consolidation by our Predecessor.
85
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
Upon completion of the Offering and the Formation Transactions, we acquired substantially all of the assets of our Predecessor
and all of the assets of the Property Funds that it controlled, other than their interests in 60 Wall Street, 50 Beale Street, and a residual
2.0% interest in One Market Plaza. In addition, as part of the Formation Transactions, we also acquired the interests of certain
unaffiliated third parties in 1633 Broadway, 31 West 52nd Street and 1301 Avenue of the Americas. These transactions were
accounted for as transactions among entities under common control. However, since the assets that we acquired from our Predecessor
are no longer held by funds which qualify for investment company accounting, we account for these assets following the Formation
Transactions using historical cost accounting. As a result, our consolidated financial statements following the Formation Transactions
differ significantly from, and are not comparable with, the historical financial position and results of operations of our Predecessor.
Significant Accounting Policies
Rental Property
Rental property is carried at cost less accumulated depreciation and amortization. Betterments, major renovations and certain
costs directly related to the improvement of rental properties are capitalized. Maintenance and repair expenses are charged to expense
as incurred. Depreciation is recognized on a straight-line basis over estimated useful lives of the assets, which range from 5 to 40
years. Tenant improvements are amortized on a straight-line basis over the lives of the related leases, which approximate the useful
lives of the assets.
Upon the acquisition of real estate, we assess the fair value of acquired assets (including land, buildings and improvements,
identified intangibles, such as acquired above-market leases and acquired in-place leases) and acquired liabilities (such as acquired
below-market leases) and allocate the purchase price based on these assessments. We assess fair value 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 historical operating results, known trends, and market/economic conditions. We record
acquired intangible assets (including acquired above-market leases and acquired in-place leases) and acquired intangible liabilities
(including below-market leases) at their estimated fair value. We amortize acquired above-and below-market leases as a decrease or
increase to rental income, respectively, over the lives of the respective leases. Amortization of acquired in-place leases is included as
a component of depreciation and amortization.
Our properties, including any related intangible assets, are individually reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment exists when the carrying amount
of an asset exceeds the aggregate projected future cash flows over the anticipated holding period on an undiscounted basis. An
impairment loss is measured based on the excess of the property’s carrying amount over its estimated fair value. Impairment analyses
are based on our current plans, intended holding periods and available market information at the time the analyses are prepared. If our
estimates of the projected future cash flows, anticipated holding periods, or market conditions change, our evaluation of impairment
losses may be different and such differences could be material to our consolidated financial statements. The evaluation of anticipated
cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that
could differ materially from actual results. Plans to hold properties over longer periods decrease the likelihood of recording
impairment losses.
Variable Interest Entities and Investments in Unconsolidated Joint Ventures
We consolidate variable interest entities (“VIEs”) in which we are considered to be the primary beneficiary. VIEs are entities in
which the equity investors do not have sufficient equity at risk to finance their endeavors without additional financial support or that
the holders of the equity investment at risk do not have a controlling financial interest. The primary beneficiary is defined by the entity
having both of the following characteristics: (i) the power to direct the activities that, when taken together, most significantly impact
the VIE’s performance, and (ii) the obligation to absorb losses and right to receive the returns from the VIE that would be significant
to the VIE. For joint ventures that are not VIEs, we consolidate entities for which we have significant decision making control over
the joint ventures’ operations. Our judgment with respect to our level of influence or control of an entity involves the consideration of
various factors including the form of our ownership interest, our representation in the entity’s governance, the size of our investment,
estimates of future cash flows, our ability to participate in policy making decisions and the rights of the other investors to participate
in the decision making process and to replace us as manager and/or liquidate the joint venture, if applicable.
86
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
We account for investments under the equity method when the requirements for consolidation are not met, and we have
significant influence over the operations of the investee. Equity method investments are initially recorded at cost and subsequently
adjusted for our share of net income or loss and cash contributions and distributions each period. Investments accounted for under the
equity method are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the
investment may not be recoverable. An impairment loss is measured based on the excess of the carrying amount of an investment over
its estimated fair value. Impairment analyses are based on current plans, intended holding periods and available information at the
time the analyses are prepared.
Investments that do not qualify for consolidation or equity method accounting are accounted for on the cost method.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, demand deposits with financial institutions, and short-term highly liquid
investments with original maturities of three months or less. The majority of our cash and cash equivalents are held at major
commercial banks, which may at times exceed the Federal Deposit Insurance Corporation limit. To date, we have not experienced any
losses on our invested cash.
Restricted Cash
Restricted cash consists of security deposits held on behalf of our tenants and cash escrowed under loan agreements for debt
service, real estate taxes, property insurance and capital improvements and cash restricted in connection with our deferred
compensation plan.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required
payments under the lease agreements. We also maintain an allowance for deferred rent receivable. This receivable arises from
earnings recognized in excess of amounts currently due under the lease agreements. Management exercises judgment in establishing
these allowances and considers payment history and current credit status in developing these estimates.
Deferred Charges
Deferred charges include deferred lease costs and deferred financing costs. Deferred lease costs consist of fees and direct costs
related to successful leasing activities. Such costs are amortized on a straight-line basis over the lives of the related leases as a
component of depreciation and amortization. Deferred financing costs consist of fees and direct costs incurred in obtaining financing.
Such costs are amortized over the terms of the related agreements as a component of interest expense.
Income Taxes
We operate and have been organized in conformity with the requirements for qualification and taxation as a REIT for U.S. federal
income tax purposes. So long as we qualify as a REIT, we generally will not be subject to U.S. federal income tax on our net income
that we distribute currently to our stockholders. In order to maintain our qualification as a REIT, we are required under the Internal
Revenue Code of 1986, as amended, to distribute at least 90% of our taxable income (without regard to the deduction for dividends
paid and excluding net capital gains) 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 U.S. federal income tax on our taxable income at regular corporate income tax rates. Even if we
qualify as a REIT, we may also be subject to certain state, local and franchise taxes. Under certain circumstances, U.S. federal income
and excise taxes may be due on our undistributed taxable income.
87
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
Derivative Instruments and Hedging Activities
We manage our market risk on variable rate debt by entering into interest rate swaps to fix the rate on all or a portion of the debt
for varying periods through maturity. These interest rate swaps are accounted for as derivative instruments and, pursuant to ASC 815,
are recorded on our balance sheet at fair value. Changes in the fair value of interest rate swaps are accounted for based on the hedging
relationship and their designation and qualification as either fair value hedges or cash flow hedges. Changes in the fair value of
interest rate swaps that are not designated as hedges are recognized in earnings. Changes in the fair value of interest rate swaps that
are designated as cash flow hedges are recognized in accumulated other comprehensive income (outside of earnings).
Revenue Recognition
Rental Income
Rental income includes base rents that each tenant pays in accordance with the terms of its respective lease and is reported on a
straight-line basis over the non-cancellable term of the lease, which includes the effects of rent steps and rent abatements under the
leases. We commence rental revenue recognition when the tenant takes possession of the leased space or controls the physical use of
the leased space and the leased space is substantially ready for its intended use. Differences between rental income recognized and
amounts due under the respective lease agreements are recorded as an increase or decrease to “deferred rent receivable.” Rental
income also includes the amortization of acquired above-and below-market leases, net.
Tenant Reimbursement Income
Tenant reimbursement income includes revenue arising from tenant leases which provide for the recovery of all or a portion of the
operating expenses and real estate taxes of the property. This revenue is accrued in the same period as the expenses are incurred.
Fee and Other Income
Fee and other income includes management fees earned pursuant to contractual agreements. This revenue is recognized as the
related services are performed. Fee and other income also includes lease termination.
Segment Reporting
Upon completion of the Offering and Formation Transactions, we acquired substantially all of the assets of our Predecessor and
substantially all of the assets of the Property Funds that it controlled. Our business, following the Formation Transactions, is
comprised of one reportable segment. We have determined that our properties have similar economic characteristics to be aggregated
into one reportable segment (operating, leasing and managing office properties). Our determination was based primarily on our
method of internal reporting. Our Predecessor historically operated an integrated business that consisted of three reportable segments,
(i) Owned Properties, (ii) Managed Funds and (iii) a Management Company. The Owned Properties segment consisted of properties in
which our Predecessor had a direct or indirect ownership interest, other than properties that it owned through its private equity real
estate funds. The Managed Funds segment consisted of the private equity real estate funds. In addition, our Predecessor included a
Management Company that performed property management and asset management services and certain general and administrative
level functions, including legal and accounting, as a separate reportable segment.
88
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
Recently Issued Accounting Literature
In May 2014, the FASB issued an update ("ASU 2014-09") Revenue from Contracts with Customers. ASU 2014-09 establishes a
single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most
of the existing revenue recognition guidance. ASU 2014-09 requires an entity to recognize revenue when it transfers promised goods
or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those
goods or services and also requires certain additional disclosures. ASU 2014-09 is effective for interim and annual reporting periods in
fiscal years that begin after December 15, 2017. We are currently evaluating the impact of the adoption of ASU 2014-09 on our
consolidated financial statements.
In June 2014, the FASB issued an update (“ASU 2014-12”) to ASC Topic 718, Compensation – Stock Compensation. ASU
2014-12 requires an entity to treat performance targets that can be met after the requisite service period of a share based award has
ended, as a performance condition that affects vesting. ASU 2014-12 is effective for interim and annual reporting periods in fiscal
years that begin after December 15, 2015. The adoption of this update on January 1, 2016 will not have a material impact on our
consolidated financial statements.
In February 2015, the FASB issued an update (“ASU 2015-02”) Amendments to the Consolidation Analysis to ASC Topic 810,
Consolidation. ASU 2015-02 modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting
interest entities, eliminates the presumption that a general partner should consolidate a limited partnership and affects the
consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party
relationships. ASU 2015-02 is effective for fiscal years that begin after December 15, 2015. The adoption of ASU 2015-02 on January
1, 2016, will result in the deconsolidation of our Real Estate Fund investments, which qualify as investment companies pursuant to
Financial Services-Investment Companies (“ASC 946”), with the exception of the Residential Fund, which is carried at historical cost.
In April 2015, the FASB issued an update (“ASU 2015-03”) Simplifying the Presentation of Debt Issuance Costs to ASC Topic
835, Interest – Imputation of Interest. ASU 2015-03 requires an entity to present debt issuance costs in the balance sheet as a direct
deduction from the related debt liability rather than as an asset. Amortization of debt issuance costs will continue to be reported as
interest expense. ASU 2015-03 is effective for interim and annual reporting periods in fiscal years that begin after December 15,
2015. In August 2015, the FASB issued an update (“ASU 2015-15”) Interest – Imputation of Interest (Subtopic 835-30):
Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to
SEC Paragraphs Pursuant to Staff Announcement at 18 June 2015 EITF Meeting. ASU 2015-15 clarifies the exclusion of line-of-
credit arrangements from the scope of ASU 2015-03. Therefore, debt issuance costs related to line-of-credit arrangements can be
deferred and presented as an asset that is subsequently amortized over the time of the line-of-credit arrangement, regardless of whether
there are any outstanding borrowings on the line-of-credit arrangement. The adoption of these updates on January 1, 2016 will not
have a material impact on our consolidated financial statements.
In September 2015, the FASB issued an update (“ASU 2015-16”) Simplifying the Accounting for Measurement-Period
Adjustments to ASC Topic 805, Business Combinations. ASU 2015-16 eliminates the requirement to retrospectively account for
adjustments made to provisional amounts recognized in a business combination. ASU 2015-16 is effective for interim and annual
reporting periods in fiscal years that begin after December 15, 2015. The adoption of this update on January 1, 2016 will not have a
material impact on our consolidated financial statements.
3.
Acquisitions
31 West 52nd Street
On October 1, 2015, we acquired the remaining 35.8% equity interest that we did not previously own in 31 West 52nd Street from
our joint venture partner for approximately $230,000,000 in cash and the assumption of $148,000,000 of existing debt. Since we
previously consolidated the results of operations of 31 West 52nd Street into our consolidated financial statements, the acquisition of
the remaining 35.8% was accounted for as an equity transaction in accordance with ASC Topic 810, Consolidations.
89
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
4.
Real Estate Fund Investments
Real estate fund investments are presented at fair value on our consolidated balance sheets and are comprised of (i) Property
Funds and (ii) Alternative Investment Funds.
The Company
Below is a summary of the fair value of the fund investments on our consolidated balance sheets.
(Amounts in thousands)
Balance Sheets
Real Estate Fund Investments:
December 31, 2015
December 31, 2014
As of
Property Funds ............................................................. $
Alternative Investment Funds ......................................
Total .......................................................................... $
248,824 $
167,614
416,438 $
183,216
140,171
323,387
Below is a summary of income from the fund investments on our consolidated statements of income.
(Amounts in thousands)
Income Statements
Investment income ....................................................... $
Investment expenses .....................................................
Net investment income ..............................................
Net realized gains .........................................................
Previously recorded unrealized gains on exited
investments ...................................................................
Net unrealized gains (losses) ........................................
Income from real estate fund investments ............... $
Year Ended
December 31, 2015
Period from
November 24, 2014
to December 31, 2014
13,406 $
1,132
12,274
11,955
(6,584)
20,330
37,975 $
3,334
565
2,769
50
-
(1,407)
1,412
Property Funds
The purpose of the Property Funds is to invest in office buildings and related facilities primarily in New York City and San
Francisco.
On October 29, 2015, Fund VII and Fund VII-H completed the acquisition of 670 Broadway, a 75,945 square foot creative office
building located in Manhattan, for $112,000,000, comprised of $42,000,000 in cash and $70,000,000 of initial mortgage debt.
The following is a summary of the Property Funds, our ownership interests in these Funds and Funds’ ownership interest in the
underlying properties.
% Ownership
60 Wall
Street
As of December 31, 2015
50 Beale
Street
One Market
Plaza
Fund II ......................
Fund III ....................
Fund VII/VII-H ........
Total Property Funds ....
Other Investors .........
Total ...........................
10.0%
3.1%
7.2%
46.3%
16.0%
-
62.3%
37.7%
100.0%
-
2.0%
-
2.0%
98.0% (1)
100.0%
(1)
Includes a 49.0% ownership interest held by us.
90
670
Broadway
-
-
100.0%
100.0%
-
100.0%
-
-
42.8 %
42.8 %
57.2 %
100.0 %
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
Alternative Investment Funds
The purpose of the Alternative Investment Funds is to invest primarily in real estate related debt and preferred equity investments.
As of December 31, 2015, the Alternate Investment Funds had an aggregate of $580,200,000 of committed capital, of which we have
invested $166,560,000.
The following is a summary of our ownership interests in the Alternative Investment Funds and the Funds’ underlying
investments, as of December 31, 2015.
