Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended | December 31, 2016 | ||
or
[ ] 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: | 000-53919 | |||
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P. |
(Exact name of registrant as specified in its charter) |
Delaware | 26-3215092 | |||||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||
3 Park Avenue, 36th Floor | ||||||||||
New York, New York | 10016 | |||||||||
(Address of principal executive offices) | (Zip Code) | |||||||||
(212) 418-4700 | ||||||||||
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Units of Limited Partnership Interests
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☑ | |||||||
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 ☐ No ☑ | |||||||
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 ☑ No ☐ | |||||||
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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).
Yes ☑ No ☐ | |||||||
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of 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.
☑ | |||||||
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ |
Non-accelerated filer ☑ (Do not check if a smaller reporting company) | Smaller reporting company ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑ | |||||||
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: Not applicable. There is no established market for the limited partnership interests of the registrant.
Number of outstanding limited partnership interests of the registrant on March 27, 2017 is 258,761.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Table of Contents |
Page | |
PART I
Forward-Looking Statements
Certain statements within this Annual Report on Form 10-K may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). These statements are being made pursuant to the PSLRA, with the intention of obtaining the benefits of the “safe harbor” provisions of the PSLRA, and, other than as required by law, we assume no obligation to update or supplement such statements. Forward-looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. You can identify these statements by the use of words such as “may,” “would,” “could,” “anticipate,” “believe,” “estimate,” “expect,” “continue,” “further,” “plan,” “seek,” “intend,” “predict” or “project” and variations of these words or comparable words or phrases of similar meaning. These forward-looking statements reflect our current beliefs and expectations with respect to future events. They are based on assumptions and are subject to risks and uncertainties and other factors outside our control that may cause actual results to differ materially from those projected. We undertake no obligation to update publicly or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
Item 1. Business
Our History
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P. (the “Partnership”) was formed on August 20, 2008 as a Delaware limited partnership. When used in this Annual Report on Form 10-K, the terms “we,” “us,” “our” or similar terms refer to the Partnership and its consolidated subsidiaries.
Our general partner is ICON GP 14, LLC, a Delaware limited liability company (the “General Partner”), which is a wholly-owned subsidiary of ICON Capital, LLC, a Delaware limited liability company (“ICON Capital”). Our General Partner manages and controls our business affairs, including, but not limited to, our investments in business-essential equipment and corporate infrastructure (collectively, “Capital Assets”), pursuant to the terms of our limited partnership agreement (the “Partnership Agreement”). Pursuant to the terms of an investment management agreement, our General Partner has engaged ICON Capital as our investment manager (the “Investment Manager”) to, among other things, facilitate the acquisition and servicing of our investments. Additionally, our General Partner has a 1% interest in our profits, losses, distributions and liquidation proceeds.
Our offering period commenced on May 18, 2009 and ended on May 18, 2011. Our operating period commenced on May 19, 2011 and ended on May 18, 2016. Our liquidation period commenced on May 19, 2016, during which we have sold and will continue to sell our assets and/or let our investments mature in the ordinary course of business. If our Investment Manager believes it would benefit our limited partners to reinvest the proceeds received from investments in additional investments during the liquidation period, our Investment Manager may do so. Our Investment Manager is not paid acquisition fees or management fees for additional investments initiated during the liquidation period, although management fees continue to be paid for investments that were part of our portfolio prior to the commencement of the liquidation period.
We offered limited partnership interests (the “Interests”) on a “best efforts” basis with the intention of raising up to $418,000,000 of capital, consisting of 420,000 Interests, of which 20,000 had been reserved for issuance pursuant to our distribution reinvestment plan (the “DRIP Plan”). The DRIP Plan allowed limited partners to purchase Interests with distributions received from us and/or certain affiliates of ours.
Our initial closing date was June 19, 2009 (the “Commencement of Operations”), the date on which we raised $1,200,000. During the period from May 18, 2009 to May 18, 2011, we sold 258,897 Interests, of which 10,506 Interests were issued at a discounted price pursuant to our DRIP Plan, representing $257,646,987 of capital contributions by 7,010 limited partners. In addition, pursuant to the terms of our offering, we established a cash reserve in the amount of 0.50% of the gross offering proceeds from the sale of our Interests. As of December 31, 2016, the cash reserve was $1,288,235. For the period from the Commencement of Operations through May 18, 2011, we paid $17,201,964 of sales commissions to third parties and $7,445,754 of dealer-manager fees to CION Securities, LLC, the dealer-manager of our offering and an affiliate of our General Partner (“CION Securities”). In addition, our General Partner and its affiliates, on our behalf, incurred $2,926,110 of organizational and offering expenses, which were recorded as a reduction of partners’ equity.
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Our Business
We operated as an equipment leasing and finance fund in which the capital our partners invested was pooled together to make investments in Capital Assets, pay fees and establish a small reserve. We primarily invested in Capital Assets, including, but not limited to, Capital Assets that were already subject to lease, Capital Assets that we purchased and leased to domestic and international businesses, loans that were secured by Capital Assets, and ownership rights to leased Capital Assets at lease expiration. In the case of leases where there was significant current cash flow generated during the primary term of the lease and the value of the Capital Assets at the end of the term would be minimal or was not considered a primary reason for making the investment, the rental payments due under the lease were expected to be, in the aggregate, sufficient to provide a return of and a return on the purchase price of the leased Capital Assets. In the case of secured loans and other financing transactions, the principal and interest payments due under the loan were expected to provide a return of and a return on the amount we loaned to borrowers. We also made investments in Capital Assets subject to operating leases and leveraged leases, interests or options to purchase interests in the residual value of Capital Assets, and other investments in Capital Assets that we expected would generate sufficient net proceeds from either the sale or re-lease of such Capital Assets, as applicable, to provide a satisfactory rate of return.
We divide the life of the Partnership into three distinct phases:
(1) Offering Period: The period during which we offered and sold Interests to investors. We invested most of the net proceeds from the sale of Interests in Capital Assets.
(2) Operating Period: After the close of the offering period, we reinvested the cash generated from our investments to the extent that cash was not needed for our expenses, reserves and distributions to limited partners. Effective May 18, 2016, we completed our operating period.
(3) Liquidation Period: On May 19, 2016, we commenced our liquidation period, during which we have sold and will continue to sell our assets and/or let our investments mature in the ordinary course of business. Our goal is to complete the liquidation period within two years after the end of the operating period, but it may take longer to do so.
At December 31, 2016 and 2015, we had total assets of $114,131,272 and $253,132,775, respectively. For the year ended December 31, 2016, we had one lessee that accounted for 82.2% of our combined total rental and finance income of $10,077,181. Our pool revenue for the year ended December 31, 2016 was solely generated by a vessel that we placed into service in 2016 by participating in a pooling arrangement. Net loss attributable to us for the year ended December 31, 2016 was $14,104,253. For the year ended December 31, 2015, we had two lessees that accounted for 82.3% of our total rental and finance income of $33,615,783. Net loss attributable to us for the year ended December 31, 2015 was $37,061,038. For the year ended December 31, 2014, we had two lessees that accounted for 69.4% of our total rental and finance income of $37,413,236. Net loss attributable to us for the year ended December 31, 2014 was $6,551,125.
At December 31, 2016, our portfolio, which we hold either directly or through joint ventures, consisted of the following investments:
Marine Vessels
· | Two supramax bulk carrier vessels, the Bulk Progress (f/k/a the Amazing) and the Bulk Power (f/k/a the Fantastic), which are subject to five-year bareboat charters with Americas Bulk Transport (BVI) Limited (“Americas Bulk”). The bareboat charters expire in June 2021. |
· | A crude oil tanker, the Shamrock (f/k/a the Center), which was placed into service in July 2016 for at least 12 months by participating in a pooling arrangement, Stena Sonangol Suezmax Pool LLC (the “Stena Pooling Arrangement”), with other crude oil tankers owned by unaffiliated third parties. |
· | A 40% ownership interest in an offshore support vessel, the AMC Ambassador (f/k/a the Lewek Ambassador), which is subject to a nine-year bareboat charter with Gallatin Marine Management, LLC (“Gallatin”). The bareboat charter expires in June 2021. |
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· | A 12.5% ownership interest in two LPG tanker vessels, the EPIC Bali and the EPIC Borneo (f/k/a the SIVA Coral and the SIVA Pearl, respectively) (collectively, the “EPIC Vessels”), which are subject to eight-year bareboat charters with an affiliate of Foreguard Shipping I Global Ships Ltd. (f/k/a Siva Global Ships Limited) (“Foreguard Shipping”). The bareboat charters expire in March 2022 and April 2022, respectively. |
· | A 12.5% ownership interest in an offshore supply vessel, the Crest Olympus, which is subject to a 10-year bareboat charter with Pacific Crest Pte. Ltd. (“Pacific Crest”). The bareboat charter expires in June 2024. |
Mining Equipment
· | A 15% ownership interest in mining equipment that is subject to two 48-month leases with Blackhawk Mining, LLC (“Blackhawk”) and its affiliates, which expire in February 2018. |
Seismic Testing Equipment
· | A 33.5% ownership interest in land-based seismic testing equipment that is subject to a 36-month lease with Geokinetics Inc., Geokinetics USA, Inc. and Geokinetics Acquisition Company (collectively, “Geokinetics”), which expires in August 2017. |
Geotechnical Drilling Vessels
· | A 15% ownership interest in two geotechnical drilling vessels, the Fugro Scout and the Fugro Voyager (collectively, the "Fugro Vessels"), which are subject to 12-year bareboat charters with affiliates of Fugro N.V. (“Fugro”), which expire in December 2027. |
Notes Receivable
· | A 75% ownership interest in a term loan to Jurong Aromatics Corporation Pte. Ltd. (“JAC”), secured by a second priority security interest in all equipment, plant and machinery associated with a condensate splitter and aromatics complex, which matures in January 2021. |
· | A term loan to Asphalt Carrier Shipping Company Limited (“Asphalt”), secured by a first priority security interest in Asphalt’s vessel, earnings from the vessel and the equity interests of Asphalt, which matures in December 2018. |
· | A subordinated term loan to four affiliates of Técnicas Maritimas Avanzadas, S.A. de C.V. (collectively, “TMA”), secured by, among other things, a first priority security interest in and earnings from platform supply vessels, which matures in August 2019. |
· | A term loan to CFL Momentum Beheer B.V. and C.V. CFL Momentum (collectively, “CFL”), secured by, among other things, a first priority security interest in and earnings from a motor cargo vessel, which matures in December 2020. |
· | A term loan to Lubricating Specialties Company (“LSC”), secured by a second priority security interest in LSC's accounts receivable and inventory and a first priority security interest in all of LSC’s other assets, which matures in December 2020. |
For a discussion of the significant transactions that we engaged in during the years ended December 31, 2016, 2015 and 2014, please refer to “Item 7. General Partner’s Discussion and Analysis of Financial Condition and Results of Operations.”
Segment Information
We engaged in one business segment, the business of investing in Capital Assets, including, but not limited to, Capital Assets that were already subject to lease, Capital Assets that we purchased and leased to domestic and international businesses, loans secured by Capital Assets and ownership rights to leased Capital Assets at lease expiration.
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Competition
The commercial leasing and financing industry is highly competitive and is characterized by competitive factors that vary based upon product and geographic region. When we made our investments we competed, and as we seek to liquidate our portfolio we compete, with a variety of competitors including other equipment leasing and finance funds, hedge funds, private equity funds, captive and independent finance companies, commercial and industrial banks, manufacturers and vendors.
Other equipment finance companies and equipment manufacturers or their affiliated financing companies may have been and/or may be in a position to offer equipment to prospective customers on financial terms that were or are more favorable than those that we could offer or that we can currently offer in liquidating our portfolio. In addition, increased competition in the equipment financing business has caused us to encounter significant challenges. Specifically, we suffered from increasing competition over the last few years from larger alternative lenders that had not historically competed with us for investment opportunities.
We competed primarily on the basis of pricing, terms and structure, particularly on structuring flexible, responsive, and customized financing solutions for our customers. Our investments were often made directly rather than through competition in the open market. Nevertheless, to the extent that our competitors competed aggressively on any combination of the foregoing factors, we could fail to achieve our investment objectives. For additional information about our competition and other risks related to our operations, please see “Item 1A. Risk Factors.”
Employees
We have no direct employees. Our General Partner and our Investment Manager supervise and control our business affairs and originate and service our investments.
Available Information
Our Annual Report on Form 10-K, our most recent Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K, and any amendments to those reports, are available free of charge on our Investment Manager’s internet website at http://www.iconinvestments.com as soon as reasonably practicable after such reports are electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”). The information contained on our Investment Manager’s website is not deemed part of this Annual Report on Form 10-K. Our reports are also available on the SEC’s website at http://www.sec.gov.
Financial Information Regarding Geographic Areas
Certain of our investments generate revenue in geographic areas outside of the United States. For additional information, see Note 14 to our consolidated financial statements.
Item 1A. Risk Factors
We are subject to a number of risks. Careful consideration should be given to the following risk factors, in addition to the other information included in this Annual Report. The risks and uncertainties described below are not the only ones we may face. Each of these risk factors could adversely affect our business operating results and/or financial condition, as well as adversely affect the value of an investment in our Interests. In addition to the following disclosures, please refer to the other information contained in this Annual Report, including the consolidated financial statements and the related notes.
General Investment Risks
All or a substantial portion of your distributions may be a return of capital and not a return on capital, which will not necessarily be indicative of our performance.
The portion of total distributions that is a return of capital and the portion that is economic return will depend upon a number of factors that cannot be determined until all of our investments have been sold or otherwise mature. At that time, you will be able to compare the total amount of all distributions you receive to your total capital invested in order to determine your economic return.
The Internal Revenue Service (the “IRS”) may have deemed the majority of your distributions to be a return of capital for tax purposes during our early years. Distributions would be deemed to be a return of capital for tax purposes to the extent
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that we are distributing cash in an amount greater than our taxable income. The fact that the IRS deems distributions to be a return of capital in part and we report an adjusted tax basis to you on Schedule K-1 is not an indication that we are performing greater than or less than expectations and cannot be utilized to forecast what your final return might be.
Your ability to resell your Interests is limited by the absence of a public trading market and substantial transfer restrictions. Therefore, you should be prepared to hold your Interests for the life of the Partnership.
A public market does not exist for our Interests and we do not anticipate that a public market will develop for our Interests. Our Interests are not currently and will not be listed on any national securities exchange at any time, and we will take steps to ensure that no public trading market develops for our Interests. In addition, our Partnership Agreement imposes significant restrictions on your right to transfer your Interests.
We have established these restrictions to comply with federal and state securities laws, as well as to ensure that we will not be considered a publicly traded partnership that is taxed as a corporation for federal income tax purposes. Your ability to sell or otherwise transfer your Interests is extremely limited and will depend on your ability to identify a buyer. Thus, you will probably not be able to sell or otherwise liquidate your Interests in the event of an emergency and, even if you were able to arrange a sale, the price you receive would likely be at a substantial discount to the price you paid for your Interests. As a result, you must view your investment in our Interests as a long-term, illiquid investment.
If you request that we repurchase your Interests, you may receive significantly less than you would receive if you held your Interests for the life of the Partnership.
You may request that we repurchase up to all of your Interests. We are under no obligation to do so, however, and will have only limited cash available for this purpose. If we repurchase your Interests, the formula for the repurchase price has been unilaterally set and, depending upon when you request repurchase, the repurchase price may be less than the unreturned amount of your investment. If your Interests are repurchased, the repurchase price may provide you a significantly lower value than the value you would realize by retaining your Interests for the duration of the Partnership.
You may not receive distributions every month and, therefore, you should not rely on distributions from your Interests as a source of income.
You should not rely on distributions from your Interests as a source of income. During the liquidation period, which commenced on May 19, 2016, although we expect that lump sums will be distributed from time to time if and when financially significant assets are sold, regularly scheduled distributions will decrease because there will be fewer investments available to generate cash flow.
Your Interests may be diluted.
Some investors, including our General Partner and its officers, directors and other affiliates, may have purchased Interests at discounted prices and generally will share in our revenues and distributions based on the number of Interests that they purchased, rather than the discounted subscription price paid by them for their Interests. As a result, investors who paid discounted prices for their investments will receive higher returns on their investments in us as compared to investors who paid the entire $1,000 per Interest.
Our assets may be plan assets for ERISA purposes, which could subject our General Partner and/or our Investment Manager to additional restrictions on their ability to operate our business with respect to all partners.
The Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and the Internal Revenue Code of 1986, as amended (the “Code”), may apply what is known as the look-through rule to an investment in our Interests. Under that rule, the assets of an entity in which a qualified plan or IRA has made an equity investment may constitute assets of the qualified plan or IRA. If you are a fiduciary of a qualified plan or IRA, you should consult with your advisors and carefully consider the effect of that treatment if the look-through rule is applied. If the look-through rule were to apply, our General Partner and/or our Investment Manager may be viewed as an additional fiduciary with respect to the qualified plan or IRA to the extent of any decisions relating to the undivided interest in our assets represented by the Interests held by such qualified plan or IRA. This could result in some restriction on our General Partner’s and/or our Investment Manager’s willingness to engage in transactions that might otherwise be in the best interest of all partners due to the strict rules of ERISA regarding fiduciary actions.
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Our Investment Manager established an estimated value per Interest of $277.88 as of December 31, 2016. You should not rely on the estimated value per Interest as being an accurate measure of the current value of our Interests or an indicator of any future value of our Interests.
Our Investment Manager established an estimated value per Interest of $277.88 for our Interests as of December 31, 2016. Our Investment Manager’s objective in determining the estimated value per Interest was to arrive at a value, based on the most recent information practically available, which it believed was reasonable, including the fair values for certain of our assets and liabilities as determined by Duff & Phelps, LLC ("Duff & Phelps"), a third party independent valuation and consulting firm engaged by our Investment Manager. However, the market for our Capital Assets can fluctuate quickly and substantially and values are expected to change in the future and may decrease.
As with any valuation methodology, the methodologies used to determine the estimated value per Interest are based upon a number of estimates and assumptions that may prove later to be inaccurate or incomplete. Further, different market participants using different estimates and assumptions could derive different estimated values. The estimated value per Interest may also not represent the price that our Interests would trade at on a national securities exchange, the amount realized in a sale, merger or liquidation or the amount you would realize in a private sale of Interests.
The estimated value per Interest was calculated as of a specific date and is expected to fluctuate over time in response to future events, including, but not limited to, changes in market interest rates, changes in economic, market and regulatory conditions, the prospects of the asset sectors in general or in particular, or the special purpose vehicles in which the assets may be held, rental and growth rates, returns on competing investments, changes in administrative expenses and other costs, the amount of distributions paid on our Interests, and the factors specified in this “Item 1A. Risk Factors.” There is no assurance that the methodologies used to calculate the estimated value per Interest would be acceptable to the Financial Industry Regulatory Authority, Inc. or in compliance with ERISA guidelines with respect to their respective reporting requirements.
Business Risks
Our business has been and could continue to be hurt by economic downturns.
Our business is affected by a number of economic factors, including, but not limited to, the level of economic activity in the markets in which we operate. A decline in economic activity in the United States or internationally could materially affect our financial condition and results of operations. The equipment leasing and financing industry is influenced by factors such as interest rates, inflation, employment rates and other macroeconomic factors over which we have no control. Any decline in economic activity as a result of these factors could result in a decrease in our profitability.
Uncertainties associated with the equipment leasing and financing industry may have an adverse effect on our business and may adversely affect our ability to give you any economic return from our Interests or a complete return of your capital.
There are a number of uncertainties associated with the equipment leasing and financing industry that may have an adverse effect on our business and may adversely affect our ability to pay distributions to you that will, in total, be equal to a return of all of your capital, or provide for any economic return from our Interests. These include, but are not limited to:
· fluctuations in demand for Capital Assets and fluctuations in interest rates and inflation rates;
· the continuing economic life and value of Capital Assets at the time our investments mature;
· the technological and economic obsolescence of Capital Assets;
· potential defaults by lessees, borrowers or other counterparties;
· supervision and regulation by governmental authorities; and
· increases in our expenses, including taxes and insurance expenses.
The risks and uncertainties associated with the industries of our lessees, borrowers, and other counterparties may indirectly affect our business, operating results and financial condition.
We are indirectly subject to a number of uncertainties associated with the industries of our lessees, borrowers, and other counterparties. We invested in a pool of Capital Assets by, among other things, acquiring Capital Assets subject to lease, purchasing Capital Assets and leasing Capital Assets to third-party end users, financing Capital Assets for third-party end users, acquiring ownership rights to items of leased Capital Assets at lease expiration, and acquiring interests or options to purchase interests in the residual value of Capital Assets. The lessees, borrowers, and other counterparties to these transactions
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operate in a variety of industries. As such, we are indirectly subject to the various risks and uncertainties that affect our lessees’, borrowers’, and other counterparties’ businesses and operations. If such risks or uncertainties were to affect our lessees, borrowers, or other counterparties, we may indirectly suffer a loss on our investment, lose future revenues or experience adverse consequences to our business, operating results and financial condition.
Because we borrowed money to make our investments, losses as a result of lessee, borrower or other counterparty defaults may be greater than if such borrowings were not incurred.
Although we acquired some of our investments for cash, we borrowed a substantial portion of the purchase price of certain of our investments. While we believe the use of leverage resulted in our ability to make more investments with less risk than if leverage was not utilized, there can be no assurance that the benefits of greater size and diversification of our investment portfolio will offset the heightened risk of loss in an individual investment using leverage. With respect to non-recourse borrowings, if we are unable to pay our debt service obligations because a lessee, borrower or other counterparty defaults, a lender could foreclose on the investment securing the non-recourse indebtedness. This could cause us to lose all or part of our investment or could force us to meet debt service payment obligations so as to protect our investment subject to such indebtedness and prevent it from being subject to repossession.
Guarantees made by the guarantors of some of our lessees, borrowers and other counterparties may be voided under certain circumstances and we may be required to return payments received from such guarantors.
Under federal bankruptcy law and comparable provisions of state fraudulent transfer laws, a guarantee could be voided, or claims in respect of a guarantee could be subordinated to all other debts of that guarantor if, among other things, the guarantor, at the time it incurred the indebtedness evidenced by its guarantee:
• | received less than reasonably equivalent value or fair consideration for the incurrence of such guarantee; and |
• | was insolvent or rendered insolvent by reason of such incurrence; or |
• | was engaged in a business or transaction for which the guarantor’s remaining assets constituted unreasonably small capital; or |
• | intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature. |
In addition, any payment by that guarantor pursuant to its guarantee could be voided and required to be returned to the guarantor, or to a court instituted fund for the benefit of the creditors of the guarantor.
The measures of insolvency for purposes of these fraudulent transfer laws will vary depending upon the law applied in any proceeding to determine whether a fraudulent transfer has occurred. Generally, however, a guarantor would be considered insolvent if:
• | the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all of its assets; |
• | the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or |
• | it could not pay its debts as they become due. |
We cannot assure you as to what standard a court would apply in making these determinations or that a court would agree with our conclusions in this regard. We also cannot make any assurances as to the standards that courts in foreign jurisdictions may use or that courts in foreign jurisdictions will take a position similar to that taken by courts in the United States.
If the value of our investments in certain types of leased Capital Assets declines more rapidly than we anticipate, our financial performance may be adversely affected.
A significant part of the value of some of the Capital Assets that we invested in is expected to be the potential value of the Capital Assets once the lease term expires (with respect to leased Capital Assets). Generally, a Capital Asset is expected to decline in value over its useful life. In making these types of investments, we assume a residual value for the Capital Assets at the end of the lease or other investment that, at maturity, is expected to be enough to return the cost of our investment in the Capital Assets and provide a rate of return despite the expected decline in the value of the Capital Assets over the term of the investment. However, the actual residual value of the Capital Assets at maturity and whether that value meets our expectations will depend to a significant extent upon the following factors, many of which are beyond our control:
• | our ability to acquire or enter into agreements that preserve or enhance the relative value of the Capital Assets; |
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• | our ability to maximize the value of the Capital Assets at maturity of our investment; |
• | market conditions prevailing at maturity; |
• | the cost of new Capital Assets at the time we are remarketing used Capital Assets; |
• | the extent to which technological or regulatory developments reduce the market for such used Capital Assets; |
• | the strength of the economy; and |
• | the condition of the Capital Assets at maturity. |
We cannot assure you that our assumptions with respect to value will be accurate or that the Capital Assets will not lose value more rapidly than we anticipate.
If a Capital Asset is not properly maintained, its residual value may be less than expected.
If a lessee or other counterparty fails to maintain Capital Assets in accordance with the terms of our financing agreements, we may have to make unanticipated expenditures to repair the Capital Assets in order to protect our investment. In addition, some of the Capital Assets we invested in were used Capital Assets. While we planned to inspect most used Capital Assets prior to making an investment, there is no assurance that an inspection of a used Capital Asset prior to purchasing it would have revealed any or all defects and problems with the Capital Asset that may occur after it was acquired by us.
We typically obtain representations from the sellers and lessees of used Capital Assets that:
• | the Capital Assets have been maintained in compliance with the terms of applicable agreements; |
• | neither the seller nor the lessee is in violation of any material terms of such agreements; and |
• | the Capital Assets are in good operating condition and repair and that, with respect to leases, the lessee has no defenses to the payment of rent for the Capital Assets as a result of the condition of such Capital Assets. |
We would have rights against the seller of Capital Assets for any losses arising from a breach of representations made to us and against the lessee for a default under the lease. However, we cannot assure you that these rights would make us whole with respect to our entire investment in the Capital Assets or our expected returns on the Capital Assets, including legal costs, costs of repair and lost revenue from the delay in being able to sell or re-lease the Capital Assets due to undetected problems or issues. These costs and lost revenue could negatively affect our liquidity and cash flows, and could negatively affect our profitability if we are unable to recoup such costs from the seller, the lessee or other third parties.
If a lessee, borrower or other counterparty defaults on its obligations to us, we could incur losses.
We entered into transactions with parties that have senior debt rated below investment grade or no credit rating. We did not require such parties to have a minimum credit rating. Lessees, borrowers, and other counterparties with lower or no credit ratings may default on payments to us more frequently than lessees, borrowers or other counterparties with higher credit ratings. For example, if a lessee does not make lease payments to us or to a lender on our behalf or a borrower does not make loan payments to us when due, or such parties otherwise violate the terms of their contract in another way, we may be forced to terminate our agreements with such parties and attempt to recover the Capital Assets. We may do this at a time when we may not be able to arrange for a new lease or to sell our investment right away, if at all. We would then lose the expected revenues and might not be able to recover the entire amount or any of our original investment. The costs of recovering Capital Assets upon a lessee’s, borrower’s or other counterparty’s default, enforcing the obligations under the contract, and transporting, storing, repairing, and finding a new lessee or purchaser for the Capital Assets may be high and may negatively affect the value of our investment in the Capital Assets. These costs could also negatively affect our liquidity and cash flows, and could negatively affect our profitability.
If a lessee, borrower or other counterparty files for bankruptcy, we may have difficulty enforcing the terms of the contract and may incur losses.
If a lessee, borrower or other counterparty files for protection under applicable bankruptcy laws, the remaining term of the lease, loan or other financing contract could be shortened or the contract could be rejected by the bankruptcy court, which could result in, among other things, any unpaid pre-bankruptcy lease, loan or other contractual payments being cancelled as part of the bankruptcy proceeding. We may also experience difficulties and delays in recovering Capital Assets from a bankrupt lessee or borrower that is involved in a bankruptcy proceeding or has been declared bankrupt by a bankruptcy court. If a contract is rejected in a bankruptcy, we would bear the cost of retrieving and storing the Capital Assets and then have to remarket such Capital Assets. In addition, the bankruptcy court would treat us as an unsecured creditor for any amounts due
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under the lease, loan or other contract. These costs and lost revenues could also negatively affect our liquidity and cash flows and could negatively affect our profitability.
Investing in Capital Assets in foreign countries may be riskier than domestic investments and may result in losses.
We made investments in Capital Assets outside of the United States. We may have difficulty enforcing our rights under foreign transaction documents. In addition, we may have difficulty repossessing our Capital Assets if a foreign party defaults and enforcement of our rights outside the United States could be more expensive. Moreover, foreign jurisdictions may confiscate our Capital Assets. Use of Capital Assets in a foreign country will be subject to that country’s tax laws, which may impose unanticipated taxes. While we seek to require lessees, borrowers, and other counterparties to reimburse us for all taxes imposed on the use of the Capital Assets and require them to maintain insurance covering the risks of confiscation of the Capital Assets, we cannot assure you that we will be successful in doing so or that insurance reimbursements will be adequate to allow for recovery of and a return on foreign investments.
In addition, we invested in Capital Assets that may travel to or between locations outside of the United States. Regulations in foreign countries may adversely affect our interest in Capital Assets in those countries. Foreign courts may not recognize judgments obtained in U.S. courts and different accounting or financial reporting practices may make it difficult to judge the financial viability of a lessee, borrower or other counterparty, heightening the risk of default and the loss of our investment in such Capital Assets, which could have a material adverse effect on our results of operations and financial condition.
In addition to business uncertainties, our investments may be affected by political, social, and economic uncertainty affecting a country or region. Many financial markets are not as developed or as efficient as those in the U.S. and, as a result, liquidity may be reduced and price volatility may be higher. The legal and regulatory environment may also be different, particularly with respect to bankruptcy and reorganization. Financial accounting standards and practices may also differ and there may be less publicly available information with respect to such companies. While our General Partner and Investment Manager consider these factors when making investment decisions, no assurance can be given that we will be able to fully avoid these risks or generate sufficient risk-adjusted returns.
We could incur losses as a result of foreign currency fluctuations.
We invested in Capital Assets where payments to us are not made in U.S. dollars. In these cases, we may have entered into a contract to protect these payments from fluctuations in the currency exchange rate. These contracts, known as hedge contracts, would allow us to receive a fixed number of U.S. dollars for any fixed, periodic payments due under the transactional documents even if the exchange rate between the U.S. dollar and the currency of the transaction changes over time. If the payments to us were disrupted due to default by the lessee, borrower or other counterparty, we would try to continue to meet our obligations under the hedge contract by acquiring the foreign currency equivalent of the missed payments, which may be available at unfavorable exchange rates. If a transaction is denominated in a major foreign currency such as the pound sterling, which historically has had a stable relationship with the U.S. dollar, we may have considered hedging to be unnecessary to protect the value of the payments to us, but our assumptions concerning currency stability may turn out to be incorrect. Our investment returns could be reduced in the event of unfavorable currency fluctuation when payments to us are not made in U.S. dollars.
Furthermore, when we acquired an interest in foreign Capital Assets, we may not have been able to hedge our foreign currency exposure with respect to the future value of such Capital Assets because the terms and conditions of such hedge contracts might not have been in our best interests. Even with transactions requiring payments in U.S. dollars, the Capital Assets may be sold at maturity for an amount that cannot be pre-determined to a buyer paying in a foreign currency. This could positively or negatively affect our income from such a transaction when the proceeds are converted into U.S. dollars.
Sellers of leased Capital Assets could use their knowledge of the lease terms for gain at our expense.
We may have acquired Capital Assets subject to lease from leasing companies that have an ongoing relationship with the lessees. A seller could use its knowledge of the terms of the lease, particularly the end of lease options and date the lease ends, to compete with us. In particular, a seller may approach a lessee with an offer to substitute similar Capital Assets at lease end for lower rental amounts. This may adversely affect our opportunity to maximize the residual value of the Capital Assets and potentially negatively affect our profitability.
Investment in joint ventures may subject us to risks relating to our co-investors that could adversely impact the financial results of such joint ventures.
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We have invested in joint ventures with other businesses our Investment Manager and its affiliates manage, as well as with unrelated third parties. Investing in joint ventures involves additional risks not present when making investments in Capital Assets that are wholly owned by us. These risks include the possibility that our co-investors might become bankrupt or otherwise fail to meet financial commitments, thereby obligating us to pay all of the debt associated with the joint venture, as each party to a joint venture may be required to guarantee all of the joint venture’s obligations. Alternatively, the co-investors may have economic or business interests or goals that are inconsistent with our investment objectives and want to manage the joint venture in ways that do not maximize our return. Among other things, actions by a co-investor might subject investments that are owned by the joint venture to liabilities greater than those contemplated by the joint venture agreement. Also, when none of the co-investors control a joint venture, there might be a stalemate on decisions, including when to sell the Capital Assets or the prices or terms of a loan or lease. Finally, while we typically have the right to buy out the other co-investor’s interest in the Capital Assets in the event of a sale, we may not have the resources available to do so. These risks could negatively affect our profitability and could result in legal and other costs, which would negatively affect our liquidity and cash flows.
We may not be able to obtain insurance for certain risks and would have to bear the cost of losses from non-insurable risks.
Capital Assets may be damaged or lost. Fire, weather, accidents, theft or other events can cause damage or loss of Capital Assets. While our transaction documents generally require lessees and borrowers to have comprehensive insurance and assume the risk of loss, some losses, such as from acts of war, terrorism or earthquakes, may be either uninsurable or not economically feasible to insure. Furthermore, not all possible liability claims or contingencies affecting Capital Assets can be anticipated or insured against, and, if insured, the insurance proceeds may not be sufficient to cover a loss. If such a disaster occurs to the Capital Assets, we could suffer a total loss of any investment in the affected Capital Assets. By investing in some types of Capital Assets, we may have been exposed to environmental tort liability. Although we use our best efforts to minimize the possibility and exposure of such liability including by means of attempting to obtain insurance, we cannot assure you that our assets will be protected against any such claims. These risks could negatively affect our profitability and could result in legal and other costs, which would negatively affect our liquidity and cash flows.
We could suffer losses from failure to maintain our Capital Assets’ registration and from unexpected regulatory compliance costs.
Many types of transportation assets are subject to registration requirements by U.S. governmental agencies, as well as foreign governments if such Capital Assets are to be used outside of the United States. Failing to register the Capital Assets, or losing such registration, could result in substantial penalties, forced liquidation of the Capital Assets and/or the inability to operate and lease the Capital Assets. Governmental agencies may also require changes or improvements to Capital Assets and we may have to spend our own funds to comply if the lessee, borrower or other counterparty is not required to do so under the transaction documents. These changes could force the Capital Assets to be removed from service for a period of time. The terms of the transaction documents may provide for payment reductions if the Capital Assets must remain out of service for an extended period of time or are removed from service. We may then have reduced income from our investment for these Capital Assets. If we do not have the funds to make a required change, we might be required to sell the affected Capital Assets. If so, we could suffer a loss on our investment, lose future revenues and experience adverse tax consequences.
If any of our investments become subject to usury laws, we could have reduced revenues or possibly a loss on such investments.
In addition to credit risks, we may be subject to other risks in Capital Asset financing transactions in which we are deemed to be a lender. For example, equipment leases have sometimes been held by U.S. courts to be loan transactions subject to state usury laws, which limit the interest rate that can be charged. Uncertainties in the application of some laws may result in inadvertent violations that could result in reduced investment returns or, possibly, losses on our investments in the affected transactions. Although part of our business strategy is to enter into or acquire leases that are structured so that they avoid being deemed loans and would therefore not be subject to usury laws, we cannot assure you that we will be successful in doing so. In addition, as part of our business strategy, we also made or acquired secured loans, which are also subject to usury laws and, while we attempted to structure these to avoid being deemed in violation of usury laws, we cannot assure you that we were successful in doing so. Loans at usurious interest rates are subject to a reduction in the amount of interest due under such loans and, if an equipment lease or secured loan is held to be a loan with a usurious rate of interest, the amount of the lease or loan payment could be reduced, which would adversely affect our revenue.
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State laws determine what rates of interest are deemed usurious, when the applicable rate of interest is determined, and how it is calculated. In addition, some U.S. courts have also held that certain lease and loan features, such as equity interests, constitute additional interest. Although we generally seek assurances and/or opinions to the effect that our transactions do not violate applicable usury laws, a finding that our transactions violate usury laws could result in the interest obligation to us being declared void and we could be liable for damages and penalties under applicable law. We cannot assure you as to what standard a court would apply in making these determinations or that a court would agree with our conclusions in this regard. We also cannot make any assurances as to the standards that courts in foreign jurisdictions may use or that courts in foreign jurisdictions will take a position similar to that taken by courts in the United States.
We competed with a variety of financing sources for our investments, which may affect our ability to achieve our investment objectives.
The commercial leasing and financing industry is highly competitive and is characterized by competitive factors that vary based upon product and geographic region. When we made our investments we competed, and as we seek to liquidate our portfolio we compete, with a variety of competitors including other equipment leasing and finance funds, hedge funds, private equity funds, captive and independent finance companies, commercial and industrial banks, manufacturers and vendors. Competition from both traditional competitors and new market entrants remains intense. Increased competition in the equipment financing business has caused us to encounter significant challenges. Specifically, we suffered from increasing competition over the last few years from larger alternative lenders that had not historically competed with us for investment opportunities.
When we made our investments, we competed primarily on the basis of pricing, terms and structure. To the extent that our competitors competed aggressively on any combination of those factors, we could fail to achieve our investment objectives.
Some of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than either we or our General Partner and its affiliates have. For example, some competitors may have had a lower cost of funds and access to funding sources that were not available to us. A lower cost of funds could have enabled a competitor to offer leases or loans at rates that were less than ours, potentially forcing us to lower our rates or lose potential lessees, borrowers or other counterparties. In addition, our competitors may have been and/or may be in a position to offer equipment to prospective customers on other terms that were or are more favorable than those that we could offer or that we will be able to offer as we liquidate our portfolio, which may have affected our ability to make investments and may affect our ability to liquidate our portfolio, in each case, in a manner that would enable us to achieve our investment objectives.
Organization and Structure Risks
You have limited voting rights and are required to rely on our General Partner and/or our Investment Manager to make all of our investment decisions and achieve our investment objectives.
Our General Partner and/or our Investment Manager will make all of our investment decisions, including determining the investments we made and the dispositions we make. Our success will depend upon the quality of the investment decisions our General Partner and/or our Investment Manager make, particularly relating to our investments in Capital Assets and the realization of such investments. You are not permitted to take part in managing, establishing or changing our investment objectives or policies.
The decisions of our General Partner and our Investment Manager may be subject to conflicts of interest.
The decisions of our General Partner and our Investment Manager may be subject to various conflicts of interest arising out of their relationship to us and our affiliates. Our General Partner and our Investment Manager could be confronted with decisions where either or both will, directly or indirectly, have an economic incentive to place its respective interests or the interests of their affiliates above ours. As of December 31, 2016, our Investment Manager, an affiliate of our General Partner, is the managing trustee or the investment manager for four other public equipment leasing and finance funds. See “Item 13. Certain Relationships and Related Transactions, and Director Independence.” These conflicts may include, but are not limited to:
• | our Investment Manager may have received more fees for managing our investments in which we incurred indebtedness to fund these investments than if indebtedness was not incurred; |
• | our Partnership Agreement does not prohibit our General Partner or any of our affiliates from competing with us for investments or engaging in other types of business; |
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• | our Investment Manager may have had opportunities to earn fees for referring a prospective investment opportunity to others; |
• | the lack of separate legal representation for us, our General Partner, and our Investment Manager and lack of arm’s-length negotiations regarding compensation payable to our General Partner and our Investment Manager; |
• | our General Partner is our tax matters partner and is able to negotiate with the IRS to settle tax disputes that would bind us and you that might not be in your best interest given your individual tax situation; and |
• | our General Partner and/or our Investment Manager can make decisions as to when and whether to sell a jointly-owned asset when the co-owner is another business it manages. |
The investment committee of our Investment Manager is not independent.
Any conflicts in determining and allocating investments between us and our General Partner or Investment Manager, or between us and another fund managed by our Investment Manager, were resolved by our Investment Manager’s investment committee, which also serves as our investment committee and the investment committee for other funds managed by our Investment Manager and its affiliates. Since all of the members of our Investment Manager’s investment committee are officers of our General Partner and our Investment Manager and certain of their affiliates and are not independent, matters determined by such investment committee, including conflicts of interest between us, our General Partner, our Investment Manager and their respective affiliates involving investment opportunities, may not have been as favorable to us as they would be if independent members were on the committee. Generally, if an investment is appropriate for more than one fund, our Investment Manager’s investment committee allocated the investment to a fund (which includes us) after taking into consideration at least the following factors:
• | whether the fund had the cash required for the investment; |
• | whether the amount of debt to be incurred with respect to the investment was acceptable for the fund; |
• | the effect the investment would have had on the fund’s cash flow; |
• | whether the investment would further diversify, or unduly concentrate, the fund’s investments in a particular lessee/borrower, class or type of Capital Asset, location, industry, etc.; |
• | whether the term of the investment was within the term of the fund; and |
• | which fund had been seeking investments for the longest period of time. |
Notwithstanding the foregoing, our Investment Manager’s investment committee may have made exceptions to these general policies when, in our Investment Manager’s judgment, other circumstances made application of these policies inequitable or economically undesirable. In addition, our Partnership Agreement permits our General Partner and our affiliates to engage in Capital Asset acquisitions, financing secured loans and refinancing, leasing and releasing opportunities on their own behalf or on behalf of other funds even if they compete with us.
Our General Partner’s and our Investment Manager’s officers and employees manage other businesses and will not devote their time exclusively to managing us and our business and we may face additional competition for time and capital because neither our Investment Manager nor its affiliates are prohibited from raising money for or managing other entities that pursue the same types of investments that we targeted.
We do not employ our own full-time officers, managers or employees. Instead, our General Partner and/or our Investment Manager supervise and control our business affairs. Our General Partner’s officers and employees are also officers and employees of our Investment Manager and its affiliates. In addition to sponsoring and managing us and other equipment funds, our Investment Manager and its affiliates currently sponsor, manage and/or distribute other investment products, including, but not limited to, a business development company.
As a result, the time and resources that our Investment Manager’s and its affiliates’ officers and employees devote to us may be diverted and during times of intense activity in other investment products that our Investment Manager and its affiliates manage, sponsor or distribute, such officers and employees may devote less time and resources to our business than would be the case if we had separate officers and employees. In addition, we may have competed with any such investment entities for the same investment opportunities.
Our General Partner and its affiliates have received and will continue to receive expense reimbursements and fees from us and those reimbursements and fees were likely to exceed the income portion of distributions paid to you during our early years.
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Before paying any distributions to you, we have reimbursed and will continue to reimburse our General Partner and its affiliates for expenses incurred on our behalf, and paid or pay our General Partner and its affiliates fees for acquiring, managing and realizing our investments. Our Investment Manager is not paid acquisition fees or management fees for additional investments initiated during the liquidation period, although management fees continue to be paid for investments that were part of our portfolio prior to the commencement of the liquidation period. The expense reimbursements and fees of our General Partner and its affiliates were established by our General Partner in compliance with the North American Securities Administrators Association guidelines for publicly offered, finite-life equipment funds (the “NASAA Guidelines”) in effect on May 18, 2009 and are not based on arm’s-length negotiations, but are subject to the limitations set forth in our Partnership Agreement. Nevertheless, the amount of these expense reimbursements and fees were likely to exceed the income portion of distributions paid to you in our early years.
In general, expense reimbursements and fees were or are paid without regard to the amount of our distributions to our limited partners, and regardless of the success or profitability of our operations. Some of those fees and expense reimbursements were or will be required to be paid as we acquired our portfolio and incurred or incur expenses, such as accounting and interest expenses, even though we may not yet have begun to receive revenues from all of our investments. This lag between the time when we paid or must pay fees and expenses and the time when we received or receive revenues may have resulted in losses to us during our early years, which our General Partner believes is typical for a fund such as us.
Furthermore, we borrowed a significant portion of the purchase price of some of our investments. This use of indebtedness permitted us to make more investments than if borrowings were not utilized. As a consequence, we have paid and may continue to pay greater fees to our Investment Manager than if no indebtedness were incurred because management and acquisition fees were or are based upon the gross payments earned or receivable from, or the purchase price (including any indebtedness incurred) of, our investments. Also, our General Partner and/or our Investment Manager will determine the amount of cash reserves that we will maintain for future expenses or contingencies. The reimbursement of expenses, payment of fees or creation of reserves could adversely affect our ability to pay distributions to you.
Our Investment Manager and its affiliates may have difficulty managing their growth, which may divert their resources and limit their ability to expand their operations successfully.
The amount of assets that our Investment Manager and its affiliates manage has grown substantially since our Investment Manager was formed in 1985. Our Investment Manager and its affiliates intend to continue to sponsor and manage, as applicable, funds similar to and different from us that may be sponsored and managed concurrently with us and they expect to experience further growth in their respective assets under management. Our Investment Manager’s future success will depend on the ability of its and its affiliates’ officers and key employees to implement and improve their operational, financial and managerial controls, reporting systems and procedures, and manage a growing number of assets and investment funds. However, they may not implement improvements to their managerial information and control systems in an efficient or timely manner and they may discover deficiencies in their existing systems and controls. Thus, our Investment Manager’s and its affiliates' anticipated growth may place a strain on their administrative and operations infrastructure, which could increase their costs and reduce their efficiency and could negatively impact our operations, business and financial condition.
Operational risks may disrupt our business and result in losses.
We may face operational risk from errors made in the execution, confirmation or settlement of transactions. We may also face operational risk from our transactions not being properly recorded, evaluated or accounted for. We rely heavily on our Investment Manager’s financial, accounting, and other software systems. If any of these systems fail to operate properly or become disabled, we could suffer financial loss and a disruption of our business.
In addition, we are highly dependent on our Investment Manager’s information systems and technology. There can be no assurance that these information systems and technology will be able to accommodate our Investment Manager's and its affiliates' growth or that the cost of maintaining such systems will not increase from its current level. A failure to accommodate growth, or an increase in costs related to such information systems, could also negatively affect our liquidity and cash flows, and could negatively affect our profitability.
Furthermore, we depend on the headquarters of our General Partner and Investment Manager, which are located in New York City, for the operation of our business. A disaster or a disruption in the infrastructure that supports our business, including a disruption involving electronic communications or other services used by us or third parties with whom we conduct business, or directly affecting our headquarters, may have an adverse impact on our ability to continue to operate our business without interruption, which could have a material adverse effect on us. Although we have disaster recovery programs in place, there
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can be no assurance that these will be sufficient to mitigate the harm that may result from such a disaster or disruption. In addition, insurance and other safeguards might only partially reimburse us for any losses.
Finally, we rely on third-party service providers for certain aspects of our business, including certain accounting and financial services. Any interruption or deterioration in the performance of these third parties could impair the quality of our operations and could adversely affect our business and result in losses.
We rely on our systems, certain affiliates’ employees, and certain third party vendors and service providers in conducting our operations, and certain failures, including internal or external fraud, operational errors, systems malfunctions, or cybersecurity incidents, could materially adversely affect our operations.
We are exposed to many types of operational risk, including the risk of fraud by certain affiliates’ employees and outsiders, clerical and recordkeeping errors, and computer or telecommunications systems malfunctions. If any of our financial, accounting, or other data processing systems fail or have other significant shortcomings, we could be materially adversely affected. We are similarly dependent on the employees of certain of our affiliates. We could be materially adversely affected if one of such employees causes a significant operational break-down or failure, either as a result of human error or where an individual purposefully sabotages or fraudulently manipulates our operations or systems. Third parties with which we do business could also be sources of operational risk to us, including relating to break-downs or failures of such parties’ own systems or employees. Any of these occurrences could result in a diminished ability for us to operate one or more of our business, or cause financial loss, potential liability, inability to secure insurance, reputational damage and regulatory intervention, which could materially adversely affect us.
We may also be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control, which may include, for example, computer viruses or electrical or telecommunications outages, natural or man-made disasters, such as earthquakes, hurricanes, floods or tornados, disease pandemics, or events arising from local or regional politics, including terrorist acts. Such disruptions may give rise to loss or liability to us. In addition, there is the risk that our controls and procedures as well as business continuity and data security systems prove to be inadequate. The computer systems and network systems we use could be vulnerable to unforeseen problems. These problems may arise in both our internally developed systems and the systems of third-party service providers. In addition, our computer systems and network infrastructure present security risks, and could be susceptible to hacking or identity theft. Any such failure could affect our operations and could materially adversely affect our results of operations by requiring us to expend significant resources to correct the defect, as well as by exposing us to litigation or losses not covered by insurance. Although we have business continuity plans and other safeguards in place, our business operations may be adversely affected by significant and widespread disruption to our physical infrastructure or operating systems that support our business.
Information security risks for financial institutions have generally increased in recent years in part because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financing transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, activists, and other external parties. Our business relies on our digital technologies, computer and email systems, software, and networks to conduct their operations. Although we believe we have robust information security procedures and controls, our technologies, systems and networks may become the target of cyber attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our confidential, proprietary and other information, or otherwise disrupt our business operations, which could materially adversely affect us.
Our internal controls over financial reporting may not be effective, which could have a significant and adverse effect on our business.
Our General Partner is required to evaluate our internal controls over financial reporting in order to allow its management to report on our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002, as amended, and the rules and regulations of the SEC thereunder, which we refer to as ‘‘Section 404.’’ During the course of testing, our General Partner may identify deficiencies that it may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404. We cannot be certain as to the timing of completion of our evaluation, testing and any remediation actions or the impact of the same on our operations. If we are not able to complete our annual evaluations required by Section 404 in a timely manner or with adequate compliance, we may be subject to sanctions or investigation by regulatory authorities, such as the SEC. As a result, we may be required to incur costs in improving our internal controls system and the
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hiring of additional personnel. Any such action could negatively affect our results of operations and the achievement of our investment objectives.
We are subject to certain reporting requirements and are required to file certain periodic reports with the SEC.
We are subject to reporting requirements under the Securities Exchange Act of 1934, as amended, including, but not limited to, the filing of current, quarterly and annual reports. Public funds sponsored by our Investment Manager have been and are subject to the same requirements. If we experience delays in the filing of our reports, our investors may not have access to timely information concerning us, our operations, and our financial results.
Your ability to institute a cause of action against our General Partner and its affiliates is limited by our Partnership Agreement.
Our Partnership Agreement provides that neither our General Partner nor any of its affiliates will have any liability to us for any loss we suffer arising out of any action or inaction of our General Partner or an affiliate if our General Partner or its affiliate determined, in good faith, that the course of conduct was in our best interests and did not constitute negligence or misconduct. As a result of these provisions in our Partnership Agreement, your right to institute a cause of action against our General Partner may be more limited than it would be without these provisions.
Changes in the laws or regulations that affect the terms and conditions set forth in the Partnership Agreement could negatively impact our and/or your rights and obligations.
Our General Partner may, without your consent, amend the Partnership Agreement to effect any change necessitated by a change in law or regulation that causes the terms and conditions set forth in the Partnership Agreement to be, in the sole discretion of our General Partner, no longer viable. The changes must be drawn as narrowly as possible so as to effectuate the original intent of the Partnership Agreement. Nevertheless, these changes could negatively impact our and/or your rights and obligations.
You are not expected to have any protection under the Investment Company Act.
We are not registered, and do not expect in the future to be required to register, as an investment company under the Investment Company Act of 1940, as amended (the "40 Act"), in reliance upon an exemption therefrom. Among other things, the 40 Act generally requires investment companies to have a minimum of forty percent (40%) independent directors and regulates the relationship between the investment adviser (i.e., our Investment Manager) and the investment company (i.e., the Partnership), in particular with regard to affiliated transactions. Such protections, and others afforded by the 40 Act, are not expected to be applicable to us. Should the 40 Act become applicable to us, these protections may be implemented in a manner that alters other rights and obligations of us and/or you with respect to other matters.
You are not expected to have any protection under the Investment Advisers Act.
Our Investment Manager will not register and does not expect in the future to be required to register as an investment adviser under the Investment Advisers Act of 1940, as amended (the "Advisers Act"), because it does not meet the definition of an investment adviser. The Advisers Act contains many provisions designed to protect clients of investment advisers, including, among other things, restrictions on the charging by registered investment advisers of performance-based compensation. Such protections, and others afforded by the Advisers Act, are not expected to be applicable to our Investment Manager and to us. Should the Advisers Act become applicable to our Investment Manager and to us, these protections may be implemented in a manner that alters other rights and obligations of us and/or you with respect to other matters.
General Tax Risks
If the IRS classifies us as a corporation rather than a partnership, your distributions would be reduced under current tax law.
We did not and will not apply for an IRS ruling that we will be classified as a partnership for federal income tax purposes. Although we received an opinion of counsel at the time of our offering that we will be taxed as a partnership and not as a corporation, that opinion is not binding on the IRS and the IRS has not ruled on any federal income tax issue relating to us. If the IRS successfully contends that we should be treated as a corporation for federal income tax purposes rather than as a partnership, then:
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• | our realized losses would not be passed through to you; |
• | our income would be taxed at tax rates applicable to corporations, thereby reducing our cash available to distribute to you; and |
• | your distributions would be taxed as dividend income to the extent of current and accumulated earnings and profits. |
In addition, we could be taxed as a corporation if we are treated as a publicly traded partnership by the IRS. To minimize this possibility, our Partnership Agreement places significant restrictions on your ability to transfer our Interests.
We could lose cost recovery or depreciation deductions if the IRS treats our leases as sales or financings.
We expect that, for federal income tax purposes, we will be treated as the owner and lessor of the Capital Assets that we lease. However, the IRS may challenge the leases and instead assert that they are sales or financings. If the IRS determines that we are not the owner of our leased Capital Assets, we would not be entitled to cost recovery, depreciation or amortization deductions, and our leasing income might be deemed to be portfolio income instead of passive activity income. The denial of such cost recovery or amortization deductions could cause your tax liabilities to increase.
Our investments in secured loans will not give rise to depreciation or cost recovery deductions and may not be offset against our passive activity losses. Any losses on such loans may constitute capital losses, the deductibility of which is limited.
We expect that, for federal income tax purposes, we will not be treated as the owner and lessor of the Capital Assets that we invested in through our lending activities. As a result, we will not be able to take depreciation or cost recovery deductions with respect to such Capital Assets. Depending on our level of activity with respect to these types of financings, we may take the position that we are in the trade or business of lending. Generally, trade or business income can be considered passive activity income. However, because we expect that the source of funds we lent to others was the capital contributed by our partners and the funds generated from our operations (rather than money we borrow from others), you may not be able to offset your share of our passive activity losses from our leasing activities with your share of our interest income from our lending activities. Instead, your share of our interest income from our lending activities would be taxed as portfolio income. Alternatively, we (or the IRS) may treat our lending activities as investment activities and not trade or business activities if our level of lending activity is not significant. In such circumstances, gains or losses from the loans could not be offset against passive activity gain or loss and any such losses would be capital losses that, except to a limited extent, could only be deducted to the extent you have capital gains.
You may incur tax liability in excess of the distributions you receive in a particular year.
In any particular year, your tax liability from owning our Interests may exceed the distributions you receive from us. While we expect that your net taxable income from owning our Interests for most years will be less than your distributions in those years, to the extent any of our debt is repaid with income or proceeds from Capital Asset sales, taxable income could exceed the amount of distributions you receive in those years. Additionally, a sale of our investments may result in taxes in a given year that are greater than the amount of cash from the sale, resulting in a tax liability in excess of distributions. Your tax liability could also exceed the amount of distributions you receive due to allocations designed to cause our limited partners’ capital accounts (as adjusted by certain items) to be equal on a per Interest basis. Therefore, you may have to pay any excess tax liability with funds from another source, because the distributions we pay may not be sufficient to pay such excess tax liability. Further, due to the operation of the various loss disallowance rules, in a given tax year you may have taxable income when, on a net basis, we have a loss, or you may recognize a greater amount of taxable income than your share of our net income because, due to a loss disallowance, income from some of our activities cannot be offset by losses from some of our other activities.
You may be subject to greater income tax obligations than originally anticipated due to special depreciation rules.
We may have acquired Capital Assets subject to lease that the Code requires us to depreciate over a longer period than the standard depreciation period. Similarly, some of the Capital Assets that we purchased may not have been eligible for accelerated depreciation under the Modified Accelerated Cost Recovery System, which was established by the Tax Reform Act of 1986 to set forth the guidelines for accelerated depreciation under the Code. Further, if we acquired Capital Assets that the Code deems to be tax-exempt use property and the leases did not satisfy certain requirements, losses attributable to such Capital Assets are suspended and may be deducted only against income we receive from those Capital Assets or when we dispose of such Capital Assets. Depending on the Capital Assets that we acquired and their eligibility for accelerated
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depreciation under the Code, we may have fewer depreciation deductions to offset gross lease revenue, thereby increasing our taxable income.
There are limitations on your ability to deduct our losses.
Your ability to deduct your share of our losses is limited to the amounts that you have at risk from owning our Interests. This is generally the amount of your investment, plus any profit allocations and minus any loss allocation and distributions. This determination is further limited by a tax rule that applies the at-risk rules on an activity-by-activity basis, further limiting losses from a specific activity to the amount at risk in that activity. Based on the tax rules, we expect that we will have multiple activities for purposes of the at-risk rules. Specifically, our lending activities must be analyzed separately from our leasing activities, and our leasing activities must be further divided into separate year-by-year groups according to the tax year the Capital Assets are placed in service. As such, you cannot aggregate income and loss from our separate activities for purposes of determining your ability to deduct your share of our losses under the at-risk rules.
Additionally, your ability to deduct losses attributable to passive activities is restricted. Some of our operations will constitute passive activities and you can only use our losses from such activities to offset passive activity income in calculating tax liability. Furthermore, passive activity losses may not be used to offset portfolio income. As stated above, we expect our lending activities to generate portfolio income from the interest we receive, even though the income may be attributable to a lending trade or business. Any gains or losses we recognize from those lending activities that are associated with a trade or business are generally allowable as either passive activity income or loss, as applicable. Gains and losses we recognize from lending activities not associated with a trade or business pass through as capital gains and losses and can be offset by other capital gains and losses you may have.
The IRS may allocate more taxable income or less loss to you than our Partnership Agreement provides.
The IRS might successfully challenge our allocations of taxable income or losses. If so, the IRS would require reallocation of our taxable income and loss, resulting in an allocation of more taxable income or less loss to you than our Partnership Agreement allocates.
If you are or invest through a tax-exempt entity or organization, you will have unrelated business taxable income from this investment.
Tax-exempt entities and organizations are subject to income tax on unrelated business taxable income (“UBTI”). Such entities and organizations are required to file federal income tax returns if they have UBTI from all sources in excess of $1,000 per year. Our leasing income will constitute UBTI. Furthermore, tax-exempt organizations in the form of charitable remainder trusts will be subject to an excise tax equal to 100% of their UBTI. Thus, an investment in our Interests may not be appropriate for a charitable remainder trust and such entities should consult their own tax advisors with respect to an investment in our Interests.
To the extent that we borrowed money in order to finance our lending activities, a portion of our income from such activities will be treated as attributable to debt-financed property and, to the extent so attributable, will constitute UBTI. The debt-financed UBTI rules are broad and there is much uncertainty in determining when, and the extent to which, property should be considered debt-financed. Thus, the IRS might assert that a portion of the assets we acquired as part of our lending activities is debt-financed property generating UBTI, especially with regard to any indebtedness we incurred to fund working capital at a time when we held loans we have acquired or made to others. If the IRS were to successfully assert that debt we believed should have been attributed to our leasing activities should instead be attributed to our lending activities, the amount of our income that constitutes UBTI would be increased.
This investment may cause you to pay additional taxes.
You may be required to pay alternative minimum tax in connection with owning our Interests since you will be allocated a proportionate share of our tax preference items. Our General Partner’s and/or our Investment Manager’s operation of our business affairs may lead to other adjustments that could also increase your alternative minimum tax. In addition, if all or a portion of our lending activities are not generated from a trade or business, then a portion of our management fees and other costs related to those investments could be considered investment expenses rather than trade or business expenses. To the extent that a portion of our fees are considered investment expenses, that portion of such fees would not be deductible for alternative minimum tax purposes and would be subject to a limitation for regular tax purposes. Alternative minimum tax is treated in the same manner as the regular income tax for purposes of making estimated tax payments.
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You may incur state and foreign tax liabilities and have an obligation to file state or foreign tax returns.
You may be required to file tax returns and pay foreign, state or local taxes, such as income, franchise or personal property taxes, as a result of an investment in our Interests, depending upon the laws of the jurisdictions in which the Capital Assets that we own are located.
Any adjustment to our tax return as a result of an audit by the IRS may result in adjustment to your tax return.
If we adjust our tax return as a result of an IRS audit, such adjustment may result in an examination of other items in your returns unrelated to us, or an examination of your tax returns for prior years. You could incur substantial legal and accounting costs in contesting any challenge by the IRS, regardless of the outcome. Further, because you will be treated for federal income tax purposes as a partner in a partnership by investing in our Interests, an audit of our tax return could potentially lead to an audit of your individual tax return. Finally, under certain circumstances, the IRS may automatically adjust your personal return without the opportunity for a hearing if it adjusts our tax return.
Some of the distributions paid with respect to our Interests will be a return of capital, in whole or in part, which will complicate your tax reporting and could cause unexpected tax consequences at liquidation.
As we depreciate our investments in leased Capital Assets over the term of our existence and/or borrowers repay loans we have made to them, it is very likely that a portion of each distribution paid by us will be considered a return of capital, rather than income. Therefore, the dollar amount of each distribution should not be considered as necessarily being all income to you. As your capital in our Interests is reduced for tax purposes over the life of your investment, you will not receive a lump sum distribution upon liquidation that equals the purchase price you paid for our Interests, such as you might expect if you had purchased a bond. Also, payments made upon our liquidation will be taxable to the extent that such payments are not a return of capital.
As you receive distributions throughout the life of your investment, you will not know at the time of the distribution what portion of the distribution represents a return of capital and what portion represents income. The Schedule K-1 statement you have received and will continue to receive from us each year will specify the amounts of capital and income you received throughout the prior year.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
We neither own nor lease office space or any other real property in our business at the present time.
Item 3. Legal Proceedings
In the ordinary course of conducting our business, we may be subject to certain claims, suits, and complaints filed against us. In our General Partner’s opinion, the outcome of such matters, if any, will not have a material impact on our consolidated financial position or results of operations. We are not aware of any material legal proceedings that are currently pending against us or against any of our assets.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant's Securities, Related Security Holder Matters and Issuer Purchases of Equity Securities
Overview
Number of Partners | ||
Title of Class | As of March 27, 2017 | |
General Partner | 1 | |
Limited partners | 7,161 | |
We, at our General Partner’s discretion, paid monthly distributions to each of our limited partners beginning the first month after each such limited partner was admitted through the end of our operating period, which was on May 18, 2016. During our liquidation period, we have paid and will continue to pay distributions in accordance with the terms of our Partnership Agreement. We expect that distributions paid during the liquidation period will vary, depending on the timing of the sale of our assets and/or the maturity of our investments, and our receipt of rental, finance and other income from our investments. We paid distributions to our limited partners totaling $10,350,460, $20,700,921 and $20,701,136 for the years ended December 31, 2016, 2015 and 2014, respectively. Additionally, we paid distributions to our General Partner of $104,550, $209,100 and $209,102 for the years ended December 31, 2016, 2015 and 2014, respectively.
Our Interests are not publicly traded and there is no established public trading market for our Interests. Given that it is unlikely that any such market will develop, our Interests are generally considered illiquid. Even if a limited partner is able to sell our Interests, the price received may be less than our estimated value (“Estimated Value”) per Interest indicated below.
Our Estimated Value per Interest as of December 31, 2016 (the “Valuation Date”) has been determined to be $277.88 per Interest. The Estimated Value per Interest is based upon the estimated fair value of our assets less the estimated fair value of our liabilities as of the Valuation Date, divided by the total number of our Interests outstanding as of the Valuation Date. To the extent an investment is owned by a joint venture, we only include our share of assets and liabilities based on our ownership percentage in such joint venture.* The information used to generate the Estimated Value per Interest, including, but not limited to, market information, investment and asset-level data and other information provided by third parties, was the most recent information practically available as of the Valuation Date. This Estimated Value per Interest is provided to assist (i) plan fiduciaries in fulfilling their annual valuation obligations as required by ERISA and (ii) broker-dealers that participated in our offering of Interests in meeting their customer account statement reporting obligations as required by the Financial Industry Regulatory Authority, Inc. (“FINRA”).
The Estimated Value per Interest was calculated by our Investment Manager primarily based on the fair values provided by Duff & Phelps, a third-party independent valuation and consulting firm engaged by our Investment Manager to provide material assistance related to the valuation of certain of our assets and liabilities, as further described below. The engagement of Duff & Phelps was approved by our Investment Manager. Duff & Phelps is a global valuation and corporate finance advisor with expertise in complex valuation.
Process and Methodology
Our Investment Manager established the Estimated Value per Interest as of the Valuation Date primarily based on the fair values of certain of our assets and liabilities provided by Duff & Phelps. In arriving at its fair value, Duff & Phelps utilized valuation methodologies that both our Investment Manager and Duff & Phelps believe are standard and acceptable in the Capital Asset financing industry for the types of assets and liabilities held by us. The valuation was performed in accordance with standard industry practice and the provisions of NASD Rule 2340 and FINRA Rule 2310. The basis of fair values provided by Duff & Phelps are in accordance with the definition of fair value in Accounting Standards Codification 820. For investments that were acquired during the year ended December 31, 2016, fair values are estimated by our Investment Manager to approximate net carrying values due to the short amount of time that passed between the date we entered into such investments and the Valuation Date. For investments that were subsequently sold or settled after the Valuation Date but before the filing of this report, fair values are estimated by our Investment Manager to approximate the sale proceeds or the settlement amounts, as applicable.
* An investment or a long-term debt obligation described in this Item 5 may not be consolidated and presented on our consolidated balance sheet as of December 31, 2016, but rather included as part of investment in joint ventures on our consolidated balance sheet as of December 31, 2016.
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A summary of the methodology used by Duff & Phelps, as well as the assumptions and limitations of their work for us and of our determination of Estimated Value, are presented below.
Discounted Cash Flow
The discounted cash flow (“DCF”) method was used to estimate value using the concept of the time value of money. All projected future cash flows accruing to an asset or liability were estimated and discounted to give their present values. The sum of all projected future cash flows, both incoming and outgoing, comprises the net present value, which was recognized as the value or price of the cash flows.
Valuation of Notes Receivable
The estimated fair value of a note receivable at the Valuation Date was derived by using the DCF method. Under the DCF method, discount rate reflects the risks associated with the borrower and the time value of money and was applied to the projected cash flows associated with the note receivable. The discounted projected cash flows included all unpaid principal, interest, and fee payments for the scheduled term period of the note receivable. An analysis of the borrower was conducted to determine viability of payment and total debt coverage, as well as to ascertain the borrower's risk level, with such considerations reflected in the implied discount rate used in discounting the cash flows. The estimated fair value at the Valuation Date of a note receivable estimated by our Investment Manager was zero as no recovery is expected based on a third party bid to purchase the assets collateralizing the note receivable. The estimated fair value of two notes receivable at the Valuation Date was estimated by our Investment Manager to approximate their carrying values due to the short amount of time that passed between the date we entered into such notes receivable and the Valuation Date. For a note receivable, which was settled after the Valuation Date, the estimated fair value was estimated by our Investment Manager to approximate the settlement amount.
The discount rates used ranged from 24.4% to 25.9%.
Valuation of Operating Leases
The estimated fair value of our operating leases at the Valuation Date was derived by applying either (i) the DCF method to projected cash flows that included all lease payments, fees and residual value assumptions for purchase at the end of the lease term or (ii) the charter-free of fair value of the asset based on an independent third-party appraisal using one or a combination of the market, income and cost approaches. Under the DCF method, the projected cash flows were discounted at the Valuation Date using discount rates reflecting the risks associated with the asset and the time value of money.