(cid:3)
(Amounts in thousands)
Fund/Investment
(cid:3)(cid:3)(cid:3)(cid:3)
Investment Type
(cid:3)(cid:3)
(cid:3)
%
Ownership
(cid:3)
(cid:3)
(cid:3)(cid:3)
(cid:3)
As of
Interest Rate
Initial Maturity December 31, 2015
December 31, 2014
Fund VIII
26 Broadway (1) ............... (cid:3) Mezzanine Loan
1440 Broadway (2)............ (cid:3) Mezzanine Loan
700 Eighth Avenue (3) ....... (cid:3) Mortgage/Mezzanine Loans
Total Mortgage and Mezzanine Loans ..................................
1.7%
1.7%
1.7%
8.3%
6.4%
6.4%
Jan-2022 $
Oct-2019
Dec-2016
$
46,678
40,619
80,317
167,614
PGRESS Funds
470 Vanderbilt Avenue (4) ... (cid:3) Preferred Equity Investment
2 Herald Square (5) ........... (cid:3) Preferred Equity Investment
One Court Square (6) ......... (cid:3) Preferred Equity Investment
Total Preferred Equity Investments .......................................
$
$
-
-
-
-
$
$
$
$
45,947
-
-
45,947
35,039
18,107
41,078
94,224
Total Alternative Investment Funds .................................................................................................................... $
167,614 $
140,171
(1) The loan is secured by the equity interests in the owner of 26 Broadway, an 836,000 square foot office building, located in
the financial district of Manhattan. The loan has a fixed interest rate and is subordinate to $220,000 of other debt.
(2) On September 30, 2015, Fund VIII closed on a $40,000 mezzanine loan secured by the equity interests in the owner of 1440
Broadway, a 751,546 square foot office and retail property located in Manhattan. The loan bears interest at LIBOR plus 600
bps, and has a one-year extension option and is subordinate to $265,000 of other debt.
(3) On November 24, 2015, Fund VIII closed on a senior mortgage and mezzanine loan aggregating $80,000 secured by 700
Eighth Avenue, a 26,126 square foot retail property located in Manhattan. The loans bear interest at LIBOR plus 600 bps and
have one-year extension options.
(4) Represents a preferred equity investment in a partnership that owns 470 Vanderbilt Avenue, a 650,000 square foot office
building located in Brooklyn, New York. (See Note 5, Preferred Equity Investments for details).
(5) Represents a preferred equity investment in a partnership that owns 2 Herald Square, a 369,000 square foot office and retail
property in Manhattan. (See Note 5, Preferred Equity Investments for details).
(6) On September 1, 2015, PGRESS and PGRESS-H redeemed their preferred equity investment in One Court Square for
$42,475, resulting in a realized gain on the investment of $7,455.
91
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
The Predecessor
Below is a summary of realized and unrealized gains from real estate fund investments on our consolidated statements of income.
(Amounts in thousands)
Income Statements
The Predecessor
Period from
January 1, 2014
to November 23, 2014
Year Ended
December 31, 2013
Net realized gains (losses) on real estate fund investments .................................
Previously recorded unrealized (gains) losses on exited investments .................
Net unrealized gains on real estate fund investments ..........................................
Realized and unrealized gains, net ....................................................................... $
43,309
(10,405 )
96,450
129,354 $
(694)
10,571
322,176
332,053
Asset Management Fees
Our predecessor earned asset management fees from the Funds it managed. Asset management fees and expenses related to Funds
included in the combined consolidated statements of income are eliminated in combination and consolidation. The limited partners’
share of such fees are reflected as a reduction of net income attributable to noncontrolling interests, which results in a corresponding
increase in net income attributable to our Predecessor.
Below is a summary of the asset management fees earned by our Predecessor.
(Amounts in thousands)
Income Statements
The Predecessor
Period from
January 1, 2014
to November 23, 2014
Year Ended
December 31, 2013
Gross asset management fees ..................................................................................... $
Eliminated fees(1) ........................................................................................................
Net asset management fees ......................................................................................... $
23,701 $
(1,078 )
22,623 $
26,180
(1,118)
25,062
(1) Eliminated fees reflect a reduction in asset management fees from the general partner interest in each of the Funds.
92
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarizes the income statements for the period January 1, 2014 to November 23, 2014 and for the year
ended December 31, 2013 for each of the Property Funds’ underlying investments.
(Amounts in thousands)
Statements of Income
Revenues:
Property Funds' Underlying Investments for the Period from January 1, 2014 to November 23, 2014
One
Market
Plaza
1301 Ave
of the
Americas
900
Third
Ave
31 West
52nd St
1899
Penn.
Ave
2099
Penn.
Ave
Liberty
Place
425 Eye
St
1633
Broadway
Rental income ............................... $ 136,422 $ 31,219
Tenant reimbursement income ...... 12,742 3,001
Fee and other income ....................
2,951 1,680
Total revenue .......................... 152,115 35,900
$ 67,453
5,126
3,360
75,939
$104,220
8,252
9,667
122,139
$ 65,314
1,191
3,242
69,747
$
5,823 $ 7,249 $
3,648
1,884
115
50
7,757 11,012
165
6
280
451
$
9,501
879
319
10,699
Expenses:
Building operating ........................ 50,830 14,904
Related party management fees ....
914
Operating ...................................... 53,694 15,818
Depreciation and amortization ...... 10,990 6,085
General and administrative ...........
113
Total expenses ........................ 64,802 22,016
Operating income (loss) ................... 87,313 13,884
2,864
118
21,516
1,244
22,760
23,438
119
46,317
29,622
46,679
1,580
48,259
37,212
167
85,638
36,501
25,119
701
25,820
31,422
4,545
61,787
7,960
3,911
214
4,125
-
66
4,191
3,566
4,674
254
4,928
3,484
58
8,470
2,542
4,147
38
4,185
-
798
4,983
(4,532)
5,148
339
5,487
5,022
71
10,580
119
Unrealized gain on interest rate
swaps ......................................... 25,226 5,759
Interest and debt expense ........... (46,315 ) (13,269) (20,092) (54,436) (48,486)
Unrealized depreciation on
investment in real estate .............
12,042
20,848
8,466
-
-
Net income (loss) before taxes ......... 66,224 6,374
-
Net income (loss) ............................ $ 66,224 $ 6,374
Income tax (expense) benefit .....
-
-
-
17,996
-
$ 17,996
-
(5,893) (19,678)
-
(4,429)
(2,430)
$ (5,893) $ (19,678) $ (2,799 ) $ (1,456 ) $ (9,859) $ (6,859)
(2,772 )
(2,694 )
(105 )
-
(1,509 )
53
(749)
(9,859)
-
-
-
-
(3,488 )
-
(4,051 )
-
(4,578)
-
(4,548)
(Amounts in thousands)
Statements of Income
Revenues:
Property Funds' Underlying Investments for the Year Ended December 31, 2013
One
Market
Plaza
1301 Ave
of the
Americas
1899
Penn. Ave
31 West
52nd St
Liberty
Place
900 Third
Ave
2099
Penn. Ave
1633
Broadway
425 Eye
St
Rental income ............................. $ 130,590 $ 33,601 $ 77,257 $ 97,576 $ 77,265 $
Tenant reimbursement income .... 13,538
1,707
Fee and other income ..................
7,778
2,994
8,421 $ 9,686 $
4,807
2,528
153
82
Total revenue ........................ 147,122 37,369 83,511 109,867 86,750 11,031 14,646
3,036
732
5,100
1,154
9,693
2,598
432 $10,167
4
801
564 10,972
74
58
Expenses:
Building operating ...................... 54,867 16,150 22,905 51,247 29,985
Related party management fees ..
832
Operating .................................... 57,737 17,130 24,200 52,893 30,817
Depreciation and amortization .... 11,187
6,349 22,688 37,075 37,847
General and administrative .........
236
251
Total expenses ...................... 69,175 23,635 47,018 90,183 68,900
Operating income (loss) ................. 77,947 13,734 36,493 19,684 17,850
2,870
1,295
1,646
980
156
215
130
4,286
275
4,561
-
63
4,624
6,407
5,066
330
5,396
4,139
69
9,604
5,042
13
4,531 5,448
354
4,544 5,802
- 5,502
75
4,610 11,379
(407)
(4,046)
66
Unrealized gain on interest rate
swaps ....................................... 34,711
9,985 15,993 21,275 36,378
Interest and debt expense ......... (52,563 ) (14,872) (22,307) (68,540) (55,170)
Unrealized (depreciation)
appreciation on investment in
real estate .................................
-
Net income (loss) before taxes ....... 60,095
-
-
8,847 30,179 (27,581)
-
Net income (loss) .......................... $ 60,095 $ 8,847 $ 30,179 $ (27,581) $
Income tax (expense) benefit ...
-
(942)
-
(942) $
-
-
-
-
-
(3,887 )
-
(4,514 )
427
1,101
(5,285) (5,664)
(2,066 )
454
(45 )
409 $
-
1,965
-
(6,265) (5,644)
528
(54 )
- 2,492
474 $ (6,265) $ (3,152)
93
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
5.
Preferred Equity Investments
On December 16, 2015, we acquired PGRESS-A, which owned a 20% interest in a PGRESS Equity Holdings L.P., for
$12,150,000. PGRESS Equity Holdings L.P. owns certain preferred equity investments that are also owned by PGRESS and
PGRESS-H (together with PGRESS-A, the “PGRESS Funds”). Prior to our acquisition of PGRESS-A, we owned a 5.4% interest in
the underlying investments held by the PGRESS and PGRESS-H Funds, which were consolidated into our consolidated financial
statements. These investments were reflected as a component of “real estate fund investments” on our consolidated balance sheets and
the income from these investments was reflected as a component of “income from real estate fund investments” on our consolidated
statements of income. Subsequent to our acquisition of PGRESS-A, we are required to consolidate PGRESS Equity Holdings L.P.
Accordingly, we reclassified the underlying investments to “preferred equity investments” on our consolidated balance sheets and
income from the investments is now reflected as a component of “interest and other income (loss), net” on our consolidated statements
of income.
The following table is a summary of the preferred equity investments.
(Amounts in thousands)
As of
Preferred Equity Investment
470 Vanderbilt Avenue (1) ............................. (cid:3)
2 Herald Square (2) ......................................... (cid:3)
Total Preferred Equity Investments ................
25.4%
25.4%
10.3%
10.3%
Feb-2019 $
Apr-2017
$
% Ownership Dividend Rate
Initial Maturity December 31, 2015
35,305 $
18,636
53,941 $
December 31, 2014
-
-
-
(1) Represents a $33,750 preferred equity investment in a partnership that owns 470 Vanderbilt Avenue, a 650,000 square foot office
building located in Brooklyn, New York. The preferred equity has a dividend rate of 10.3%, of which 8.0% is being paid in cash
through February 2016 and will increase thereafter to 10.3% through maturity, and the unpaid portion accretes to the balance of
the investment.
(2) Represents a $17,500 preferred equity investment in a partnership that owns 2 Herald Square, a 369,000 square foot office and
retail property in Manhattan. The preferred equity has a dividend rate of 10.3%, of which 7.0% is paid currently and the
remainder accretes to the balance of the investment. The preferred equity investment has two one-year extension options.
94
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
6.
Investments in Unconsolidated Joint Ventures
The following table summarizes our investments in unconsolidated joint ventures as of December 31, 2015 and December 31,
2014.
(Amounts in thousands)
Investments:
% Ownership at
December 31, 2015
December 31, 2015
December 31, 2014
As of
712 Fifth Avenue ....................................................................................
Oder-Center, Germany ...........................................................................
50.0% $
9.5%
$
3,577 $
3,525
$
7,102
1,697
4,052
5,749
The following table summarizes our income from unconsolidated joint ventures for the periods set forth below.
%
Ownership at(cid:3)
December 31, 2015(cid:3)
The Company
Period from
Year Ended
November 24, 2014
The Predecessor
Period from
January 1, 2014(cid:3)
Year Ended
December 31, 2015 to December 31, 2014 to November 23, 2014 December 31, 2013
(Amounts in thousands)
Our share of Net Income
(Loss):
712 Fifth Avenue ...................
Oder-Center, Germany (1) ...... (cid:3)
1325 Avenue of the Americas(cid:3)(cid:3)
900 Third Avenue (2) .............. (cid:3)
50.0 % $
9.5 %
n/a
n/a
$
6,734 $
116
-
-
6,850 $
938 $
-
-
-
938 $
4,141 $
-
100
-
4,241 $
2,612
-
(1,550)
-
1,062
(1) We account for our interest in Oder-Center on a one quarter lag basis.
(2) As of November 23, 2014, and December 31, 2013, our Predecessor’s investment in 900 Third Avenue had a deficit balance
and since our Predecessor had no obligations to fund operating losses, it did not recognize any losses in excess of its
investment balance. All unrecognized losses were aggregated to offset future net income until all unrecognized losses were
utilized. See page 96 for details.
95
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
712 Fifth Avenue
As of December 31, 2015, we own a 50.0% interest in a joint venture that owns 712 Fifth Avenue, which is accounted under the
equity method. The following tables summarize 712 Fifth Avenue’s financial information as of the dates of and for the periods set
forth below.
(Amounts in thousands)
Balance Sheets
Rental property, net ............................................ $
Other assets.........................................................
Total assets ..................................................... $
As of
December 31, 2015 December 31, 2014
221,827
46,126
267,953
214,139 $
42,255
256,394 $
Notes and mortgages payable ............................. $
Other liabilities ...................................................
Total liabilities .................................................
Equity (1) .............................................................
Total liabilities and equity............................. $
246,500 $
15,000
261,500
(5,106)
256,394 $
246,500
30,321
276,821
(8,868 )
267,953
(1) The carrying amount of our investment in 712 Fifth Avenue is greater than our share of 712 Fifth Avenue’s equity by
approximately $6,131. This basis difference resulted from distributions in excess of the equity in net earnings of 712 Fifth
Avenue.
(Amounts in thousands)
Income Statements
The Company
The Predecessor
Period from
Period from
Year Ended
November 24, 2014
January 1, 2014
Year Ended
December 31, 2015 to December 31, 2014 to November 23, 2014 December 31, 2013
Rental income .................................................. $
Tenant reimbursement income ........................
Fee and other income .......................................
Total revenue ................................................
Operating ......................................................... (cid:3)
Depreciation and amortization .........................
General and administrative ..............................
Total expenses...............................................
Operating income ............................................
Unrealized gain on interest rate swaps ............
Interest and debt expense .................................
Net income ................................................... $
49,382 $
4,758
1,235
55,375
22,956
11,764
-
34,720
20,655
4,223
(11,410)
13,468 $
5,118 $
607
232
5,957
2,586
1,209
32
3,827
2,130
1,285
(1,538)
1,877 $
41,710 $
4,282
1,274
47,266
20,826
10,127
182
31,135
16,131
5,249
(13,098 )
8,282 $
41,166
4,311
1,785
47,262
22,306
10,009
194
32,509
14,753
10,031
(14,517)
10,267
96
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
Oder-Center
As of December 31, 2015, we own a 9.5% interest in a joint venture that owns Oder-Center, a shopping center located in
Brandenburg, Germany. We account for our interest in Oder-Center on a one quarter lag basis. The following tables summarize
Oder-Center’s financial information as of the dates and for the periods set forth below.
(Amounts in thousands)
Balance Sheet
As of
September 30, 2015
Rental property, net .................................................................. $
Other assets...............................................................................
Total assets ........................................................................... $
Notes and mortgages payable ................................................... $
Other liabilities .........................................................................
Total liabilities .......................................................................
Equity .......................................................................................
Total liabilities and equity................................................... $
6,626
1,228
7,854
24,143
245
24,388
(16,534 )
7,854
(Amounts in thousands)
Income Statement
Twelve Months Ended
September 30, 2015
Rental income ........................................................................... $
Fee and other income................................................................
Total revenue .........................................................................
Operating ..................................................................................
Depreciation and amortization..................................................
Total expenses .......................................................................
Operating income .....................................................................
Interest and debt expense ..........................................................
Income tax expense ..................................................................
Net income ............................................................................ $
4,458
60
4,518
625
401
1,026
3,492
(1,186 )
(21 )
2,285
97
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
1325 Avenue of the Americas
Prior to the completion of the Offering and the Formation Transactions, our Predecessor owned a 50.0% interest in a joint venture
that owned 1325 Avenue of the Americas, which was accounted for under the equity method. The remaining 50.0% interest was held
by a third-party joint venture partner. As part of the Formation Transactions, we acquired the 50.0% interest held by our joint venture
partner for $130,381,000 payable in shares of our common stock. The purchase price took into account certain tax benefits to our joint
venture partner. The transaction was accounted for as a step acquisition in which we were required to re-measure our existing 50.0%
ownership interest at fair value. As a result of the acquisition, we own 100.0% of the property and began consolidating the accounts
of the property into our consolidated financial statements from the date of acquisition. In connection therewith, we recognized a
$239,716,000 gain in the period from November 24, 2014 to December 31, 2014, comprised of (i) $175,917,000 representing the
excess of the fair value of the property over the carrying amount of our investment in the property and (ii) $63,799,000 representing a
purchase gain.
The following tables summarize 1325 Avenue of the Americas’ financial information for as of the dates and for the periods set
forth below.
(Amounts in thousands)
Balance Sheet
The Predecessor(cid:3)
As of December 31, 2013
Rental property, net ................................................................. $
Other assets..............................................................................
Total assets .......................................................................... $
Notes and mortgages payable .................................................. $
Other liabilities ........................................................................
Total liabilities ......................................................................
Equity ......................................................................................
Total liabilities and equity.................................................. $
209,455
56,479
265,934
220,000
5,450
225,450
40,484
265,934
The Predecessor
(Amounts in thousands)
Income Statements
Period from
January 1, 2014
to November 23, 2014
Year Ended
December 31, 2013
33,397
5,186
1,203
39,786
33,693 $
4,629
1,472
39,794
21,381
7,959
215
29,555
10,239
(10,039)
200 $
23,667
7,830
238
31,735
8,051
(11,150 )
(3,099 )
Rental income ................................................... $
Tenant reimbursement income .........................
Fee and other income........................................
Total revenue .................................................
Operating ..........................................................
Depreciation and amortization..........................
General and administrative ...............................
Total expenses ...............................................
Operating income .............................................
Interest and debt expense ..................................
Net income (loss) .......................................... $
98
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
900 Third Avenue
Prior to the completion of the Offering and the Formation Transactions, our Predecessor owned a direct 11.8% interest in the
property, which was accounted for under the equity method. The remaining 88.2% interest was held by the Property Funds that were
controlled by our Predecessor and was consolidated and accounted for at fair value using investment company accounting. As a part of
the Formation Transactions, we acquired 100% of the property. Accordingly, we no longer account for the 11.8% interest under the
equity method and began consolidating the accounts of the property into our consolidated financial statements from the date of
acquisition.
The following table summarizes 900 Third Avenue’s financial information for as of the dates and for the periods set forth below.
(Amounts in thousands)
Balance Sheet
Rental property, net ............................................................................................ $
Other assets ........................................................................................................
Total assets ..................................................................................................... $
The Predecessor
As of December 31, 2013
135,886
35,288
171,174
Notes and mortgages payable ............................................................................. $
Other liabilities ...................................................................................................
Total liabilities .................................................................................................
Equity .................................................................................................................
Total liabilities and equity ............................................................................ $
274,337
30,797
305,134
(133,960)
171,174
(Amounts in thousands)
Income Statements
The Predecessor
Period from
January 1, 2014
Year Ended
to November 23, 2014 December 31, 2013
Rental income .......................................................................... $
Tenant reimbursement income .................................................
Fee and other income ...............................................................
Total revenue .........................................................................
Operating ..................................................................................
Depreciation and amortization .................................................
General and administrative .......................................................
Total expenses .......................................................................
Operating income .....................................................................
Unrealized gain on interest rate swaps .....................................
Interest and debt expense .........................................................
Net income ............................................................................ $
32,269 $
3,001
630
35,900
15,818
6,085
113
22,016
13,884
5,759
(13,269 )
6,374 $
33,601
3,036
732
37,369
17,130
6,349
156
23,635
13,734
9,985
(14,872)
8,847
99
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
7.
Intangible Assets and Liabilities
The following summarizes our identified assets (primarily acquired above-market leases and acquired in-place leases) and
intangible liabilities (primarily acquired below-market leases) as of December 31, 2015 and December 31, 2014.
(Amounts in thousands)
Intangible assets:
December 31, 2015
December 31, 2014
As of
Gross amount ................................................... $
Accumulated amortization ...............................
$
Intangible liabilities:
Gross amount ................................................... $
Accumulated amortization ...............................
$
655,194 $
(143,987)
511,207 $
221,672 $
(41,931)
179,741 $
689,894
(20,509 )
669,385
222,985
(3,757 )
219,228
Amortization of acquired below-market leases, net of acquired above-market leases resulted in an increase to rental income of
$9,917,000 and $467,000 for the year ended December 31, 2015 and for the period from November 24, 2014 to December 31, 2014,
respectively. Estimated annual amortization of acquired below-market leases, net of acquired above-market leases, for each of the five
succeeding years commencing January 1, 2016 is as follows:
(Amounts in thousands)
2016.............................................................................................. $
2017..............................................................................................
2018..............................................................................................
2019..............................................................................................
2020..............................................................................................
20,229
6,738
8,646
7,965
6,590
Amortization of acquired in-place leases (a component of depreciation and amortization expense) was $128,603,000 and
$17,260,000 for the year ended December 31, 2015 and for the period from November 24, 2014 to December 31, 2014. Estimated
annual amortization of acquired in-place leases for each of the five succeeding years commencing January 1, 2016 is as follows:
(Amounts in thousands)
2016.............................................................................................. $
2017..............................................................................................
2018..............................................................................................
2019..............................................................................................
2020..............................................................................................
87,289
55,417
49,071
44,458
38,944
100
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
8.
Debt
On December 1, 2015, we completed a $1.0 billion refinancing of 1633 Broadway, a 2.6 million square foot, office building
located on Broadway between 50th and 51st Streets in Manhattan. The new seven-year loan is interest only at LIBOR plus 175 basis
points and can be increased at our option, by $250,000,000 to $1.25 billion, until December 1, 2018, if certain performance hurdles
relating to the property are satisfied. The net proceeds from the refinancing were used to repay the existing $926,260,000 loan and
fund $42,011,000 of costs, primarily for swap breakage. The existing loan was scheduled to mature in December 2016 and had a
weighted average interest rate of 5.35%.
The following is a summary of our outstanding debt.
Maturity
Date
Fixed/Variable
Rate
Interest Rate at
December 31, 2015
December 31, 2015
December 31, 2014
Balance at
(Amounts in thousands)
Notes and mortgages payable
1633 Broadway
900 Third Avenue
31 West 52nd Street
Fixed (1)
Dec-2022
Dec-2022 Variable
Fixed (1)
Nov-2017
Nov-2017 Variable
Fixed (1)
Dec-2017
Dec-2017 Variable
One Market Plaza (49.0% interest) ... Dec-2019
Waterview......................................... June-2017
1899 Pennsylvania Avenue............... Nov-2020
Liberty Place ..................................... June-2018
Fixed (1)
Fixed
Fixed
Fixed
Total Notes and mortgages payable ....
$1.0 Billion Revolving Credit Facility
($200,000 reserved for
outstanding letters of credit) .............. Nov-2018 Variable
3.54% $
2.15%
3.52%
5.98%
1.69%
4.22%
6.04%
1.79%
4.23%
6.14%
5.76%
4.88%
4.50%
4.68% $
1,000,000 $
13,544
1,013,544
162,000
112,337
274,337
237,600
175,890
413,490
857,037
210,000
89,116
84,000
2,941,524 $
772,100
154,160
926,260
255,000
19,337
274,337
337,500
75,990
413,490
853,711
210,000
90,489
84,000
2,852,287
1.54% $
20,000 $
-
(1) Represents loans with variable interest rates that have been fixed by interest rate swaps. (See Note 9, Derivative Instruments
and Hedging Activities).
As of December 31, 2015, principal repayments required for the next five years and thereafter in connection with our mortgages
and notes payable and revolving credit facility are as follows.
(Amounts in thousands)
2016.............................................................................................. $
2017..............................................................................................
2018..............................................................................................
2019..............................................................................................
2020..............................................................................................
Thereafter .....................................................................................
1,441
899,340
105,588
858,705
82,906
1,013,544
101
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
9.
Derivative Instruments and Hedging Activities
We manage our market risk on variable rate debt by entering into interest rate swaps to fix the rate on all or a portion of the debt
for varying periods through maturity. These interest rate swaps are accounted for as derivative instruments and, pursuant to ASC 815,
are recorded on our balance sheet at fair value. Changes in the fair value of interest rate swaps are accounted for based on the hedging
relationship and their designation and qualification as either fair value hedges or cash flow hedges.
Interest Rate Swaps – Non-designated Hedges
As of December 31, 2015, we had 14 interest rate swaps with an aggregate notional amount of $1.2 billion that were not
designated as hedges. Changes in the fair value of interest rate swaps that are not designated as hedges are recognized in earnings. In
the year ended December 31, 2015 and for the period from November 24, 2014 to December 31, 2014, we recognized unrealized gain
of $75,760,000 and $15,084,000, respectively, from the changes in the fair value of these interest rate swaps. The table below
provides additional details on our interest rate swaps that are not designated as hedges.
Property
(Amounts in thousands)
Notional
Amount
Effective Date
Maturity Date
Strike
Rate
Fair Value as of
December 31, 2015
December 31, 2014
One Market Plaza .. $
31 W 52nd Street ...
900 Third Avenue ..
1633 Broadway (1) ..
840,000 Aug-2007 to Aug-2012
Dec-2007
237,600
Nov-2007
162,000
n/a
-
Aug-2017
Dec-2017
Nov-2017
n/a
5.02% $
4.79%
4.78%
n/a
Total interest rate swap liabilities related to non-designated hedges...............................
$
55,404 $
17,661
11,630
-
84,695 $
86,099
28,748
19,158
60,191
194,196
(1) Terminated in connection with the refinancing of 1633 Broadway.
Interest Rate Swaps – Designated as Cash Flow Hedges
On September 16, 2015, we entered into three interest rate swaps with an aggregate notional amount of $1.0 billion on 1633
Broadway. These interest rate swaps are designated as cash flow hedges. Changes in the fair value of interest rate swaps that are
designated as cash flow hedges are recognized in accumulated other comprehensive income (outside of earnings). On November 25,
2015, we entered into a forward starting interest rate swap with an aggregate notional amount of $400,000,000 to extend the maturity
of one of the three swaps that were entered on September 16, 2015 for an additional one year period. In the year ended December 31,
2015, we recognized other comprehensive losses of $9,241,000 from the changes in the fair value of these interest rate swaps. The
table below provides additional details on our interest rate swaps that are designated as cash flow hedges.
Property
(Amounts in thousands)
Notional
Amount
Effective Date
Maturity Date
Strike
Rate
Fair Value as of
December 31, 2015
December 31, 2014
1633 Broadway .... $ 1,000,000
1633 Broadway .... $
400,000
Dec 2015
Dec-2020
Dec 2020 to Dec-2022
Dec-2021
Total interest rate swap liabilities related to cash flow hedges........................................
1.79% $
2.35%
$
9,204 $
37
9,241 $
-
-
-
102
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
10. Accumulated Other Comprehensive (Loss) Income (“AOCI”)
The following table sets forth the changes in accumulated other comprehensive (loss) income by component.
(Amounts in thousands)
For the Year Ended December 31, 2015
Balance as of December 31, 2014 ....................... $
OCI before reclassifications (1) .................... (cid:3)
Amounts reclassified from AOCI ...............
Net current period OCI .......................................
Balance as of December 31, 2015 ....................... $
Total
Pro rata share of OCI of
unconsolidated joint ventures
Change in value of
interest rate swaps
- $
(7,843)
-
(7,843)
(7,843) $
- $
(412 )
-
(412 )
(412 ) $
-
(7,431)
-
(7,431)
(7,431)
(1) Net of amounts attributable to the noncontrolling interests in the Operating Partnership.
11. Noncontrolling Interests
Consolidated Joint Ventures and Funds
Noncontrolling interests in consolidated joint ventures and funds consists of (i) equity interests held by third parties in properties
that are consolidated into our financial results because we exercise control over the entities that own such properties and (ii) equity
interests held by third parties in funds that are consolidated into our financial results because we are the sole general partner of such
Funds. As of December 31, 2015 and December 31, 2014, noncontrolling interests in consolidated joint ventures and funds on our
consolidated balance sheets aggregated $651,486,000 and $685,888,000, respectively.
Operating Partnership
Noncontrolling interests in the Operating Partnership represents common units of the Operating Partnership that are held by third
parties, including management and units issued to management under equity incentive plans. Common units of the Operating
Partnership may be tendered for redemption to the Operating Partnership for cash. We, at our option, may assume that obligation and
pay the holder either cash or common shares on a one-for-one basis. Since the number of common shares outstanding is equal to the
number of common units owned by us, the redemption value of each common unit is equal to the market value of each common share
and distributions paid to each common unitholder is equivalent to dividends paid to common stockholders. As of December 31, 2015,
noncontrolling interests in the Operating Partnership on our consolidated balance sheets had a carrying amount of $898,047,000 and a
redemption value of $935,048,000.