The discount rates used ranged from 7.7% to 12.2%.
Valuation of Finance Leases
The estimated fair value of our finance leases at the Valuation Date was derived by applying either (i) the DCF method to projected cash flows that included all lease payments, fees and residual value assumptions for purchase at the end of the lease term or (ii) the charter-free of fair value of the asset based on an independent third-party appraisal using one or a combination of the market, income and cost approaches. Under the DCF method, the projected cash flows were discounted at the Valuation Date using discount rates reflecting the risks associated with the asset and the time value of money.
The discount rates used ranged from 9.1% to 15.5%.
Valuation of Long-term Obligations
The estimated fair value at the Valuation Date of our long-term obligations was derived by applying the DCF method to the projected cash flows accruing to each obligation, using a discount rate reflecting the risks associated with each such obligation and the time value of money. The discounted projected cash flows included all unpaid principal, interest, and fee payments for the scheduled term period of the obligation. An analysis of the borrower was conducted to determine viability of payment, total debt coverage as well as to ascertain the borrower's risk level, with such considerations reflected in the implied discount rate used in discounting the cash flows.
The discount rates used ranged from 3.7% to 12.2%.
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Cash, Other Assets and Other Liabilities
Cash, other assets and other liabilities (collectively, “Other Net Assets”) include our share of items of tangible or monetary value as of the Valuation Date. The fair values of Other Net Assets as of the Valuation Date were estimated by our Investment Manager to approximate their carrying values because of their nature or short-term maturities. Excluded from Other Net Assets is our share of deferred financing costs, prepaid assets and deferred revenue, which our Investment Manager estimated as having a minimal fair value as of the Valuation Date.
Assumptions and Limitations
As with any valuation methodology, the methodologies used to determine our Estimated Value per Interest are based upon a number of estimates and assumptions that may prove later to be inaccurate or incomplete. Further, different market participants using different estimates and assumptions could derive different estimated values. Our Estimated Value per Interest may also not represent the price that our Interests would trade at on a national securities exchange, the amount realized in a sale, merger or liquidation, or the amount a limited partner would realize in a private sale of our Interests.
The Estimated Value per Interest calculated by our Investment Manager is based on economic, market and other conditions and the information available to us and Duff & Phelps as of the Valuation Date. The Estimated Value per Interest is expected to fluctuate over time in response to future events, including, but not limited to, changes in market interest rates, changes in economic, market and regulatory conditions, the prospects of the asset sectors in general or in particular, or the special purpose vehicles in which the assets may be held, rental and growth rates, returns on competing investments, changes in administrative expenses and other costs, the amount of distributions paid on our Interests, and the factors specified in “Item 1A. Risk Factors” included elsewhere in this Annual Report on Form 10-K. The Estimated Value per Interest may also change as a result of changes in the circumstances of the risks associated with each investment.
There is no assurance that the methodologies used to calculate the Estimated Value per Interest would be acceptable to FINRA or in compliance with guidelines promulgated under ERISA with respect to their respective reporting requirements.
Our Investment Manager is ultimately and solely responsible for the establishment of our Estimated Value per Interest. In arriving at its determination of the Estimated Value per Interest, our Investment Manager considered all information provided in light of its own familiarity with our assets and liabilities and the estimated fair values recommended by Duff & Phelps.
We currently expect that our next Estimated Value per Interest will be based upon our assets and liabilities as of December 31, 2017 and such value will be included in our Annual Report on Form 10-K for the year ending December 31, 2017. We intend to publish an updated Estimated Value per Interest annually in our subsequent Annual Reports on Form 10-K.
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Item 6. Selected Financial Data
The selected financial data should be read in conjunction with “Item 7. General Partner’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Consolidated Financial Statements and Supplementary Data” contained elsewhere in this Annual Report on Form 10-K.
Years Ended December 31, | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
Total revenue and other income | $ | 21,950,386 | $ | 36,268,570 | $ | 40,870,031 | $ | 50,233,891 | $ | 58,742,744 | |||||||||
Net (loss) income attributable to Fund Fourteen | $ | (14,104,253 | ) | $ | (37,061,038 | ) | $ | (6,551,125 | ) | $ | 12,947,701 | $ | 12,758,456 | ||||||
Net (loss) income attributable to Fund Fourteen allocable to limited partners | $ | (13,963,210 | ) | $ | (36,690,428 | ) | $ | (6,485,614 | ) | $ | 12,818,224 | $ | 12,630,871 | ||||||
Net (loss) income attributable to Fund Fourteen allocable to General Partner | $ | (141,043 | ) | $ | (370,610 | ) | $ | (65,511 | ) | $ | 129,477 | $ | 127,585 | ||||||
Weighted average number of limited partnership interests outstanding | 258,761 | 258,761 | 258,764 | 258,812 | 258,829 | ||||||||||||||
Net (loss) income attributable to Fund Fourteen per weighted average limited partnership interest outstanding | $ | (53.96 | ) | $ | (141.79 | ) | $ | (25.06 | ) | $ | 49.53 | $ | 48.80 | ||||||
Distributions to limited partners | $ | 10,350,460 | $ | 20,700,921 | $ | 20,701,136 | $ | 20,705,645 | $ | 20,706,372 | |||||||||
Distributions per weighted average limited partnership interest outstanding | $ | 40.00 | $ | 80.00 | $ | 80.00 | $ | 80.00 | $ | 80.00 | |||||||||
Distributions to General Partner | $ | 104,550 | $ | 209,100 | $ | 209,102 | $ | 209,148 | $ | 209,155 | |||||||||
December 31, | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
Total assets (1) | $ | 114,131,272 | $ | 253,132,775 | $ | 345,739,710 | $ | 407,779,379 | $ | 429,742,675 | |||||||||
Long-term debt and seller's credit (1) | $ | 35,185,385 | $ | 129,596,269 | $ | 159,155,525 | $ | 190,672,166 | $ | 204,807,586 | |||||||||
Partners' equity | $ | 76,049,020 | $ | 100,608,283 | $ | 158,579,342 | $ | 186,047,883 | $ | 194,053,315 | |||||||||
(1) As of March 31, 2016, we retrospectively adopted Accounting Standards Update No. 2015-03, Interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs, which revised the presentation of debt issuance costs. Prior periods have been adjusted as a result of our adoption of this new accounting standard.
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Item 7. General Partner's Discussion and Analysis of Financial Condition and Results of Operations
Our General Partner’s Discussion and Analysis of Financial Condition and Results of Operations relates to our consolidated financial statements and should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. Statements made in this section may be considered forward-looking. These statements are not guarantees of future performance and are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of these risks and assumptions, including, among other things, factors discussed in “Part I. Forward-Looking Statements” and “Item 1A. Risk Factors” located elsewhere in this Annual Report on Form 10-K.
Overview
We operated as an equipment leasing and finance fund in which the capital our partners invested was pooled together to make investments in Capital Assets, pay fees and establish a small reserve. During our offering period from May 18, 2009 to May 18, 2011, we raised total equity of $257,646,987. Our operating period commenced on May 19, 2011. We invested a substantial portion of the proceeds from the sale of our Interests in Capital Assets. After these proceeds were invested, additional investments were made with the cash generated from our initial investments to the extent that cash was not used for our expenses, reserves and distributions to limited partners. The investment in additional Capital Assets in this manner is called “reinvestment.” We invested and reinvested in Capital Assets from time to time during our five-year operating period. Our operating period ended on May 18, 2016 and our liquidation period commenced on May 19, 2016. During our liquidation period, we have sold and will continue to sell our assets and/or let our investments mature in the ordinary course of business. If our Investment Manager believes it would benefit our limited partners to reinvest the proceeds received from investments in additional investments during the liquidation period, our Investment Manager may do so. Our Investment Manager is not paid acquisition fees or management fees for additional investments initiated during the liquidation period, although management fees continue to be paid for investments that were part of our portfolio prior to the commencement of the liquidation period.
Our General Partner manages and controls our business affairs, including, but not limited to, our investments in Capital Assets, under the terms of our Partnership Agreement. Our Investment Manager, an affiliate of our General Partner, originates and services our investments.
Current Business Environment
Recent trends indicate that domestic and global equipment financing volume is correlated to overall business investments in equipment, which are typically impacted by general economic conditions. As the economy slows or builds momentum, the demand for productive equipment generally slows or builds and equipment financing volume generally decreases or increases, depending on a number of factors. These factors include the availability of liquidity to provide equipment financing and/or provide it on terms satisfactory to borrowers, lessees, and other counterparties, as well as the desire to upgrade equipment and/or expand operations during times of growth, but also in times of recession in order to, among other things, seize the opportunity to obtain competitive advantage over distressed competitors and/or increase business as the economy recovers.
Our Investment Manager is cautiously optimistic that the U.S. economy’s recovery will continue throughout 2017 and into 2018. An overall improvement in the unemployment rate, which was 4.7% as of December 31, 2016, as well as price increases in energy and other commodities, have resulted in stock market gains and an increase in loan prices. However, continued increases in the U.S. dollar could have an adverse impact on net exports and energy and other commodity prices.
The equipment financing industry has encountered significant challenges over the past several years as a result of, among other things, an unprecedented and prolonged weakness in global shipping and offshore markets. These challenges, among other factors, have caused us to record credit losses and/or impairment charges on certain of our investments (see “Significant Transactions” below).
Significant Transactions
We engaged in the following significant transactions during the years ended December 31, 2016, 2015 and 2014:
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Telecommunications Equipment
Between February 2010 and June 2011, we purchased telecommunications equipment for $17,230,869 that was leased to Global Crossing Telecommunications, Inc. (“Global Crossing”). Each of the three leases was for a period of 36 months. On each of February 28, 2013, February 28, 2014 and May 30, 2014, Global Crossing exercised its options to purchase the telecommunications equipment at lease expiration for $641,942, $1,423,423 and $794,164, respectively. No gain or loss was recorded as a result of the transactions.
Marine Vessels
On September 29, 2010, we purchased two supramax bulk carrier vessels, the Amazing and the Fantastic, from wholly-owned subsidiaries of Geden Holdings Ltd. (“Geden”) for an aggregate purchase price of $67,000,000. Simultaneously, the vessels were bareboat chartered to the Geden subsidiaries for a period of seven years. The purchase price for the vessels was funded by $23,450,000 in cash and $43,550,000 in non-recourse long-term debt.
On June 21, 2011, we purchased a crude oil tanker, the Center. The tanker was acquired for $16,000,000 in cash, $44,000,000 of financing through non-recourse long-term debt and $9,000,000 of financing through a subordinated, non-interest-bearing seller’s credit. The tanker was simultaneously bareboat chartered to Center Navigation Ltd. (“Center Navigation”), a wholly-owned subsidiary of Geden, for a period of five years.
As a result of the depressed shipping market and historically low charter rates, the subsidiaries of Geden had only partially satisfied their lease payment obligations related to the three vessels and as a result, the leases were placed on a non-accrual status during the three months ended June 30, 2013. Our Investment Manager and Geden negotiated amendments to the leases, which, among other things, included restructuring the payment terms. Although the amendments were not executed by the parties, Geden made lease payments to us in accordance with the proposed restructured terms during the year ended December 31, 2014.
Subsequent to December 31, 2014, Geden either made partial lease payments based upon the proposed restructured terms or no payments at all on the Amazing and the Fantastic due to the continued decline in charter rates associated with supramax bulk carrier vessels. As a result, our Investment Manager believed that Geden might be unable to fully satisfy its remaining lease payment obligations and fulfill its purchase obligations at lease expiration on September 30, 2017 related to the Amazing and the Fantastic. Based upon this assessment, we recorded a credit loss reserve of $12,646,486 as of December 31, 2014 based on the expected undiscounted cash flows comprised of the estimated lease payments to be collected from Geden over the remaining terms of the leases and the expected fair value of the vessels at lease expiration should the purchase obligations not be satisfied. Critical assumptions used in the analysis included a 2.5-year moving average of inflation-adjusted vessel values and charter rates. Subsequently, on a quarterly basis, we updated our analysis of the remaining expected undiscounted cash flows by updating the moving average of inflation-adjusted vessel values and charter rates for a period that represented the remaining lease terms. We also considered the actual lease payments received for the Amazing and the Fantastic for each reporting period. As a result of the continuing decline in fair value of the vessels and charter rates, we have recorded additional credit losses based on these updated quarterly analyses.
During the three months ended September 30, 2015, based on discussions with Geden, our Investment Manager determined that there was doubt regarding Geden’s ability to subsidize operating expenses associated with the Amazing and the Fantastic and to otherwise operate the vessels through the end of the lease term in September 2017. As a result, commencing with the quarterly assessment for the three months ended September 30, 2015, we also considered the then current fair market value of the vessels, in addition to updating the quarterly undiscounted cash flows, to account for the possibility that we might take the vessels back from Geden prior to lease expiration. Utilizing a weighted average probability approach on the quarterly undiscounted cash flows and the then current fair market values, we estimated the recoverable amount of Geden’s obligations to us associated with the Amazing and the Fantastic and recorded additional credit losses based on the quarterly analyses. For the year ended December 31, 2015, we recorded an aggregate credit loss of $24,160,583 related to the Amazing and the Fantastic.
In April 2016, our Investment Manager was informed by Geden that it would redeliver the Amazing and the Fantastic to us prior to lease expiration and that it would not be fulfilling its purchase obligations with respect to the vessels. As a result, during the year ended December 31, 2016, our Investment Manager determined to record additional credit losses based primarily on the then current fair market value of the vessels at each reporting period. For the year ended December 31, 2016, we recorded an aggregate credit loss of $2,645,555 related to the Amazing and the Fantastic.
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We accounted for the leases related to the Amazing and the Fantastic on a non-accrual basis and finance income was recognized on a cash basis commencing with the three months ended June 30, 2013 until the leases were considered impaired as of December 31, 2014. Subsequently, no finance income was recognized. For the year ended December 31, 2014, we recognized finance income of $2,041,752, of which $2,190,250 was recognized on cash basis, related to the Amazing and the Fantastic. As of December 31, 2015, our net investment in finance leases related to the Amazing and the Fantastic was $11,904,077 and $11,741,477, respectively.
On July 5, 2016, the Amazing and the Fantastic were redelivered to us by Geden and the charters were terminated. Upon redelivery, the vessels were renamed "Bulk Progress" and "Bulk Power", respectively, and were bareboat chartered to Americas Bulk for a period of five years, effective July 2016. The new charters are classified as operating leases under U.S. generally accepted accounting principles ("U.S. GAAP") and as a result, the vessels were reclassified to "leased equipment at cost" at their then fair market value on our consolidated balance sheet upon commencement of the charters. Commencing 12 months following the effective date, either party can terminate one or both charters on each subsequent anniversary date, provided certain criteria are met. Charter hire payments are expected to vary month-to-month as a result of a profit sharing arrangement set forth in the charters.
In connection with the redelivery of the vessels to us by Geden and the commencement of new charters with Americas Bulk, on July 6, 2016, we repaid $10,000,000 to satisfy in full the portion of the outstanding balance of the long-term debt associated with the Amazing and the Fantastic due to one of the two lenders, Norddeutsche Landesbank Girozentrale (“Nord LB”), net of a discount of $2,427,602. As a result of the discounted repayment, we recognized a gain on extinguishment of debt of $2,343,762 during the year ended December 31, 2016. In addition, on July 6, 2016, we refinanced the existing outstanding balance of the long-term debt associated with the two vessels of $10,700,000 that was due to DVB Bank SE (“DVB”) with a new $10,700,000 facility agreement that we entered into with DVB on June 30, 2016. During 2016, prior to this refinancing transaction, we made repayments on the outstanding balance of the long-term debt related to the Amazing and the Fantastic totaling $14,727,602. The new facility matures on April 30, 2021 and bears interest at the London Interbank Offered Rate (“LIBOR”) plus 3.85%. As part of this refinancing, we incurred loan origination fees of $300,000. Upon repayment in full of the long-term debt associated with the Amazing and the Fantastic with the proceeds from the new facility, we cured our non-compliance with the long-term debt covenant under the prior facility and the debt balance shortfall guarantee that we issued to the senior lender as part of the prior facility was terminated.
With respect to the Center, our Investment Manager had assessed the collectability of the lease payments due from Geden over the remaining term of the lease as well as Geden’s ability to satisfy its purchase obligation at lease expiration and concluded that no credit loss reserve was required as of December 31, 2015 and 2014 due to the fixed employment of the vessel, prevailing market conditions and various new charter proposals then on hand. As part of this assessment, our Investment Manager considered charter rates for crude oil tankers, which had increased since December 31, 2013, and the expected fair market value of the vessel at lease expiration should the purchase obligation not be satisfied.
In April 2016, our Investment Manager was informed by Geden that it would also redeliver the Center to us prior to lease expiration and that it would not be fulfilling its purchase obligation with respect to the vessel. As a result, during the three months ended March 31, 2016, our Investment Manager determined to record a credit loss of $396,762 based primarily on the then current fair market value of the vessel.
We accounted for the lease related to the Center on a non-accrual basis and finance income was recognized on a cash basis commencing with the three months ended June 30, 2013 until the lease was considered impaired during the three months ended March 31, 2016. For the year ended December 31, 2016, we did not recognize any finance income related to the Center. For the years ended December 31, 2015 and 2014, we recognized finance income related to the Center of $8,792,671 and $2,860,189, respectively (of which $8,725,500 and $2,790,500, respectively, was recognized on a cash basis). As of December 31, 2015, our net investment in finance lease related to the Center was $68,108,070.
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On June 17, 2016, the Center was redelivered to us by Geden and the charter was terminated. Upon redelivery, the vessel was dry-docked until early July 2016, after which we renamed the vessel "Shamrock" and placed it into service for at least 12 months by participating in the Stena Pooling Arrangement. As part of the Stena Pooling Arrangement, we are entitled to receive a monthly distribution based partly on the performance of all vessels within the pool. The Stena Pooling Arrangement includes a shortfall provision that will require us to pay back a portion of the monthly distribution received upon certain criteria being met if we remove the vessel from the pool. The shortfall provision expires on July 14, 2018. At December 31, 2016, the total amount subject to the shortfall provision of $1,467,325 was recognized as deferred revenue on our consolidated balance sheets. Upon redelivery of the vessel to us, we reclassified the Center from "net investment in finance leases" to "vessel" on our consolidated balance sheet at the then fair market value of $48,000,000. Upon reclassification, U.S. GAAP requires that we record the vessel at the lower of the present carrying value or the present fair market value. Due to the decrease in the fair market value of the Center, we recognized an additional credit loss of $6,546,754 during the three months ended June 30, 2016, net of the forfeiture of the $9,000,000 seller’s credit that was payable to Geden as a result of Geden’s default on the charter.
In connection with the redelivery of the vessel to us by Geden and placing the vessel in the Stena Pooling Arrangement, the non-recourse long-term debt associated with the Center, which was scheduled to mature on June 21, 2016, was extended and refinanced with a new facility agreement with the senior lender as further described below. In June 2016, upon maturity of the interest rate swap on the non-recourse long-term debt, we made a payment of $104,511. On June 30, 2016, we and the senior lender entered into a new $26,000,000 facility agreement for the purpose of refinancing the long-term debt related to the Center. During 2016, we made repayments on the outstanding balance of the long-term debt totaling $4,770,000 prior to the refinancing. On July 18, 2016, we drew down the full principal amount of the new facility to repay in full the then long-term debt balance of $26,000,000 under the prior facility. The new facility matures on March 31, 2021 and bears interest at LIBOR plus 3.50%. As part of this refinancing, we incurred loan origination fees of 390,000.
On March 29, 2011, we and ICON Leasing Fund Twelve Liquidating Trust (formerly, ICON Leasing Fund Twelve, LLC) (“Fund Twelve”), an entity also managed by our Investment Manager, entered into a joint venture, ICON AET Holdings, LLC (“ICON AET”), owned 75% by us and 25% by Fund Twelve, for the purpose of acquiring two aframax tankers and two very large crude carriers (the “VLCCs,” and collectively with the aframax tankers, the “AET Vessels”). The aframax tankers, the Eagle Otome and the Eagle Subaru, were each acquired for $13,000,000, of which $9,000,000 was financed through non-recourse long-term debt with DVB, and were simultaneously bareboat chartered to AET Inc. Limited (“AET”) for a period of three years. The VLCCs, the Eagle Vermont and the Eagle Virginia, were each acquired for $72,000,000, of which $55,000,000 was financed through non-recourse long-term debt with DVB (collectively with the non-recourse long-term debt associated with the aframax tankers, the “Senior Debt”), and were simultaneously bareboat chartered to AET for a period of 10 years. On April 5, 2011, ICON AET borrowed $22,000,000 of subordinated non-recourse long-term debt (the "Sub Debt") from Wafra Investment Advisory Group, Inc. ("Wafra") related to the investment in the AET Vessels. The Sub Debt was for a period of 60 months and at our option could have been extended for an additional 12 months. The Sub Debt was secured by the equity of ICON AET. On March 31, 2014, we satisfied the Senior Debt obligations associated with the Eagle Otome and the Eagle Subaru by making a final payment of $5,682,978. On April 14, 2014 and May 21, 2014, upon expiration of the leases with AET, ICON AET sold the two aframax tankers to third-party purchasers for an aggregate price of $14,821,980. The sale proceeds were used to partially pay down the outstanding principal and interest related to the Sub Debt. As a result, ICON AET recognized an aggregate gain on sale of assets of $2,229,932. During the year ended December 31, 2016 (prior to the sale of ICON AET as further described below) and 2015, due to curing covenant breaches that resulted in restrictions on our ability to utilize cash generated by the charters for purposes other than paying the Senior Debt, proceeds from rental income receipts that were previously restricted were used to partially pay down outstanding principal and interest under the Sub Debt in an aggregate amount of $1,530,000 and $10,112,821, respectively.
On June 8, 2016, an unaffiliated third party purchased 100% of the limited liability company interests of ICON AET for net sales proceeds of $48,798,058. As a result, we recorded a gain on sale of $6,708,694, which is included in gain on sale of subsidiaries on our consolidated statements of operations. A portion of the proceeds from the sale was used to satisfy in full ICON AET’s outstanding Sub Debt obligations of $529,660. Through the acquisition of the interests of ICON AET, the third party purchaser acquired ownership of the Eagle Vermont and the Eagle Virginia and assumed all outstanding Senior Debt obligations of $60,786,199 associated with such vessels.
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On December 19, 2011, a joint venture owned 40% by us and 60% by ICON ECI Fund Fifteen, L.P. ("Fund Fifteen"), an entity also managed by our Investment Manager, agreed to purchase an offshore support vessel, the AMC Ambassador (f/k/a the Lewek Ambassador), from Ezram LLC, a wholly-owned subsidiary of Ezra Holdings Limited ("Ezra"). On December 20, 2011, the joint venture funded $9,000,000 of the purchase price through a combination of debt and equity, with the remaining portion to be funded upon delivery of the vessel. Simultaneously with the initial funding, the joint venture entered into a bareboat charter with Gallatin for a period of nine years to commence on the delivery date of the vessel. Gallatin's obligations under the bareboat charter are guaranteed by Ezra. The vessel was delivered on June 4, 2012 and the purchase price was set at $24,869,000. The joint venture financed the remaining purchase price with non-recourse long-term debt totaling $17,500,000. As of December 31, 2016, the joint venture’s notes payable to us and Fund Fifteen were $2,597,674 and $3,896,511, respectively. As of December 31, 2015, the joint venture's notes payable to us and Fund Fifteen were $2,614,691 and $3,922,035, respectively. The notes bear interest at 15.5% per year and mature on June 4, 2019. The note payable to us is presented as note receivable from joint venture, net of a credit loss of $1,514,498 (as further described below), on our consolidated balance sheets.
In May 2016, Gallatin began paying its monthly charter payments late and all charter payments have ceased since the payment due in December 2016. In December 2016, Ezra hired a restructuring advisor. In January 2017, our Investment Manager was informed that, following a deterioration of Ezra’s and its affiliated companies’ financial condition during the fourth quarter of 2016, payments under the bareboat charter could no longer be reasonably expected to be made. On February 6, 2017, EMAS Chiyoda Subsea Limited (“EMAS”), the time charterer of the vessel, filed a petition in Singapore to wind up and liquidate the company. In addition, Ezra may become subject to a winding up order in Singapore. On February 27, 2017, both Gallatin and EMAS commenced voluntary Chapter 11 proceedings in the Bankruptcy Court in the Southern District of Texas. On March 7, 2017, Gallatin and EMAS filed a motion with the bankruptcy court to reject the bareboat and time charters. On March 18, 2017, Ezra commenced a voluntary Chapter 11 proceeding in the Bankruptcy Court in the Southern District of New York. Our Investment Manager is currently considering certain options, which include, without limitation, repossessing and selling the vessel.
Consequently, as of December 31, 2016, our Investment Manager assessed the joint venture’s collectability of the finance lease based on the estimated fair market value of the vessel provided by an independent third party appraiser. As a result, the joint venture recorded a credit loss of $7,271,958 to write down its net investment in finance lease related to the vessel to $8,000,000. We were only allocated $1,306,625 of such credit loss as our investment in the joint venture was written down to zero. An additional credit loss may be recorded by the joint venture in future periods if the collectability assessment of the finance lease continues to be based on collateral value and the fair market value of the vessel decreases from its current estimate. To the extent our investment in the joint venture remains at zero, we will not be allocated any additional credit loss recorded by the joint venture. However, any additional credit loss recorded by the joint venture may result in an additional credit loss being recorded on our note receivable due from the joint venture. During the three months ended December 31, 2016, the joint venture placed the lease on non-accrual status and ceased to recognize finance income. Additionally, as collectability of the remaining lease payments is in doubt, finance income will be recognized by the joint venture only to the extent cash receipts are in excess of all contractual lease payments due. For the years ended December 31, 2016, 2015 and 2014, the joint venture recognized finance income of $1,424,846, $2,164,054 and $2,407,228, respectively, of which no amount was recognized on a cash basis, prior to the finance lease being considered impaired. As of December 31, 2016 and 2015, the total net investment in finance lease held by the joint venture was $8,000,000 and $17,517,912, respectively, and our total investment in the joint venture was $0 and $1,353,519, respectively. As a result of the credit loss recorded on the joint venture’s finance lease, our Investment Manager determined to record a credit loss of $1,514,498 on the related party note receivable due to us from the joint venture as a result of the fair market value of the vessel and the balance of the joint venture’s non-recourse long-term debt associated with the vessel, which has priority over our related party note receivable. The related party note receivable was placed on non-accrual status during the three months ended December 31, 2016. For the years ended December 31, 2016, 2015 and 2014, we recognized interest income prior to the related party note receivable being considered impaired of $307,885, $411,509 and $407,970, respectively, of which no amount was recognized on a cash basis. The interest income is included in finance income on our consolidated statements of operations.
On December 20, 2012, ICON Hoegh, LLC ("ICON Hoegh"), a joint venture owned 20% by us and 80% by Fund Fifteen, purchased a car carrier vessel, the Hoegh Copenhagen. Simultaneously, the Hoegh Copenhagen was bareboat chartered to Hoegh Autoliners Shipping AS, a wholly-owned subsidiary of Hoegh Autoliners Holding AS, for a period of eight years. On June 8, 2016, an unaffiliated third party purchased 100% of the limited liability company interests of ICON Hoegh for net sales proceeds of $21,007,515. As a result, we recorded a gain on sale of investment in joint venture of $284,448.
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On April 2, 2013, two joint ventures each owned 45% by us and 55% by Fund Fifteen purchased two chemical tanker vessels, the Ardmore Capella and the Ardmore Calypso (collectively, the "Ardmore Vessels"), from wholly-owned subsidiaries of Ardmore Shipholding Limited ("Ardmore"). Simultaneously, the Ardmore Vessels were bareboat chartered to the Ardmore subsidiaries for a period of five years. The aggregate purchase price for the Ardmore Vessels was funded by $8,850,000 in cash, $22,750,000 of financing through non-recourse long-term debt and $5,500,000 of financing through subordinated, non-interest-bearing seller’s credits. Our total contribution to the joint ventures was $4,361,088. On April 5, 2016, Ardmore, in accordance with the terms of the bareboat charters scheduled to expire on April 3, 2018, exercised its options to purchase the Ardmore Vessels from the two joint ventures for an aggregate purchase price of $26,990,000. In addition, Ardmore paid all break costs and legal fees incurred by the joint ventures with respect to the sale of the Ardmore Vessels. No significant gain or loss was recorded as a result of these sales.
On March 21, 2014, a joint venture owned 12.5% by us, 75% by Fund Twelve and 12.5% by Fund Fifteen, through two indirect subsidiaries, entered into memoranda of agreement to purchase the EPIC Vessels from Foreguard Shipping for an aggregate purchase price of $41,600,000. The EPIC Bali and the EPIC Borneo were delivered on March 28, 2014 and April 8, 2014, respectively. The EPIC Vessels were bareboat chartered to an affiliate of Foreguard Shipping for a period of eight years upon the delivery of each respective vessel. The EPIC Vessels were each acquired for approximately $3,550,000 in cash, $12,400,000 of financing through a senior secured loan from DVB Group Merchant Bank (Asia) Ltd. (“DVB Asia”) and $4,750,000 of financing through a subordinated, non-interest-bearing seller’s credit. Our contribution to the joint venture was $1,022,225.
On June 12, 2014, a joint venture owned 12.5% by us, 75% by Fund Twelve and 12.5% by Fund Fifteen purchased an offshore supply vessel from Pacific Crest for $40,000,000. Simultaneously, the vessel was bareboat chartered to Pacific Crest for 10 years. The vessel was acquired for approximately $12,000,000 in cash, $26,000,000 of financing through a senior secured loan from DVB and $2,000,000 of financing through a subordinated, non-interest-bearing seller’s credit. Our contribution to the joint venture was $1,617,158.
Motor Coaches
On March 9, 2010, we purchased eleven 2010 MCI J4500 motor coach buses for $4,502,715 and simultaneously leased the buses to Dillion’s Bus Service, Inc. (“DBS”). On May 13, 2010, we purchased fifteen additional 2010 MCI J4500 motor coach buses for $5,865,450 and simultaneously leased the buses to Lakefront Lines, Inc. (“Lakefront”). The leases were for a period of 60 months commencing on June 1, 2010. On January 3, 2012, DBS, Lakefront and their parent company, Coach Am Group Holdings Corp., commenced a voluntary Chapter 11 proceeding in U.S. Bankruptcy Court, subsequent to which DBS and Lakefront made all of their lease payments. On July 20, 2012, Lakefront and DBS assigned their respective interests in the leases to 24 of 26 motor coaches to CAM Leasing, LLC (“CAM Leasing”). On October 19, 2012, the remaining two motor coaches were sold for $551,337 with no material gain or loss recognized as a result of the sales. On September 2, 2014, due to damage to one motor coach bus on lease, we received $230,599 based on the stipulated loss value of the bus pursuant to the lease agreement and a gain of $36,339 was recognized.
In August 2015, upon expiration of the leases with CAM Leasing, we sold the remaining 23 motor coach buses to a third-party purchaser for an aggregate price of $4,025,000. No significant gain or loss was recorded as a result of these sales. Pursuant to the lease agreement, CAM Leasing was required to pay a remarketing fee totaling $477,362 upon termination of the leases and the return of the motor coach buses, which was recognized as additional rental income on our consolidated statements of operations.
Mining Equipment
On March 4, 2014, a joint venture owned 15% by us, 60% by Fund Twelve, 15% by Fund Fifteen and 10% by ICON ECI Fund Sixteen (“Fund Sixteen”), an entity also managed by our Investment Manager, purchased mining equipment from an affiliate of Blackhawk. Simultaneously, the mining equipment was leased to Blackhawk and its affiliates for four years. The aggregate purchase price for the mining equipment of $25,359,446 was funded by $17,859,446 in cash and $7,500,000 of non-recourse long-term debt. Our contribution to the joint venture was $2,693,395. On October 27, 2015, the joint venture amended the lease with Blackhawk to waive Blackhawk’s breach of a financial covenant during the nine months ended September 30, 2015 in consideration for a partial prepayment of $3,502,514, which included an amendment fee of $75,000. In addition, corresponding amendments were made to certain payment and repurchase provisions of the lease to account for the partial prepayment. On December 8, 2015 and December 7, 2016, the joint venture further amended the lease with Blackhawk to, among other things, add, revise and/or waive Blachawk's breach of certain financial covenants and received additional amendment fees of $75,000 and $150,000, respectively.
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Packaging Equipment
On July 31, 2009, we, through our wholly-owned subsidiary, ICON Exopack, LLC ("ICON Exopack"), purchased a three-layer blown film extrusion line from Coveris Flexibles US LLC (f/k/a Exopack, LLC) (“Coveris”) for $2,713,210, which was simultaneously leased to Coveris for 60 months commencing on August 1, 2009. On September 30, 2009, we purchased an eight color flexographic printing press from Coveris for $3,662,460, which was simultaneously leased to Coveris for 60 months commencing on October 1, 2009. On October 22, 2015, we amended our leases with Coveris to extend the term for 36 months, effective November 1, 2015, after such leases were automatically extended twice for a total of 18 months since the original expiration dates. On June 8, 2016, an unaffiliated third party purchased 100% of the limited liability company interests of ICON Exopack for net sales proceeds of $2,813,350. As a result, we recorded a gain on sale of $409,910, which is included in gain on sale of subsidiaries on our consolidated statements of operations. Through the acquisition of the interests of ICON Exopack, the third party purchaser acquired ownership of the packaging and printing equipment that is on lease to Coveris.