103
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
12. Fair Value Measurements
ASC 820, Fair Value Measurement and Disclosures, defines fair value and establishes a framework for measuring fair
value. The objective of fair value is to determine the price that would be received upon the sale of an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date (the exit price). ASC 820 establishes a fair
value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels: Level 1 – quoted
prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities; Level 2 – observable prices
that are based on inputs not quoted in active markets, but corroborated by market data; and Level 3 – unobservable inputs that are used
when little or no market data is available. The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to
Level 3 inputs. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the
use of unobservable inputs to the extent possible, as well as consider counterparty credit risk in our assessment of fair
value. Considerable judgment is necessary to interpret Level 2 and 3 inputs in determining the fair value of our financial and non-
financial assets and liabilities. Accordingly, our fair value estimates, which are made at the end of each reporting period, may be
different than the amounts that may ultimately be realized upon sale or disposition of these assets.
Financial Assets and Liabilities measured at Fair Value
Financial assets and liabilities that are measured at fair value on our consolidated balance sheets consist of (i) real estate fund
investments, (ii) marketable securities (which represent the assets in our deferred compensation plan for which there is a
corresponding liability on our consolidated balance sheets) and (iii) interest rate swaps. The table below aggregates the fair values of
these financial assets and liabilities at December 31, 2015 and December 31, 2014, based on their levels in the fair value hierarchy.
(cid:3)
(Amounts in thousands)
Real estate fund investments:
Total
As of December 31, 2015
Level 1
Level 2
Level 3
Investments in Property Funds ............................... $
Investments in Alternative Investment Funds ........
Total real estate fund investments ...............................
Marketable securities ...................................................
Total assets ............................................................ $
248,824 $
167,614
416,438
21,521
437,959 $
- $
-
21,521
21,521
$
- $
-
-
- $
248,824
167,614
416,438
-
416,438
Interest rate swap liabilities ......................................... $
Total liabilities ...................................................... $
93,936
$
93,936
-
$
-
93,936
93,936 $
-
-
(cid:3)(cid:3)
(Amounts in thousands)
Real estate fund investments:
Total
Level 1
Level 2
Level 3
As of December 31, 2014
Investments in Property Funds ................................ $
Investments in Alternative Investment Funds .........
Total real estate fund investments ................................
Marketable securities ....................................................
Total assets ............................................................. $
Interest rate swap liabilities .......................................... $
Total liabilities ....................................................... $
183,216 $
140,171
323,387
20,159
$
343,546
194,196
$
194,196
- $
-
20,159
$
20,159
- $
-
-
$
-
- $
$
-
194,196
$
194,196
183,216
140,171
323,387
-
323,387
-
-
104
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
Property Funds
At December 31, 2015, the Property Funds had four investments. These investments are classified as Level 3. We obtain third
party appraisals at least annually. We use a discounted cash flow valuation technique to estimate the fair value of each of these
investments, which is updated quarterly by personnel responsible for the management of each investment and reviewed by senior
management at each reporting period. The discounted cash flow valuation technique requires us to estimate cash flows for each
investment over the anticipated holding period, which currently ranges from 1.0 to 10.0 years. Cash flows are derived from property
rental revenue (base rents plus reimbursements) less operating expenses, real estate taxes and capital and other costs, plus projected
sales proceeds in the year of exit. Property rental revenue is based on leases currently in place and our estimates for future leasing
activity, which are based on current market rents for similar space. Similarly, estimated real estate taxes and operating expenses are
based on amounts incurred in the current period plus a projected growth factor for future periods. Anticipated sales proceeds at the end
of an investment’s expected holding period are determined based on the net cash flow of the investment in the year of exit, divided by
a terminal capitalization rate, less estimated selling costs. The fair value of each property is calculated by discounting future cash
flows (including anticipated sales proceeds), using an appropriate discount rate. The fair value of the investment is calculated by
subtracting property level debt, if any, from the fair value of the property.
Significant unobservable inputs used in determining the fair value of each investment include capitalization rates and discount
rates. These rates are based on, among other factors, location and type of property. Significant unobservable quantitative inputs in the
table below were utilized in determining the fair value of the Property Fund investments at December 31, 2015 and 2014.
As of December 31, 2015
As of December 31, 2014
Unobservable Quantitative Input
Discount rates .................................................................. 7.00% - 7.50%
Terminal capitalization rates ........................................... 5.00% - 6.00%
Range
Weighted average
(based on fair
value of
investments)
7.18%
5.47%
Weighted average
(based on fair
value of
investments)
6.83%
5.72%
Range
6.50%-7.25%
5.50% - 6.00%
The above inputs are subject to change based on changes in economic and market conditions and/or changes in use or timing of
exit. Changes in discount rates and terminal capitalization rates result in increases, or decreases, in the fair values of these investments.
The discount rates encompass, among other things, uncertainties in the valuation models with respect to terminal capitalization rates
and the amount and timing of cash flows. Therefore, a change in the fair value of these investments resulting from a change in the
terminal capitalization rate may be partially offset by a change in the discount rate. Significant increases (decreases) in any of these
inputs in isolation would result in a significantly lower (higher) fair value, respectively.
Alternative Investment Funds
At December 31, 2015, the investments in the Alternative Investment Funds were comprised of mezzanine loans and senior
mortgage loans. These investments are classified as Level 3. Estimates of the fair value of these instruments are determined by the
standard practice of modeling the contractual cash flows required and discounting it back to its present value at the appropriate risk
adjusted interest rate. The balances are updated quarterly by a third party and reviewed by senior management at each reporting period.
Significant unobservable inputs used in determining the fair value of these investments include preferred returns and credit
spreads. Significant increases (decreases) in any of these inputs in isolation would result in a significantly lower (higher) fair value,
respectively. Significant unobservable quantitative inputs in the table below were utilized in determining the fair value of the
investments in the Alternative Investment Funds at December 31, 2015 and 2014.
As of December 31, 2015
As of December 31, 2014
Unobservable Quantitative Input
Preferred return ................................................ 7.32% - 14.02%
Credit spread ....................................................
2.34%
Range
Weighted average
(based on fair value
of investments)
9.51%
2.34%
Range
8.50% - 14.00%
n/a
Weighted average
(based on fair value
of investments)
11.07%
n/a
105
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
The table below summarizes the changes in the fair value of Real Estate Fund Investments that are classified as Level 3, for the
years ended December 31, 2015 and 2014.
Real Estate Fund Investments
for the Year Ended December 31,
(Amounts in thousands)
Beginning balance ............................................................... $
Purchases / Additions ..........................................................
Sales / Transfer of assets .....................................................
Net realized gains ................................................................
Previously recorded unrealized gains on exited
investments .........................................................................
Net unrealized gains ............................................................
Ending Balance ................................................................. $
2015
323,387 $
170,218
(98,368)
7,455
(6,584)
20,330
416,438 $
2014
2,158,889
258,677
(2,222,176 )
32,954
-
95,043
323,387
Interest Rate Swaps
Interest rate swaps are valued by a third-party specialist. The valuation of these interest rate swaps is determined using widely
accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis
reflects the contractual terms of the interest rate swaps and uses observable market-based inputs, including interest rate curves and
implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the
discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable
cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market
interest rate curves. Interest rate swaps are classified as Level 2.
Financial Assets and Liabilities Not Measured at Fair Value
Financial assets not measured at fair value on our consolidated balance sheets consists of cash equivalents, and are classified as
Level 1 as their carrying amount approximates their fair value, due to their short-term nature. Financial liabilities not measured at fair
value include notes and mortgages payable and revolving credit facility. Estimates of the fair value of these instruments are
determined by the standard practice of modeling the contractual cash flows required under the instrument and discounting them back
to their present value at the appropriate current risk adjusted interest rate, which is provided by a third-party specialist. For floating
rate debt, we use forward rates derived from observable market yield curves to project the expected cash flows we would be required
to make under the instrument. These instruments are classified as Level 2.
The following is a summary of the carrying amounts and fair value of these financial instruments as of December 31, 2015 and
2014.
(Amounts in thousands)
Carrying Amount
Fair Value
Carrying Amount
Fair Value
Cash equivalents ............................................. $
Total Assets ................................................... $
118,561 $
118,561 $
118,561 $
118,561 $
401,215 $
401,215 $
401,215
401,215
As of December 31, 2015
As of December 31, 2014
(Amounts in thousands)
Carrying Amount
Fair Value
Carrying Amount
Fair Value
Notes and mortgages payable ......................... $
Revolving credit facility .................................
Total Liabilities ............................................. $
2,941,524 $
20,000
2,961,524 $
2,907,242 $
20,723
2,927,965 $
2,852,287 $
-
2,852,287 $
2,796,842
-
2,796,842
As of December 31, 2015
As of December 31, 2014
106
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
13. Leases
We lease office, retail and storage space to tenants under operating leases. These leases provide for the payment of fixed
minimum rents over the terms of the respective lease and generally require tenants to reimburse us for operating costs and real estate
taxes above their base year costs.
The following is a schedule of future minimum rents under non-cancelable operating leases as of December 31, 2015.
(Amounts in thousands)
2016........................................................................... $
2017...........................................................................
2018...........................................................................
2019...........................................................................
2020...........................................................................
Thereafter ..................................................................
Total ......................................................................... $
486,384
515,160
515,559
502,487
479,075
3,112,430
5,611,095
14. Fee and Other Income
The following table sets forth the details of our fee and other income.
(Amounts in thousands)
Fee income
The Company
The Predecessor
Year Ended
Period from
November 24, 2014
Period from
January 1, 2014
Year Ended
December 31, 2015 to December 31, 2014 to November 23, 2014 December 31, 2013
Property management fees ...................... $
Acquisition and disposition fees .............
Construction fees ....................................
Other fees ................................................
Total fee income (1) ....................................... (cid:3)
Other income (2) ............................................ (cid:3)
Total fee and other income ........................ $
(cid:3)(cid:3)(cid:3)
(cid:3)(cid:3)
(cid:3)
5,763 $
1,985
216
2,284
10,248
14,745
24,993 $
587 $
510
58
21
1,176
1,629
2,805 $
(cid:3)
(cid:3)
15,599 $
25,038
5,718
2,743
49,098
-
49,098 $
(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)
15,641
2,785
6,937
1,063
26,426
-
26,426
(cid:3)
(1) Includes $2,308 and $222 of fee income for the year ended December 31, 2015 and for the period from November 24,
2014 to December 31, 2014, pursuant to management agreements with our joint venture partner at 712 Fifth Avenue.
(2) Other income is primarily comprised of (i) tenant payments for items such as after hour heating and cooling, freight
elevator services and similar expenses and (ii) lease termination income.
15.
Interest and Other Income (Loss), net
The following table sets forth the details of interest and other income (loss), net.
The Company
Period from
Year Ended
November 24, 2014
The Predecessor
Period from
January 1, 2014(cid:3)
(cid:3)
Year Ended
December 31, 2015 to December 31, 2014 to November 23, 2014(cid:3)(cid:3) December 31, 2013
(Amounts in thousands)
Mark-to-market of investments in our deferred(cid:3)
compensation plans (1) .......................................... $
Interest and other income ........................................
Total interest and other income (loss) ................. $
197 $
674
871 $
(321) $
142
(179) $
1,706 $
773
2,479 $
5,532
3,875
9,407
(1) The change resulting from the mark-to-market of the deferred compensation plan assets is entirely offset by the change in the
deferred compensation plan liabilities, which is included in general and administrative expense.
107
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
16.
Interest and Debt Expense
The following table sets forth the details of interest and debt expense:
The Company
The Predecessor
(Amounts in thousands)
Interest and debt expense .................................... $
Amortization of deferred financing costs ............
Total interest and debt expense ....................... $
165,801 $
2,565
168,366 $
Year Ended
December 31, 2015
Period from
November 24, 2014
to December 31, 2014
Period from
January 1, 2014
Year Ended
43,503 (1)$
240
43,743 $
to November 23, 2014 December 31, 2013
29,373
434
29,807
28,196 $
389
28,585 $
(1)
Includes $25,717 of defeasance and debt breakage costs from the repayment of debt that was assumed in connection with
the Formation Transactions.
17. Formation Related Costs
The following table sets forth the details of formation related costs in connection with our initial public offering.
(Amounts in thousands)
Founders Grants ......................................................... $
Transfer taxes .............................................................
Accounting, legal and other professional fees ...........
Total formation related costs .................................. $
The Company
Year Ended
December 31, 2015
Period from
November 24, 2014
to December 31, 2014
71,000
$
51,306
21,131
143,437
-
-
-
- $
18.
Incentive Compensation
Stock Based Compensation
In November 2014, we adopted our 2014 Equity Incentive Plan (the “Plan”), under which we expect to grant future cash and
equity incentive awards to our executive officers, non-employee directors, eligible employees and other key persons in order to attract,
motivate and retain the talent for which we compete. Under the Plan, awards may be granted up to a maximum of 17,142,857 shares,
if all awards granted are “full value awards,” as defined, and up to 34,285,714 shares, if all of the awards granted are “not full value
awards,” as defined. “Full value awards” are awards such as restricted stock or long-term incentive plan (“LTIP”) units that do not
require the payment of an exercise price. “Not full value awards” are awards such as stock options or stock appreciation rights that
require the payment of an exercise price. As of December 31, 2015, we have 14,384,791 shares available for future grants under the
Plan, if all awards granted are full value awards, as defined in the 2014 Equity Incentive Plan.
We account for all stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation. Stock based
compensation expense for the year ended December 31, 2015 and for the period from November 24, 2014 to December 31, 2014 was
$7,000,000 and $391,000, respectively. The year ended December 31, 2015 includes $1,861,000 of expense related to the acceleration
of vesting of the stock awards in connection with a separation agreement and release.
108
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
Stock Options
We grant certain of our executive officers and other employees stock options which vest over five years and expire 10 years from
the date of grant. Compensation expense related to stock option awards is recognized on a straight-line basis over the vesting period.
For the year ended December 31, 2015 and for the period from November 24, 2014 to December 31, 2014, we recognized $1,241,000
and $79,000, respectively, of compensation expense related to stock options. The year ended December 31, 2015 includes $294,000 of
expense related to the acceleration of vesting of stock options in connection with a separation agreement and release. As of December
31, 2015, there was $4,159,000 of total unrecognized compensation cost related to unvested stock options, which is expected to be
recognized over a weighted-average period of 4.0 years. Below is a summary of our stock option activity for year ended December 31,
2015.
Outstanding at December 31, 2014 ................
Granted ...........................................................
Exercised ........................................................
Cancelled or expired .......................................
Outstanding at December 31, 2015 ................
Options vested and expected to vest at
December 31, 2015......................................
Options exercisable at December 31, 2015 ....
Weighted-Average
Exercise Price
Weighted-Average
Remaining
Contractual Term
(in years)
Aggregate
Intrinsic
Value
Shares
1,489,500 $
200,000
(200)
(64,850)
1,624,450 $
(cid:3)
17.50
19.08
17.50
17.50
17.69
8.9 $
854,670
1,524,250 $
368,250 $
17.69
17.50
8.9 $
8.9 $
803,000
221,000
The fair value of stock options granted in the years ended December 31, 2015 and December 31, 2014 was $4.44 and $3.39 per
stock option, respectively. The fair value of the option is estimated on the date of grant using an option-pricing model with the
following weighted-average assumptions for grants for the year ended December 31, 2015 and for the period from November 24, 2014
to December 31, 2014.
Expected volatility ...............................................................................
Expected life ........................................................................................
Risk free interest rate ...........................................................................
Expected dividend yield ......................................................................
December 31, 2015
27.0%
6.5 years
1.8%
2.0%
December 31, 2014
23.0%
6.5 years
2.1%
2.3%
LTIP Units
We grant our executive officers, non-employee directors and other employees LTIP units which vest over five years and are
subject to a taxable book-up event, as defined. Compensation expense related to LTIP unit awards is recognized on a straight-line
basis over the vesting period. For the year ended December 31, 2015 and for the period from November 24, 2014 to December 31,
2014, we recognized $4,507,000 and $296,000, respectively, of compensation expense related to LTIP units. The year ended
December 31, 2015 includes $1,567,000 of expense related to the acceleration of vesting of LTIP unit awards in connection with a
separation agreement and release. As of December 31, 2015, there was $10,486,000 of total unrecognized compensation cost related
to unvested LTIP units, which is expected to be recognized over a weighted-average period of 3.8 years. Below is a summary of LTIP
unit activity under the Plan for the year ended December 31, 2015.
Unvested at December 31, 2014 ...............................................................................
Granted ......................................................................................................................
Vested .......................................................................................................................
Cancelled or expired .................................................................................................
Unvested at December 31, 2015 ...............................................................................
Units
885,713 $
116,095
(286,849 )
-
714,959 $
Weighted-Average
Grant-Date Fair
Value
(cid:3)
16.60
17.93
16.54
-
16.84
The fair value of LTIP units granted for the year ended December 31, 2015 and for the period from November 24, 2014 to
December 31, 2014 was $2,081,000 and $14,700,000, respectively.
109
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
Restricted Stock
We grant shares of restricted stock to a non-employee director. The restricted stock vests at each annual meeting and is being
recognized into expense on a straight-line basis over the vesting period. For the year ended December 31, 2015 and for the period
from November 24, 2014 to December 31, 2014, we recognized $142,000 and $16,000, respectively, of compensation expense related
to restricted stock. Below is a summary of restricted stock activity under the Plan for the year ended December 31, 2015.
Unvested at December 31, 2014 ...............................................................................
Granted ......................................................................................................................
Vested .......................................................................................................................
Cancelled or expired .................................................................................................
Unvested at December 31, 2015 ...............................................................................
Units
5,714 $
5,219
(5,714 )
-
5,219 $
Weighted-Average
Grant-Date Fair
Value
(cid:3)
17.50
19.16
17.50
-
19.16
The fair value of shares of restricted stock granted for the year ended December 31, 2015 and for the period from November 24,
2014 to December 31, 2014 was $100,000 and $100,000, respectively.
2015 Performance Plan
On April 1, 2015, the compensation committee (the “Compensation Committee”) of the board of directors approved the
Company’s 2015 Performance Plan (the “2015 Performance Plan”), a multi-year performance-based equity compensation program.
The purpose of the 2015 Performance Plan is to further align the interests of the Company’s stockholders with that of management by
encouraging the Company’s senior officers to create stockholder value in a “pay for performance” structure. Under the 2015
Performance Plan, participants may earn awards in the form of LTIP Units of the Operating Partnership based on the Company’s total
return to stockholders (“TRS”) over a three-year performance measurement period beginning on April 1, 2015 and continuing through
March 31, 2018, on both an absolute basis and relative basis. One-half of the award is earned if the Company outperforms a
predetermined absolute TRS and the other half is earned if the Company outperforms a predetermined relative TRS. Specifically,
participants begin to earn awards under the 2015 Performance Plan if the Company’s TRS for the performance measurement period
equals or exceeds 21% on an absolute basis and exceeds the performance of the SNL Office REIT Index by 100 basis points on a
relative basis, and awards will be fully earned if the Company’s TRS for the performance measurement period equals or exceeds 40%
on an absolute basis and exceeds the performance of the SNL Office REIT Index by 700 basis points on a relative basis. Participants
will not earn any awards under the 2015 Performance Plan if the Company’s TRS during the performance measurement period does
not meet these minimum thresholds. The number of LTIP Units that are earned if performance is above the minimum thresholds, but
below the maximum thresholds, will be determined based on linear interpolation between the percentages earned at the minimum and
maximum thresholds. During the performance measurement period, participants will receive per unit distribution equal to one-tenth of
the per share dividends otherwise payable to the Company’s common stockholders with respect to their LTIP Units. If the LTIP Units
are ultimately earned based on the achievement of the designated performance objectives, participants will receive cash or additional
LTIP Units based on the amount the participants would have received if per unit distributions during the performance measurement
period for the earned LTIP Units had equaled per share dividends paid to the Company’s common stockholders less the amount of
distributions participants actually received during the performance measurement period.
If the designated performance objectives are achieved, awards earned under the 2015 Performance Plan will also be subject to
vesting based on continued employment with the Company through April 1, 2020, with 50% of each award vesting following the
conclusion of the performance period, and 25% vesting on each of April 1, 2019 and April 1, 2020. The fair value of awards granted
under the 2015 Performance Plan on the date of grant was $7,930,000 and is being amortized into expense over the five-year vesting
period using a graded vesting attribution method.
In the year ended December 31, 2015, we recognized $1,110,000 of compensation expense related to the 2015 Performance Plan.
110
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
Deferred Compensation
In connection with the Formation Transactions, we assumed a deferred compensation plan (the “1993 Plan”) from our
Predecessor. The 1993 Plan permits certain management employees to defer certain percentages of their compensation, as defined.
The assets of the 1993 Plan remain the sole property of the Company and are subject to the claims of its general creditors. The assets
of the 1993 Plan are included in “marketable securities” and “restricted cash,” with an offsetting liability included in “other liabilities”
on our consolidated balance sheets. Income from the mark-to-market of investments in our deferred compensation plan is included in
“interest and other income” and this amount is entirely offset by expense from the mark-to-market of plan liabilities, which is included
as a component of “general and administrative” expenses on our consolidated statements of income. The 1993 Plan had a balance of
$28,947,000 and $28,148,000 as of December 31, 2015 and December 31, 2014, respectively.
19. Variable Interest Entities
As of December 31, 2015, and 2014, we held variable interests in PGRESS-H, Residential Fund Feeder and Fund VII-H, which
were determined to be VIEs. As of December 31, 2014, we also held variable interest in PGRESS-A, which was determined to be a
VIE (See Note 5, Preferred Equity Investments for details). We are required to consolidate our interests in these entities because we
are deemed to be the primary beneficiary and have the power to direct the activities of the entity that most significantly affect
economic performance and the obligation to absorb losses and right to receive benefits that could potentially be significant to the
entity. The table below summarizes the assets and liabilities of these entities. The liabilities are secured by only the assets of the
entities, and are non-recourse to us.
(Amounts in thousands)
Investments, at fair value ................................................ $
Investments, at cost .........................................................
Cash and restricted cash ..................................................
Total VIE assets ............................................................ $
Balance as of
December 31, 2015 December 31, 2014
17,136
63,550
4,976
85,662
8,025 $
63,511
497
72,033 $
Loans payable to noncontrolling interests....................... $
Other liabilities ...............................................................
Total VIE liabilities ....................................................... $
45,662 $
195
45,857 $
42,195
131
42,326
111
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
20.
Income Taxes
The Company
We operate and have been organized in conformity with the requirements for qualification and taxation as a REIT for U.S. federal
income tax purposes. So long as we qualify as a REIT, we generally will not be subject to U.S. federal income tax on our net income
that we distribute currently to our stockholders. In order to maintain our qualification as a REIT, we are required under the Internal
Revenue Code of 1986, as amended, to distribute at least 90% of our taxable income (without regard to the deduction for dividends
paid and excluding net capital gains) 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 U.S. federal income tax on our taxable income at regular corporate income tax rates. Even if we
qualify as a REIT, we may also be subject to certain state, local and franchise taxes.
We treat certain consolidated subsidiaries, and may in the future elect to treat newly formed subsidiaries, as taxable REIT
subsidiaries. Taxable REIT subsidiaries may participate in non-real estate related activities and/or perform non-customary services for
tenants and are subject to federal and state income tax at regular corporate tax rates. Our taxable REIT subsidiaries had a combined
current income tax expense of approximately $2,545,000 and $189,000 for the year ended December 31, 2015 and for the period from
November 24, 2014 to December 31, 2014, respectively, and have immaterial differences between the financial reporting and tax basis
of assets and liabilities.
The following table reconciles net income attributable to Paramount Group, Inc. to estimated taxable income for the year ended
December 31, 2015 and for the period from November 24, 2014 to December 31, 2014.
(Amounts in thousands)
Net (loss) income attributable to Paramount Group, Inc. ................... $
Book to tax differences:
Year Ended
December 31, 2015
Period from
November 24, 2014
to December 31, 2014
57,308
(4,419) $
Straight-line and prepaid rents .....................................................
Depreciation and amortization .....................................................
Stock based compensation .................................................
Gain on consolidation of unconsolidated joint venture ......
Swap breakage costs ....................................................................
Unrealized gain on interest rate swaps ...............................
Earnings of unconsolidated joint ventures, including real
estate investments ..........................................................
Other, net .....................................................................................
Estimated taxable income (loss) (unaudited)....................... $
(36,131)
104,399
5,794
-
(27,147)
(29,586)
(12,909)
7,356
7,357 $
6,927
11,691
57,740
(192,891)
(11,316)
(6,832)
(5,347)
20,832
(61,888)
Dividends distributed for the year ended December 31, 2015, were characterized for federal income tax purposes as (i) $0.289 per
share or 89.2% as return of capital and (ii) $0.035 per share or 10.8% as ordinary dividends. Dividends distributed for the year ended
December 31, 2015 exclude the fourth quarter 2015 dividend of $0.095 per share, which was paid on January 15, 2016 and is allocable
to 2016 for federal income tax purposes.
112
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
The Predecessor
The companies included in our Predecessor’s combined consolidated financial statements operated in the U.S. as partnerships or
corporations for U.S. federal income tax purposes. Our Predecessor, which owned the general partners of the Funds and consolidated
them, was a corporate entity that was subject to federal, state, and local corporate income taxes at the entity level for their share of the
profits and losses of the underlying investments. Our Predecessor accounted for income taxes using the asset and liability method of
accounting. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of
differences between the carrying amounts of assets and liabilities and their respective tax basis, using tax rates in effect for the year in
which the differences are expected to reverse. The effect on deferred assets and liabilities of a change in tax rates is recognized in
income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when it is more likely than
not that some portion or all of the deferred tax assets will not be realized. Current and deferred tax liabilities are recorded within
accounts and other payables in the combined consolidated balance sheet. Below is a summary of the components of deferred tax
liabilities.
(Amounts in thousands)
Investment in partnerships/real estate.................................................. $
Basis adjustments ................................................................................
Deferred compensation .......................................................................
Net operating losses & carryovers .......................................................
Valuation allowance ............................................................................
Other, net .............................................................................................
Total deferred tax liabilities ............................................................. $
Year Ended December 31, 2013
175,438
31,981
(9,886 )
(9,158 )
1,710
(491 )
189,594
Upon completion of the Formation Transactions, the assets of the partnerships held by our Predecessor were contributed to the
Operating Partnership, whose parent and sole general partner was the newly formed REIT. Since a REIT is effectively a non-taxable
pass-through entity due to the allowance of a dividends paid deduction for US federal income tax purposes, our Predecessor’s deferred
tax assets and liabilities associated with these partnerships no longer existed. Therefore, our Predecessor’s deferred tax amounts were
reversed as an adjustment to equity and is reflected as “deemed contributions” in our Predecessors consolidated statement of changes
in equity.
The following table summarizes our Predecessor’s tax position.
(Amounts in thousands)
Income before income taxes .......................................... $
Total provision for income taxes ...................................
Effective income tax rate ...............................................
Period from
January 1, 2014
Year Ended
to November 23, 2014
(cid:3) December 31, 2013
127,859 $
18,461
14.4%
313,868
11,029
3.5%
The following table reconciles our Predecessor’s provision for income taxes to the U.S. federal statutory tax rate.
(cid:3)
(cid:3)
Period from
January 1, 2014
to November 23, 2014
(cid:3)(cid:3)
(cid:3)(cid:3)
Year Ended
December 31, 2013
Statutory U.S. federal income tax rate ............................
Income passed through to common unitholders
and noncontrolling interests(1) ........................................
State and local income taxes ...........................................
Other ...............................................................................
Effective income tax rate (2) ..............................................
35.0%
(24.1%)
5.5%
(2.0%)
14.4%
35.0%
(31.6%)
0.8%
(0.7%)
3.5%
(1) Includes income that is not taxable to the Predecessor. Such income is directly taxable to the
Predecessor’s unitholders and the noncontrolling interests.
(2) The effective tax rate is calculated on income before income taxes.
113
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
21. Earnings Per Share
The following table provides a reconciliation of net (loss) income and the number of common shares used in the computation of
basic income (loss) per common share - which includes the weighted average number of common shares outstanding without regard to
dilutive potential common shares, and diluted income per common share - which includes the weighted average common shares and
dilutive share equivalents. Dilutive share equivalents may include our employee stock options and restricted stock.
(Amounts in thousands, except per share amounts)
Numerator:
Year Ended
December 31, 2015
Period from
November 24, 2014
to December 31, 2014
Net (loss) income attributable to common stockholders - basic and diluted ........... $
(4,419 ) $
57,308
Denominator:
Denominator for basic (loss) income per share - weighted average shares .............
Effect of dilutive employee stock options and restricted share awards (1) ................
Denominator for diluted (loss) income per share - weighted average shares ..........
212,107
-
212,107
212,107
1
212,108
(Loss) income per share - basic and diluted .................................................................. $
(0.02 ) $
0.27
(1)
The effect of dilutive securities for the year ended December 31, 2015 and for the period from November 24, 2014 to December
31, 2014 excludes an aggregate of 53,281 and 53,043 weighted average share equivalents, respectively, as their effect was anti-
dilutive.