Oil Field Services Equipment
On February 15, 2013, a joint venture owned 38% by us, 58% by Fund Fifteen and 4% by ICON ECI Partners L.P. (“ECI Partners”), an entity also managed by our Investment Manager, purchased onshore oil field services equipment from Go Frac, LLC (“Go Frac”) for $11,803,985. Simultaneously, the equipment was leased to Go Frac for a period of 45 months, which was scheduled to expire on November 30, 2016. On July 19, 2013, the joint venture purchased additional onshore oil field services equipment from Go Frac for $165,382, which was leased to Go Frac for a period of 45 months and was scheduled to expire on April 30, 2017. Our total contribution to the joint venture was $3,605,911. On December 30, 2013, the joint venture assigned the remaining 35 and 40 monthly rental payments totaling $7,028,793 due to the joint venture from Go Frac to Element Financial Corp. (“Element”) in exchange for Element making a $6,464,372 non-recourse loan to the joint venture. The non-recourse loan bore interest at a fixed rate of 6.0% and was scheduled to mature on April 30, 2017.
During the three months ended December 31, 2014, declining energy prices negatively impacted Go Frac’s financial performance resulting in its failure to satisfy its lease payment obligations to the joint venture in February 2015. In early February 2015, our Investment Manager was informed that Go Frac was ceasing its operations. During the three months ended December 31, 2014, the joint venture recognized an impairment charge of $4,026,090 based on a third-party appraised fair market value of the leased equipment as of December 31, 2014. The fair market value provided by the independent appraiser was derived based on a combination of the cost approach and the sales comparison approach. During the three months ended March 31, 2015, our Investment Manager obtained quotes from multiple auctioneers and subsequently an auctioneer was engaged to sell the equipment at an auction. As of March 31, 2015, the equipment met the criteria to be classified as assets held for sale and the joint venture recognized an additional impairment charge to write down the equipment to its estimated fair value less cost to sell. We were not allocated any impairment loss during the three months ended March 31, 2015 as our investment in the joint venture was reduced to zero as of December 31, 2014. On May 14, 2015, the equipment was sold at an auction for $5,542,000. After deducting selling costs of $538,786, the joint venture recognized a gain on sale of assets of $983,474. In addition, as a result of Go Frac’s default on the lease and the joint venture’s repossession and ultimate sale of the equipment, the joint venture recognized additional rental income of $2,638,850, primarily due to the extinguishment of the joint venture’s obligation to return a security deposit to Go Frac pursuant to the terms of the lease. Income generated by the joint venture for the three months ended June 30, 2015, which was primarily a result of the gain on sale of assets and additional rental income, was not allocated to us as such income did not exceed the net losses previously not recognized by us. However, we recognized income of $269,965 during the three months ended June 30, 2015, which represents our share of the net proceeds received by the joint venture from its sale of the equipment after repayment of the non-recourse long-term debt related to such equipment.
Seismic Testing Equipment
On September 4, 2014, a joint venture owned 33.5% by us, 52% by Fund Sixteen and 14.5% by ECI Partners purchased certain land-based seismic testing equipment for $10,677,018. Simultaneously, the seismic testing equipment was leased to Geokinetics for three years. Our contribution to the joint venture was $3,666,221. During 2016 and 2015, due to damage to certain of the assets on lease, the joint venture received a total of $48,076 and $216,023, respectively, based on the stipulated loss values of such assets pursuant to the lease agreement. As a result, future minimum rents receivable and residual values were reduced and the joint venture recognized additional finance income of $4,760 and $11,083 during 2016 and 2015, respectively, of which our share was $1,595 and $3,713, respectively.
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On February 15, 2017, Fund Sixteen purchased all of ECI Partners’ limited liability company interests in the joint venture. As a result, the joint venture is owned 33.5% by us and 66.5% by Fund Sixteen.
Auto Manufacturing Equipment
On July 10, 2015, ICON Challenge, LLC ("ICON Challenge"), a joint venture owned 40% by us, 50% by Fund Fifteen and 10% by Fund Sixteen, purchased auxiliary support equipment and robots used in the production of certain automobiles for $9,934,118, which were simultaneously leased to Challenge Mfg. Company, LLC and certain of its affiliates (collectively, "Challenge") for 60 months. Our contribution to ICON Challenge was $3,993,515. On June 8, 2016, an unaffiliated third party purchased 100% of the limited liability company interests of ICON Challenge for net sales proceeds of $9,004,214. No significant gain or loss was recorded by us as a result of the sale.
Geotechnical Drilling Vessels
On December 23, 2015, a joint venture owned 15% by us, 75% by Fund Fifteen and 10% by Fund Sixteen, through two indirect subsidiaries, entered into memoranda of agreement to purchase the Fugro Vessels from affiliates of Fugro for an aggregate purchase price of $130,000,000. The Fugro Scout and the Fugro Voyager were delivered on December 24, 2015 and January 8, 2016, respectively. The Fugro Vessels were bareboat chartered to affiliates of Fugro for a period of 12 years upon delivery of each respective vessel, although such charters can be terminated by the indirect subsidiaries after year five. On December 24, 2015, the Fugro Scout was acquired for (i) $8,250,000 in cash, (ii) $45,500,000 of financing through a senior secured loan from ABN AMRO Bank N.V. (“ABN AMRO”), Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. (“Rabobank”) and NIBC Bank N.V. (“NIBC”) and (iii) a seller's credit of $11,250,000. As of December 31, 2015, the cash portion of the purchase price for the Fugro Voyager of approximately $10,221,000 was being held by the applicable indirect subsidiary of the joint venture until delivery of the vessel. On January 8, 2016, the Fugro Voyager was also acquired for $8,250,000 in cash, $45,500,000 of financing through a senior secured loan from ABN AMRO, Rabobank and NIBC and a seller's credit of $11,250,000. The senior secured loans bear interest at LIBOR plus 2.95% per year and mature on December 31, 2020. On February 8, 2016, the two indirect subsidiaries entered into interest rate swap agreements to effectively fix the interest rate of the senior secured loans from a variable rate of LIBOR plus 2.95% per year to a fixed rate of 4.117% per year. Our contribution to the joint venture totaling $3,565,875 was made in December 2015.
As a result of Fugro obtaining additional third party financing, effective December 31, 2016, the indirect subsidiaries and the affiliates of Fugro amended the bareboat charters to, among other things, increase the daily charter rate and provide for additional security deposits. Also, effective December 31, 2016, the indirect subsidiaries amended the facility agreement with ABN AMRO, Rabobank and NIBC to, among other things, increase the interest rate on the senior secured loans to share the economic benefits of the amended bareboat charters.
Notes Receivable
On June 29, 2009, we and Fund Twelve entered into a joint venture for the purpose of making secured term loans in the aggregate amount of $20,000,000 to INOVA Rentals Corporation (f/k/a ARAM Rentals Corporation) and INOVA Seismic Rentals, Inc. (f/k/a ARAM Seismic Rentals Inc.) (collectively, the “INOVA Borrowers”), which were scheduled to mature on August 1, 2014. In 2011, we exchanged our 42.616% ownership interest in the joint venture for our proportionate share of the notes receivable owned by the joint venture, which was subsequently deconsolidated and then terminated. The loans bore interest at 15% per year and were secured by a first priority security interest in all analog seismic system equipment owned by the INOVA Borrowers, among other collateral. On January 31, 2014, the INOVA Borrowers satisfied their obligations in connection with the loans by making a prepayment of $1,367,865. No material gain or loss was recorded as a result of this transaction.
On June 30, 2010, we made two secured term loans in the aggregate amount of $14,400,000, one to Ocean Navigation 5 Co. Ltd. and one to Ocean Navigation 6 Co. Ltd. (collectively, “Ocean Navigation”), as part of a $96,000,000 term loan facility. The loans were funded between July and September 2010 and proceeds from the facility were used by Ocean Navigation to purchase two aframax tanker vessels, the Shah Deniz and the Absheron. The loans bore interest at 15.25% per year and were for a period of six years maturing between July and September 2016. The loans were secured by a second priority security interest in the vessels. On April 15, 2014, we sold all of our interest in the loans with Ocean Navigation to Garanti Bank International, N.V. for $14,400,000. As a result, we wrote off the remaining initial direct costs associated with the notes receivable of $545,483 as a charge against finance income.
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On September 27, 2010, we, through our wholly-owned subsidiary, ICON SE, LLC (“ICON SE”), participated in a $46,000,000 facility by agreeing to make a secured term loan to SE Shipping Pte. Ltd. (“SE”) for the purchase of a new-build heavy lift vessel and accompanying equipment. Although all of the material conditions to closing were satisfied, SE breached its obligations under the loan by refusing to draw down on the facility. Subsequently, ICON SE commenced an action against SE in the United Kingdom for SE’s failure to pay ICON SE the commitment fee due in accordance with the loan agreement. In December 2015, the parties entered into a settlement agreement pursuant to which ICON SE received a settlement amount of $150,000, which was recognized as a gain on litigation on our consolidated statements of operations. On January 8, 2016, we received such settlement amount.
On July 26, 2011, we made a secured term loan to Western Drilling Inc. and Western Landholdings, LLC (collectively, “Western Drilling”) in the amount of $9,465,000. The loan bore interest at 14% per year and was scheduled to mature on September 1, 2016. The loan was secured by, among other collateral, a first priority security interest in oil and gas drilling rigs and a mortgage on real property. Due to a change in market demand, the utilization of Western Drilling’s rigs declined, which led to Western Drilling’s failure to meet its payment obligations. As a result, the loan was placed on a non-accrual status and we recorded a credit loss of $3,412,087 during the year ended December 31, 2013 based on the estimated value of the recoverable collateral. No finance income was recognized since the date the loan was considered impaired. During the year ended December 31, 2014, an additional credit loss reserve of $862,131 was recorded based on cash proceeds received from the sale of the collateral. As of December 31, 2014, we fully reserved the remaining balance of the loan of $3,805,935. On March 18, 2015, we entered into a settlement and mutual release with the estate of Western Drilling’s guarantor to settle our claims against the guarantor for $37,860. On April 29, 2015, we received the settlement amount and wrote off the fully reserved loan as of June 30, 2015.
On December 22, 2011, a joint venture owned 75% by us and 25% by Fund Twelve made a $20,124,000 subordinated term loan to JAC as part of a $171,050,000 term loan facility. The loan initially bore interest at rates ranging between 12.5% and 15% per year and matures in January 2021. As a result of JAC’s failure to make an expected payment that was due to the joint venture during the three months ended March 31, 2015, the interest rate payable by JAC under the loan increased from 12.5% to 15.5%. The loan is secured by a second priority security interest in all of JAC’s assets, which include, among other things, all equipment, plant and machinery associated with a condensate splitter and aromatics complex.
During 2015, JAC experienced liquidity constraints as a result of a general economic slow-down in China and India, which led to lower demand from such countries, as well as the price decline of energy and other commodities. As a result, JAC’s manufacturing facility ceased operations and JAC was not able to service interest payments under the loan. During the three months ended June 30, 2015, an expected tolling arrangement with JAC’s suppliers that would have allowed JAC’s manufacturing facility to resume operations did not commence as originally anticipated. Accordingly, our Investment Manager determined that there was doubt regarding our ultimate collectability of the loan. Our Investment Manager visited JAC’s facility and engaged in discussions with JAC’s other stakeholders to agree upon a restructuring plan. Based upon such discussions, which included a potential conversion of a portion of the loan to equity and/or a restructuring of the loan, our Investment Manager believed that we may potentially not be able to recover approximately $6,400,000 to $22,300,000 of the outstanding balance due from JAC as of June 30, 2015. During the three months ended June 30, 2015, we recognized a credit loss of $15,921,795, which our Investment Manager believed was the most likely outcome based upon the negotiations at the time. During the three months ended June 30, 2015, we placed the loan on non-accrual status and ceased to recognize finance income. During the three months ended September 30, 2015, discussions between the senior lenders and certain other stakeholders of JAC regarding a restructuring plan ended as the senior lenders did not agree to amendments to their credit facilities as part of the broader restructuring that was being contemplated. As a result, JAC entered receivership on September 28, 2015. Our Investment Manager reassessed the collectability of the loan by considering the following factors: (i) what a potential buyer may be willing to pay to acquire JAC based on a comparable enterprise value derived from EBITDA multiples and (ii) the average trading price of unsecured distressed debt in comparable industries. Our Investment Manager also considered the proposed plan of converting a portion of the loan to equity and/or restructuring the loan in the event that JAC’s stakeholders recommenced discussions. Based upon such reassessment, our Investment Manager believed that we may potentially not be able to recover approximately $19,400,000 to $24,000,000 of the outstanding balance due from JAC prior to recording the initial credit loss. During the three months ended September 30, 2015, we recognized an additional credit loss of $7,927,576, which our Investment Manager believed was the most likely outcome derived from its reassessment.
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In January 2016, our Investment Manager engaged in further discussions with JAC’s other subordinated lenders and the Receiver regarding a near term plan for JAC’s manufacturing facility. Based upon such discussions, our Investment Manager anticipated that a one-year tolling arrangement with JAC’s suppliers would be implemented to allow JAC’s facility to recommence operations. Our Investment Manager updated the collectability analysis under the loan as of December 31, 2015 and determined that comparable enterprise values derived from EBITDA multiples and trading prices of unsecured distressed debt in comparable industries each decreased. In addition, our Investment Manager considered that, as of December 31, 2015, (i) a tolling arrangement with JAC’s suppliers did not commence as originally anticipated; (ii) no further discussions occurred between JAC, us, the senior lenders and certain other stakeholders of JAC regarding a restructuring plan and (iii) JAC’s manufacturing facility continued to be non-operational. Based upon these factors, our Investment Manager believed that our ultimate collectability of the loan could result in less of a recovery from its prior estimate. As a result, our Investment Manager determined to record an additional credit loss of $4,772,087, which our Investment Manager believed was the most likely outcome derived from its reassessment as of December 31, 2015. In July 2016, the tolling arrangement was finally implemented and the manufacturing facility resumed operations. Although our Investment Manager believes that the marketability of JAC’s facility should improve now that it has recommenced operations, our Investment Manager does not anticipate that JAC will make any payments to us while operating under the tolling arrangement. As part of the tolling arrangement and the receivership process, JAC incurred additional senior debt, which could be up to $55,000,000, to fund its operations as well as any receivership-related costs. As a result, our Investment Manager determined that our ultimate collectability of the loan was further in doubt. As of June 30, 2016, our Investment Manager updated its quarterly assessment and also considered the additional senior debt incurred by JAC, which has priority over our loan. Based upon this reassessment, our Investment Manager determined that we should fully reserve the outstanding balance of the loan due from JAC as of June 30, 2016. As a result, we recorded an additional credit loss of $4,772,088 for the three months ended June 30, 2016. During the fourth quarter of 2016, the Receiver formally commenced the process of marketing JAC's manufacturing facility for sale. Our Investment Manager continues to closely monitor the operations of JAC, the receivership process and the marketing process for sale of the manufacturing facility through regular communications with the Receiver and certain other stakeholders. We did not recognize any finance income for the year ended December 31, 2016. For the years ended December 31, 2015 and 2014, we recognized finance income of $984,108 and $3,355,697, respectively, of which no amount was recognized on a cash basis, prior to the loan being considered impaired. As of December 31, 2016 and 2015, our net investment in note receivable related to JAC was $0 and $4,772,088, respectively.
On February 29, 2012, we made a secured term loan in the amount of $6,000,000 to VAS Aero Services, LLC (“VAS”) as part of a $42,755,000 term loan facility. The loan bore interest at variable rates ranging between 12% and 14.5% per year and matured on October 6, 2014. The loan was secured by a second priority security interest in all of VAS’s assets. During the year ended December 31, 2014, VAS experienced financial hardship resulting in its failure to make the final monthly payment under the loan as well as the balloon payment due on the maturity date. Our Investment Manager engaged in discussions with VAS, VAS’s owners, the senior creditor and other second lien creditors in order to put in place a viable restructuring or refinancing plan. In December 2014, this specific plan to restructure or refinance fell through. While discussions on other options were still ongoing, our Investment Manager determined that we should record a credit loss reserve based on an estimated liquidation value of VAS’s inventory and accounts receivable. As a result, the loan was placed on non-accrual status and a credit loss reserve of $1,895,957 was recorded during the year ended December 31, 2014 based on our pro-rata share of the liquidation value of the collateral. The value of the collateral was based on a third-party appraisal using a sales comparison approach. As of December 31, 2014, the net carrying value of the loan was $2,899,078. In March 2015, the 90-day standstill period provided for in the loan agreement ended without a viable restructuring or refinancing plan agreed upon. In addition, the senior lender continued to charge VAS forbearance fees. Although discussions among the parties were still ongoing, these factors resulted in our Investment Manager making a determination to record an additional credit loss reserve of $1,087,993 during the three months ended March 31, 2015 to reflect a potential forced liquidation of the collateral. The forced liquidation value of the collateral was primarily based on a third-party appraisal using a sales comparison approach. On July 23, 2015, we sold all of our interest in the loan to GB Loan, LLC (“GB”) for $806,924. As a result, we recorded an additional credit loss of $1,004,161 during the three months ended June 30, 2015 prior to the sale. No gain or loss was recognized as a result of the sale. In addition, we wrote off the credit loss reserve and corresponding balance of the loan of $3,988,111 during the year ended December 31, 2015. No finance income was recognized since the date the loan was considered impaired. Accordingly, no finance income was recognized for the year ended December 31, 2015. Finance income recognized on the loan prior to recording the credit loss reserve was $591,081 for the year ended December 31, 2014.
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On June 22, 2012, we made a secured term loan in the amount of $1,855,000 to NTS Communications Inc. and certain of its affiliates (collectively, “NTS”). The loan bore interest at 12.75% per year and was for a period of 60 months. The loan was secured by, among other things, a first priority security interest in equipment used in NTS’s high speed broadband services operation. On September 27, 2012, we made an additional secured term loan to NTS (the “Second Term Loan”) in the amount of $1,564,500. The Second Term Loan bore interest at 12.75% per year and was for a period of 57 months. The Second Term Loan was secured by a first priority security interest in the assets acquired with the proceeds from the Second Term Loan. On June 6, 2014, NTS satisfied their obligations in connection with the two loans by making a prepayment of $3,421,036, comprised of all outstanding principal, accrued interest and a prepayment fee of $129,941. The prepayment fee was recognized as additional finance income.
On July 24, 2012, we made a secured term loan in the amount of $2,000,000 to affiliates of Frontier Oilfield Services, Inc. (collectively, “Frontier”) as part of a $5,000,000 term loan facility. The loan bore interest at 14% per year and was for a period of 66 months. The loan was secured by, among other things, a first priority security interest in Frontier’s saltwater disposal wells and related equipment and a second priority security interest in Frontier's other assets, including real estate, machinery and accounts receivable. On October 11, 2013, Frontier made a partial prepayment of $346,098, which included a prepayment fee of $35,696 that was recognized as additional finance income. On December 30, 2014, we sold all of our interest in the loan to Frontier Expansion and Development, LLC for $1,500,000. As a result, we recognized a loss and wrote off the remaining initial direct costs associated with the note receivable totaling $249,461 as a charge against finance income.
On September 10, 2012, we made a secured term loan in the amount of $12,410,000 to Superior Tube Company, Inc. and Tubes Holdco Limited (collectively, “Superior”) as part of a $17,000,000 term loan facility. The loan bore interest at 12% per year and was for a period of 60 months. The loan was secured by, among other things, a first priority security interest in Superior’s assets, including tube manufacturing and related equipment and a mortgage on real property, and a second priority security interest in Superior’s accounts receivable and inventory. On January 30, 2015, Superior satisfied its obligations in connection with the loan by making a prepayment of $10,198,899, comprised of all outstanding principal, accrued interest and a prepayment fee of $296,960. As a result, we recognized additional finance income of $123,006.
On November 28, 2012, we made a secured term loan in the amount of $4,050,000 to SAExploration, Inc., SAExploration Seismic Services (US), LLC and NES, LLC (collectively, “SAE”) as part of an $80,000,000 term loan facility. The loan bore interest at 13.5% per year and was for a period of 48 months. The loan was secured by, among other things, a first priority security interest in all existing and thereafter acquired assets, including seismic testing equipment, of SAE and its parent company, SAExploration Holdings, Inc. (“SAE Holdings”), and a pledge of all the equity interests in SAE and SAE Holdings. In addition, we acquired warrants, exercisable until December 5, 2022, to purchase 0.051% of the outstanding common stock of SAE Holdings. On October 31, 2013, we entered into an amendment to the loan agreement with SAE to amend certain provisions and covenant ratios. As a result of the amendment, we received an amendment fee of $30,687. On July 2, 2014, SAE satisfied its obligations in connection with the loan by making a prepayment of $4,591,523, comprised of all outstanding principal, accrued interest and prepayment fees of $449,389. The prepayment fees were recognized as additional finance income. On July 21, 2014, we exercised the warrants and received net cash proceeds of $14,208, which resulted in a loss of $43,126 that was recorded in loss on derivative financial instruments.
On March 1, 2013, we made a secured term loan in the amount of $4,800,000 to Heniff Transportation Systems, LLC and Heniff TTL, LLC (collectively, “Heniff”) as part of a $12,000,000 secured term loan facility. The loan bore interest at 12.25% per year and was for a period of 42 months. The loan was secured by, among other things, a second priority security interest in all of Heniff’s assets, including tractors and stainless steel tank trailers. On December 30, 2014, Heniff made a partial prepayment in the aggregate amount of $2,619,570 on the loan, which included a prepayment fee and make whole interest of $123,570. As part of the transaction, the remaining balance of the loan was sold and assigned for $1,600,000. No significant gain or loss was recorded as a result of this transaction.
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On September 16, 2013, we made a secured term loan in the amount of $9,000,000 to Cenveo Corporation (“Cenveo”). The loan bore interest at LIBOR, subject to a 1% floor, plus 11.0% per year, and was for a period of 60 months. The loan was secured by a first priority security interest in specific equipment used to produce, print, fold, and package printed commercial envelopes. On October 31, 2013, we borrowed $5,850,000 of non-recourse long-term debt from NXT Capital, LLC (“NXT”) secured by our interest in the loan to and collateral from Cenveo. The non-recourse long-term debt was scheduled to mature on October 1, 2018 and bore interest at LIBOR plus 6.5% per year. On July 7, 2014, Cenveo made a partial prepayment of $909,747 in connection with the loan, which included a net prepayment fee of $9,747. Simultaneously, we partially paid down our non-recourse long-term debt with NXT by making a prepayment of $575,113. On September 30, 2015, Cenveo satisfied its obligations in connection with the loan in full by making a prepayment of $5,675,625, comprised of all outstanding principal, accrued interest and a prepayment fee of $108,000. The prepayment fee was recognized as additional finance income. As a result of the prepayment by Cenveo, we satisfied our non-recourse long-term debt obligations with NXT in full by making a prepayment of $3,455,535.
On September 25, 2013, we, together with a third-party creditor, made a senior secured term loan (the “Loan”) to Asphalt, of which our share was $2,200,000 (the “Partnership Loan”). The Partnership Loan bore interest at 15.5% per year and was scheduled to mature on December 31, 2018. The Loan was secured by a first priority security interest in Asphalt’s vessel, earnings from the vessel and the equity interests of Asphalt. In accordance with the loan agreement, proceeds from the repayment of the Loan and enforcement of any security interest would have first been provided to the third-party creditor and then to us.
On June 17, 2014, we and Fund Twelve entered into a secured term loan credit facility agreement with SeaChange Projects LLC (“SeaChange”) to provide a credit facility of up to $7,000,000, of which our commitment was $700,000. On June 20, 2014 and August 20, 2014, we funded $450,000 and $250,000, respectively. The facility was used to partially finance SeaChange’s acquisition and conversion of a containership vessel to meet certain time charter specifications of the Military Sealift Command of the Department of the United States Navy. The facility bore interest at 13.25% per year and was scheduled to mature on February 15, 2018. The facility was secured by, among other things, a first priority security interest in and earnings from the vessel and the equity interests of SeaChange. Due to SeaChange’s inability to meet certain requirements of the Department of the United States Navy, which resulted in the cancellation of the time charter, SeaChange was required to repay all outstanding principal and accrued interest under the facility in accordance with the loan agreement. On September 24, 2014, SeaChange satisfied its obligations by making a prepayment of $719,544, comprised of all outstanding principal and accrued interest.
On July 14, 2014, we, Fund Twelve and Fund Fifteen (collectively, “ICON”) entered into a secured term loan credit facility agreement with TMA to provide a credit facility of up to $29,000,000 (the “ICON Loan”), of which our commitment of $3,625,000 was funded on August 27, 2014 (the “TMA Initial Closing Date”). The facility was used by TMA to acquire and refinance two platform supply vessels. At inception, the loan bore interest at LIBOR, subject to a 1% floor, plus a margin of 17%. Upon the acceptance of both vessels by TMA’s sub-charterer on September 19, 2014, the margin was reduced to 13%. On November 24, 2014, ICON entered into an amended and restated senior secured term loan credit facility agreement with TMA pursuant to which an unaffiliated third party agreed to provide a senior secured term loan in the amount of up to $89,000,000 (the “Senior Loan”, and collectively with the ICON Loan, the “TMA Facility”) to acquire two additional vessels. The TMA Facility has a term of five years from the TMA Initial Closing Date. As a result of the amendment, the margin for the ICON Loan increased to 15% and repayment of the ICON Loan became subordinated to the repayment of the Senior Loan. The TMA Facility is secured by, among other things, a first priority security interest in the four vessels and TMA’s right to the collection of hire with respect to earnings from the sub-charterer related to the four vessels. As of December 31, 2016, our share of the collateral value, net of the balance of the Senior Loan, was estimated to be approximately $800,000. The amendment qualified as a new loan under U.S. GAAP and therefore, we wrote off the initial direct costs and deferred revenue associated with the ICON Loan of $77,524 as a charge against finance income. As a condition to the amendment and increased size of the TMA Facility, TMA was required to cause all four platform supply vessels to be under contract by March 31, 2015. Due to TMA’s failure to meet such condition, TMA has been in technical default and in payment default while available cash has been swept by the senior lender and applied to the Senior Loan in accordance with the loan agreement. As a result, the principal balance of the Senior Loan was paid down at a faster rate. In January 2016, the remaining two previously unchartered vessels had commenced employment. Based on, among other things, TMA’s payment history and estimated collateral value as of December 31, 2016, our Investment Manager continues to believe that all contractual interest and outstanding principal payments under the ICON Loan are collectible. As a result, we continue to account for our net investment in note receivable related to TMA on an accrual basis despite a portion of the outstanding balance being over 90 days past due. Interest on the ICON Loan is currently being accrued.
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On September 24, 2014, we, Fund Twelve, Fund Fifteen and Fund Sixteen entered into a secured term loan credit facility agreement with Premier Trailer Leasing, Inc. (“Premier Trailer”) to provide a credit facility of up to $20,000,000, of which our commitment of $2,500,000 was funded on such date. The loan bore interest at LIBOR, subject to a 1% floor, plus 9% per year, and was for a period of six years. The loan was secured by a second priority security interest in all of Premier Trailer’s assets, including, without limitation, its fleet of trailers, and the equity interests of Premier Trailer. On August 9, 2016, Premier Trailer satisfied its obligations in connection with the loan by making a prepayment of $2,581,944, comprised of all outstanding principal, accrued interest and a prepayment fee of $50,000. The prepayment fee was recognized as additional finance income.
On November 13, 2014, we and Fund Twelve made secured term loans in the aggregate amount of $15,000,000 to NARL Marketing Inc. and certain of its affiliates (collectively, “NARL”) as a part of a $30,000,000 senior secured term loan credit facility, of which our commitment was $3,000,000. The loan bore interest at 10.75% per year and was for a period of three years. The loan was secured by a first priority security interest in all of NARL’s existing and thereafter acquired assets including, but not limited to, its retail and wholesale fuel equipment, including pumps and storage tanks, and a mortgage on certain real properties. On May 7, 2015, NARL made a partial prepayment on the loan of $206,818 pursuant to the excess cash sweep provision of the loan agreement. On July 15, 2015, NARL made a voluntary partial prepayment on the loan of $1,574,215, which included a prepayment fee of $67,500. The prepayment fee was recognized as additional finance income. On August 6, 2015, NARL satisfied its obligations in full by making a prepayment of $1,079,963 pursuant to the excess cash sweep provision of the loan agreement, comprised of all outstanding principal and unpaid interest.
On December 20, 2016, we, Fund Fifteen and Fund Sixteen entered into a secured term loan credit facility agreement with CFL to provide a credit facility of up to $7,400,000, of which our commitment of $1,258,000 was funded on December 21, 2016. The loan bears interest at 8% per year and we are entitled to an equity participation fee based partly on the fair market value of the vessel upon repayment of the loan. The loan is for a period of four years, maturing on December 21, 2020. The loan is secured by, among other things, a first priority security interest in and earnings from a motor cargo vessel.
On December 30, 2016, we, Fund Fifteen and Fund Sixteen entered into a secured term loan agreement with LSC to provide a loan in the aggregate amount of $32,500,000, of which our commitment of $5,525,000 was funded on such date. The loan bears interest at LIBOR, subject to a 1% floor, plus 11% per year, and is for a period of four years maturing on December 30, 2020. The loan is secured by a second priority security interest in LSC's accounts receivable and inventory and a first priority security interest in all of LSC’s other assets.
Acquisition Fees
In connection with the transactions that we entered into during the years ended December 31, 2016, 2015 and 2014, we incurred or paid acquisition fees to our Investment Manager of $0, $586,841 and $922,917, respectively.
Subsequent Event
On January 24, 2017, Asphalt satisfied its obligations in connection with a secured term loan scheduled to mature on December 31, 2018 by making a prepayment of $1,731,830, comprised of all outstanding principal, accrued interest and a prepayment fee of $81,400.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In August 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-15, Presentation of Financial Statements – Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), which provides guidance about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. We adopted ASU 2014-15 on December 31, 2016, which did not have an effect on our consolidated financial statements.
In January 2015, FASB issued ASU No. 2015-01, Income Statement – Extraordinary and Unusual Items: Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items (“ASU 2015-01”), which simplifies income statement presentation by eliminating the concept of extraordinary items. We adopted ASU 2015-01 on January 1, 2016, which did not have an effect on our consolidated financial statements.
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In February 2015, FASB issued ASU No. 2015-02, Consolidation – Amendments to the Consolidation Analysis (“ASU 2015-02”), which modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership, and affects the consolidation analysis by reducing the frequency of application of related party guidance and excluding certain fees in the primary beneficiary determination. We adopted ASU 2015-02 on January 1, 2016, which did not have an effect on our consolidated financial statements.
In April 2015, FASB issued ASU No. 2015-03, Interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), which requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of such debt liability, consistent with debt discounts. In August 2015, FASB issued ASU No. 2015-15, Interest – Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (“ASU 2015-15”), which further specifies the SEC staff’s view on the presentation and subsequent measurement of debt issuance costs associated with line of credit arrangements. We retrospectively adopted ASU 2015-03 as of March 31, 2016. Consequently, we reclassified $1,394,344 of debt issuance costs from other assets to long-term debt on our consolidated balance sheet at December 31, 2015, which resulted in the following adjustments:
At December 31, 2015 | |||||||
As Reported | As Adjusted | ||||||
Other assets | $ | 2,078,777 | $ | 684,433 | |||
Long-term debt | $ | 122,225,418 | $ | 120,831,074 | |||
In addition, we adopted ASU 2015-15 on January 1, 2016 and continue to present debt issuance costs associated with our revolving line of credit as other assets on our consolidated balance sheets.
Other Recent Accounting Pronouncements
In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), requiring revenue to be recognized in an amount that reflects the consideration expected to be received in exchange for goods and services. This new revenue standard may be applied retrospectively to each prior period presented, or retrospectively with the cumulative effect recognized as of the date of adoption. In August 2015, FASB issued ASU No. 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date (“ASU 2015-14”), which defers implementation of ASU 2014-09 by one year. Under such deferral, the adoption of ASU 2014-09 becomes effective for us on January 1, 2018, including interim periods within that reporting period. Early adoption is permitted, but not before our original effective date of January 1, 2017. Our evaluation of the impact of the adoption of ASU 2014-09 on our consolidated financial statements is ongoing and our implementation efforts have included the identification of revenue within the scope of the guidance and the evaluation of applicable revenue contracts. We continue to evaluate the timing of recognition of various revenue; however, since a substantial portion of our revenue is recognized from our leasing contracts, which is subject to ASU 2016-02 (as defined below), such revenue is excluded from our evaluation of ASU 2014-09.
In January 2016, FASB issued ASU No. 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which provides guidance related to accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The adoption of ASU 2016-01 becomes effective for us on January 1, 2018, including interim periods within that reporting period. We are currently in the process of evaluating the impact of the adoption of ASU 2016-01 on our consolidated financial statements.
In February 2016, FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”), which requires lessees to recognize assets and liabilities for leases with lease terms greater than twelve months on the balance sheet and disclose key information about leasing arrangements. ASU 2016-02 implements changes to lessor accounting focused on conforming with certain changes made to lessee accounting and the recently released revenue recognition guidance. The adoption of ASU 2016-02 becomes effective for us on January 1, 2019. Early adoption is permitted. We are currently in the process of evaluating the impact of the adoption of ASU 2016-02 on our consolidated financial statements.
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In March 2016, FASB issued ASU No. 2016-05, Derivatives and Hedging: Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (“ASU 2016-05”), which clarifies that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The adoption of ASU 2016-05 becomes effective for us on January 1, 2017, including interim periods within that reporting period. An entity has the option to apply ASU 2016-05 on either a prospective basis or a modified retrospective basis. Early adoption is permitted. The adoption of ASU 2016-05 is not expected to have a material effect on our consolidated financial statements.
In March 2016, FASB issued ASU No. 2016-07, Investments – Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting (“ASU 2016-07”), which eliminates the retroactive adjustments to an investment upon it qualifying for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence by the investor. ASU 2016-07 requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment qualifies for equity method accounting. The adoption of ASU 2016-07 becomes effective for us on January 1, 2017, including interim periods within that reporting period. Early adoption is permitted. The adoption of ASU 2016-07 is not expected to have a material effect on our consolidated financial statements.
In June 2016, FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (“ASU 2016-13”), which modifies the measurement of credit losses by eliminating the probable initial recognition threshold set forth in current guidance, and instead reflects an entity’s current estimate of all expected credit losses. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity will apply the amendments within ASU 2016-13 through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The adoption of ASU 2016-13 becomes effective for us on January 1, 2020, including interim periods within that reporting period. Early adoption is permitted. We are currently in the process of evaluating the impact of the adoption of ASU 2016-13 on our consolidated financial statements.
In August 2016, FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which provides guidance on how certain cash receipts and cash payments are to be presented and classified in the statement of cash flows. The adoption of ASU 2016-15 becomes effective for us on January 1, 2018, including interim periods within that reporting period. Early adoption is permitted. An entity will apply the amendments within ASU 2016-15 using a retrospective transition method to each period presented. We are currently in the process of evaluating the impact of the adoption of ASU 2016-15 on our consolidated financial statements.
In October 2016, FASB issued ASU No. 2016-17, Consolidation (“ASU 2016-17”), which amends the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity should treat indirect interests in such entity held by related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that variable interest entity. Under ASU 2016-17, a single decision maker is not required to consider indirect interests held by related parties that are under common control with the single decision maker to be the equivalent of direct interests in their entirety. The adoption of ASU 2016-17 becomes effective for us on January 1, 2017, including interim periods within that reporting period. Early adoption is permitted. As a result of our adoption of ASU 2015-02 on January 1, 2016, we are required to apply the amendments within ASU 2016-17 retrospectively to when we initially applied the amendments within ASU 2015-02. We are currently in the process of evaluating the impact of the adoption of ASU 2016-17 on our consolidated financial statements.
In November 2016, FASB issued ASU No. 2016-18, Statement of Cash Flows (“ASU 2016-18”), which provides guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. The adoption of ASU 2016-18 becomes effective for us on January 1, 2018, including interim periods within that reporting period. Early adoption is permitted. An entity will apply the amendments within ASU 2016-18 using a retrospective transition method to each period presented. We are currently in the process of evaluating the impact of the adoption of ASU 2016-18 on our consolidated financial statements.
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In January 2017, FASB issued ASU No. 2017-01, Business Combinations (“ASU 2017-01”), which clarifies the definition of a business. ASU 2017-01 sets forth requirements to be met for a set to be deemed a business and establishes a practical way to determine when a set is not a business. To be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create an output, and removes the evaluation of whether a market participant could replace missing elements. In addition, ASU 2017-01 narrows the definition of outputs and aligns such definition with how outputs are described within the revenue guidance. The adoption of ASU 2017-01 becomes effective for us on January 1, 2018, including interim periods within that reporting period. Early adoption is permitted for transactions that occur before the issuance date or effective date of ASU 2017-01 to the extent that such transactions have not been reported in financial statements that have been issued or made available for issuance. We are currently in the process of evaluating the impact of the adoption of ASU 2017-01 on our consolidated financial statements.
We do not believe any other recently issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect on our consolidated financial statements.
Critical Accounting Policies
An understanding of our critical accounting policies is necessary to understand our financial results. The preparation of financial statements in conformity with U.S. GAAP requires our Investment Manager to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates primarily include the determination of credit loss reserves, impairment losses, estimated useful lives and residual values. Actual results could differ from those estimates. We applied our critical accounting policies and estimation methods consistently in all periods presented. We consider the following accounting policies to be critical to our business:
· Lease classification and revenue recognition;
· Accounting for vessel revenue and expenses;
· Asset impairments;
· Depreciation;
· Notes receivable and revenue recognition;
· Credit quality of notes receivable and finance leases and credit loss reserve; and
· Derivative financial instruments.
Lease Classification and Revenue Recognition
Each equipment lease we enter into is classified as either a finance lease or an operating lease, based upon the terms of each lease. The estimated residual value is a critical component of and can directly influence the determination as to whether a lease is classified as an operating or a finance lease.
Our Investment Manager has an investment committee that approves each new equipment lease and other financing transaction. As part of its process, the investment committee determines the estimated residual value, if any, to be used once the investment has been approved. The factors considered in determining the residual value include, but are not limited to, the creditworthiness of the potential lessee, the type of equipment considered, how the equipment is integrated into the potential lessee’s business, the length of the lease and the industry in which the potential lessee operates. Residual values are reviewed for impairment in accordance with our impairment review policy.
The residual value assumes, among other things, that the asset is utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the marketplace are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of the asset quickly. The residual value is calculated using information from various external sources, such as trade publications, auction data, equipment dealers, wholesalers and industry experts, as well as inspection of the physical asset and other economic indicators.
For finance leases, we capitalize, at lease inception, the total minimum lease payments receivable from the lessee, the estimated unguaranteed residual value of the equipment at lease termination and the initial direct costs related to the lease, less unearned income. Unearned income represents the difference between the sum of the minimum lease payments receivable, plus the estimated unguaranteed residual value, minus the cost of the leased equipment. Unearned income is recognized as finance income over the term of the lease using the effective interest rate method.
For operating leases, rental income is recognized on a straight-line basis over the lease term. Billed operating lease receivables are included in accounts receivable until collected or written off. We record a reserve if we deem any receivable not collectible. The difference between the timing of the cash received and the income recognized on a straight-line basis is recognized as either deferred revenue or other assets, as appropriate. Initial direct costs are capitalized as a component of the cost of the equipment and depreciated over the lease term.
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Contingent rentals are included in the determination of income as they are earned. Contingent rentals based on an existing index or rate are included in the determination of income based on the index or rate at lease commencement, with subsequent changes to the index or rate recognized in income as they are earned.
Accounting for Vessel Revenue and Expenses
Revenue generated from time charters and/or revenue generated from profit sharing arrangements are recognized over the term of the respective time charter agreements as service is provided and the profit sharing is fixed and determinable. Under time charters, voyage expenses such as bunkers, port dues, cargo handling operations and brokerage commissions are paid by our customers. Vessel operating costs, including, without limitation, crewing, vessel maintenance, technical management costs and vessel insurance, are expensed by us as incurred on an accrual basis. Commercial management and technical management fees are expensed as incurred. Dry-docking costs are generally expensed as incurred as such costs primarily represent normal maintenance and repairs. To the extent dry-docking costs represent expenditures that add economic life to the vessel or improve the vessel’s efficiency, such costs can be capitalized and depreciated over the life of the vessel.
For our vessel operating in a pool, revenue and voyage expenses related to our vessel are pooled with revenue and voyage expenses of other pool participants and allocated to each participant under a time charter equivalent basis in accordance with an agreed-upon formula. The formula in the pool agreement for allocating gross revenue, net of voyage expenses, is based on points allocated to each participant's vessel based on the number of days such vessel operates in the pool and other technical characteristics, such as speed and fuel consumption. The selection of charterers, negotiation of rates, the collection of related receivables and the payment of voyage expenses, which include the cost of bunkers and port expenses, are the responsibility of the pool. Operating costs related to our vessel participating in the pool, including, without limitation, crewing and maintenance, are typically paid by us. Since we share the net earnings of the pool with the other participants and the pool operates in a spot market, revenue earned by our vessel participating in the pool is subject to fluctuations of such spot market. We recognize pool revenue from this arrangement based on the right to receive our portion of net distributions reported by the pool, with net distributions being the net voyage revenue of the pool after deduction of voyage expenses and pool manager fees. A portion of the net distributions from the pool that is subject to repayment by us based on certain criteria is deferred until the time such criteria are met.
Asset Impairments
The significant assets in our portfolio are periodically reviewed, no less frequently than annually or when indicators of impairment exist, to determine whether events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss will be recognized only if the carrying value of a long-lived asset is not recoverable and exceeds its fair market value. If there is an indication of impairment, we will estimate the future cash flows (undiscounted and without interest charges) expected from the use of the asset and its eventual disposition. Future cash flows are the future cash inflows expected to be generated by an asset less the future outflows expected to be necessary to obtain those inflows. If an impairment is determined to exist, the impairment loss will be measured as the amount by which the carrying value of a long-lived asset exceeds its fair value and recorded in our consolidated statements of operations in the period the determination is made.
The events or changes in circumstances that generally indicate that an asset may be impaired are (i) the estimated fair value of the underlying asset is less than its carrying value or (ii) the lessee is experiencing financial difficulties and it does not appear likely that the estimated proceeds from the disposition of the asset will be sufficient to satisfy the residual position in the asset and, if applicable, the remaining obligation to the non-recourse lender. Generally, in the latter situation, the residual position relates to equipment subject to third-party non-recourse debt where the lessee remits its rental payments directly to the lender and we do not recover our residual position until the non-recourse debt is repaid in full. The preparation of the undiscounted cash flows requires the use of assumptions and estimates, including the level of future rents, the residual value expected to be realized upon disposition of the asset, estimated downtime between re-leasing events and the amount of re-leasing costs. Our Investment Manager’s review for impairment includes a consideration of the existence of impairment indicators including third-party appraisals, published values for similar assets, recent transactions for similar assets, adverse changes in market conditions for specific asset types and the occurrence of significant adverse changes in general industry and market conditions that could affect the fair value of the asset.
Depreciation
We record depreciation expense on equipment when the lease is classified as an operating lease. In order to calculate depreciation, we first determine the depreciable base, which is the equipment cost less the estimated residual value at lease termination. Depreciation expense is recorded on a straight-line basis over the lease term.
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Notes Receivable and Revenue Recognition
Notes receivable are reported in our consolidated balance sheets at the outstanding principal balance, plus costs incurred to originate the loans, net of any unamortized premiums or discounts on purchased loans. We use the effective interest rate method to recognize finance income, which produces a constant periodic rate of return on the investment. Unearned income, discounts and premiums are amortized to finance income in our consolidated statements of operations using the effective interest rate method. Interest receivable related to the unpaid principal is recorded separately from the outstanding balance in our consolidated balance sheets. Upon the prepayment of a note receivable, any prepayment penalties and unamortized loan origination, closing and commitment fees are recorded as part of finance income in our consolidated statements of operations. Our notes receivable may contain a paid-in-kind (“PIK”) interest provision. Any PIK interest, if deemed collectible, will be added to the principal balance of the note receivable and is recorded as income.
Credit Quality of Notes Receivable and Finance Leases and Credit Loss Reserve
Our Investment Manager monitors the ongoing credit quality of our financing receivables by (i) reviewing and analyzing a borrower’s financial performance on a regular basis, including review of financial statements received on a monthly, quarterly or annual basis as prescribed in the loan or lease agreement, (ii) tracking the relevant credit metrics of each financing receivable and a borrower’s compliance with financial and non-financial covenants, (iii) monitoring a borrower’s payment history and public credit rating, if available, and (iv) assessing our exposure based on the current investment mix. As part of the monitoring process, our Investment Manager may physically inspect the collateral or a borrower’s facility and meet with a borrower’s management to better understand such borrower’s financial performance and its future plans on an as-needed basis.
As our financing receivables, generally notes receivable and finance leases, are limited in number, our Investment Manager is able to estimate the credit loss reserve based on a detailed analysis of each financing receivable as opposed to using portfolio-based metrics. Our Investment Manager does not use a system of assigning internal risk ratings to each of our financing receivables. Rather, each financing receivable is analyzed quarterly and categorized as either performing or non-performing based on certain factors including, but not limited to, financial results, satisfying scheduled payments and compliance with financial covenants. A financing receivable is usually categorized as non-performing only when a borrower experiences financial difficulties and has failed to make scheduled payments. Our Investment Manager then analyzes whether the financing receivable should be placed on a non-accrual status, a credit loss reserve should be established or the financing receivable should be restructured. As part of the assessment, updated collateral value is usually considered and such collateral value can be based on a third party industry expert appraisal or, depending on the type of collateral and accessibility to relevant published guides or market sales data, internally derived fair value. Material events would be specifically disclosed in the discussion of each financing receivable held.
Financing receivables are generally placed on a non-accrual status when payments are more than 90 days past due. Additionally, our Investment Manager periodically reviews the creditworthiness of companies with payments outstanding less than 90 days and based upon our Investment Manager’s judgment, these accounts may be placed on a non-accrual status.
In accordance with the cost recovery method, payments received on non-accrual financing receivables are applied to principal if there is doubt regarding the ultimate collectability of principal. If collection of the principal of non-accrual financing receivables is not in doubt, interest income is recognized on a cash basis. Financing receivables on non-accrual status may not be restored to accrual status until all delinquent payments have been received, and we believe recovery of the remaining unpaid receivable is probable.
When our Investment Manager deems it is probable that we will not be able to collect all contractual principal and interest on a non-performing financing receivable, we perform an analysis to determine if a credit loss reserve is necessary. This analysis considers the estimated cash flows from the financing receivable, and/or the collateral value of the asset underlying the financing receivable when financing receivable repayment is collateral dependent. If it is determined that the impaired value of the non-performing financing receivable is less than the net carrying value, we will recognize a credit loss reserve or adjust the existing credit loss reserve with a corresponding charge to earnings. We then charge off a financing receivable in the period that it is deemed uncollectible by reducing the credit loss reserve and the balance of the financing receivable.
Derivative Financial Instruments
We entered into derivative financial instruments for purposes of hedging specific financial exposures, including movements in foreign currency exchange rates and changes in interest rates on our long-term debt. We entered into these instruments only for hedging underlying exposures. We did not hold or issue derivative financial instruments for purposes other than hedging, except for warrants, which are not hedges. Certain derivatives did not meet the established criteria to be designated as qualifying accounting hedges, even though we believed that these were effective economic hedges.
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We recognized all derivative financial instruments as either assets or liabilities on our consolidated balance sheets and measured those instruments at fair value. Changes in the fair value of such instruments were recognized immediately in earnings unless certain criteria were met. These criteria demonstrated that the derivative was expected to be highly effective at offsetting changes in the fair value or expected cash flows of the underlying exposure at both the inception of the hedging relationship and on an ongoing basis and included an evaluation of the counterparty risk and the impact, if any, on the effectiveness of the derivative. If these criteria were met, which we documented and assessed at inception and on an ongoing basis, we recognized the changes in fair value of such instruments in accumulated other comprehensive income (loss), a component of equity on our consolidated balance sheets. Changes in the fair value of the ineffective portion of all derivatives were recognized immediately in earnings.
Results of Operations for the Years Ended December 31, 2016 (“2016”) and 2015 (“2015”)
The following percentages are only as of a stated period and are not expected to be comparable in future periods. Further, these percentages are only representative of the percentage of the carrying value of such assets, finance income or rental income as of each stated period, and as such are not indicative of the concentration of any asset type or customer by the amount of equity invested or our investment portfolio as a whole.
Financing Transactions
The following tables set forth the types of assets securing the financing transactions in our portfolio:
December 31, | ||||||||||||
2016 | 2015 | |||||||||||
Asset Type | Net Carrying Value | Percentage of Total Net Carrying Value | Net Carrying Value | Percentage of Total Net Carrying Value | ||||||||
Lubricant manufacturing and blending equipment | $ | 5,138,818 | 44% | $ | — | — | ||||||
Platform supply vessels | 3,500,490 | 30% | 3,500,490 | 3% | ||||||||
Asphalt carrier vessel | 1,697,300 | 15% | 1,914,261 | 2% | ||||||||
Motor cargo vessel | 1,234,770 | 11% | — | — | ||||||||
Marine - crude oil tanker (1) | — | — | 68,108,070 | 65% | ||||||||
Marine - dry bulk vessels (2) | — | — | 23,645,554 | 23% | ||||||||
Petrochemical facility | — | — | 4,772,088 | 4% | ||||||||
Trailers | — | — | 2,618,464 | 3% | ||||||||
$ | 11,571,378 | 100% | $ | 104,558,927 | 100% | |||||||
(1) Upon redelivery to us in June 2016, we reclassified the vessel from "net investment in finance leases" to "vessel" on our consolidated balance sheet.
(2) Upon redelivery to us in July 2016 and entering into new charters that are classified as operating leases, we reclassified the vessels from "net investment in finance leases" to "leased equipment at cost" on our consolidated balance sheet.
The net carrying value of our financing transactions includes the balance of our net investment in notes receivable and our net investment in finance leases as of each reporting date.
During 2016 and 2015, certain customers generated significant portions (defined as 10% or more) of our total finance income as follows:
Percentage of Total Finance Income | ||||||
Customer | Asset Type | 2016 | 2015 | |||
Técnicas Maritimas Avanzadas, S.A. de C.V. | Platform supply vessels | 44% | 5% | |||
Gallatin Marine Management, LLC | Offshore support vessel | 27% | 3% | |||
Asphalt Carrier Shipping Company Limited | Asphalt carrier vessel | 21% | 2% | |||
Geden Holdings Ltd. | Marine - dry bulk vessels and crude oil tanker | — | 72% | |||
92% | 82% | |||||
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Interest income and prepayment fees from our net investment in notes receivable and finance income from our net investment in finance leases are included in finance income in our consolidated statements of operations.
Non-performing Assets within Financing Transactions
As of December 31, 2015, the net carrying value of our finance leases related to Geden was $91,753,624. The three leases with Geden were placed on a non-accrual status during the three months ended June 30, 2013. As our Investment Manager believed that Geden might be unable to fully satisfy its remaining lease payment obligations and fulfill its purchase obligations at lease expiration on September 30, 2017 related to the Amazing and the Fantastic, commencing with the three months ended December 31, 2014, credit losses were recorded based on the quarterly expected undiscounted cash flows comprised of the estimated lease payments to be collected from Geden over the remaining terms of the leases and the expected fair value of the vessels at lease expiration should the purchase obligations not be satisfied. During 2015, in addition to updating the quarterly undiscounted cash flows, we also considered the actual lease payments received for the Amazing and the Fantastic for each reporting period and the then current fair market value of the vessels to account for the possibility that we might take the vessels back from Geden prior to lease expiration. Based upon the updated quarterly analyses and as a result of the continuing decline in fair value of the vessels and charter rates, an aggregate credit loss of $24,160,583 was recorded as of December 31, 2015 related to the Amazing and the Fantastic.
With respect to the Center, our Investment Manager had assessed the collectability of the lease payments due from Geden over the remaining term of the lease as well as Geden’s ability to satisfy its purchase obligation at lease expiration and concluded that no credit loss reserve was required as of December 31, 2015 due to the fixed employment of the vessel, prevailing market conditions and various new charter proposals then on hand. As a result, we had been accounting for the lease on a non-accrual basis and finance income was recognized on a cash basis.
In April 2016, our Investment Manager was informed by Geden that it would redeliver the three vessels to us prior to lease expiration and that it would not be fulfilling its purchase obligations with respect to the three vessels. As a result, our Investment Manager determined to record credit losses of $4,804,077, $4,641,478 and $396,762 related to the Amazing, the Fantastic and the Center, respectively, during the three months ended March 31, 2016 based primarily on the then current fair market value of the vessels.
On June 17, 2016, the Center was redelivered to us by Geden and the charter was terminated. Upon redelivery, the vessel was dry-docked until early July 2016, after which we renamed the vessel "Shamrock" and placed it into service for at least 12 months by participating in the Stena Pooling Arrangement. Upon redelivery of the vessel to us, we reclassified the Center from "net investment in finance leases" to "vessel" on our consolidated balance sheet at the then fair market value of $48,000,000. Our Investment Manager recorded an additional credit loss of $6,546,754 during the three months ended June 30, 2016, net of the forfeiture of the $9,000,000 seller’s credit that was payable to Geden as a result of Geden’s default on the charter.
On July 5, 2016, the Amazing and the Fantastic were also redelivered to us by Geden and the charters were terminated. Upon redelivery, the vessels were renamed "Bulk Progress" and "Bulk Power", respectively, and were bareboat chartered to Americas Bulk for a period of five years, effective July 2016. The new charters are classified as operating leases under U.S. GAAP and as a result, the vessels were reclassified to "leased equipment at cost" at their then fair market value on our consolidated balance sheet upon commencement of the charters. For the three months ended June 30, 2016, we recognized a reversal of an aggregate credit loss of $6,800,000 related to the Amazing and the Fantastic upon redelivery based on their then aggregate fair market values of $21,000,000 as of June 30, 2016.
During 2016 and 2015, we did not recognize any finance income related to the Amazing and the Fantastic as the leases were considered impaired as of December 31, 2014. Accordingly, all cash receipts during 2015 related to the Amazing and the Fantastic were applied to minimum rents receivable (see “Significant Transactions” above).
During 2016, we did not recognize any finance income related to the Center as it was considered impaired during the three months ended March 31, 2016. During 2015, we recognized finance income of $8,792,671 (of which $8,725,500 was recognized on a cash basis) related to the Center (see “Significant Transactions” above).
The loan related to VAS was considered impaired during the three months ended December 31, 2014. During 2015, we recognized an additional credit loss of $2,092,154 prior to the sale of our interest in the loan to GB for $806,924 on July 23, 2015. No gain or loss was recognized as a result of the sale. No finance income was recognized since the date the loan was
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considered impaired. Accordingly, no finance income was recognized in 2015. Finance income recognized on the loan prior to recording the credit loss was $591,081 in 2014 (see “Significant Transactions” above).
As of December 31, 2016 and 2015, our net investment in note receivable related to JAC was $0 and $4,772,088, respectively. During the three months ended June 30, 2015, our Investment Manager determined that there was doubt regarding our ultimate collectability of the loan. Accordingly, we recognized a credit loss of $15,921,795, placed the loan on non-accrual status and ceased to recognize finance income. On September 28, 2015, JAC entered receivership. As a result, our Investment Manager reassessed our collectability of the loan and recognized an additional credit loss of $7,927,576 during the three months ended September 30, 2015. In January 2016, our Investment Manager engaged in further discussions with JAC’s other subordinated lenders and the Receiver regarding a near term plan for JAC’s manufacturing facility. Based upon such discussions, our Investment Manager anticipated that a one-year tolling arrangement with JAC’s suppliers would be implemented to allow JAC’s facility to recommence operations. Our Investment Manager updated the collectability analysis under the loan as of December 31, 2015 and determined that comparable enterprise values derived from EBITDA multiples and trading prices of unsecured distressed debt in comparable industries each decreased. In addition, our Investment Manager considered that, as of December 31, 2015, (i) a tolling arrangement with JAC’s suppliers did not commence as originally anticipated; (ii) no further discussions occurred between JAC, us, the senior lenders and certain other stakeholders of JAC regarding a restructuring plan and (iii) JAC’s manufacturing facility continued to be non-operational. Based upon these factors, our Investment Manager believed that our ultimate collectability of the loan might result in less of a recovery from its prior estimate. As a result, our Investment Manager determined to record an additional credit loss of $4,772,087, which our Investment Manager believed was the most likely outcome derived from its reassessment as of December 31, 2015. In July 2016, the tolling arrangement was finally implemented and the manufacturing facility resumed operations. Although our Investment Manager believes that the marketability of JAC’s facility should improve now that it has recommenced operations, our Investment Manager does not anticipate that JAC will make any payments to us while operating under the tolling arrangement. As part of the tolling arrangement and the receivership process, JAC incurred additional senior debt, which could be up to $55,000,000, to fund its operations as well as any receivership-related costs. As a result, our Investment Manager determined that our ultimate collectability of the loan was further in doubt. As of June 30, 2016, our Investment Manager updated its quarterly assessment and considered the additional senior debt incurred by JAC, which has priority over our loan. Based upon this reassessment, our Investment Manager determined that we should fully reserve the outstanding balance of the loan due from JAC as of June 30, 2016 and as a result, we recorded an additional credit loss of $4,772,088. During the fourth quarter of 2016, the Receiver formally commenced the process of marketing JAC's manufacturing facility for sale. Our Investment Manager continues to closely monitor the operations of JAC, the receivership process and the marketing process for sale of the manufacturing facility through regular communications with the Receiver and certain other stakeholders. We did not recognize finance income for 2016. For 2015 and 2014, we recognized finance income of $984,108 and $3,355,697, respectively, of which no amount was recognized on a cash basis, prior to the loan being considered impaired (see “Significant Transactions” above).
As of December 31, 2015, the net carrying value of our impaired loan related to Western Drilling was $0. As of December 31, 2014, the remaining loan balance of $3,805,935 was fully reserved subsequent to the application of cash proceeds from the sale of the collateral in May 2014. On March 18, 2015, we entered into a settlement and mutual release with the estate of Western Drilling’s guarantor to settle our claims against the guarantor for $37,860. On April 29, 2015, we received the settlement amount and wrote off the fully reserved loan at such time. Finance income recognized on the loan related to Western Drilling for each of 2015 and 2014 was $0 (see “Significant Transactions” above).
Operating Lease Transactions
The following tables set forth the types of equipment subject to operating leases and charters in our portfolio:
December 31, | ||||||||||||
2016 | 2015 | |||||||||||
Asset Type | Net Carrying Value | Percentage of Total Net Carrying Value | Net Carrying Value | Percentage of Total Net Carrying Value | ||||||||
Marine - crude oil tankers | $ | 47,023,912 | 70% | $ | 106,074,620 | 97% | ||||||
Marine - dry bulk vessels | 20,583,746 | 30% | — | — | ||||||||
Packaging equipment | — | — | 2,720,919 | 3% | ||||||||
$ | 67,607,658 | 100% | $ | 108,795,539 | 100% | |||||||
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The net carrying value of our operating lease transactions represents the balance of our leased equipment at cost and vessel as of each reporting date.
During 2016 and 2015, certain customers generated significant portions (defined as 10% or more) of our total rental income and pool revenue as follows:
Percentage of Total Rental Income | ||||||
Customer | Asset Type | 2016 | 2015 | |||
AET Inc. Limited | Marine - crude oil tankers | 75% | 88% | |||
Stena Sonangol Suezmax Pool LLC | Marine - crude oil tanker | 19% | — | |||
94% | 88% | |||||
Revenue and other income for 2016 and 2015 is summarized as follows:
Years Ended December 31, | |||||||||||
2016 | 2015 | Change | |||||||||
Finance income | $ | 1,126,919 | $ | 12,202,464 | $ | (11,075,545 | ) | ||||
Rental income | 8,950,262 | 21,413,319 | (12,463,057 | ) | |||||||
Pool revenue | 2,064,596 | — | 2,064,596 | ||||||||
Income from investment in joint ventures | 320,115 | 2,474,158 | (2,154,043 | ) | |||||||
Gain on extinguishment of debt | 2,343,762 | — | 2,343,762 | ||||||||
Gain on sale of assets, net | — | 15,314 | (15,314 | ) | |||||||
Gain on sale of subsidiaries | 6,708,694 | — | 6,708,694 | ||||||||
Gain on sale of investment in joint ventures | 291,990 | — | 291,990 | ||||||||
Gain on litigation | — | 150,000 | (150,000 | ) | |||||||
Other income | 144,048 | 13,315 | 130,733 | ||||||||
Total revenue and other income | $ | 21,950,386 | $ | 36,268,570 | $ | (14,318,184 | ) | ||||
Total revenue and other income for 2016 decreased $14,318,184, or 39.5%, as compared to 2015. The decrease was primarily due to decreases in (i) rental income primarily due to the sale of interests of ICON AET and ICON Exopack in June 2016, as well as the sale of assets previously on lease to CAM Leasing upon lease expiration in 2015, partially offset by rental income recognized on new operating leases that we entered into with Americas Bulk during 2016, (ii) finance income primarily as a result of our finance lease related to the Center and our loan related to JAC being considered impaired resulting in no income recognition related to such assets during 2016, as well as the prepayment of certain notes receivable primarily during 2015 and (iii) income from investment in joint ventures primarily due to our share of the impairment loss recorded on the AMC Ambassador during 2016 and a decrease in income recognized during 2016 as a result of the sale of the Ardmore Vessels in April 2016. These decreases were partially offset by (a) a gain on sale of subsidiaries recorded during 2016 due to the sale of interests of ICON AET and ICON Exopack, (b) a gain on extinguishment of debt recorded in 2016 upon repayment of the prior facility related to the Amazing and the Fantastic at a discount, (c) pool revenue recognized in connection with net earnings derived from placing the Shamrock in the Stena Pooling Arrangement since July 2016 and (d) a gain on sale of investment in joint ventures recorded during 2016 due to the sale of interests of ICON Challenge and ICON Hoegh in June 2016.
Expenses for 2016 and 2015 are summarized as follows:
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Years Ended December 31, | |||||||||||
2016 | 2015 | Change | |||||||||
Management fees | $ | 869,053 | $ | 2,033,788 | $ | (1,164,735 | ) | ||||
Administrative expense reimbursements | 1,519,571 | 1,597,312 | (77,741 | ) | |||||||
General and administrative | 3,048,745 | 2,385,601 | 663,144 | ||||||||
Credit loss, net | 15,875,657 | 54,836,335 | (38,960,678 | ) | |||||||
Depreciation | 5,410,687 | 9,945,714 | (4,535,027 | ) | |||||||
Interest | 4,104,608 | 6,774,484 | (2,669,876 | ) | |||||||
Vessel operating expenses | 4,796,285 | — | 4,796,285 | ||||||||
Loss on derivative financial instruments | 1,211,654 | 1,422,647 | (210,993 | ) | |||||||
Total expenses | $ | 36,836,260 | $ | 78,995,881 | $ | (42,159,621 | ) | ||||
Total expenses for 2016 decreased $42,159,621, or 53.4%, as compared to 2015. The decrease in total expenses was primarily due to decreases in (i) credit losses recorded related to JAC, the Amazing and the Fantastic, and no credit loss recorded related to VAS, partially offset by the credit losses recorded related to the Center and the note receivable from joint venture, each in 2016, (ii) depreciation primarily due to the sale of interests of ICON AET and ICON Exopack in June 2016, as well as the sale of assets previously on lease to CAM Leasing during 2015, partially offset by depreciation recorded on the three vessels redelivered to us by Geden, which we redeployed in July 2016, (iii) interest expense primarily due to the repayment of the Sub Debt with Wafra upon the sale of interests of ICON AET and partial repayments on our debt obligations related to the vessels previously on lease to Geden and (iv) management fees primarily due to the sale and prepayment of several investments during or subsequent to 2015. These decreases were partially offset primarily by vessel operating expenses recorded during 2016 related to dry-docking costs and operating expenses incurred subsequent to the redelivery of the Center to us by Geden.
Net (Loss) Income Attributable to Noncontrolling Interests
Net loss attributable to noncontrolling interests decreased $4,884,652, from $5,666,273 in 2015 to $781,621 in 2016. The decrease was primarily due to a lower credit loss recorded on our consolidated joint venture related to JAC, partially offset by lower income allocated to ICON AET following the sale of our interests in such joint venture in 2016.
Net Loss Attributable to Fund Fourteen
As a result of the foregoing factors, net loss attributable to us for 2016 and 2015 was $14,104,253 and $37,061,038, respectively. Net loss attributable to us per weighted average Interest outstanding for 2016 and 2015 was $53.96 and $141.79, respectively.
Results of Operations for the Years Ended December 31, 2015 (“2015”) and 2014 (“2014”)
The following percentages are only as of a stated period and are not expected to be comparable in future periods. Further, these percentages are only representative of the percentage of the carrying value of such assets, finance income or rental income as of each stated period, and as such are not indicative of the concentration of any asset type or customer by the amount of equity invested or our investment portfolio as a whole.
Financing Transactions
The following tables set forth the types of assets securing the financing transactions in our portfolio:
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December 31, | ||||||||||||
2015 | 2014 | |||||||||||
Asset Type | Net Carrying Value | Percentage of Total Net Carrying Value | Net Carrying Value | Percentage of Total Net Carrying Value | ||||||||
Marine - crude oil tankers | $ | 68,108,070 | 65% | $ | 68,040,899 | 37% | ||||||
Marine - dry bulk vessels | 23,645,554 | 23% | 49,964,886 | 27% | ||||||||
Petrochemical facility | 4,772,088 | 5% | 31,976,805 | 17% | ||||||||
Platform supply vessels | 3,500,490 | 3% | 3,598,174 | 2% | ||||||||
Trailers | 2,618,464 | 2% | 2,643,487 | 2% | ||||||||
Asphalt carrier vessel | 1,914,261 | 2% | 2,135,251 | 1% | ||||||||
Manufacturing equipment | — | — | 9,957,724 | 6% | ||||||||
Printing equipment | — | — | 6,582,292 | 4% | ||||||||
Energy equipment | — | — | 2,939,164 | 2% | ||||||||
Aircraft parts | — | — | 2,899,078 | 2% | ||||||||
$ | 104,558,927 | 100% | $ | 180,737,760 | 100% | |||||||
The net carrying value of our financing transactions includes the balance of our net investment in notes receivable and our net investment in finance leases as of each reporting date.
During 2015 and 2014, certain customers generated significant portions (defined as 10% or more) of our total finance income as follows:
Percentage of Total Finance Income | ||||||
Customer | Asset Type | 2015 | 2014 | |||
Geden Holdings Ltd. | Marine - dry bulk vessels and crude oil tanker | 72% | 37% | |||
Jurong Aromatics Corporation Pte. Ltd. | Petrochemical facility | 8% | 25% | |||
80% | 62% | |||||
Interest income and prepayment fees from our net investment in notes receivable and finance income from our net investment in finance leases are included in finance income in our consolidated statements of operations.