22. Summary of Quarterly Results (unaudited)
The quarterly results of operations of our company and our Predecessor for the years ended December 31, 2015 and 2014 are as
follows:
Net (Loss) Income Net Income (Loss)
(Amounts in thousands, except per share amounts)
The Company:
Revenues
December 31, 2015 ..................................... $
September 31, 2015 ....................................
June 30, 2015 ..............................................
March 31, 2015 ...........................................
$
170,528
167,726
162,928
161,226
November 24, 2014 to December 31, 2014 ..... $
66,135
$
attributable to
the Predecessor
attributable to
the Company
Net Income (Loss) Per Common Share
Basic
Diluted
-
-
-
-
-
$
$
8,905
1,116
(4,709)
(9,731)
$
0.04
0.01
(0.02)
(0.05)
$
57,308
$
0.27
$
0.04
0.01
(0.02)
(0.05)
0.27
The Predecessor:
October 1, 2014 to November 23, 2014 ...... $
September 30, 2014 ....................................
June 30, 2014 ..............................................
March 31, 2014 ...........................................
36,043
71,392
58,328
61,626
$
(968)
12,904
5,178
4,396
114
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
23. Related Party
Due to Affiliates
As of December 31, 2015 and December 31, 2014, we had an aggregate of $27,299,000 of liabilities that were due to affiliates.
These liabilities were comprised of a $24,500,000 note payable to CNBB-RDF Holdings, LP, which is an entity that is partially owned
by Katharina Otto-Bernstein (a member of our Board of Directors), and a $2,799,000 note payable to a different entity owned by
members of the Otto Family, both of which were made in lieu of certain cash distributions prior to the completion of the Formation
Transactions. The notes are due in October 2017 and bear interest at a fixed rate of 0.50%. In the year ended December 31, 2015, we
recognized $136,000 of interest expense in connection with these notes.
Management Agreements
In connection with the Formation Transactions, we assumed certain management agreements of our predecessor pursuant to
which we provide property management, leasing and other related services for certain properties owned by members of the Otto
Family. In the year ended December 31, 2015, we recognized an aggregate of $776,000 of fee income, in connection with these
agreements, which is included as a component of “fee and other income” on our consolidated statements of income.
Hamburg Trust Consulting GMBH (“HTC”)
In connection with the Formation Transactions, we assumed the arrangement that our predecessor had with HTC. HTC is a
licensed broker in Germany engaged to supervise selling efforts for our private equity real estate funds (or investments in feeder
vehicles for these funds) to investors in Germany, including an ongoing engagement to distribute securitized notes of a feeder vehicle
for Fund VIII. Pursuant to this engagement, our predecessor had agreed to pay HTC for the costs incurred to sell investments in this
feeder vehicle, which primarily consist of commissions paid to third party agents, and other incremental costs incurred by HTC as a
result of the engagement, plus, in each case, a mark-up of 10%. HTC is 100% owned by Albert Behler, our Chairman, Chief Executive
Officer and President. In the year ended December 31, 2015, we incurred $349,000 of expense, in connection with these agreements,
which is included as a component of “acquisition and transaction related costs” on our consolidated statements of income.
Other
In the year ended December 31, 2015, certain of the Property Funds that were controlled by our Predecessor, received an
aggregate of $5,482,000 (of which our share was $121,000), for the reimbursement of certain costs and expenses, from CNBB-RDF
Holdings, LP.
115
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
24. Commitments and Contingencies
Insurance
We carry commercial general liability coverage on our properties, with limits of liability customary within the industry. Similarly,
we are insured against the risk of direct and indirect physical damage to our properties including coverage for the perils of floods,
earthquakes and windstorms. Our policies also cover the loss of rental income during an estimated reconstruction period. Our policies
reflect limits and deductibles customary in the industry and specific to the buildings and portfolio. We also obtain title insurance
policies when acquiring new properties. We currently have coverage for losses incurred in connection with both domestic and foreign
terrorist-related activities. While we do carry commercial general liability insurance, property insurance and terrorism insurance with
respect to our properties, these policies include limits and terms we consider commercially reasonable. In addition, there are certain
losses (including, but not limited to, losses arising from known environmental conditions or acts of war) that are not insured, in full or
in part, because they are either uninsurable or the cost of insurance makes it, in our belief, economically impractical to maintain such
coverage. Should an uninsured loss arise against us, we would be required to use our own funds to resolve the issue, including
litigation costs. We believe the policy specifications and insured limits are adequate given the relative risk of loss, the cost of the
coverage and industry practice and, in consultation with our insurance advisors, we believe the properties in our portfolio are
adequately insured.
Other Commitments and Contingencies
We are a party to various claims and routine litigation arising in the ordinary course of business. Some of these claims or others,
to which we may be subject from time to time, including claims arising specifically from the Formation Transactions, may result in
defense costs, settlements, fines or judgments against us, some of which are not, or cannot be, covered by insurance. Payment of any
such costs, settlements, fines or judgments that are not insured could have an adverse impact on our financial position and results of
operations. Should any litigation arise in connection with the Formation Transactions, we would contest it vigorously. In addition,
certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which
could adversely impact our results of operations and cash flow, expose us to increased risks that would be uninsured, and/or adversely
impact our ability to attract officers and directors.
The terms of our mortgage debt and certain side letters in place include certain restrictions and covenants which may limit, among
other things, certain investments, the incurrence of additional indebtedness and liens and the disposition or other transfer of assets and
interests in the borrower and other credit parties, and requires compliance with certain debt yield, debt service coverage and loan to
value ratios. In addition, our revolving credit facility contains representations, warranties, covenants, other agreements and events of
default customary for agreements of this type with comparable companies. As of Decembers 31, 2015, we believe we are in
compliance with all of our covenants.
718 Fifth Avenue - Put Right
Prior to the Formation Transactions, an affiliate of our Predecessor owned a 25.0% interest in 718 Fifth Avenue, a five-story
building containing 19,050 square feet of prime retail space that is located on the southwest corner of 56th Street and Fifth Avenue in
New York, (based on its 50.0% interest in a joint venture that held a 50.0% tenancy-in-common interest in the property). Prior to the
completion of the Formation Transactions, this interest was sold to its partner in the 718 Fifth Avenue joint venture, who is also our
partner in the joint venture that owns 712 Fifth Avenue, New York, New York. In connection with this sale, we granted our joint
venture partner a put right, pursuant to which the 712 Fifth Avenue joint venture would be required to purchase the entire direct or
indirect interests held by our joint venture partner or its affiliates in 718 Fifth Avenue at a purchase price equal to the fair market value
of such interests. The put right may be exercised at any time after the four-year anniversary of the sale of its interest in 718 Fifth
Avenue (i.e., September 10, 2018) upon 12 months written notice with the actual purchase occurring no earlier than the five-year
anniversary of such sale (i.e., September 10, 2019). If the put right is exercised and the 712 Fifth Avenue joint venture acquires the
50.0% tenancy-in-common interest in the property that will be held by our joint venture partner following the sale of its interest to our
joint venture partner, we will own a 25.0% interest in 718 Fifth Avenue.
116
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
25. Segments
The Company
Upon completion of the Offering and Formation Transactions, we acquired substantially all of the assets of our Predecessor and
substantially all of the assets of the Property Funds that it controlled. Our business, following the Formation Transactions, is
comprised of one reportable segment. We have determined that our properties have similar economic characteristics to be aggregated
into one reportable segment (operating, leasing and managing office properties). Our determination was based, in part, on our method
of internal reporting.
The following tables provide selected results for each reportable segment for the year ended December 31, 2015 and for the
period from November 24, 2014 to December 31, 2014.
(Amounts in thousands)
Income Statement Data:
Revenues
Rental income ........................................................................... $
Tenant reimbursement income .................................................
Fee and other income ................................................................
Total revenues ................................................................................
Total expenses ................................................................................
Operating income (loss) .................................................................
Income from real estate fund investments ................................
Income from unconsolidated joint ventures ..............................
Unrealized gain on interest rate swaps .....................................
Interest and other income, net ...................................................
Interest and debt expense ..........................................................
Net income (loss) before income taxes ..........................................
Income tax (expense) benefit ....................................................
Net income (loss) ...........................................................................
Add:
Depreciation and amortization ..................................................
General and administrative .......................................................
Interest and debt expense ..........................................................
Transfer taxes due in connection with the sale of shares
by a former joint venture partner ......................................
Acquisition and transaction costs .............................................
Income tax expense (benefit) ....................................................
Net Operating Income from unconsolidated joint ventures ......
Less:
Income from real estate fund investments ................................
Income from unconsolidated joint ventures ..............................
Fee income ................................................................................
Unrealized gain on interest rate swaps .....................................
Interest and other income, net ...................................................
Net Operating Income (1) .............................................................. $
Balance Sheet data:
Year Ended December 31, 2015
Owned
Properties
Other
Total
583,825 $
50,885
14,737
649,447
541,774
107,673
-
6,734
75,760
367
(160,058)
30,476
310
30,786
293,433
-
160,058
-
-
(310)
16,210
-
(6,734)
-
(75,760)
(367)
417,316
$
2,705 $
-
10,256
12,961
50,015
(37,054 )
37,975
116
-
504
(8,308 )
(6,767 )
(2,876 )
(9,643 )
1,191
42,056
8,308
5,872
4,483
2,876
370
(37,975 )
(116 )
(10,248 )
-
(504 )
6,670
$
586,530
50,885
24,993
662,408
591,789
70,619
37,975
6,850
75,760
871
(168,366)
23,709
(2,566)
21,143
294,624
42,056
168,366
5,872
4,483
2,566
16,580
(37,975)
(6,850)
(10,248)
(75,760)
(871)
423,986
Total assets ............................................................................... $
Total liabilities ..........................................................................
Total equity ............................................................................... $
8,172,529 $
3,309,104
4,863,425 $
621,614 $
174,489
447,125 $
8,794,143
3,483,593
5,310,550
117
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
Income Statement data:
Revenues
Rental income ........................................................................... $
Tenant reimbursement income .................................................
Fee and other income ................................................................
Total revenues ................................................................................
Total expenses ................................................................................
Operating income ...........................................................................
Income from real estate fund investments ................................
Income from unconsolidated joint ventures ..............................
Unrealized gain on interest rate swaps .....................................
Interest and other income (loss), net .........................................
Interest and debt expense ..........................................................
Formation related costs .............................................................
Gain on consolidation of unconsolidated joint ventures ...........
Net income (loss) before income taxes ..........................................
Income tax expense ..................................................................
Net income (loss) ...........................................................................
Add:
Depreciation and amortization expense ....................................
General and administrative expenses ........................................
Interest and debt expense ..........................................................
Formation related costs .............................................................
Income tax expense ..................................................................
NOI from unconsolidated joint ventures ..................................
Less:
Income from unconsolidated joint ventures ..............................
Fee income ................................................................................
Unrealized gain on interest rate swaps .....................................
Interest and other (income) loss, net .........................................
Gain on consolidation of unconsolidated joint ventures ...........
Net Operating Income (1) .............................................................. $
Period from November 24, 2014 to December 31, 2014
Owned
Properties
Other
Total
57,169 $
5,865
1,629
64,663
61,091
3,572
-
938
15,084
30
(41,633)
-
-
(22,009)
(475)
(22,484)
34,378
91
41,633
-
475
1,680
(938)
-
(15,084)
(30)
-
39,721
$
296 $
-
1,176
1,472
1,608
(136 )
1,412
-
-
(209 )
(2,110 )
(143,437 )
239,716
95,236
(30 )
95,206
103
2,116
2,110
143,437
30
-
-
(1,176 )
-
209
(239,716 )
2,319
$
57,465
5,865
2,805
66,135
62,699
3,436
1,412
938
15,084
(179)
(43,743)
(143,437)
239,716
73,227
(505)
72,722
34,481
2,207
43,743
143,437
505
1,680
(938)
(1,176)
(15,084)
179
(239,716)
42,040
Balance Sheet data:
Total assets ............................................................................... $
Total liabilities ..........................................................................
Total equity ............................................................................... $
8,345,966 $
3,350,798
4,995,168 $
684,475 $
124,690
559,785 $
9,030,441
3,475,488
5,554,953
(1) Net Operating Income (“NOI”) is used to measure the operating performance of a property. NOI consists of property-related
revenue (which includes rental revenue, tenant reimbursement income and certain other income) less operating expenses (which
includes building expenses such as cleaning, security, repairs and maintenance, utilities, property administration and real estate
taxes). We use NOI internally as a performance measure and believe it provides useful information to investors regarding our
financial condition and results of operations because it reflects only those income and expense items that are incurred at the
property level. Other real estate companies may use different methodologies for calculating NOI, and accordingly, our
presentation of NOI may not be comparable to other real estate companies.
118
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
The Predecessor
Our Predecessor historically operated an integrated business that consisted of three reportable segments, (i) Owned Properties, (ii)
Managed Funds and (iii) a Management Company. The Owned Properties segment consisted of properties in which our Predecessor
had a direct or indirect ownership interest, other than properties that it owned through its private equity real estate funds. The
Managed Funds segment consisted of the private equity real estate funds. In addition, our Predecessor included a Management
Company that performed property management and asset management services and certain general and administrative level functions,
including legal and accounting, as a separate reportable segment.
The following tables provide selected results for each reportable segment for the period from January 1, 2014 to November 23,
2014 and the year ended December 31, 2013.
(Amounts in thousands)
Income Statement data:
Revenues
Period from January 1, 2014 to November 23, 2014
Owned
Properties
Managed
Funds
Management
Company
Eliminations
Total
Rental income ........................................................... $
Tenant reimbursement income .................................
Distributions from real estate fund investments .......
Realized and unrealized gains, net ............................
Fee and other income ................................................
Total revenues ................................................................
Total expenses ................................................................
Operating income ...........................................................
Income from unconsolidated joint ventures ..............
Unrealized loss on interest rate swaps ......................
Interest and other income, net ...................................
Interest and debt expense ..........................................
Net income before income taxes ....................................
Income tax expense ..................................................
Net income .....................................................................
Net income attributable to noncontrolling interests ....