Non-performing Assets within Financing Transactions
As of December 31, 2015 and 2014, the net carrying value of our finance leases related to Geden was $91,753,624 and $118,005,785, respectively. All three leases with Geden were placed on a non-accrual status during the three months ended June 30, 2013. During 2014, we recorded a credit loss reserve of $12,646,486 related to the leases for the Amazing and the Fantastic as our Investment Manager believed that Geden may be unable to fully satisfy its remaining lease payment obligations and fulfill its purchase obligations at lease expiration. Subsequently, on a quarterly basis, we update our credit loss assessment by updating the key assumptions used in our undiscounted cash flows. As a result of the continuing decline in fair value of the vessels and charter rates, we have recorded additional credit losses based on these updated quarterly analyses. During the three months ended September 30, 2015, based on discussions with Geden, our Investment Manager determined that there was doubt regarding Geden’s ability to subsidize operating expenses associated with the Amazing and the Fantastic and to otherwise operate the vessels through the end of the lease term in September 2017. As a result, commencing with the quarterly assessment for the three months ended September 30, 2015, we also consider the current fair market value of the vessels to account for the possibility that we may take the vessels back from Geden prior to lease expiration or the current fair market value remains the same at lease expiration. Utilizing a weighted average probability approach on the quarterly undiscounted cash flows and the current fair market values, we estimated the recoverable amount of Geden’s obligations to us associated with the Amazing and the Fantastic and recorded additional credit losses based on the quarterly analyses. During 2015, we recorded an aggregate credit loss of $24,160,583 related to the Amazing and the Fantastic. As of December 31, 2015 and 2014, no credit loss reserve was deemed necessary related to the lease for the Center due to the fixed employment of the vessel, prevailing market conditions and various new charter proposals on hand.
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Finance income recognized on the leases related to Geden for 2015 and 2014 was $8,792,671 and $4,901,941, respectively. The increase in finance income recognized in 2015 was related to the lease for the Center as a result of increased cash receipts in 2015 as compared to 2014. We recognized finance income on the Center only to the extent cash was received. No finance income was recognized in 2015 related to the leases for the Amazing and the Fantastic as these financing receivables were considered impaired during the three months ended December 31, 2014. Accordingly, all cash receipts during 2015 related to the Amazing and the Fantastic were applied to minimum rents receivable (see “Significant Transactions” above).
As of December 31, 2014, the net carrying value of our impaired loan related to VAS was $2,899,078. The loan was considered impaired during the three months ended December 31, 2014. During 2015, we recognized an additional credit loss of $2,092,154 prior to the sale of our interest in the loan to GB for $806,924 on July 23, 2015. No gain or loss was recognized as a result of the sale. No finance income was recognized since the date the loan was considered impaired. Accordingly, no finance income was recognized in 2015. Finance income recognized on the loan prior to recording the credit loss was $591,081 in 2014 (see “Significant Transactions” above).
As of December 31, 2015 and 2014, our net investment in note receivable related to JAC was $4,772,088 and $31,976,805, respectively. During the three months ended June 30, 2015, our Investment Manager determined that there was doubt regarding our ultimate collectability of the loan. Accordingly, we recognized a credit loss of $15,921,795 and placed the loan on non-accrual status. On September 28, 2015, JAC entered receivership. As a result, we reassessed our collectability of the loan and recognized an additional credit loss of $7,927,576 during the three months ended September 30, 2015. In January 2016, our Investment Manager engaged in further discussions with JAC’s other subordinated lenders and the Receiver regarding a near term plan for JAC’s manufacturing facility. Based upon such discussions, our Investment Manager anticipates that a one-year tolling arrangement with JAC’s suppliers will be implemented during the first half of 2016 to allow JAC’s facility to recommence operations. Although our Investment Manager believes that the marketability of JAC’s facility should improve if and when the facility recommences operations, our Investment Manager does not anticipate that JAC will make any payments to us while operating under the expected tolling arrangement. Our Investment Manager updated the collectability analysis under the loan as of December 31, 2015 and determined that comparable enterprise values derived from EBITDA multiples and trading prices of unsecured distressed debt in comparable industries each decreased. In addition, our Investment Manager considered that, as of December 31, 2015, (i) a tolling arrangement with JAC’s suppliers did not commence as originally anticipated; (ii) no further discussions occurred between JAC, us, the senior lenders and certain other stakeholders of JAC regarding a restructuring plan and (iii) JAC’s manufacturing facility continues to be non-operational. Based upon these factors, our Investment Manager believes that our ultimate collectability of the loan may result in less of a recovery from its prior estimate. As a result, our Investment Manager determined to record an additional credit loss of $4,772,087, which our Investment Manager believes is the most likely outcome derived from its reassessment as of December 31, 2015. No finance income was recognized since the date the loan was considered impaired during the three months ended June 30, 2015. During 2015 and 2014, we recognized finance income of $984,108 and $3,355,697, respectively, of which no amount was recognized on a cash basis, prior to the loan being considered impaired (see “Significant Transactions” above).
As of December 31, 2015, the net carrying value of our impaired loan related to Western Drilling was $0. As of December 31, 2014, the remaining loan balance of $3,805,935 was fully reserved subsequent to the application of cash proceeds from the sale of the collateral in May 2014. On March 18, 2015, we entered into a settlement and mutual release with the estate of Western Drilling’s guarantor to settle our claims against the guarantor for $37,860. On April 29, 2015, we received the settlement amount and wrote off the fully reserved loan at such time. Finance income recognized on the loan related to Western Drilling for each of 2015 and 2014 was $0 (see “Significant Transactions” above).
Operating Lease Transactions
The following tables set forth the types of equipment subject to operating leases in our portfolio:
December 31, | ||||||||||||
2015 | 2014 | |||||||||||
Asset Type | Net Carrying Value | Percentage of Total Net Carrying Value | Net Carrying Value | Percentage of Total Net Carrying Value | ||||||||
Marine - crude oil tankers | $ | 106,074,620 | 97% | $ | 114,864,691 | 94% | ||||||
Packaging equipment | 2,720,919 | 3% | 3,220,856 | 2% | ||||||||
Motor coaches | — | — | 4,665,392 | 4% | ||||||||
$ | 108,795,539 | 100% | $ | 122,750,939 | 100% | |||||||
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The net carrying value of our operating lease transactions represents the balance of our leased equipment at cost as of each reporting date.
During 2015 and 2014, one customer generated a significant portion (defined as 10% or more) of our total rental income as follows:
Percentage of Total Rental Income | ||||||
Customer | Asset Type | 2015 | 2014 | |||
AET Inc. Limited | Marine - crude oil tankers | 88% | 88% | |||
Revenue and other income for 2015 and 2014 is summarized as follows:
Years Ended December 31, | |||||||||||
2015 | 2014 | Change | |||||||||
Finance income | $ | 12,202,464 | $ | 13,409,240 | $ | (1,206,776 | ) | ||||
Rental income | 21,413,319 | 24,003,996 | (2,590,677 | ) | |||||||
Income from investment in joint ventures | 2,474,158 | 1,145,516 | 1,328,642 | ||||||||
Gain on sale of assets, net | 15,314 | 2,266,237 | (2,250,923 | ) | |||||||
Gain on litigation | 150,000 | — | 150,000 | ||||||||
Other income | 13,315 | 45,042 | (31,727 | ) | |||||||
Total revenue and other income | $ | 36,268,570 | $ | 40,870,031 | $ | (4,601,461 | ) | ||||
Total revenue and other income for 2015 decreased $4,601,461, or 11.3%, as compared to 2014. The decrease was primarily due to (i) a decrease in rental income primarily as a result of the expiration of two operating leases related to the Eagle Otome and the Eagle Subaru during 2014, (ii) a gain on sale of assets during 2014 related to the sale of the Eagle Otome and the Eagle Subaru compared to a smaller gain on sale of assets during 2015 related to the sale of assets previously on lease to CAM Leasing and (iii) a decrease in finance income primarily as a result of minimal finance income recognized during 2015 on our impaired assets related to JAC, the Amazing, the Fantastic and VAS and the sale of our interest in and the prepayment of several notes receivable during or subsequent to 2014, partially offset by an increase in finance income related to the Center in 2015 that was recognized on a cash basis. The decrease in total revenue and other income was partially offset by an increase in income from investment in joint ventures primarily as a result of a net loss recorded by a joint venture in 2014 due to an impairment recognized on the equipment previously on lease to Go Frac as compared to a gain recorded by such joint venture in 2015 due to distributions paid from proceeds from the sale of such equipment.
Expenses for 2015 and 2014 are summarized as follows:
Years Ended December 31, | |||||||||||
2015 | 2014 | Change | |||||||||
Management fees | $ | 2,033,788 | $ | 2,478,049 | $ | (444,261 | ) | ||||
Administrative expense reimbursements | 1,597,312 | 1,675,514 | (78,202 | ) | |||||||
General and administrative | 2,385,601 | 2,607,943 | (222,342 | ) | |||||||
Credit loss | 54,836,335 | 15,412,805 | 39,423,530 | ||||||||
Depreciation | 9,945,714 | 11,678,140 | (1,732,426 | ) | |||||||
Interest | 6,774,484 | 8,894,664 | (2,120,180 | ) | |||||||
Loss on derivative financial instruments | 1,422,647 | 2,344,725 | (922,078 | ) | |||||||
Total expenses | $ | 78,995,881 | $ | 45,091,840 | $ | 33,904,041 | |||||
Total expenses for 2015 increased $33,904,041, or 75.2%, as compared to 2014. The increase in total expenses was primarily due to higher credit losses recorded in 2015 related to JAC, the Amazing, the Fantastic and VAS as compared to lower credit losses recorded in 2014 related to the Amazing, the Fantastic, VAS and Western Drilling. The increase was partially offset by decreases in interest expense and depreciation primarily due to the sale of the Eagle Otome and the Eagle Subaru during 2014 and the use of such sale proceeds to repay the related non-recourse long-term debt, as well as a decrease in loss on derivative financial instruments due to less unfavorable movements in interest rates on our non-designated interest rate swaps.
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Net (Loss) Income Attributable to Noncontrolling Interests
Net (loss) income attributable to noncontrolling interests changed by $7,995,589, from a net income of $2,329,316 in 2014 to a net loss of $5,666,273 in 2015. The net loss attributable to noncontrolling interests during 2015 was due to the credit loss recorded on our consolidated joint venture related to JAC, a portion of which was allocated to the noncontrolling interest holder.
Net Loss Attributable to Fund Fourteen
As a result of the foregoing factors, net loss attributable to us for 2015 and 2014 was $37,061,038 and $6,551,125, respectively. Net loss attributable to us per weighted average Interest outstanding for 2015 and 2014 was $141.79 and $25.06, respectively.
Financial Condition
This section discusses the major balance sheet variances at December 31, 2016 compared to December 31, 2015.
Total Assets
Total assets decreased $139,001,503, from $253,132,775 at December 31, 2015 to $114,131,272 at December 31, 2016. The decrease was primarily due to (i) the sale of our interests in ICON AET in June 2016, (ii) repayments on certain long-term debt and our revolving line of credit, (iii) credit losses recorded in 2016 related to the three leases with Geden and the note receivable due from JAC, (iv) distributions paid to our partners and noncontrolling interests and (v) depreciation of our leased equipment at cost and vessel.
Total Liabilities
Total liabilities decreased $103,356,220, from $141,430,194 at December 31, 2015 to $38,073,974 at December 31, 2016. The decrease was primarily due to (i) repayments on our long-term debt and revolving line of credit, and the assumption of our debt obligations by an unaffiliated third party as a result of the sale of our interests in ICON AET, (ii) Geden’s forfeiture of the seller’s credit associated with the Center during 2016 and (iii) the expiration of an interest rate swap associated with the Center, and the assumption of interest rate swaps by the unaffiliated third party purchaser related to ICON AET.
Equity
Equity decreased $35,645,283, from $111,702,581 at December 31, 2015 to $76,057,298 at December 31, 2016. The decrease was primarily due to (i) our net loss in 2016, (ii) distributions paid to our partners and noncontrolling interests and (iii) the deconsolidation of ICON AET upon the sale of our interests in such joint venture in 2016.
Liquidity and Capital Resources
Summary
At December 31, 2016 and 2015, we had cash and cash equivalents of $19,452,937 and $9,281,044, respectively. Pursuant to the terms of our offering, we have established a cash reserve in the amount of 0.50% of the gross offering proceeds from the sale of our Interests. As of December 31, 2016, the cash reserve was $1,288,235. During our operating period, our main source of cash was typically from operating activities and our main use of cash was in investing and financing activities. Our operating period ended on May 18, 2016 and our liquidation period commenced on May 19, 2016. Our liquidity will vary in the future, increasing to the extent cash flows from investments and proceeds from the sale of our investments exceed expenses and decreasing as we pay distributions to our partners and noncontrolling interests and to the extent that expenses exceed cash flows from operations and proceeds from the sale of our investments.
We believe that cash generated from the expected results of our operations will be sufficient to finance our liquidity requirements for the foreseeable future.
Our ability to generate cash in the future is subject to general economic, financial, competitive, regulatory and other factors that affect us and our lessees’ and borrowers’ businesses that are beyond our control. See “Item 1A. Risk Factors.”
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We have used the net proceeds of the offering and cash from operations to invest in Capital Assets located in North America, Europe and other developed markets, including those in Asia and elsewhere. We have sought to acquire a portfolio of Capital Assets that is comprised of transactions that (a) provide current cash flow in the form of payments of principal and/or interest (in the case of secured loans) and rental payments (in the case of leases), (b) generate deferred cash flow from realizing the value of Capital Assets or interests therein at the maturity of the investment or exercise of an option to purchase Capital Assets, or (c) provide a combination of both.
Cash Flows
The following table sets forth summary cash flow data:
Years Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Net cash (used in) provided by: | |||||||||||
Operating activities | $ | (1,317,168 | ) | $ | 21,947,701 | $ | 20,165,665 | ||||
Investing activities | 51,842,325 | 21,884,561 | 36,181,914 | ||||||||
Financing activities | (40,353,264 | ) | (47,104,470 | ) | (53,320,952 | ) | |||||
Net increase (decrease) in cash and cash equivalents | $ | 10,171,893 | $ | (3,272,208 | ) | $ | 3,026,627 | ||||
Note: See the Consolidated Statements of Cash Flows included in “Item 8. Consolidated Financial Statements and Supplementary Data” of this Annual Report on Form 10-K for additional information.
Operating Activities
Cash flows from operating activities changed by $23,264,869, from a source of cash of $21,947,701 in 2015 to a use of cash of $1,317,168 in 2016. The decrease primarily related to (i) less cash generated from our investments in 2016 due to certain prepayments by our borrowers and lessees and the sale of certain investments during or subsequent to 2015, (ii) a decrease during 2016 in the release of restricted cash that was related to rental receipts that were previously restricted to pay down certain non-recourse long-term debt and (iii) the timing of cash payments and cash receipts from year-to-year.
Investing Activities
Cash provided by investing activities increased $29,957,764, from $21,884,561 in 2015 to $51,842,325 in 2016. The increase was primarily due to (i) proceeds received from the sale of certain subsidiaries and joint ventures to unaffiliated third parties, (ii) investments in joint ventures that we entered into during 2015 related to Challenge and Fugro with no comparable investments made in 2016, (iii) an increase in distributions received from joint ventures in excess of profits primarily due to proceeds received from the sale of the Ardmore Vessels and (iv) an increase in principal received in 2016 on the finance lease related to the Center as cash receipts from Geden were applied to principal following its impairment in 2016 as compared to finance income in 2015. These increases were partially offset by (a) a decrease in principal received on notes receivable due to the prepayment of several notes receivable primarily during 2015, (b) investments in notes receivable that we entered into during 2016 related to CFL and LSC with no comparable investments made in 2015 and (c) proceeds received from the sale of assets previously on lease to CAM Leasing during 2015 with no comparable proceeds received during 2016.
Financing Activities
Cash used in financing activities decreased $6,751,206, from $47,104,470 in 2015 to $40,353,264 in 2016. The decrease was primarily due to decreases in distributions to partners and repayments on our long-term debt during 2016, which were partially offset by (i) the repayment of our revolving line of credit in 2016, which we drew down in 2015 and (ii) the payment of debt financing costs in connection with the refinancing transactions with DVB during 2016.
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Financings and Borrowings
Long-Term Debt
As of December 31, 2016, our non-recourse long-term debt obligations were $35,185,385. As of December 31, 2015, our long-term debt obligations of $120,831,074 consisted of non-recourse and recourse long-term debt of $117,331,074 and $3,500,000, respectively. During the year ended December 31, 2015, we provided a guarantee on the debt related to the Amazing and the Fantastic of up to an aggregate of $5,000,000, which was reduced in accordance with the terms of the guarantee. As of December 31, 2015, the debt balance shortfall that we were guaranteeing was an aggregate of $3,500,000. The guarantee was terminated in July 2016 upon consummation of a refinancing transaction. All of our non-recourse long-term debt obligations consist of notes payable in which the lender has a security interest in the underlying assets. If the borrower was to default on the underlying lease or loan, resulting in our default on the non-recourse long-term debt, the assets could be foreclosed upon and the proceeds would be remitted to the lender in extinguishment of that debt. As of December 31, 2016, the total carrying value of assets subject to non-recourse long-term debt was $67,607,658. As of December 31, 2015, the total carrying value of assets subject to long-term debt was $197,828,244, of which $91,753,624 was related to non-performing assets associated with Geden.
On October 1, 2010, we entered into a loan agreement with DVB and Nord LB under which we borrowed $43,500,000 to finance the acquisition of the Amazing and the Fantastic. The loan was scheduled to mature on September 30, 2017. Subsequently, we restructured the long-term debt associated with the Amazing and the Fantastic on March 31, 2014 to amend the repayment stream and financial covenants. The interest rate of 4.9825% and maturity date remained the same for the loan. Beginning September 29, 2014, the interest rate was floating at LIBOR plus 3.85% as part of the original agreement. During 2015, due to a change in the fair market value of the Amazing and the Fantastic, we were in non-compliance with a financial covenant. On July 8, 2015, we amended the loan agreement associated with the Amazing and the Fantastic to provide a guarantee of up to $2.5 million for each vessel to cover any debt balance shortfall and to revise certain financial covenants. During the three months ended December 31, 2015, we were notified by our lenders of non-compliance with a financial covenant as a result of a decrease in the fair market value of the Amazing and the Fantastic.
On July 6, 2016, we repaid $10,000,000 to satisfy in full the portion of the outstanding balance of the loan due to Nord LB, net of a discount of $2,427,602. As a result of the discounted repayment, we recognized a gain on extinguishment of debt of $2,343,762 during the year ended December 31, 2016. In addition, on July 6, 2016, we refinanced the existing outstanding balance of the loan due to DVB of $10,700,000 with a new $10,700,000 facility agreement that we entered into with DVB on June 30, 2016. This refinancing transaction was consummated to coincide with redelivery of the vessels to us by Geden, renaming the vessels "Bulk Progress" and "Bulk Power", and our entry into new five-year charters with Americas Bulk, effective July 6, 2016. During 2016, prior to this refinancing transaction, we made repayments on the outstanding balance of the long-term debt related to the Amazing and the Fantastic totaling $14,727,602. The new facility matures on April 30, 2021 and bears interest at LIBOR plus 3.85%. As part of this refinancing, we incurred loan origination fees of $300,000. Upon repayment in full of the long-term debt associated with the Amazing and the Fantastic with the proceeds from the new facility, we cured our non-compliance with the long-term debt covenant under the prior facility and the debt balance shortfall guarantee that we issued to the senior lender as part of the prior facility was terminated.
On June 21, 2011, we borrowed $44,000,000 in connection with the acquisition of the crude oil tanker, the Center. The loan was for a period of five years and bore interest at 3.500% per year through September 21, 2011. The interest rate after that date had been fixed pursuant to a swap agreement at 5.235% per year through the maturity of the debt. The loan was secured by the Center. On March 19, 2014, we restructured the non-recourse long-term debt associated with the Center to amend the repayment stream and financial covenants. The interest rate and maturity date remained the same for the loan. The loan was scheduled to mature on June 21, 2016, but was extended to coincide with the consummation of the July 2016 refinancing transaction with the senior lender. In June 2016, upon maturity of the interest rate swap on the non-recourse long-term debt, we made a payment of $104,511. On June 30, 2016, we and the senior lender entered into a new $26,000,000 facility agreement for the purpose of refinancing the long-term debt related to the Center. This refinancing transaction was consummated to coincide with redelivery of the vessel to us by Geden, renaming the vessel "Shamrock", and placing the vessel in the Stena Pooling Arrangement. During 2016, prior to this refinancing transaction, we made repayments on the outstanding balance of the long-term debt related to the Center totaling $4,770,000. On July 18, 2016, we drew down the full principal amount of the new facility to repay in full the then long-term debt balance of $26,000,000 under the prior facility. The new facility matures on March 31, 2021 and bears interest at 3.50%. As part of this refinancing, we incurred loan origination fees of $390,000.
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As of December 31, 2015, we had Senior Debt and Sub Debt obligations totaling $61,614,488 and $1,985,726, respectively, related to the Eagle Vermont and the Eagle Virginia. At December 31, 2015, $1,000,000, representing the minimum cash requirement under the Senior Debt loan agreement, was included in restricted cash. During the year ended December 31, 2015 and the three months ended March 31, 2016, due to curing the covenant breach that resulted in the restriction on our ability to utilize cash generated by the charters for purposes other than paying the Senior Debt, proceeds from rental income receipts that were previously restricted were used to partially pay down outstanding principal and interest under the Sub Debt with Wafra in an aggregate amount of $10,112,821 and $1,530,000, respectively. On June 8, 2016, simultaneously with the sale of 100% of the limited liability company interests of ICON AET to an unaffiliated third party, we satisfied in full the outstanding balance of the Sub Debt of $529,660. In addition, as part of the sale of interests of ICON AET, the third party purchaser assumed all outstanding Senior Debt obligations of $60,786,199 associated with the Eagle Vermont and the Eagle Virginia.
As of December 31, 2016, we were in compliance with the covenants related to our non-recourse long-term debt.
Revolving Line of Credit, Recourse
We had an agreement with California Bank & Trust (“CB&T”) for a revolving line of credit through May 30, 2017 of up to $12,500,000 (the “Facility”), which was secured by all of our assets not subject to a first priority lien. Amounts available under the Facility were subject to a borrowing base that was determined, subject to certain limitations, by the present value of the future receivables under certain loans and lease agreements in which we had a beneficial interest.
The interest rate on general advances under the Facility was CB&T’s prime rate. We could have elected to designate up to five advances on the outstanding principal balance of the Facility to bear interest at LIBOR plus 2.5% per year. In all instances, borrowings under the Facility were subject to an interest rate floor of 4.0% per year. In addition, we were obligated to pay an annualized 0.5% fee on unused commitments under the Facility. On July 15, 2016, we repaid the outstanding balance under the Facility of $6,000,000. On October 31, 2016, we and CB&T terminated the Facility.
Distributions
We, at our General Partner’s discretion, paid monthly distributions to our limited partners beginning with the first month after each such limited partner’s admission and continued to pay such distributions until the termination of our operating period, which was May 18, 2016. We paid distributions to our limited partners in the amount of $10,350,460, $20,700,921 and $20,701,136 in 2016, 2015 and 2014, respectively. We paid distributions to our General Partner in the amount of $104,550, $209,100 and $209,102 in 2016, 2015 and 2014, respectively. We paid distributions to our noncontrolling interests in the amount of $263,739, $24,751 and $53,400 in 2016, 2015 and 2014, respectively. During our liquidation period, we have paid and will continue to pay distributions in accordance with the terms of our Partnership Agreement. We expect that distributions paid during our liquidation period will vary, depending on the timing of the sale of our assets and/or the maturity of our investments, and our receipt of rental, finance and other income from our investments.
Commitments and Contingencies and Off-Balance Sheet Transactions
Commitments and Contingencies
At the time we acquire or divest of an interest in Capital Assets, we may, under very limited circumstances, agree to indemnify the seller or buyer for specific contingent liabilities. Our General Partner believes that any liability of ours that may arise as a result of any such indemnification obligations may or may not have a material adverse effect on our consolidated financial condition or results of operations taken as a whole.
On September 27, 2016, we commenced a legal proceeding against Center Navigation and Geden seeking monetary damages incurred as a result of their failure to meet their payment and performance obligations under the charter and guaranty, respectively, related to the Center.
At December 31, 2016, we had long-term debt obligations. Each lender has a security interest in the majority of the assets collateralizing each non-recourse debt instrument and an assignment of the rental payments under the lease associated with the assets. If the lessee defaults on the lease, the assets could be foreclosed upon and the proceeds would be remitted to the lender in extinguishment of the non-recourse debt. At December 31, 2016, our outstanding non-recourse long-term indebtedness totaled $35,185,385.
Principal and interest maturities of our debt and related interest consisted of the following at December 31, 2016:
52
Payments Due by Period | |||||||||||||||||||
Total | 1 Year | 2-3 Years | 4-5 Years | Thereafter | |||||||||||||||
Long-term debt | $ | 35,862,500 | $ | 3,350,000 | $ | 7,337,500 | $ | 25,175,000 | $ | — | |||||||||
Long-term debt interest* | 5,661,496 | 1,549,963 | 2,643,538 | 1,467,995 | — | ||||||||||||||
$ | 41,523,996 | $ | 4,899,963 | $ | 9,981,038 | $ | 26,642,995 | $ | — | ||||||||||
*Based on fixed or variable rates in effect at December 31, 2016.
In connection with certain debt obligations, we are required to maintain restricted cash balances with certain banks. At December 31, 2016, we had restricted cash of $1,500,000.
Off-Balance Sheet Transactions
None.
Inflation and Interest Rates
The potential effects of inflation on us are difficult to predict. If the general economy experiences significant rates of inflation, however, it could affect us in a number of ways. We do not currently have or expect to have rent escalation clauses tied to inflation in our leases and most of our notes receivable contain fixed interest rates. The anticipated residual values to be realized upon the sale or re-lease of equipment upon lease termination (and thus the overall cash flow from our leases) may increase with inflation as the cost of similar new and used equipment increases.
If interest rates increase or decrease significantly, our leases and notes receivable already in place would generally not be affected.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We, like most other companies, are exposed to certain market risks, which include changes in interest rates and the demand for equipment owned by us. We believe that our exposure to other market risks, including foreign currency exchange rate risk, commodity risk and equity price risk, are insignificant at this time to both our financial position and our results of operations.
Our exposure to market risk relates primarily to our fixed-rate notes receivable. As of December 31, 2016, the principal balance on our fixed-rate notes receivable was $13,240,973.
For certain of our financial instruments, fair values are not readily available since there are no active trading markets. Accordingly, we derive or estimate fair values using various valuation techniques, such as computing the present value of estimated future cash flows using discount rates commensurate with the risks involved. However, the determination of cash flows may be subjective and based on estimates. Changes in assumptions or estimates can have a material effect on these estimated fair values. The following fair values were determined using the discount rates that we believe our outstanding fixed-rate notes receivable would warrant as of December 31, 2016 and are indicative of the interest rate environment as of December 31, 2016, and do not take into consideration the effects of subsequent interest rate fluctuations. Accordingly, we estimate that the fair value of the principal balance on our fixed-rate notes receivable was $12,972,324 as of December 31, 2016.
We currently have three outstanding notes payable, which constitute our non-recourse long-term debt obligations. The interest rates for our non-recourse long-term debt obligations are variable interest rates. As of December 31, 2016, our variable non-recourse long-term debt obligations do not have hedging arrangements. To the extent interest rates fluctuate significantly, our interest expense will fluctuate accordingly.
We manage our exposure to equipment and residual risk by monitoring the markets in which our equipment is located and maximizing remarketing proceeds through the re-lease or sale of equipment.
53
Item 8. Consolidated Financial Statements and Supplementary Data
Page | |
54
Report of Independent Registered Public Accounting Firm
The Partners
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
We have audited the accompanying consolidated balance sheets of ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P. (the “Partnership”) as of December 31, 2016 and 2015, and the related consolidated statements of operations, changes in equity and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements and schedule 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. We were not engaged to perform an audit of the Partnership’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P. at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Partnership revised its consolidated balance sheets to present debt issuance costs as a direct deduction from debt rather than within other assets, for all periods presented as a result of the adoption of the of the amendments to the FASB Accounting Standards Codification resulting from Accounting Standards Update No. 2015-03, “Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs,” effective December 15, 2015.
/s/ ERNST & YOUNG LLP
New York, New York
March 30, 2017
55
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Consolidated Balance Sheets
December 31, | |||||||
2016 | 2015 | ||||||
Assets | |||||||
Cash and cash equivalents | $ | 19,452,937 | $ | 9,281,044 | |||
Restricted cash | 1,500,000 | 3,150,000 | |||||
Vessel (less accumulated depreciation of $976,088) | 47,023,912 | — | |||||
Net investment in finance leases | — | 91,753,624 | |||||
Leased equipment at cost (less accumulated depreciation | |||||||
of $416,254 and $45,640,228, respectively) | 20,583,746 | 108,795,539 | |||||
Net investment in notes receivable | 11,571,378 | 12,805,303 | |||||
Note receivable from joint venture | 1,329,483 | 2,614,691 | |||||
Investment in joint ventures | 9,441,801 | 24,048,141 | |||||
Other assets | 3,228,015 | 684,433 | |||||
Total assets | $ | 114,131,272 | $ | 253,132,775 | |||
Liabilities and Equity | |||||||
Liabilities: | |||||||
Long-term debt | $ | 35,185,385 | $ | 120,831,074 | |||
Derivative financial instruments | — | 4,005,922 | |||||
Deferred revenue | 1,467,325 | 1,617,210 | |||||
Due to General Partner and affiliates, net | 204,430 | 903,809 | |||||
Revolving line of credit, recourse | — | 4,500,000 | |||||
Seller's credit | — | 8,765,195 | |||||
Accrued expenses and other liabilities | 1,216,834 | 806,984 | |||||
Total liabilities | 38,073,974 | 141,430,194 | |||||
Commitments and contingencies (Note 15) | |||||||
Equity: | |||||||
Partners' equity: | |||||||
Limited partners | 77,588,121 | 101,901,791 | |||||
General Partner | (1,539,101 | ) | (1,293,508 | ) | |||
Total partners' equity | 76,049,020 | 100,608,283 | |||||
Noncontrolling interests | 8,278 | 11,094,298 | |||||
Total equity | 76,057,298 | 111,702,581 | |||||
Total liabilities and equity | $ | 114,131,272 | $ | 253,132,775 | |||
See accompanying notes to consolidated financial statements.
56
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Consolidated Statements of Operations
Years Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Revenue and other income: | |||||||||||
Finance income | $ | 1,126,919 | $ | 12,202,464 | $ | 13,409,240 | |||||
Rental income | 8,950,262 | 21,413,319 | 24,003,996 | ||||||||
Pool revenue | 2,064,596 | — | — | ||||||||
Income from investment in joint ventures | 320,115 | 2,474,158 | 1,145,516 | ||||||||
Gain on extinguishment of debt | 2,343,762 | — | — | ||||||||
Gain on sale of assets, net | — | 15,314 | 2,266,237 | ||||||||
Gain on sale of subsidiaries | 6,708,694 | — | — | ||||||||
Gain on sale of investment in joint ventures | 291,990 | — | — | ||||||||
Gain on litigation | — | 150,000 | — | ||||||||
Other income | 144,048 | 13,315 | 45,042 | ||||||||
Total revenue and other income | 21,950,386 | 36,268,570 | 40,870,031 | ||||||||
Expenses: | |||||||||||
Management fees | 869,053 | 2,033,788 | 2,478,049 | ||||||||
Administrative expense reimbursements | 1,519,571 | 1,597,312 | 1,675,514 | ||||||||
General and administrative | 3,048,745 | 2,385,601 | 2,607,943 | ||||||||
Credit loss, net | 15,875,657 | 54,836,335 | 15,412,805 | ||||||||
Depreciation | 5,410,687 | 9,945,714 | 11,678,140 | ||||||||
Interest | 4,104,608 | 6,774,484 | 8,894,664 | ||||||||
Vessel operating expenses | 4,796,285 | — | — | ||||||||
Loss on derivative financial instruments | 1,211,654 | 1,422,647 | 2,344,725 | ||||||||
Total expenses | 36,836,260 | 78,995,881 | 45,091,840 | ||||||||
Net loss | (14,885,874 | ) | (42,727,311 | ) | (4,221,809 | ) | |||||
Less: net (loss) income attributable to noncontrolling interests | (781,621 | ) | (5,666,273 | ) | 2,329,316 | ||||||
Net loss attributable to Fund Fourteen | $ | (14,104,253 | ) | $ | (37,061,038 | ) | $ | (6,551,125 | ) | ||
Net loss attributable to Fund Fourteen allocable to: | |||||||||||
Limited partners | $ | (13,963,210 | ) | $ | (36,690,428 | ) | $ | (6,485,614 | ) | ||
General Partner | (141,043 | ) | (370,610 | ) | (65,511 | ) | |||||
$ | (14,104,253 | ) | $ | (37,061,038 | ) | $ | (6,551,125 | ) | |||
Weighted average number of limited partnership interests outstanding | 258,761 | 258,761 | 258,764 | ||||||||
Net loss attributable to Fund Fourteen per weighted average limited partnership interest outstanding | $ | (53.96 | ) | $ | (141.79 | ) | $ | (25.06 | ) | ||
See accompanying notes to consolidated financial statements.
57
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Consolidated Statements of Changes in Equity
Partners' Equity | ||||||||||||||||||||||
Limited Partnership Interests | Limited Partners | General Partner | Total Partners' Equity | Noncontrolling Interests | Total Equity | |||||||||||||||||
Balance, December 31, 2013 | 258,772 | $ | 186,487,068 | $ | (439,185 | ) | $ | 186,047,883 | $ | 14,336,793 | $ | 200,384,676 | ||||||||||
Net (loss) income | — | (6,485,614 | ) | (65,511 | ) | (6,551,125 | ) | 2,329,316 | (4,221,809 | ) | ||||||||||||
Repurchase of limited partnership interests | (11 | ) | (7,178 | ) | — | (7,178 | ) | — | (7,178 | ) | ||||||||||||
Distributions | — | (20,701,136 | ) | (209,102 | ) | (20,910,238 | ) | (53,400 | ) | (20,963,638 | ) | |||||||||||
Investment by noncontrolling interests | — | — | — | — | 21,706 | 21,706 | ||||||||||||||||
Balance, December 31, 2014 | 258,761 | 159,293,140 | (713,798 | ) | 158,579,342 | 16,634,415 | 175,213,757 | |||||||||||||||
Net loss | — | (36,690,428 | ) | (370,610 | ) | (37,061,038 | ) | (5,666,273 | ) | (42,727,311 | ) | |||||||||||
Distributions | — | (20,700,921 | ) | (209,100 | ) | (20,910,021 | ) | (24,751 | ) | (20,934,772 | ) | |||||||||||
Investment by noncontrolling interests | — | — | — | — | 150,907 | 150,907 | ||||||||||||||||
Balance, December 31, 2015 | 258,761 | 101,901,791 | (1,293,508 | ) | 100,608,283 | 11,094,298 | 111,702,581 | |||||||||||||||
Net loss | — | (13,963,210 | ) | (141,043 | ) | (14,104,253 | ) | (781,621 | ) | (14,885,874 | ) | |||||||||||
Distributions | — | (10,350,460 | ) | (104,550 | ) | (10,455,010 | ) | (263,739 | ) | (10,718,749 | ) | |||||||||||
Deconsolidation of subsidiary | — | — | — | — | (10,054,430 | ) | (10,054,430 | ) | ||||||||||||||
Investment by noncontrolling interests | — | — | — | — | 13,770 | 13,770 | ||||||||||||||||
Balance, December 31, 2016 | 258,761 | $ | 77,588,121 | $ | (1,539,101 | ) | $ | 76,049,020 | $ | 8,278 | $ | 76,057,298 | ||||||||||
See accompanying notes to consolidated financial statements.
58
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Consolidated Statements of Cash Flows
Years Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Cash flows from operating activities: | |||||||||||
Net loss | $ | (14,885,874 | ) | $ | (42,727,311 | ) | $ | (4,221,809 | ) | ||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | |||||||||||
Finance income, net of costs and fees | 175,643 | 567,052 | (2,977,149 | ) | |||||||
Income from investment in joint ventures | (320,115 | ) | (2,209,330 | ) | (1,145,516 | ) | |||||
Net gain on sale of assets | — | (15,314 | ) | (2,266,237 | ) | ||||||
Depreciation | 5,410,687 | 9,945,714 | 11,678,140 | ||||||||
Credit loss, net | 15,875,657 | 54,836,335 | 15,412,805 | ||||||||
Interest expense from amortization of debt financing costs | 412,923 | 693,413 | 403,207 | ||||||||
Interest expense from amortization of seller's credit | 234,805 | 449,003 | 426,000 | ||||||||
Paid-in-kind interest | (246,307 | ) | (1,769,429 | ) | — | ||||||
Loss (gain) on derivative financial instruments | 537,861 | (1,373,552 | ) | (855,915 | ) | ||||||
Gain on sale of subsidiaries | (6,708,694 | ) | — | — | |||||||
Gain on sale of investment in joint ventures | (291,990 | ) | — | — | |||||||
Gain on extinguishment of debt | (2,343,762 | ) | — | — | |||||||
Changes in operating assets and liabilities: | |||||||||||
Restricted cash | 650,000 | 4,167,126 | 3,543,838 | ||||||||
Other assets | (2,574,640 | ) | 324,298 | 3,279,087 | |||||||
Accrued expenses and other liabilities | 1,191,711 | (1,991,792 | ) | (3,870,677 | ) | ||||||
Deferred revenue | 1,063,764 | (748,682 | ) | (862,071 | ) | ||||||
Due to General Partner and affiliates | (699,379 | ) | (267,476 | ) | 303,642 | ||||||
Distributions from joint ventures | 1,200,542 | 2,067,646 | 1,318,320 | ||||||||
Net cash (used in) provided by operating activities | (1,317,168 | ) | 21,947,701 | 20,165,665 | |||||||
Cash flows from investing activities: | |||||||||||
Proceeds from sale of equipment | — | 4,025,000 | 16,599,540 | ||||||||
Principal received on finance leases | 4,164,554 | 2,158,751 | 835,975 | ||||||||
Investment in joint ventures | (56 | ) | (7,098,579 | ) | (9,142,768 | ) | |||||
Distributions received from joint ventures in excess of profits | 6,214,770 | 2,418,747 | 911,615 | ||||||||
Investment in notes receivable | (6,372,790 | ) | — | (10,046,538 | ) | ||||||
Principal and sale proceeds received on notes receivable | 2,676,000 | 20,380,642 | 37,024,090 | ||||||||
Proceeds from sale of subsidiaries, net of cash transferred | 37,356,658 | — | — | ||||||||
Proceeds from sale of investment in joint ventures | 7,803,189 | — | — | ||||||||
Net cash provided by investing activities | 51,842,325 | 21,884,561 | 36,181,914 | ||||||||
Cash flows from financing activities: | |||||||||||
Payment of debt financing costs | (690,000 | ) | — | — | |||||||
Repayment of long-term debt | (24,458,285 | ) | (30,678,105 | ) | (32,371,842 | ) | |||||
Proceeds from revolving line of credit, recourse | 1,500,000 | 4,500,000 | — | ||||||||
Repayment of revolving line of credit, recourse | (6,000,000 | ) | — | — | |||||||
Investment by noncontrolling interests | 13,770 | 8,407 | 21,706 | ||||||||
Distributions to noncontrolling interests | (263,739 | ) | (24,751 | ) | (53,400 | ) | |||||
Distributions to partners | (10,455,010 | ) | (20,910,021 | ) | (20,910,238 | ) | |||||
Repurchase of limited partnership interests | — | — | (7,178 | ) | |||||||
Net cash used in financing activities | (40,353,264 | ) | (47,104,470 | ) | (53,320,952 | ) | |||||
Net increase (decrease) in cash and cash equivalents | 10,171,893 | (3,272,208 | ) | 3,026,627 | |||||||
Cash and cash equivalents, beginning of year | 9,281,044 | 12,553,252 | 9,526,625 | ||||||||
Cash and cash equivalents, end of year | $ | 19,452,937 | $ | 9,281,044 | $ | 12,553,252 | |||||
Supplemental disclosure of cash flow information: | |||||||||||
Cash paid for interest | $ | 3,282,965 | $ | 9,240,196 | $ | 9,005,223 | |||||
Supplemental disclosure of non-cash financing and investing activities: | |||||||||||
Deconsolidation of subsidiary - noncontrolling interests | $ | 10,054,430 | $ | — | $ | — | |||||
Balance due to noncontrolling interest deemed contribution | $ | — | $ | 142,500 | $ | — | |||||
Acquisition fee payable to Investment Manager | $ | — | $ | 487,500 | $ | — | |||||
See accompanying notes to consolidated financial statements.
59
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2016
(1) | Organization |
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P. (the “Partnership”) was formed on August 20, 2008 as a Delaware limited partnership. When used in these notes to consolidated financial statements, the terms “we,” “us,” “our” or similar terms refer to the Partnership and its consolidated subsidiaries.
We engaged in one business segment, the business of investing in business-essential equipment and corporate infrastructure (collectively, “Capital Assets”), including, but not limited to, Capital Assets that were already subject to lease, Capital Assets that we purchased and leased to domestic and international businesses, loans secured by Capital Assets and ownership rights to leased Capital Assets at lease expiration.
Our principal investment objective is to obtain the maximum economic return from our investments for the benefit of our partners. To achieve this objective, we: (i) acquired a diversified portfolio by making investments in Capital Assets; (ii) paid monthly distributions, at our general partner’s discretion, to our partners commencing, with respect to each partner, the month following such partner’s admission to us and continued until the end of the operating period; (iii) reinvested substantially all undistributed cash from operations and cash from sales of investments in Capital Assets during the operating period; and (iv) will dispose of our remaining investments and distribute the excess cash from such dispositions to our partners during our liquidation period.
Our general partner is ICON GP 14, LLC, a Delaware limited liability company (the “General Partner”), which is a wholly-owned subsidiary of ICON Capital, LLC, a Delaware limited liability company (“ICON Capital”). Our General Partner manages and controls our business affairs, including, but not limited to, our investments in Capital Assets. Our General Partner has engaged ICON Capital as our investment manager (the “Investment Manager”) to, among other things, facilitate the acquisition and servicing of our investments. Additionally, our General Partner has a 1% interest in our profits, losses, distributions and liquidation proceeds.
Our offering period commenced on May 18, 2009 and ended on May 18, 2011. We offered limited partnership interests (the "Interests") on a “best efforts” basis with the intention of raising up to $418,000,000 of capital, consisting of 420,000 Interests, of which 20,000 had been reserved for issuance pursuant to our distribution reinvestment plan (the “DRIP Plan”). The DRIP Plan allowed limited partners to purchase Interests with distributions received from us and/or certain affiliates of ours.
Our initial closing date was June 19, 2009 (the “Commencement of Operations”), the date on which we raised $1,200,000. During the period from May 18, 2009 to May 18, 2011, we sold 258,897 Interests, of which 10,506 Interests were issued at a discounted price pursuant to our DRIP Plan, to 7,010 limited partners, representing $257,646,987 of capital contributions. For the period from the Commencement of Operations through May 18, 2011, we paid the following fees in connection with the offering of our Interests: (i) sales commissions to third parties in the amount of $17,201,964 and (ii) dealer-manager fees in the amount of $7,445,754 to CION Securities, LLC, an affiliate of our General Partner and the dealer-manager of our offering (“CION Securities”). In addition, our General Partner and its affiliates, on our behalf, incurred organizational and offering expenses in the amount of $2,926,110, which was recorded as a reduction of partners’ equity.
With the proceeds from the sale of Interests, we invested in a diverse pool of Capital Assets and established a cash reserve in the amount of 0.50% of the gross offering proceeds from the sale of our Interests.
Our operating period commenced on May 19, 2011 and ended on May 18, 2016. On May 19, 2016, we commenced our liquidation period, during which we have sold and will continue to sell our assets and/or let our investments mature in the ordinary course of business. If our Investment Manager believes it would benefit our limited partners to reinvest the proceeds received from investments in additional investments during the liquidation period, our Investment Manager may do so. Our Investment Manager is not paid acquisition fees or management fees for additional investments initiated during the liquidation period, although management fees continue to be paid for investments that were part of our portfolio prior to the commencement of the liquidation period.
Partners’ capital accounts are increased for their initial capital contribution plus their proportionate share of earnings and decreased by their proportionate share of losses and distributions. Profits, losses, distributions and liquidation proceeds are allocated 99% to the limited partners and 1% to our General Partner until the aggregate amount of distributions paid to limited
60
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2016
partners equals the sum of the limited partners’ aggregate capital contributions plus an 8% cumulative annual return on their aggregate unreturned capital contributions, compounded daily. After such time, distributions will be allocated 90% to the limited partners and 10% to our General Partner.
(2) | Summary of Significant Accounting Policies |
Basis of Presentation and Consolidation
Our accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). In the opinion of our General Partner, all adjustments, which are of a normal recurring nature, considered necessary for a fair presentation have been included.
The consolidated financial statements include our accounts and the accounts of our majority-owned subsidiaries and other controlled entities. All intercompany accounts and transactions have been eliminated in consolidation. In joint ventures where we have a controlling financial interest, the financial condition and results of operations of the joint venture are consolidated. Noncontrolling interest represents the minority owner’s proportionate share of its equity in the joint venture. The noncontrolling interest is adjusted for the minority owner’s share of the earnings, losses, investments and distributions of the joint venture.
We account for our noncontrolling interests in joint ventures where we have influence over financial and operational matters, generally 50% or less ownership interest, under the equity method of accounting. In such cases, our original investments are recorded at cost and adjusted for our share of earnings, losses and distributions. We account for investments in joint ventures where we have virtually no influence over financial and operational matters using the cost method of accounting. In such cases, our original investments are recorded at cost and any distributions received are recorded as revenue. All of our investments in joint ventures are subject to our impairment review policy.
We report noncontrolling interests as a separate component of consolidated equity and net (loss) income attributable to noncontrolling interests is included in consolidated net (loss) income. The attribution of net (loss) income between controlling and noncontrolling interests is disclosed on our accompanying consolidated statements of operations.
Net (loss) income attributable to us per weighted average Interest outstanding is based upon the weighted average number of Interests outstanding during the year.
Cash and Cash Equivalents
Cash and cash equivalents include cash in banks and highly liquid investments with original maturity dates of three months or less.
Our cash and cash equivalents are held principally at three financial institutions and at times may exceed insured limits. We have placed these funds in high quality institutions in order to minimize risk relating to exceeding insured limits.
Restricted Cash
Cash that is restricted from use in operations is generally classified as restricted cash. Classification of changes in restricted cash within the consolidated statements of cash flows depends on the predominant source of the related cash flows. For the years ended December 31, 2016, 2015 and 2014, the predominant cash generated from restricted cash was related to the release of restricted cash sourced from rental receipts associated with our leasing operations that was previously restricted pursuant to certain provisions in the applicable long-term debt agreements. As a result, these changes in restricted cash were classified within cash flows from operating activities for the years ended December 31, 2016, 2015 and 2014.
Debt Financing Costs
Debt financing costs associated with a recognized debt liability are netted against the carrying amount of the related debt liability and debt financing costs associated with a line of credit arrangement are capitalized and included as other assets. Such costs are amortized to interest expense over the term of the debt instrument using the effective interest rate method.
61
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2016
Leased Equipment at Cost
Investments in leased equipment are stated at cost less accumulated depreciation. Leased equipment is depreciated on a straight-line basis over the lease term, which typically ranges from 5 to 10 years, to the asset’s residual value.
Our Investment Manager has an investment committee that approves each new equipment lease and other financing transaction. As part of its process, the investment committee determines the estimated residual value, if any, to be used once the investment has been approved. The factors considered in determining the estimated residual value include, but are not limited to, the creditworthiness of the potential lessee, the type of equipment considered, how the equipment is integrated into the potential lessee’s business, the length of the lease and the industry in which the potential lessee operates. Residual values are reviewed for impairment in accordance with our impairment review policy.
The residual value assumes, among other things, that the asset is utilized normally in an open, unrestricted and stable market. Short-term fluctuations in the marketplace are disregarded and it is assumed that there is no necessity either to dispose of a significant number of the assets, if held in quantity, simultaneously or to dispose of the asset quickly. The residual value is calculated using information from various external sources, such as trade publications, auction data, equipment dealers, wholesalers and industry experts, as well as inspection of the physical asset and other economic indicators.
Depreciation
We record depreciation expense on equipment when the lease is classified as an operating lease. In order to calculate depreciation, we first determine the depreciable base, which is the equipment cost less the estimated residual value at lease termination. Depreciation expense is recorded on a straight-line basis over the lease term.
Asset Impairments
The significant assets in our portfolio are periodically reviewed, no less frequently than annually or when indicators of impairment exist, to determine whether events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss will be recognized only if the carrying value of a long-lived asset is not recoverable and exceeds its fair market value. If there is an indication of impairment, we will estimate the future cash flows (undiscounted and without interest charges) expected from the use of the asset and its eventual disposition. Future cash flows are the future cash inflows expected to be generated by an asset less the future outflows expected to be necessary to obtain those inflows. If an impairment is determined to exist, the impairment loss will be measured as the amount by which the carrying value of a long-lived asset exceeds its fair value and recorded in our consolidated statements of operations in the period the determination is made.
The events or changes in circumstances that generally indicate that an asset may be impaired are (i) the estimated fair value of the underlying asset is less than its carrying value or (ii) the lessee is experiencing financial difficulties and it does not appear likely that the estimated proceeds from the disposition of the asset will be sufficient to satisfy the residual position in the asset and, if applicable, the remaining obligation to the non-recourse lender. Generally, in the latter situation, the residual position relates to equipment subject to third-party non-recourse debt where the lessee remits its rental payments directly to the lender and we do not recover our residual position until the non-recourse debt is repaid in full. The preparation of the undiscounted cash flows requires the use of assumptions and estimates, including the level of future rents, the residual value expected to be realized upon disposition of the asset, estimated downtime between re-leasing events and the amount of re-leasing costs. Our Investment Manager’s review for impairment includes a consideration of the existence of impairment indicators including third-party appraisals, published values for similar assets, recent transactions for similar assets, adverse changes in market conditions for specific asset types and the occurrence of significant adverse changes in general industry and market conditions that could affect the fair value of the asset.
Lease Classification and Revenue Recognition
Each equipment lease we enter into is classified as either a finance lease or an operating lease, based upon the terms of each lease. The estimated residual value is a critical component of and can directly influence the determination as to whether a lease is classified as a finance or an operating lease.
For finance leases, we capitalize, at lease inception, the total minimum lease payments receivable from the lessee, the estimated unguaranteed residual value of the equipment at lease termination and the initial direct costs related to the lease,
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ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2016
less unearned income. Unearned income represents the difference between the sum of the minimum lease payments receivable, plus the estimated unguaranteed residual value, minus the cost of the leased equipment. Unearned income is recognized as finance income over the term of the lease using the effective interest rate method.
For operating leases, rental income is recognized on a straight-line basis over the lease term. Billed operating lease receivables are included in accounts receivable until collected or written off. We record a reserve if we deem any receivable not collectible. The difference between the timing of the cash received and the income recognized on a straight-line basis is recognized as either deferred revenue or other assets, as appropriate. Initial direct costs are capitalized as a component of the cost of the equipment and depreciated over the lease term.
Contingent rentals are included in the determination of income as they are earned. Contingent rentals based on an existing index or rate are included in the determination of income based on the index or rate at lease commencement, with subsequent changes to the index or rate recognized in income as they are earned.
Accounting for Vessel Revenue and Expenses
Revenue generated from time charters and/or revenue generated from profit sharing arrangements are recognized over the term of the respective time charter agreements as service is provided and the profit sharing is fixed and determinable. Under time charters, voyage expenses such as bunkers, port dues, cargo handling operations and brokerage commissions are paid by our customers. Vessel operating costs, including, without limitation, crewing, vessel maintenance, technical management costs and vessel insurance, are expensed by us as incurred on an accrual basis. Commercial management and technical management fees are expensed as incurred. Dry-docking costs are generally expensed as incurred as such costs primarily represent normal maintenance and repairs. To the extent dry-docking costs represent expenditures that add economic life to the vessel or improve the vessel’s efficiency, such costs can be capitalized and depreciated over the life of the vessel.
For our vessel operating in a pool, revenue and voyage expenses related to our vessel are pooled with revenue and voyage expenses of other pool participants and allocated to each participant under a time charter equivalent basis in accordance with an agreed-upon formula. The formula in the pool agreement for allocating gross revenue, net of voyage expenses, is based on points allocated to each participant's vessel based on the number of days such vessel operates in the pool and other technical characteristics, such as speed and fuel consumption. The selection of charterers, negotiation of rates, the collection of related receivables and the payment of voyage expenses, which include the cost of bunkers and port expenses, are the responsibility of the pool. Operating costs related to our vessel participating in the pool, including, without limitation, crewing and maintenance, are typically paid by us. Since we share the net earnings of the pool with the other participants and the pool operates in a spot market, revenue earned by our vessel participating in the pool is subject to fluctuations of such spot market. We recognize pool revenue from this arrangement based on the right to receive our portion of net distributions reported by the pool, with net distributions being the net voyage revenue of the pool after deduction of voyage expenses and pool manager fees. A portion of the net distributions from the pool that is subject to repayment by us based on certain criteria is deferred until the time such criteria are met.
Notes Receivable and Revenue Recognition
Notes receivable are reported in our consolidated balance sheets at the outstanding principal balance, plus costs incurred to originate the loans, net of any unamortized premiums or discounts on purchased loans. We use the effective interest rate method to recognize finance income, which produces a constant periodic rate of return on the investment. Unearned income, discounts and premiums are amortized to finance income in our consolidated statements of operations using the effective interest rate method. Interest receivable related to the unpaid principal is recorded separately from the outstanding balance in our consolidated balance sheets. Upon the prepayment of a note receivable, any prepayment penalties and unamortized loan origination, closing and commitment fees are recorded as part of finance income in our consolidated statements of operations. Our notes receivable may contain a paid-in-kind (“PIK”) interest provision. Any PIK interest, if deemed collectible, will be added to the principal balance of the note receivable and is recorded as income.
Credit Quality of Notes Receivable and Finance Leases and Credit Loss Reserve
Our Investment Manager monitors the ongoing credit quality of our financing receivables by (i) reviewing and analyzing a borrower’s financial performance on a regular basis, including review of financial statements received on a monthly, quarterly or annual basis as prescribed in the loan or lease agreement, (ii) tracking the relevant credit metrics of each financing receivable and a borrower’s compliance with financial and non-financial covenants, (iii) monitoring a borrower’s payment history and
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ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2016
public credit rating, if available, and (iv) assessing our exposure based on the current investment mix. As part of the monitoring process, our Investment Manager may physically inspect the collateral or a borrower’s facility and meet with a borrower’s management to better understand such borrower’s financial performance and its future plans on an as-needed basis.
As our financing receivables, generally notes receivable and finance leases, are limited in number, our Investment Manager is able to estimate the credit loss reserve based on a detailed analysis of each financing receivable as opposed to using portfolio-based metrics. Our Investment Manager does not use a system of assigning internal risk ratings to each of our financing receivables. Rather, each financing receivable is analyzed quarterly and categorized as either performing or non-performing based on certain factors including, but not limited to, financial results, satisfying scheduled payments and compliance with financial covenants. A financing receivable is usually categorized as non-performing only when a borrower experiences financial difficulties and has failed to make scheduled payments. Our Investment Manager then analyzes whether the financing receivable should be placed on a non-accrual status, a credit loss reserve should be established or the financing receivable should be restructured. As part of the assessment, updated collateral value is usually considered and such collateral value can be based on a third party industry expert appraisal or, depending on the type of collateral and accessibility to relevant published guides or market sales data, internally derived fair value. Material events would be specifically disclosed in the discussion of each financing receivable held.
Financing receivables are generally placed on a non-accrual status when payments are more than 90 days past due. Additionally, our Investment Manager periodically reviews the creditworthiness of companies with payments outstanding less than 90 days and based upon our Investment Manager’s judgment, these accounts may be placed on a non-accrual status.
In accordance with the cost recovery method, payments received on non-accrual financing receivables are applied to principal if there is doubt regarding the ultimate collectability of principal. If collection of the principal of non-accrual financing receivables is not in doubt, interest income is recognized on a cash basis. Financing receivables on non-accrual status may not be restored to accrual status until all delinquent payments have been received, and we believe recovery of the remaining unpaid receivable is probable.
When our Investment Manager deems it is probable that we will not be able to collect all contractual principal and interest on a non-performing financing receivable, we perform an analysis to determine if a credit loss reserve is necessary. This analysis considers the estimated cash flows from the financing receivable, and/or the collateral value of the asset underlying the financing receivable when financing receivable repayment is collateral dependent. If it is determined that the impaired value of the non-performing financing receivable is less than the net carrying value, we will recognize a credit loss reserve or adjust the existing credit loss reserve with a corresponding charge to earnings. We then charge off a financing receivable in the period that it is deemed uncollectible by reducing the credit loss reserve and the balance of the financing receivable.
Initial Direct Costs
We capitalize initial direct costs, including acquisition fees, associated with the origination and funding of leased assets and other financing transactions. We paid acquisition fees through the end of our operating period to our Investment Manager of 2.5% of the purchase price of the investment made by or on our behalf, including, but not limited to, the cash paid, indebtedness incurred or assumed, and the excess of the collateral value of the long-lived asset over the amount of the investment, if any. The costs of each transaction are amortized over the transaction term using the straight-line method for operating leases and the effective interest rate method for finance leases and notes receivable in our consolidated statements of operations. Costs related to leases or other financing transactions that were not consummated are expensed.
Warrants
Warrants held by us were not registered for public sale and were revalued on a quarterly basis. The revaluation of warrants was calculated using the Black-Scholes-Merton option pricing model. The assumptions utilized in the Black-Scholes-Merton option pricing model included share price, strike price, expiration date, risk-free rate and the volatility percentage. The change in the fair value of warrants was recognized as a component of loss (gain) on derivative financial instruments in the consolidated statements of operations.
64
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2016
Derivative Financial Instruments
We entered into derivative financial instruments for purposes of hedging specific financial exposures, including movements in foreign currency exchange rates and changes in interest rates on our long-term debt. We entered into these instruments only for hedging underlying exposures. We did not hold or issue derivative financial instruments for purposes other than hedging, except for warrants, which are not hedges. Certain derivatives did not meet the established criteria to be designated as qualifying accounting hedges, even though we believed that these were effective economic hedges.
We recognized all derivative financial instruments as either assets or liabilities on our consolidated balance sheets and measured those instruments at fair value. Changes in the fair value of such instruments were recognized immediately in earnings unless certain criteria were met. These criteria demonstrated that the derivative was expected to be highly effective at offsetting changes in the fair value or expected cash flows of the underlying exposure at both the inception of the hedging relationship and on an ongoing basis and included an evaluation of the counterparty risk and the impact, if any, on the effectiveness of the derivative. If these criteria were met, which we documented and assessed at inception and on an ongoing basis, we recognized the changes in fair value of such instruments in accumulated other comprehensive income (loss), a component of equity on our consolidated balance sheets. Changes in the fair value of the ineffective portion of all derivatives were recognized immediately in earnings.
Income Taxes
We are taxed as a partnership for federal and state income tax purposes. Therefore, no provision for federal and state income taxes has been recorded since the liability for such taxes is the responsibility of each of the individual partners rather than our business as a whole. We are potentially subject to New York City unincorporated business tax (“UBT”), which is imposed on unincorporated trade or business operating in New York City. The UBT is imposed for each taxable year at a rate of 4% of taxable income allocated to New York City. Our federal, state and local income tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the applicable taxing authorities. All penalties and interest associated with income taxes are included in general and administrative expense in our consolidated statements of operations. We are currently under examination by the New York City Department of Finance related to UBT. The tax years that remain open for examination include from 2012 to 2016. We have provided for such UBT taxes related to the years open for examination, including amounts covering interest and penalties, where applicable. Conclusions regarding tax positions are subject to review and may be adjusted at a later date based on factors including, but not limited to, on-going analyses of tax laws, regulations and interpretations thereof.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires our General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates primarily include the determination of credit loss reserves, impairment losses, estimated useful lives and residual values. Actual results could differ from those estimates.
Recently Adopted Accounting Pronouncements
In August 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-15, Presentation of Financial Statements – Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), which provides guidance about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. We adopted ASU 2014-15 on December 31, 2016, which did not have an effect on our consolidated financial statements.
In January 2015, the FASB issued ASU No. 2015-01, Income Statement – Extraordinary and Unusual Items: Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items (“ASU 2015-01”), which simplifies income statement presentation by eliminating the concept of extraordinary items. We adopted ASU 2015-01 on January 1, 2016, which did not have an effect on our consolidated financial statements.
In February 2015, FASB issued ASU No. 2015-02, Consolidation – Amendments to the Consolidation Analysis (“ASU 2015-02”), which modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities
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ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2016
or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership, and affects the consolidation analysis by reducing the frequency of application of related party guidance and excluding certain fees in the primary beneficiary determination. We adopted ASU 2015-02 on January 1, 2016, which did not have an effect on our consolidated financial statements.
In April 2015, FASB issued ASU No. 2015-03, Interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), which requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of such debt liability, consistent with debt discounts. In August 2015, FASB issued ASU No. 2015-15, Interest – Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (“ASU 2015-15”), which further specifies the SEC staff’s view on the presentation and subsequent measurement of debt issuance costs associated with line of credit arrangements. We retrospectively adopted ASU 2015-03 as of March 31, 2016. Consequently, we reclassified $1,394,344 of debt issuance costs from other assets to long-term debt on our consolidated balance sheet at December 31, 2015, which resulted in the following adjustments:
At December 31, 2015 | |||||||
As Reported | As Adjusted | ||||||
Other assets | $ | 2,078,777 | $ | 684,433 | |||
Long-term debt | $ | 122,225,418 | $ | 120,831,074 | |||
In addition, we adopted ASU 2015-15 on January 1, 2016 and continue to present debt issuance costs associated with our revolving line of credit as other assets on our consolidated balance sheets.
Other Recent Accounting Pronouncements
In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), requiring revenue to be recognized in an amount that reflects the consideration expected to be received in exchange for goods and services. This new revenue standard may be applied retrospectively to each prior period presented, or retrospectively with the cumulative effect recognized as of the date of adoption. In August 2015, FASB issued ASU No. 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date (“ASU 2015-14”), which defers implementation of ASU 2014-09 by one year. Under such deferral, the adoption of ASU 2014-09 becomes effective for us on January 1, 2018, including interim periods within that reporting period. Early adoption is permitted, but not before our original effective date of January 1, 2017. Our evaluation of the impact of the adoption of ASU 2014-09 on our consolidated financial statements is ongoing and our implementation efforts have included the identification of revenue within the scope of the guidance and the evaluation of applicable revenue contracts. We continue to evaluate the timing of recognition of various revenue; however, since a substantial portion of our revenue is recognized from our leasing contracts, which is subject to ASU 2016-02 (as defined below), such revenue is excluded from our evaluation of ASU 2014-09.
In January 2016, FASB issued ASU No. 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which provides guidance related to accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The adoption of ASU 2016-01 becomes effective for us on January 1, 2018, including interim periods within that reporting period. We are currently in the process of evaluating the impact of the adoption of ASU 2016-01 on our consolidated financial statements.
In February 2016, FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”), which requires lessees to recognize assets and liabilities for leases with lease terms greater than twelve months on the balance sheet and disclose key information about leasing arrangements. ASU 2016-02 implements changes to lessor accounting focused on conforming with certain changes made to lessee accounting and the recently released revenue recognition guidance. The adoption of ASU 2016-02 becomes effective for us on January 1, 2019. Early adoption is permitted. We are currently in the process of evaluating the impact of the adoption of ASU 2016-02 on our consolidated financial statements.
66
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2016
In March 2016, FASB issued ASU No. 2016-05, Derivatives and Hedging: Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (“ASU 2016-05”), which clarifies that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The adoption of ASU 2016-05 becomes effective for us on January 1, 2017, including interim periods within that reporting period. An entity has the option to apply ASU 2016-05 on either a prospective basis or a modified retrospective basis. Early adoption is permitted. The adoption of ASU 2016-05 is not expected to have a material effect on our consolidated financial statements.
In March 2016, FASB issued ASU No. 2016-07, Investments – Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting (“ASU 2016-07”), which eliminates the retroactive adjustments to an investment upon it qualifying for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence by the investor. ASU 2016-07 requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment qualifies for equity method accounting. The adoption of ASU 2016-07 becomes effective for us on January 1, 2017, including interim periods within that reporting period. Early adoption is permitted. The adoption of ASU 2016-07 is not expected to have a material effect on our consolidated financial statements.
In June 2016, FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (“ASU 2016-13”), which modifies the measurement of credit losses by eliminating the probable initial recognition threshold set forth in current guidance, and instead reflects an entity’s current estimate of all expected credit losses. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity will apply the amendments within ASU 2016-13 through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The adoption of ASU 2016-13 becomes effective for us on January 1, 2020, including interim periods within that reporting period. Early adoption is permitted. We are currently in the process of evaluating the impact of the adoption of ASU 2016-13 on our consolidated financial statements.
In August 2016, FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which provides guidance on how certain cash receipts and cash payments are to be presented and classified in the statement of cash flows. The adoption of ASU 2016-15 becomes effective for us on January 1, 2018, including interim periods within that reporting period. Early adoption is permitted. An entity will apply the amendments within ASU 2016-15 using a retrospective transition method to each period presented. We are currently in the process of evaluating the impact of the adoption of ASU 2016-15 on our consolidated financial statements.
In October 2016, FASB issued ASU No. 2016-17, Consolidation (“ASU 2016-17”), which amends the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity should treat indirect interests in such entity held by related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that variable interest entity. Under ASU 2016-17, a single decision maker is not required to consider indirect interests held by related parties that are under common control with the single decision maker to be the equivalent of direct interests in their entirety. The adoption of ASU 2016-17 becomes effective for us on January 1, 2017, including interim periods within that reporting period. Early adoption is permitted. As a result of our adoption of ASU 2015-02 on January 1, 2016, we are required to apply the amendments within ASU 2016-17 retrospectively to when we initially applied the amendments within ASU 2015-02. We are currently in the process of evaluating the impact of the adoption of ASU 2016-17 on our consolidated financial statements.
In November 2016, FASB issued ASU No. 2016-18, Statement of Cash Flows (“ASU 2016-18”), which provides guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. The adoption of ASU 2016-18 becomes effective for us on January 1, 2018, including interim periods within that reporting period. Early adoption is permitted. An entity will apply the amendments within ASU 2016-18 using a retrospective transition method to each period presented. We are currently in the process of evaluating the impact of the adoption of ASU 2016-18 on our consolidated financial statements.
In January 2017, FASB issued ASU No. 2017-01, Business Combinations (“ASU 2017-01”), which clarifies the definition of a business. ASU 2017-01 sets forth requirements to be met for a set to be deemed a business and establishes a practical way to determine when a set is not a business. To be considered a business, a set must include, at a minimum, an input and a
67
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2016
substantive process that together significantly contribute to the ability to create an output, and removes the evaluation of whether a market participant could replace missing elements. In addition, ASU 2017-01 narrows the definition of outputs and aligns such definition with how outputs are described within the revenue guidance. The adoption of ASU 2017-01 becomes effective for us on January 1, 2018, including interim periods within that reporting period. Early adoption is permitted for transactions that occur before the issuance date or effective date of ASU 2017-01 to the extent that such transactions have not been reported in financial statements that have been issued or made available for issuance. We are currently in the process of evaluating the impact of the adoption of ASU 2017-01 on our consolidated financial statements.
(3) | Net Investment in Notes Receivable |
As of December 31, 2016, we had net investment in notes receivable on non-accrual status of $33,393,546, which had been fully reserved. As of December 31, 2015, we had net investment in notes receivable on non-accrual status of $33,393,546, of which we recorded a credit loss reserve of $28,621,458.