Net income attributable to the Predecessor ............... $
27,774 $
1,646
-
-
-
29,420
20,553
8,867
4,241
-
2,004
(11,157)
3,955
-
3,955
-
3,955 $
2,434 $
-
17,083
129,354
-
148,871
27,995
120,876
-
(673)
388
(17,323)
103,268
-
103,268
(87,888)
15,380 $
- $
-
-
-
74,686
74,686
54,032
20,654
48,683
-
87
(105 )
69,319
(18,461 )
50,858
-
- $
-
-
-
(25,588)
(25,588)
(25,588)
-
(48,683)
-
-
-
(48,683)
-
(48,683)
-
50,858 $ (48,683) $
30,208
1,646
17,083
129,354
49,098
227,389
76,992
150,397
4,241
(673)
2,479
(28,585)
127,859
(18,461)
109,398
(87,888)
21,510
119
PARAMOUNT GROUP, INC. AND PARAMOUNT PREDECESSOR
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
Owned
Properties
Managed
Funds
Management
Company
Eliminations
Total
Year Ended December 31, 2013
(Amounts in thousands)
Income Statement data:
Revenues
- $
-
-
-
54,298
54,298
60,385
(6,087 )
74,695
-
2,364
(145 )
- $
-
-
-
(27,872)
(27,872)
(27,872)
-
(74,695)
-
-
-
(74,695)
70,827
(11,029 )
59,798
-
-
(74,695)
-
59,798 $ (74,695) $
30,406
1,821
29,184
332,053
26,426
419,890
88,299
331,591
1,062
1,615
9,407
(29,807)
313,868
(11,029)
302,839
(286,325)
16,514
373,173 $ (332,109) $2,922,691
897,247
276,577 $ (273,395) $2,025,444
(58,714)
96,596
Rental income .......................................................... $
Tenant reimbursement income ................................
Distributions from real estate fund investments ......
Realized and unrealized gains, net ...........................
Fee and other income ...............................................
Total revenues ...............................................................
Total expenses ...............................................................
Operating income (loss) ................................................
Income from unconsolidated joint ventures .............
Unrealized gain on interest rate swaps ....................
Interest and other income, net ..................................
Interest and debt expense .........................................
Net income before income taxes ...................................
Income tax expense .................................................
Net income ....................................................................
Net income attributable to noncontrolling interests .....
Net income attributable to the Predecessor .............. $
30,406 $
1,821
-
-
-
32,227
26,369
5,858
1,062
-
5,891
(12,443)
368
-
368
-
368 $
- $
-
29,184
332,053
-
361,237
29,417
331,820
-
1,615
1,152
(17,219)
317,368
-
317,368
(286,325)
31,043 $
Balance Sheet data:
Total assets .............................................................. $
Total liabilities .........................................................
Total equity .............................................................. $
552,474 $ 2,329,153 $
350,884
508,481
201,590 $ 1,820,672 $
120
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange
Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is processed,
recorded, summarized and reported within the time periods specified in the SEC’s rules and regulations. In designing and evaluating
the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control objectives.
As of December 31, 2015, the end of the period covered by this Report, we carried out an evaluation, under the supervision and
with the participation of management, including our Chief Executive Officer and Chief Financial Officer, regarding the effectiveness
of our disclosure controls and procedures at the end of the period covered by this Report. Based on the foregoing, our Chief Executive
Officer and Chief Financial Officer concluded, as of that time, that our disclosure controls and procedures were effective to provide
reasonable assurance that information required to be disclosed by us in reports filed or submitted under the Exchange Act is processed,
recorded, summarized and reported within the time periods specified in the SEC’s rules and forms.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting (as such
term is defined in Rule13a-15(f) and 15d-15(f) under the Exchange Act). Our internal control over financial reporting is a process
designed under the supervision of our principal executive officer and principal financial officer to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in
accordance with U.S. generally accepted accounting principles.
As of December 31, 2015, management conducted an assessment of the effectiveness of our internal control over financial
reporting based on the framework established in Internal Control—Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that our
internal control over financial reporting as of December 31, 2015 was effective in providing reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally
accepted accounting principles.
Our internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect transactions and dispositions of our assets, (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted
accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management
and directors, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on our financial statements.
The effectiveness of our internal control over financial reporting as of December 31, 2015 has been audited by Deloitte & Touche
LLP, an independent registered public accounting firm, as stated in their report appearing on page 119 in this Form 10-K, which
expresses an unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 2015.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2015, that have
materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
121
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Paramount Group, Inc.
New York, NY
We have audited the internal control over financial reporting of Paramount Group, Inc., together with its consolidated subsidiaries
(the “Company”) as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's
principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of
directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's
internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial
statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.
Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to
the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2015, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement schedules as of and for the year ended December 31, 2015, of the Company
and our report dated February 25, 2016, expressed an unqualified opinion on those financial statements and financial statement
schedules.
/s/ Deloitte & Touche LLP
New York, NY
February 25, 2016
122
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 will be set forth in our Definitive Proxy Statement for our 2015 Annual Meeting of
Stockholders (which is scheduled to be held on May 19, 2016), to be filed pursuant to Regulation 14A under the Securities and
Exchange Act of 1934, as amended, or our Proxy Statement, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 will be set forth in our Proxy Statement and is incorporated herein by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by Item 12 will be set forth in our Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 will be set forth in our Proxy Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 will be set forth in our Proxy Statement and is incorporated herein by reference.
123
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES
(a) The following documents are filed as part of this report
PART IV
1. The combined consolidated financial statements are set forth in Item 8 of this Annual Report on Form 10-K
2. The following financial statement schedules should be read in conjunction with the financial statements included:
Schedule II – Valuation and Qualifying Accounts for the years ended December 31,
2015, 2014 and 2013 ...........................................................................................................
Schedule III – Real Estate and Accumulated Depreciation as of December 31, 2015,
2014 and 2013 .....................................................................................................................
125
126
Pages in this
Annual Report on
Form 10-K
(b) The exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index on page 129 of this Annual Report, on Form
10-K, and is incorporated herein by reference.
124
PARAMOUNT GROUP, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
COLUMN A
(Amounts in thousands)
The Company:
Year Ended December 31, 2015
Allowance for doubtful accounts............................................... $
For the period from November 24, 2014
to December 31, 2014
Allowance for doubtful accounts............................................... $
The Predecessor:
For the period from January 1, 2014
to November 23, 2014
Allowance for doubtful accounts............................................... $
Year Ended December 31, 2013
Allowance for doubtful accounts............................................... $
COLUMN B
Balance at
Beginning
of Year
COLUMN C
Additions
Charged
Against
Operations
COLUMN D
COLUMN E
Uncollectible
accounts
Written-off
Balance
at End
of Year
333
257
(1)
-
-
$
$
$
$
87 $
(55 ) $
76 $
- $
- $
- $
- $
- $
365
333
-
-
(1) Represents the allowance for doubtful accounts of the properties that were acquired in connection with the Formation(cid:3)
Transactions
125
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1
(
PARAMOUNT GROUP, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
(Amounts in thousands)
Rental Property
Balance at beginning of period .........................................
Acquisitions ......................................................................
Acquisition of properties in connection
with the Formation Transactions ....................................
Additions during the period:
Land................................................................................
Buildings and improvements ..........................................
Assets sold and written-off................................................
Balance at end of period ....................................................
Accumulated Depreciation
Balance at beginning of period .........................................
Additions charged to expense ...........................................
Accumulated depreciation on
assets sold and written-off ..............................................
Balance at end of period ....................................................
2015
Year Ended December 31,
2014
2013
$
7,530,239
$
414,998
64,650
$
-
7,043,650
-
123,277
(1,399)
7,652,117
81,050
163,438
(1,399)
243,089
$
$
$
$
$
$
-
9,676
(2,735 )
7,530,239
57,689
26,096
(2,735 )
81,050
$
$
$
414,855
-
-
-
147
(4)
414,998
48,425
9,268
(4)
57,689
127
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 25, 2016
Date: February 25, 2016
Date: February 25, 2016
By: /s/ Albert Behler
(Albert Behler)
By: /s/ Michael Walsh
(Michael Walsh)
By: /s/ Wilbur Paes
(Wilbur Paes)
Paramount Group, Inc.
Chairman, Chief Executive Officer and President
Executive Vice President, Chief Financial Officer and Treasurer
Senior Vice President, Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Title
Date
Chairman, Chief Executive Officer and President
February 25, 2016
(Principal Executive Officer)
Executive Vice President, Chief Financial Officer and Treasurer
February 25, 2016
Signature
/s/ Albert Behler
(Albert Behler)
/s/ Michael Walsh
(Michael Walsh)
/s/ Wilbur Paes
(Wilbur Paes)
/s/ Thomas Armbrust
(Thomas Armbrust)
/s/ Dan Emmett
(Dan Emmett)
/s/ Lizanne Galbreath
(Lizanne Galbreath)
/s/ Peter Linneman
(Peter Linneman)
/s/ David O’Connor
(David O’Connor)
By:
By:
By:
By:
By:
By:
By:
By:
By:
(Principal Financial Officer)
Senior Vice President, Chief Accounting Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
February 25, 2016
February 25, 2016
February 25, 2016
February 25, 2016
February 25, 2016
February 25, 2016
February 25, 2016
/s/ Katharina Otto-Bernstein Director
(Katharina Otto-Bernstein)
128
Exhibit
Number
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5†
10.6
10.7
10.8
10.9
10.10
EXHIBIT INDEX
Exhibit Description
Articles of Amendment and Restatement of Paramount Group, Inc., incorporated by reference to Exhibit 3.1 to
Amendment No. 4 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on November 14,
2014.
Amended and Restated Bylaws of Paramount Group, Inc., incorporated by reference to Exhibit 3.2 to the Registrant’s
Form 10-K filed with the SEC on March 19, 2015.
Specimen Certificate of Common Stock of Paramount Group, Inc., incorporated by reference to Exhibit 4.1 to
Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on November 12,
2014.
Amended and Restated Limited Partnership Agreement of Paramount Group Operating Partnership LP, dated as of
November 21, 2014, incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8-K filed with the SEC on
November 24, 2014.
Registration Rights Agreement by and among Paramount Group, Inc. and the holders named therein, dated November 6,
2014, incorporated by reference to Exhibit 10.2 to Amendment No. 3 to the Registrant’s Form S-11 (Registration No.
333-198392) filed with the SEC on November 12, 2014.
Registration Rights Agreement among Paramount Group, Inc. and the persons named therein, dated November 6, 2014,
incorporated by reference to Exhibit 10.3 to Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-
198392) filed with the SEC on November 12, 2014.
Stockholders Agreement between Paramount Group, Inc. and Maren Otto, Alexander Otto and Katharina Otto-Bernstein,
dated November 6, 2014, incorporated by reference to Exhibit 10.4 to Amendment No. 3 to the Registrant’s Form S-11
(Registration No. 333-198392) filed with the SEC on November 12, 2014.
2014 Equity Incentive Plan, incorporated by reference to Exhibit 10.5 to the Registrant’s Form 10-K filed with the SEC
on March 19, 2015.
Form of Indemnification Agreement between Paramount Group, Inc. and each of its Directors and Executive Officers,
incorporated by reference to Exhibit 10.6 to Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-
198392) filed with the SEC on November 12, 2014.
Contribution Agreement by and among Paramount Group Real Estate Fund I, L.P., Paramount Group Operating
Partnership LP and Paramount Group, Inc., dated as of November 6, 2014, incorporated by reference to Exhibit 10.7 to
Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on November 12,
2014.
Contribution Agreement by and among Paramount Group Real Estate Fund III, L.P., Paramount Group Operating
Partnership LP and Paramount Group, Inc., dated as of November 6, 2014, incorporated by reference to Exhibit 10.8 to
Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on November 12,
2014.
Contribution Agreement by and among Paramount Group Real Estate Fund IV, L.P., Paramount Group Operating
Partnership LP and Paramount Group, Inc., dated as of November 6, 2014, incorporated by reference to Exhibit 10.9 to
Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on November 12,
2014.
Contribution Agreement by and among PGREF IV Parallel Fund Sub US, LP, Paramount Group Operating Partnership
LP and Paramount Group, Inc., dated as of November 6, 2014, incorporated by reference to Exhibit 10.10 to Amendment
No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on November 12, 2014.
129
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
Transfer Agreement by and among Paramount Group Real Estate Fund V (Core), L.P., Paramount Group Operating
Partnership LP and Paramount Group, Inc., dated as of November 6, 2014, incorporated by reference to Exhibit 10.11 to
Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on November 12,
2014.
Contribution Agreement by and among PGREF V (Core) Parallel Fund Sub US, LP, Paramount Group Operating
Partnership LP and Paramount Group, Inc., dated as of November 6, 2014, incorporated by reference to Exhibit 10.12 to
Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on November 12,
2014.
Contribution Agreement by and among Paramount Group Real Estate Fund V (CIP), L.P., Paramount Group Operating
Partnership LP and Paramount Group, Inc., dated as of November 6, 2014, incorporated by reference to Exhibit 10.13 to
Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on November 12,
2014.
Contribution Agreement by and among Arcade Rental Investments, Inc., Paramount Group, Inc. and the Stockholder of
Arcade Rental Investments, Inc., dated as of November 6, 2014, incorporated by reference to Exhibit 10.14 to
Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on November 12,
2014.
Contribution Agreement by and among Arcade Rental Investments 2, Inc., Paramount Group, Inc. and the Stockholder of
Arcade Rental Investments 2, Inc., dated as of November 6, 2014, incorporated by reference to Exhibit 10.15 to
Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on November 12,
2014.
Contribution Agreement by and among Marathon Rental Investments, Inc., Paramount Group, Inc. and the Stockholder
of Marathon Rental Investments, Inc., dated as of November 6, 2014, incorporated by reference to Exhibit 10.16 to
Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on November 12,
2014.
Agreement and Plan of Merger by and among Cosmos Rental Investments, Inc., Paramount Group, Inc. and the
Stockholder of Cosmos Rental Investments, Inc., dated as of November 6, 2014, incorporated by reference to Exhibit
10.17 to Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on
November 12, 2014.
Agreement and Plan of Merger by and among Paramount Group, Inc., a Delaware corporation, Paramount Group, Inc.
and the Stockholders of Paramount Group, Inc., a Delaware corporation, dated as of November 6, 2014, incorporated by
reference to Exhibit 10.18 to Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with
the SEC on November 12, 2014.
Stock Purchase Agreement by and between Paramount Group, Inc. and the Stockholder of Forum Rental Investments,
Inc., dated as of November 6, 2014, incorporated by reference to Exhibit 10.19 to Amendment No. 3 to the Registrant’s
Form S-11 (Registration No. 333-198392) filed with the SEC on November 12, 2014.
Stock Purchase Agreement by and among Paramount Group, Inc., the Stockholders of Imperial Rental Investments, Inc.,
dated as of November 6, 2014, incorporated by reference to Exhibit 10.20 to Amendment No. 3 to the Registrant’s Form
S-11 (Registration No. 333-198392) filed with the SEC on November 12, 2014.
Stock Purchase Agreement by and among Paramount Group, Inc., the Stockholders of Milton Rental Investments, Inc.,
dated as of November 6, 2014, incorporated by reference to Exhibit 10.21 to Amendment No. 3 to the Registrant’s Form
S-11 (Registration No. 333-198392) filed with the SEC on November 12, 2014.
Share Purchase Agreement, dated as of October 31, 2014, between Paramount Group, Inc. and WvF 718, L.P.,
incorporated by reference to Exhibit 10.22 to Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-
198392) filed with the SEC on November 12, 2014.
Share Purchase Agreement, dated as of November 6, 2014, between Paramount Group, Inc. and the individuals and entity
listed therein, incorporated by reference to Exhibit 10.23 to Amendment No. 3 to the Registrant’s Form S-11
(Registration No. 333-198392) filed with the SEC on November 12, 2014.
130
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
Contribution Agreement by and between Albert Behler, Paramount Group Operating Partnership LP, and Paramount
Group, Inc., dated as of November 6, 2014, incorporated by reference to Exhibit 10.24 to Amendment No. 3 to the
Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on November 12, 2014.
Contribution Agreement by and between Jolanta Bott, Paramount Group Operating Partnership LP, and Paramount
Group, Inc., dated as of November 6, 2014, incorporated by reference to Exhibit 10.25 to Amendment No. 3 to the
Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on November 12, 2014.
Contribution Agreement by and between David Spence, Paramount Group Operating Partnership LP, and Paramount
Group, Inc., dated as of November 6, 2014, incorporated by reference to Exhibit 10.26 to Amendment No. 3 to the
Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on November 12, 2014.
Contribution Agreement by and between Daniel Lauer, Paramount Group Operating Partnership LP, and Paramount
Group, Inc., dated as of November 6, 2014, incorporated by reference to Exhibit 10.27 to Amendment No. 3 to the
Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on November 12, 2014.
Contribution Agreement by and between Vito Messina, Paramount Group Operating Partnership LP, and Paramount
Group, Inc., dated as of November 6, 2014, incorporated by reference to Exhibit 10.28 to Amendment No. 3 to the
Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on November 12, 2014.
Contribution Agreement by and between Ralph DiRuggiero, Paramount Group Operating Partnership LP, and Paramount
Group, Inc., dated as of November 6, 2014, incorporated by reference to Exhibit 10.29 to Amendment No. 3 to the
Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on November 12, 2014.
Contribution Agreement by and between Gage Johnson, Paramount Group Operating Partnership LP, and Paramount
Group, Inc., dated as of November 6, 2014, incorporated by reference to Exhibit 10.30 to Amendment No. 3 to the
Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on November 12, 2014.
Contribution Agreement by and between Theodore Koltis, Paramount Group Operating Partnership LP, and Paramount
Group, Inc., dated as of November 6, 2014, incorporated by reference to Exhibit 10.31 to Amendment No. 3 to the
Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on November 12, 2014.
Agreement and Plan of Merger by and among Paramount Group, Inc., WvF 1325, Inc., WvF 1325, L.P., US Real Estate
Holding AG and WvF, L.P., dated as of October 31, 2014, incorporated by reference to Exhibit 10.32 to Amendment No.
3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on November 12, 2014.
Purchase and Sale Agreement of Ownership Interests in PGREF I Paramount Plaza, L.P., by and between BCSP 1633
Broadway, LLC, as Seller, and Paramount Development and Investment, Inc., as Purchaser, PGREF I Paramount Plaza
GP, LLC and Paramount Group, Inc., a Delaware corporation, dated as of September 4, 2014, incorporated by reference
to Exhibit 10.33 to Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC
on November 12, 2014.
Purchase and Sale Agreement of Ownership Interests in PGREF V 1301 Sixth Holding LP, by and between PGREF V
1301 Sixth Investors I LP, as Seller, Paramount Development and Investment, Inc., as Purchaser, and PGREF V 1301
Sixth Investors GP LLC, dated as of July 23, 2014, incorporated by reference to Exhibit 10.34 to Amendment No. 3 to
the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on November 12, 2014.
131
10.35
10.36
10.37
10.38
10.39
10.40†
10.41†
10.42†
10.43†
10.44†
10.45
10.46
First Amendment to Purchase and Sale Agreement by and among PGREF V 1301 Sixth Investors I LP, as Seller,
Paramount Development and Investment, Inc., as Purchaser, PGREF V 1301 Sixth Investors GP LLC, Commonwealth
Land Title Insurance Company and First American Title Insurance Company, dated as of September 26, 2014,
incorporated by reference to Exhibit 10.35 to Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-
198392) filed with the SEC on November 12, 2014.
Purchase Option Agreement for Purchase and Sale of Direct and Indirect Limited Partnership Interests in PGREF II 60
Wall Street Investors, L.P., by and between Paramount Development and Investment, Inc., and Paramount Group Real
Estate Fund II, L.P. and Paramount Group Real Estate Fund III, L.P., dated as of June 27, 2014, incorporated by
reference to Exhibit 10.36 to Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with
the SEC on November 12, 2014.
Consent and Tag-Along Agreement among Paramount Development and Investment, Inc., SSF III 60 Wall JV LLC,
Paramount Group Real Estate Fund II, L.P., PGREF II 60 Wall Investors GP, LLC and PGREF III Wall Street Investors,
L.P., with respect to PGREF II 60 Wall Street Investors, L.P., dated as of June 27, 2014, incorporated by reference to
Exhibit 10.37 to Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on
November 12, 2014.
Put Option Agreement among WvF 2 W. 56, Inc., WvF, Inc., WvF, L.P. and WvF 718, L.P., collectively, as optionee,
and 712 Fifth Avenue, L.P., as optionor, dated as of September 10, 2014, incorporated by reference to Exhibit 10.38 to
Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on November 12,
2014.
Credit Agreement among Paramount Group Operating Partnership LP, as the Borrower, and Paramount Group, Inc. and
certain subsidiaries of Paramount Group, Inc. from time to time party thereto, as Guarantors, Bank of America, N.A., as
Administrative Agent and Swing Line Lender, Morgan Stanley Senior Funding, Inc. and Wells Fargo Bank, National
Association, as Co-Syndication Agents, U.S. Bank National Association, as Documentation Agent, Bank of America,
N.A., Morgan Stanley Bank, N.A., and Wells Fargo Bank, National Association, as L/C Issuers, and the lenders from
time to time party thereto, Bank of America Merrill Lynch, Morgan Stanley Senior Funding, Inc. and Wells Fargo
Securities, LLC, as Joint Lead Arrangers And Joint Bookrunners, dated as of November 24, 2014, incorporated by
reference to Exhibit 10.1 to the Registrant’s Form 8-K filed with the SEC on November 24, 2014.
Employment Agreement among Paramount Group Operating Partnership LP, Paramount Group, Inc. and Albert Behler,
dated as of November 18, 2014, incorporated by reference to Exhibit 10.7 to the Registrant’s Form 8-K filed with the
SEC on November 24, 2014.
Employment Agreement among Paramount Group Operating Partnership LP, Paramount Group, Inc. and David Spence,
dated as of November 18, 2014, incorporated by reference to Exhibit 10.8 to the Registrant’s Form 8-K filed with the
SEC on November 24, 2014.
Employment Agreement among Paramount Group Operating Partnership LP, Paramount Group, Inc. and Jolanta Bott,
dated as of November 18, 2014, incorporated by reference to Exhibit 10.9 to the Registrant’s Form 8-K filed with the
SEC on November 24, 2014.
Paramount Group, Inc. Executive Severance Plan, incorporated by reference to Exhibit 10.10 to the Registrant’s Form 8-
K filed with the SEC on November 24, 2014.
The Paramount Group 2005 Nonqualified Deferred Compensation Plan, incorporated by reference to Exhibit 10.44 to
Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on November 12,
2014.
Waiver of Ownership Limits granted to The Otto Family by Paramount Group, Inc., dated as of November 18, 2014,
incorporated by reference to Exhibit 10.6 to the Registrant’s Form 8-K filed with the SEC on November 24, 2014.
Property Management Agreement, dated as of August 7, 2013, between CNBB Owner LLC and Paramount Group, Inc.,
a Delaware corporation, incorporated by reference to Exhibit 10.46 to Amendment No. 3 to the Registrant’s Form S-11
(Registration No. 333-198392) filed with the SEC on November 12, 2014.
132
10.47
10.48
10.49
10.50
10.51†
10.52†
Lease, dated as of October 27, 2014, between Paramount Group, Inc., a Delaware corporation, as Agent for PGREF I
1633 Broadway Tower, L.P. (Landlord), and CNBB-RDF Holdings, LP (Tenant), incorporated by reference to Exhibit
10.47 to Amendment No. 3 to the Registrant’s Form S-11 (Registration No. 333-198392) filed with the SEC on
November 12, 2014.
Agreement and Plan of Merger by and among Arcade Rental Investments LLC, Paramount Group, Inc. and the
stockholder of Arcade Rental Investments LLC, dated as of November 24, 2014, incorporated by reference to Exhibit
10.3 to the Registrant’s Form 8-K filed with the SEC on November 24, 2014.
Agreement and Plan of Merger by and among Arcade Rental Investments 2 LLC, Paramount Group, Inc. and the
stockholder of Arcade Rental Investments 2 LLC, dated as of November 24, 2014, incorporated by reference to Exhibit
10.4 to the Registrant’s Form 8-K filed with the SEC on November 24, 2014.
Agreement and Plan of Merger by and among Marathon Rental Investments LLC, Paramount Group, Inc. and the
stockholder of Marathon Rental Investments LLC, dated as of November 24, 2014, incorporated by reference to Exhibit
10.5 to the Registrant’s Form 8-K filed with the SEC on November 24, 2014.
Employment Agreement among Paramount Group, Inc., Paramount Group Operating Partnership, L.P. and Michael
Walsh, dated March 26, 2015, incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed with the SEC
on March 26, 2015.
Separation Agreement and Release among Paramount Group, Inc., Paramount Group Operating Partnership, L.P. and
David Spence dated March 25, 2015, incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8-K filed with
the SEC on March 26, 2015.
10.53†
Form of Paramount Group, Inc. Performance LTIP Unit Award Agreement, incorporated by reference to Exhibit 10.1 to
the Registrant’s Form 8-K filed with the SEC on April 1, 2015.
21.1*
23.1*
23.2*
31.1*
31.2*
32.1*
32.2*
List of Subsidiaries of the Registrant.
Consent of Deloitte & Touche LLP.
Consent of Deloitte & Touche LLP for 712 Fifth Avenue LP.
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
99.1*
Consolidated Financial Statements of 712 Fifth Avenue.
101.INS* XBRL Instance Document.
101.SCH* XBRL Taxonomy Extension Schema.
101.CAL* XBRL Taxonomy Extension Calculation Linkbase.
101.DEF* XBRL Taxonomy Extension Definition Linkbase.
101.LAB* XBRL Taxonomy Extension Label Linkbase.
101.PRE* XBRL Taxonomy Extension Presentation Linkbase.
*
†
_______________________
Filed herewith.
Indicates management contract or compensatory plan or arrangement required to be filed or incorporated by reference as
an exhibit to this Form 10-K pursuant to Item 15(b) of Form 10-K.
133
EXHIBIT 31.1
I, Albert Behler, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Paramount Group, Inc.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
February 25, 2016
/s/ Albert Behler
Albert Behler
Chairman, Chief Executive Officer and President
EXHIBIT 31.2
I, Michael Walsh certify that:
1.
I have reviewed this Annual Report on Form 10-K of Paramount Group, Inc.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
February 25, 2016
/s/ Michael Walsh
Michael Walsh
Executive Vice President, Chief Financial Officer and
Treasurer
CERTIFICATION
EXHIBIT 32.1
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Paramount Group, Inc. (the “Company”),
hereby certifies, to such officer’s knowledge, that:
(cid:120)
(cid:120)
the Annual Report on Form 10-K for the year ended December 31, 2015 (the “Report”) of the Company fully complies with
the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
This certification shall not be deemed “filed” for any purpose, nor shall it be deemed to be incorporated by reference into any
filing under the Securities Act of 1933 or the Securities Exchange Act of 1934 regardless of any general incorporation language in
such filing.
February 25, 2016
/s/ Albert Behler
Name:Albert Behler
Title: Chairman, Chief Executive Officer and President
CERTIFICATION
EXHIBIT 32.2
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Paramount Group, Inc. (the “Company”),
hereby certifies, to such officer’s knowledge, that:
(cid:120)
(cid:120)
the Annual Report on Form 10-K for the year ended December 31, 2015 (the “Report”) of the Company fully complies with
the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
This certification shall not be deemed “filed” for any purpose, nor shall it be deemed to be incorporated by reference into any
filing under the Securities Act of 1933 or the Securities Exchange Act of 1934 regardless of any general incorporation language in
such filing.
February 25, 2016
/s/ Michael Walsh
Name:Michael Walsh
Title: Executive Vice President, Chief Financial Officer
and Treasurer
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Corporate Headquarters
1633 Broadway, Suite 1801
New York, New York 10019
(212) 237-3100
www.paramount-group.com
About Our Stock
Our Common Stock is listed on the
New York Stock Exchange under the
symbol PGRE.
Annual Meeting
Thursday, May 19, 2016
Investor Relations Information
ir@paramount-group.com
(212) 237-3398
Registrar & Transfer Agent
Computershare Trust Company, N.A .
http://www.computershare.com/us/
(800) 962-4284
Corporate Counsel
Goodwin Procter LLP
New York, NY
Auditors
Deloitte & Touche LLP
New York, NY
CORPOR ATE DATA
Board of Directors
Albert Behler
Chairman, Chief Executive Officer & President
Thomas Armbrust
Managing Director of CURA Vermögensverwaltung
Martin Bussmann
Trustee of the Mannheim Trust in New York
Dan Emmett
Chairman of the Board, Douglas Emmett
Lizanne Galbreath
Managing Partner, Galbreath & Company
Karin Klein
Partner at Bloomberg Beta
Peter Linneman
Professor Emeritus, The University of Pennsylvania,
Wharton School of Business
David O’Connor
Co-Founder and Senior Managing Partner of
High Rise Capital Management, L.P.
Katharina Otto-Bernstein
President of Film Manufacturers Inc.
Management
Albert Behler
Chairman, Chief Executive Officer & President
Wilbur Paes
Executive Vice President, Chief Financial Officer
and Treasurer
Jolanta Bott
Executive Vice President, Operations and
Human Resources
Theodore Koltis
Executive Vice President, Leasing
Daniel Lauer
Executive Vice President, Chief Investment Officer
Ralph DiRuggiero
Senior Vice President, Property Management
Gage Johnson
Senior Vice President, General Counsel and Secretary
Vito Messina
Senior Vice President, Asset Management
New York • Washington, D.C. • San Francisco