As of December 31, 2016, our net investment in note receivable and accrued interest related to four affiliates of Técnicas Maritimas Avanzadas, S.A. de C.V. (collectively, “TMA”) totaled $3,500,490 and $953,389, respectively, of which an aggregate of $1,380,312 was over 90 days past due. As of December 31, 2015, our net investment in note receivable and accrued interest related to TMA totaled $3,500,490 and $461,211, respectively, of which an aggregate of $522,913 was over 90 days past due. TMA has been in technical default due to its failure to cause all four platform supply vessels to be under contract by March 31, 2015 and in payment default while available cash has been swept by the senior lender and applied to the Senior Loan (as defined elsewhere in this Note 3) in accordance with the secured term loan credit facility agreement. As a result, the principal balance of the Senior Loan was paid down at a faster rate. In January 2016, the remaining two previously unchartered vessels had commenced employment. Based on, among other things, TMA’s payment history and estimated collateral value as of December 31, 2016, our Investment Manager continues to believe that all contractual interest and outstanding principal payments under the ICON Loan (as defined elsewhere in this Note 3) are collectible. As a result, we continue to account for our net investment in note receivable related to TMA on an accrual basis despite a portion of the outstanding balance being over 90 days past due. As of December 31, 2016, our share of the collateral value, net of the balance of the Senior Loan, was estimated to be approximately $800,000. Interest on the ICON Loan is currently being accrued.
Net investment in notes receivable consisted of the following:
December 31, | |||||||
2016 | 2015 | ||||||
Principal outstanding(1) | $ | 43,699,502 | $ | 39,592,502 | |||
Initial direct costs | 2,414,038 | 2,627,650 | |||||
Deferred fees | (1,148,616 | ) | (793,391 | ) | |||
Credit loss reserve(2) | (33,393,546 | ) | (28,621,458 | ) | |||
Net investment in notes receivable(3) | $ | 11,571,378 | $ | 12,805,303 | |||
(1) As of December 31, 2016 and 2015, total principal outstanding related to our impaired loan of $31,788,011 was related to JAC (defined below).
(2) As of December 31, 2016 and 2015, the credit loss reserve of $33,393,546 and $28,621,458, respectively, was related to JAC.
(3) As of December 31, 2016 and 2015, net investment in notes receivable related to our impaired loan was $0 and $4,772,088, respectively.
On July 26, 2011, we made a secured term loan to Western Drilling Inc. and Western Landholdings, LLC (collectively, “Western Drilling”) in the amount of $9,465,000. The loan bore interest at 14% per year and was scheduled to mature on September 1, 2016. The loan was secured by, among other collateral, a first priority security interest in oil and gas drilling rigs and a mortgage on real property. Due to a change in market demand, the utilization of Western Drilling’s rigs declined, which led to Western Drilling’s failure to meet its payment obligations. As a result, the loan was placed on a non-accrual status and we recorded a credit loss of $3,412,087 during the year ended December 31, 2013 based on the estimated value of the recoverable collateral. No finance income was recognized since the date the loan was considered impaired. During the year ended December 31, 2014, an additional credit loss reserve of $862,131 was recorded based on cash proceeds received from the sale of the collateral. As of December 31, 2014, we fully reserved the remaining balance of the loan of $3,805,935. On March 18, 2015, we entered into a settlement and mutual release with the estate of Western Drilling’s guarantor to settle our claims against the guarantor for $37,860. On April 29, 2015, we received the settlement amount and wrote off the fully reserved loan as of June 30, 2015.
68
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2016
On December 22, 2011, a joint venture owned 75% by us and 25% by ICON Leasing Fund Twelve Liquidating Trust (formerly, ICON Leasing Fund Twelve, LLC) (“Fund Twelve”), an entity also managed by our Investment Manager, made a $20,124,000 subordinated term loan to Jurong Aromatics Corporation Pte. Ltd. (“JAC”) as part of a $171,050,000 term loan facility. The loan initially bore interest at rates ranging between 12.5% and 15% per year and matures in January 2021. As a result of JAC’s failure to make an expected payment that was due to the joint venture during the three months ended March 31, 2015, the interest rate payable by JAC under the loan increased from 12.5% to 15.5%. The loan is secured by a second priority security interest in all of JAC’s assets, which include, among other things, all equipment, plant and machinery associated with a condensate splitter and aromatics complex.
During 2015, JAC experienced liquidity constraints as a result of a general economic slow-down in China and India, which led to lower demand from such countries, as well as the price decline of energy and other commodities. As a result, JAC’s manufacturing facility ceased operations and JAC was not able to service interest payments under the loan. During the three months ended June 30, 2015, an expected tolling arrangement with JAC’s suppliers that would have allowed JAC’s manufacturing facility to resume operations did not commence as originally anticipated. Accordingly, our Investment Manager determined that there was doubt regarding our ultimate collectability of the loan. Our Investment Manager visited JAC’s facility and engaged in discussions with JAC’s other stakeholders to agree upon a restructuring plan. Based upon such discussions, which included a potential conversion of a portion of the loan to equity and/or a restructuring of the loan, our Investment Manager believed that we may potentially not be able to recover approximately $6,400,000 to $22,300,000 of the outstanding balance due from JAC as of June 30, 2015. During the three months ended June 30, 2015, we recognized a credit loss of $15,921,795, which our Investment Manager believed was the most likely outcome based upon the negotiations at the time. During the three months ended June 30, 2015, we placed the loan on non-accrual status and ceased to recognize finance income. During the three months ended September 30, 2015, discussions between the senior lenders and certain other stakeholders of JAC regarding a restructuring plan ended as the senior lenders did not agree to amendments to their credit facilities as part of the broader restructuring that was being contemplated. As a result, JAC entered receivership on September 28, 2015. Our Investment Manager reassessed the collectability of the loan by considering the following factors: (i) what a potential buyer may be willing to pay to acquire JAC based on a comparable enterprise value derived from EBITDA multiples and (ii) the average trading price of unsecured distressed debt in comparable industries. Our Investment Manager also considered the proposed plan of converting a portion of the loan to equity and/or restructuring the loan in the event that JAC’s stakeholders recommenced discussions. Based upon such reassessment, our Investment Manager believed that we may potentially not be able to recover approximately $19,400,000 to $24,000,000 of the outstanding balance due from JAC prior to recording the initial credit loss. During the three months ended September 30, 2015, we recognized an additional credit loss of $7,927,576, which our Investment Manager believed was the most likely outcome derived from its reassessment.
69
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2016
In January 2016, our Investment Manager engaged in further discussions with JAC’s other subordinated lenders and the Receiver regarding a near term plan for JAC’s manufacturing facility. Based upon such discussions, our Investment Manager anticipated that a one-year tolling arrangement with JAC’s suppliers would be implemented to allow JAC’s facility to recommence operations. Our Investment Manager updated the collectability analysis under the loan as of December 31, 2015 and determined that comparable enterprise values derived from EBITDA multiples and trading prices of unsecured distressed debt in comparable industries each decreased. In addition, our Investment Manager considered that, as of December 31, 2015, (i) a tolling arrangement with JAC’s suppliers did not commence as originally anticipated; (ii) no further discussions occurred between JAC, us, the senior lenders and certain other stakeholders of JAC regarding a restructuring plan and (iii) JAC’s manufacturing facility continued to be non-operational. Based upon these factors, our Investment Manager believed that our ultimate collectability of the loan could result in less of a recovery from its prior estimate. As a result, our Investment Manager determined to record an additional credit loss of $4,772,087, which our Investment Manager believed was the most likely outcome derived from its reassessment as of December 31, 2015. In July 2016, the tolling arrangement was finally implemented and the manufacturing facility resumed operations. Although our Investment Manager believes that the marketability of JAC’s facility should improve now that it has recommenced operations, our Investment Manager does not anticipate that JAC will make any payments to us while operating under the tolling arrangement. As part of the tolling arrangement and the receivership process, JAC incurred additional senior debt, which could be up to $55,000,000, to fund its operations as well as any receivership-related costs. As a result, our Investment Manager determined that our ultimate collectability of the loan was further in doubt. As of June 30, 2016, our Investment Manager updated its quarterly assessment and also considered the additional senior debt incurred by JAC, which has priority over our loan. Based upon this reassessment, our Investment Manager determined that we should fully reserve the outstanding balance of the loan due from JAC as of June 30, 2016. As a result, we recorded an additional credit loss of $4,772,088 for the three months ended June 30, 2016. During the fourth quarter of 2016, the Receiver formally commenced the process of marketing JAC's manufacturing facility for sale. Our Investment Manager continues to closely monitor the operations of JAC, the receivership process and the marketing process for sale of the manufacturing facility through regular communications with the Receiver and certain other stakeholders. We did not recognize any finance income for the year ended December 31, 2016. For the years ended December 31, 2015 and 2014, we recognized finance income of $984,108 and $3,355,697, respectively, of which no amount was recognized on a cash basis, prior to the loan being considered impaired. As of December 31, 2016 and 2015, our net investment in note receivable related to JAC was $0 and $4,772,088, respectively.
On February 29, 2012, we made a secured term loan in the amount of $6,000,000 to VAS Aero Services, LLC (“VAS”) as part of a $42,755,000 term loan facility. The loan bore interest at variable rates ranging between 12% and 14.5% per year and matured on October 6, 2014. The loan was secured by a second priority security interest in all of VAS’s assets. During the year ended December 31, 2014, VAS experienced financial hardship resulting in its failure to make the final monthly payment under the loan as well as the balloon payment due on the maturity date. Our Investment Manager engaged in discussions with VAS, VAS’s owners, the senior creditor and other second lien creditors in order to put in place a viable restructuring or refinancing plan. In December 2014, this specific plan to restructure or refinance fell through. While discussions on other options were still ongoing, our Investment Manager determined that we should record a credit loss reserve based on an estimated liquidation value of VAS’s inventory and accounts receivable. As a result, the loan was placed on non-accrual status and a credit loss reserve of $1,895,957 was recorded during the year ended December 31, 2014 based on our pro-rata share of the liquidation value of the collateral. The value of the collateral was based on a third-party appraisal using a sales comparison approach. As of December 31, 2014, the net carrying value of the loan was $2,899,078. In March 2015, the 90-day standstill period provided for in the loan agreement ended without a viable restructuring or refinancing plan agreed upon. In addition, the senior lender continued to charge VAS forbearance fees. Although discussions among the parties were still ongoing, these factors resulted in our Investment Manager making a determination to record an additional credit loss reserve of $1,087,993 during the three months ended March 31, 2015 to reflect a potential forced liquidation of the collateral. The forced liquidation value of the collateral was primarily based on a third-party appraisal using a sales comparison approach. On July 23, 2015, we sold all of our interest in the loan to GB Loan, LLC (“GB”) for $806,924. As a result, we recorded an additional credit loss of $1,004,161 during the three months ended June 30, 2015 prior to the sale. No gain or loss was recognized as a result of the sale. In addition, we wrote off the credit loss reserve and corresponding balance of the loan of $3,988,111 during the year ended December 31, 2015. No finance income was recognized since the date the loan was considered impaired. Accordingly, no finance income was recognized for the year ended December 31, 2015. Finance income recognized on the loan prior to recording the credit loss reserve was $591,081 for the year ended December 31, 2014.
On September 10, 2012, we made a secured term loan in the amount of $12,410,000 to Superior Tube Company, Inc. and Tubes Holdco Limited (collectively, “Superior”) as part of a $17,000,000 term loan facility. The loan bore interest at 12% per
70
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2016
year and was for a period of 60 months. The loan was secured by, among other things, a first priority security interest in Superior’s assets, including tube manufacturing and related equipment and a mortgage on real property, and a second priority security interest in Superior’s accounts receivable and inventory. On January 30, 2015, Superior satisfied its obligations in connection with the loan by making a prepayment of $10,198,899, comprised of all outstanding principal, accrued interest and a prepayment fee of $296,960. As a result, we recognized additional finance income of $123,006.
On September 16, 2013, we made a secured term loan in the amount of $9,000,000 to Cenveo Corporation (“Cenveo”). The loan bore interest at the London Interbank Offered Rate ("LIBOR"), subject to a 1% floor, plus 11.0% per year, and was for a period of 60 months. The loan was secured by a first priority security interest in specific equipment used to produce, print, fold, and package printed commercial envelopes. On July 7, 2014, Cenveo made a partial prepayment of $909,747 in connection with the loan, which included a net prepayment fee of $9,747. On September 30, 2015, Cenveo satisfied its obligations in connection with the loan in full by making a prepayment of $5,675,625, comprised of all outstanding principal, accrued interest and a prepayment fee of $108,000. The prepayment fee was recognized as additional finance income.
On July 14, 2014, we, Fund Twelve and ICON ECI Fund Fifteen, L.P. (“Fund Fifteen”), an entity also managed by our Investment Manager (collectively, “ICON”), entered into a secured term loan credit facility agreement with TMA to provide a credit facility of up to $29,000,000 (the “ICON Loan”), of which our commitment of $3,625,000 was funded on August 27, 2014 (the “TMA Initial Closing Date”). The facility was used by TMA to acquire and refinance two platform supply vessels. At inception, the loan bore interest at LIBOR, subject to a 1% floor, plus a margin of 17%. Upon the acceptance of both vessels by TMA’s sub-charterer on September 19, 2014, the margin was reduced to 13%. On November 24, 2014, ICON entered into an amended and restated senior secured term loan credit facility agreement with TMA pursuant to which an unaffiliated third party agreed to provide a senior secured term loan in the amount of up to $89,000,000 (the “Senior Loan”, and collectively with the ICON Loan, the “TMA Facility”) to acquire two additional vessels. The TMA Facility has a term of five years from the TMA Initial Closing Date. As a result of the amendment, the margin for the ICON Loan increased to 15% and repayment of the ICON Loan became subordinated to the repayment of the Senior Loan. The TMA Facility is secured by, among other things, a first priority security interest in the four vessels and TMA’s right to the collection of hire with respect to earnings from the sub-charterer related to the four vessels. As of December 31, 2016, our share of the collateral value, net of the balance of the Senior Loan, was estimated to be approximately $800,000. The amendment qualified as a new loan under U.S. GAAP and therefore, we wrote off the initial direct costs and deferred revenue associated with the ICON Loan of $77,524 as a charge against finance income. As a condition to the amendment and increased size of the TMA Facility, TMA was required to cause all four platform supply vessels to be under contract by March 31, 2015. Due to TMA’s failure to meet such condition, TMA has been in technical default and in payment default while available cash has been swept by the senior lender and applied to the Senior Loan in accordance with the loan agreement. As a result, the principal balance of the Senior Loan was paid down at a faster rate. In January 2016, the remaining two previously unchartered vessels had commenced employment. Based on, among other things, TMA’s payment history and estimated collateral value as of December 31, 2016, our Investment Manager continues to believe that all contractual interest and outstanding principal payments under the ICON Loan are collectible. As a result, we continue to account for our net investment in note receivable related to TMA on an accrual basis despite a portion of the outstanding balance being over 90 days past due. Interest on the ICON Loan is currently being accrued.
On September 24, 2014, we, Fund Twelve, Fund Fifteen and ICON ECI Fund Sixteen (“Fund Sixteen”), an entity also managed by our Investment Manager, entered into a secured term loan credit facility agreement with Premier Trailer Leasing, Inc. (“Premier Trailer”) to provide a credit facility of up to $20,000,000, of which our commitment of $2,500,000 was funded on such date. The loan bore interest at LIBOR, subject to a 1% floor, plus 9% per year, and was for a period of six years. The loan was secured by a second priority security interest in all of Premier Trailer’s assets, including, without limitation, its fleet of trailers, and the equity interests of Premier Trailer. On August 9, 2016, Premier Trailer satisfied its obligations in connection with the loan by making a prepayment of $2,581,944, comprised of all outstanding principal, accrued interest and a prepayment fee of $50,000. The prepayment fee was recognized as additional finance income.
On November 13, 2014, we and Fund Twelve made secured term loans in the aggregate amount of $15,000,000 to NARL Marketing Inc. and certain of its affiliates (collectively, “NARL”) as a part of a $30,000,000 senior secured term loan credit facility, of which our commitment was $3,000,000. The loan bore interest at 10.75% per year and was for a period of three years. The loan was secured by a first priority security interest in all of NARL’s existing and thereafter acquired assets including, but not limited to, its retail and wholesale fuel equipment, including pumps and storage tanks, and a mortgage on certain real properties. On May 7, 2015, NARL made a partial prepayment on the loan of $206,818 pursuant to the excess cash sweep provision of the loan agreement. On July 15, 2015, NARL made a voluntary partial prepayment on the loan of $1,574,215,
71
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2016
which included a prepayment fee of $67,500. The prepayment fee was recognized as additional finance income. On August 6, 2015, NARL satisfied its obligations in full by making a prepayment of $1,079,963 pursuant to the excess cash sweep provision of the loan agreement, comprised of all outstanding principal and unpaid interest.
On December 20, 2016, we, Fund Fifteen and Fund Sixteen entered into a secured term loan credit facility agreement with CFL Momentum Beheer B.V. and C.V. CFL Momentum (collectively, “CFL”) to provide a credit facility of up to $7,400,000, of which our commitment of $1,258,000 was funded on December 21, 2016. The loan bears interest at 8% per year and we are entitled to an equity participation fee based partly on the fair market value of the vessel upon repayment of the loan. The loan is for a period of four years, maturing on December 21, 2020. The loan is secured by, among other things, a first priority security interest in and earnings from a motor cargo vessel.
On December 30, 2016, we, Fund Fifteen and Fund Sixteen entered into a secured term loan agreement with Lubricating Specialties Company (“LSC”) to provide a loan in the aggregate amount of $32,500,000, of which our commitment of $5,525,000 was funded on such date. The loan bears interest at LIBOR, subject to a 1% floor, plus 11% per year, and is for a period of four years maturing on December 30, 2020. The loan is secured by a second priority security interest in LSC's accounts receivable and inventory and a first priority security interest in all of LSC’s other assets.
Credit loss allowance activities for the years ended December 31, 2016, 2015 and 2014 were as follows:
Credit Loss Allowance | |||
Allowance for credit loss as of December 31, 2013 | $ | 5,902,599 | |
Provisions | 2,758,088 | ||
Write-offs, net of recoveries | (2,958,795 | ) | |
Allowance for credit loss as of December 31, 2014 | $ | 5,701,892 | |
Provisions | 30,675,752 | ||
Write-offs, net of recoveries | (7,756,186 | ) | |
Allowance for credit loss as of December 31, 2015 | $ | 28,621,458 | |
Provisions | 4,772,088 | ||
Write-offs, net of recoveries | — | ||
Allowance for credit loss as of December 31, 2016 | $ | 33,393,546 | |
(4) | Net Investment in Finance Leases |
As of December 31, 2016, we no longer owned equipment subject to finance leases in our portfolio. As of December 31, 2015, we had net investment in finance leases on non-accrual status of $91,753,624, and no net investment in finance leases that was past due 90 days or more and still accruing.
Net investment in finance leases consisted of the following:
December 31, | |||||||
2016 | 2015 | ||||||
Minimum rents receivable (1) | $ | — | $ | 156,434,921 | |||
Initial direct costs | — | 880,958 | |||||
Unearned income | — | (28,755,186 | ) | ||||
— | 128,560,693 | ||||||
Credit loss reserve (2) | — | (36,807,069 | ) | ||||
Net investment in finance leases | $ | — | $ | 91,753,624 | |||
(1) As of December 31, 2015, total minimum rents receivable related to our impaired finance leases of $82,241,851 was related to the Amazing and the Fantastic (each discussed below).
(2) As of December 31, 2015, the credit loss reserve of $36,807,069 was related to the Amazing and the Fantastic.
72
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2016
Marine Vessels
On September 29, 2010, we purchased two supramax bulk carrier vessels, the Amazing and the Fantastic, from wholly-owned subsidiaries of Geden Holdings Ltd. (“Geden”) for an aggregate purchase price of $67,000,000. Simultaneously, the vessels were bareboat chartered to the Geden subsidiaries for a period of seven years. The purchase price for the vessels was funded by $23,450,000 in cash and $43,550,000 in non-recourse long-term debt.
On June 21, 2011, we purchased a crude oil tanker, the Center. The tanker was acquired for $16,000,000 in cash, $44,000,000 of financing through non-recourse long-term debt and $9,000,000 of financing through a subordinated, non-interest-bearing seller’s credit. The tanker was simultaneously bareboat chartered to Center Navigation Ltd. (“Center Navigation”), a wholly-owned subsidiary of Geden, for a period of five years.
As a result of the depressed shipping market and historically low charter rates, the subsidiaries of Geden had only partially satisfied their lease payment obligations related to the three vessels and as a result, the leases were placed on a non-accrual status during the three months ended June 30, 2013. Our Investment Manager and Geden negotiated amendments to the leases, which, among other things, included restructuring the payment terms. Although the amendments were not executed by the parties, Geden made lease payments to us in accordance with the proposed restructured terms during the year ended December 31, 2014.
Subsequent to December 31, 2014, Geden either made partial lease payments based upon the proposed restructured terms or no payments at all on the Amazing and the Fantastic due to the continued decline in charter rates associated with supramax bulk carrier vessels. As a result, our Investment Manager believed that Geden might be unable to fully satisfy its remaining lease payment obligations and fulfill its purchase obligations at lease expiration on September 30, 2017 related to the Amazing and the Fantastic. Based upon this assessment, we recorded a credit loss reserve of $12,646,486 as of December 31, 2014 based on the expected undiscounted cash flows comprised of the estimated lease payments to be collected from Geden over the remaining terms of the leases and the expected fair value of the vessels at lease expiration should the purchase obligations not be satisfied. Critical assumptions used in the analysis included a 2.5-year moving average of inflation-adjusted vessel values and charter rates. Subsequently, on a quarterly basis, we updated our analysis of the remaining expected undiscounted cash flows by updating the moving average of inflation-adjusted vessel values and charter rates for a period that represented the remaining lease terms. We also considered the actual lease payments received for the Amazing and the Fantastic for each reporting period. As a result of the continuing decline in fair value of the vessels and charter rates, we have recorded additional credit losses based on these updated quarterly analyses.
During the three months ended September 30, 2015, based on discussions with Geden, our Investment Manager determined that there was doubt regarding Geden’s ability to subsidize operating expenses associated with the Amazing and the Fantastic and to otherwise operate the vessels through the end of the lease term in September 2017. As a result, commencing with the quarterly assessment for the three months ended September 30, 2015, we also considered the then current fair market value of the vessels, in addition to updating the quarterly undiscounted cash flows, to account for the possibility that we might take the vessels back from Geden prior to lease expiration. Utilizing a weighted average probability approach on the quarterly undiscounted cash flows and the then current fair market values, we estimated the recoverable amount of Geden’s obligations to us associated with the Amazing and the Fantastic and recorded additional credit losses based on the quarterly analyses. For the year ended December 31, 2015, we recorded an aggregate credit loss of $24,160,583 related to the Amazing and the Fantastic.
In April 2016, our Investment Manager was informed by Geden that it would redeliver the Amazing and the Fantastic to us prior to lease expiration and that it would not be fulfilling its purchase obligations with respect to the vessels. As a result, during the year ended December 31, 2016, our Investment Manager determined to record additional credit losses based primarily on the then current fair market value of the vessels at each reporting period. For the year ended December 31, 2016, we recorded an aggregate credit loss of $2,645,555 related to the Amazing and the Fantastic.
We accounted for the leases related to the Amazing and the Fantastic on a non-accrual basis and finance income was recognized on a cash basis commencing with the three months ended June 30, 2013 until the leases were considered impaired as of December 31, 2014. Subsequently, no finance income was recognized. For the year ended December 31, 2014, we recognized finance income of $2,041,752, of which $2,190,250 was recognized on cash basis, related to the Amazing and the Fantastic. As of December 31, 2015, our net investment in finance leases related to the Amazing and the Fantastic was $11,904,077 and $11,741,477, respectively.
73
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2016
On July 5, 2016, the Amazing and the Fantastic were redelivered to us by Geden and the charters were terminated. Upon redelivery, the vessels were renamed "Bulk Progress" and "Bulk Power," respectively, and were bareboat chartered to Americas Bulk Transport (BVI) Limited ("Americas Bulk") for a period of five years, effective July 2016. The new charters are classified as operating leases under U.S. GAAP and as a result, the vessels were reclassified to "leased equipment at cost" at their then fair market value on our consolidated balance sheet upon commencement of the charters (see Note 5).
With respect to the Center, our Investment Manager had assessed the collectability of the lease payments due from Geden over the remaining term of the lease as well as Geden’s ability to satisfy its purchase obligation at lease expiration and concluded that no credit loss reserve was required as of December 31, 2015 and 2014 due to the fixed employment of the vessel, prevailing market conditions and various new charter proposals then on hand. As part of this assessment, our Investment Manager considered charter rates for crude oil tankers, which had increased since December 31, 2013, and the expected fair market value of the vessel at lease expiration should the purchase obligation not be satisfied.
In April 2016, our Investment Manager was informed by Geden that it would also redeliver the Center to us prior to lease expiration and that it would not be fulfilling its purchase obligation with respect to the vessel. As a result, during the three months ended March 31, 2016, our Investment Manager determined to record a credit loss of $396,762 based primarily on the then current fair market value of the vessel.
We accounted for the lease related to the Center on a non-accrual basis and finance income was recognized on a cash basis commencing with the three months ended June 30, 2013 until the lease was considered impaired during the three months ended March 31, 2016. For the year ended December 31, 2016, we did not recognize any finance income related to the Center. For the years ended December 31, 2015 and 2014, we recognized finance income related to the Center of $8,792,671 and $2,860,189, respectively (of which $8,725,500 and $2,790,500, respectively, was recognized on a cash basis). As of December 31, 2015, our net investment in finance lease related to the Center was $68,108,070.
On June 17, 2016, the Center was redelivered to us by Geden and the charter was terminated. Upon redelivery, the vessel was dry-docked until early July 2016, after which we renamed the vessel "Shamrock" and placed it into service for at least 12 months by participating in a pooling arrangement, Stena Sonangol Suezmax Pool LLC (the "Stena Pooling Arrangement"). As part of the Stena Pooling Arrangement, we are entitled to receive a monthly distribution based partly on the performance of all vessels within the pool. Upon redelivery of the vessel to us, we reclassified the Center from "net investment in finance leases" to "vessel" on our consolidated balance sheet at the then fair market value of $48,000,000. Upon reclassification, U.S. GAAP requires that we record the vessel at the lower of the present carrying value or the present fair market value. Due to the decrease in the fair market value of the Center, we recognized an additional credit loss of $6,546,754 during the three months ended June 30, 2016, net of the forfeiture of the $9,000,000 seller’s credit that was payable to Geden as a result of Geden’s default on the charter.
(5) | Leased Equipment at Cost |
Leased equipment at cost consisted of the following:
December 31, | ||||||||
2016 | 2015 | |||||||
Packaging equipment | $ | — | $ | 6,535,061 | ||||
Marine - crude oil tankers | — | 147,900,706 | ||||||
Marine - dry bulk vessels | 21,000,000 | — | ||||||
Leased equipment at cost | 21,000,000 | 154,435,767 | ||||||
Less: accumulated depreciation | 416,254 | 45,640,228 | ||||||
Leased equipment at cost, less accumulated depreciation | $ | 20,583,746 | $ | 108,795,539 | ||||
Depreciation expense was $4,434,599, $9,945,714 and $11,678,140 for the years ended December 31, 2016, 2015 and 2014, respectively.
Motor Coaches
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ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2016
On March 9, 2010, we purchased eleven 2010 MCI J4500 motor coach buses for $4,502,715 and simultaneously leased the buses to Dillon's Bus Service, Inc. (“DBS”). On May 13, 2010, we purchased fifteen additional 2010 MCI J4500 motor coach buses for $5,865,450 and simultaneously leased the buses to Lakefront Lines, Inc. (“Lakefront”). The leases were for a period of 60 months commencing on June 1, 2010. On January 3, 2012, DBS, Lakefront and their parent company, Coach Am Group Holdings Corp., commenced a voluntary Chapter 11 proceeding in U.S. Bankruptcy Court, subsequent to which DBS and Lakefront made all of their lease payments. On July 20, 2012, Lakefront and DBS assigned their respective interests in the leases to 24 of 26 motor coaches to CAM Leasing, LLC (“CAM Leasing”). On October 19, 2012, the remaining two motor coaches were sold for $551,337 with no material gain or loss recognized as a result of the sales. On September 2, 2014, due to damage to one motor coach bus on lease, we received $230,599 based on the stipulated loss value of the bus pursuant to the lease agreement and a gain of $36,339 was recognized.
In August 2015, upon expiration of the leases with CAM Leasing, we sold the remaining 23 motor coach buses to a third-party purchaser for an aggregate price of $4,025,000. No significant gain or loss was recorded as a result of these sales. Pursuant to the lease agreement, CAM Leasing was required to pay a remarketing fee totaling $477,362 upon termination of the leases and the return of the motor coach buses, which was recognized as additional rental income on our consolidated statements of operations.
Marine Vessels
On March 29, 2011, we and Fund Twelve entered into a joint venture, ICON AET Holdings, LLC (“ICON AET”), owned 75% by us and 25% by Fund Twelve, for the purpose of acquiring two aframax tankers and two very large crude carriers (the “VLCCs,” and collectively with the aframax tankers, the “AET Vessels”). The aframax tankers, the Eagle Otome and the Eagle Subaru, were each acquired for $13,000,000, of which $9,000,000 was financed through non-recourse long-term debt, and were simultaneously bareboat chartered to AET Inc. Limited (“AET”) for a period of three years. The VLCCs, the Eagle Vermont and the Eagle Virginia, were each acquired for $72,000,000, of which $55,000,000 was financed through non-recourse long-term debt, and were simultaneously bareboat chartered to AET for a period of 10 years.
On April 14, 2014 and May 21, 2014, upon expiration of the leases with AET, ICON AET sold the two aframax tankers to third-party purchasers for an aggregate price of $14,821,980. As a result, ICON AET recognized an aggregate gain on sale of assets of $2,229,932.
On June 8, 2016, an unaffiliated third party purchased 100% of the limited liability company interests of ICON AET for net sales proceeds of $48,798,058. As a result, we recorded a gain on sale of $6,708,694, which is included in gain on sale of subsidiaries on our consolidated statements of operations. A portion of the proceeds from the sale was used to satisfy in full ICON AET’s outstanding subordinated debt obligations of $529,660. Through the acquisition of the interests of ICON AET, the third party purchaser acquired ownership of the Eagle Vermont and the Eagle Virginia, which are on charter to AET, and assumed all outstanding senior debt obligations of $60,786,199 associated with such vessels. For the year ended December 31, 2016, pre-tax income of ICON AET was $1,679,328, of which the pre-tax income attributable to us was $1,265,121. For the year ended December 31, 2015, pre-tax income of ICON AET was $5,393,059, of which the pre-tax income attributable to us was $4,058,294. For the year ended December 31, 2014, pre-tax income of ICON AET was $5,479,519, of which the pre-tax income attributable to us was $3,949,839.
Upon termination of the charters and redelivery of the vessels to us by Geden (see Note 4), we entered into five-year operating leases with Americas Bulk related to the Bulk Progress and the Bulk Power, effective July 6, 2016. The new charters are classified as operating leases under U.S. GAAP and as a result, the vessels were reclassified to "leased equipment at cost" at their then fair market value on our consolidated balance sheet upon commencement of the charters. Commencing 12 months following the effective date, either party can terminate one or both charters on each subsequent anniversary date, provided certain criteria are met. Charter hire payments are expected to vary month-to-month as a result of a profit sharing arrangement set forth in the charters.
Packaging Equipment
We owned packaging and printing equipment through our wholly-owned subsidiary, ICON Exopack, LLC (“ICON Exopack”), which was subject to leases with Coveris Flexibles US LLC (f/k/a Exopack, LLC) (“Coveris”). On October 22, 2015, we amended our leases with Coveris to extend the term for 36 months, effective November 1, 2015, after such leases were automatically extended twice for a total of 18 months since the original expiration dates.
75
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2016
On June 8, 2016, an unaffiliated third party purchased 100% of the limited liability company interests of ICON Exopack for net sales proceeds of $2,813,350. As a result, we recorded a gain on sale of $409,910, which is included in gain on sale of subsidiaries on our consolidated statements of operations. Through the acquisition of the interests of ICON Exopack, the third party purchaser acquired ownership of the packaging and printing equipment that is on lease to Coveris. For the years ended December 31, 2016, 2015 and 2014, pre-tax income of ICON Exopack was $195,511, $459,913 and $609,376, respectively.
Aggregate annual minimum future rentals receivable from our non-cancelable leases over the next five years and thereafter consisted of the following at December 31, 2016:
Years Ending December 31, | |
2017 | $348,911 |
2018 | 341,356 |
2019 | 456,500 |
2020 | 640,500 |
2021 | 364,000 |
Thereafter | — |
Total (1) | $2,151,267 |
(1) This amount does not include contingent rentals that may be received under the charters that we entered into with Americas Bulk in July 2016. Contingent rentals in connection with the aforementioned charters of $184,880 was recognized during the year ended December 31, 2016.
(6) | Vessel |
Upon termination of the charter and redelivery of the vessel to us by Geden (see Note 4), on July 14, 2016, we entered the Shamrock into the Stena Pooling Arrangement with other crude oil tankers owned by unaffiliated third parties. The term of the pooling arrangement is for at least 12 months, after which the time charter and participation of the vessel in the pool may be terminated by either party at any time. As part of the Stena Pooling Arrangement, we are entitled to receive a monthly distribution, calculated on a time charter equivalent basis, whereby net pool earnings are allocated to each pool participant according to an agreed upon formula based on, among other things, the number of days a vessel operates in the pool and other technical characteristics, such as speed and fuel consumption. The Stena Pooling Arrangement also includes a shortfall provision that will require us to pay back a portion of the monthly distribution received upon certain criteria being met if we remove the vessel from the pool. The shortfall provision expires on July 14, 2018. At December 31, 2016, the total amount subject to the shortfall provision of $1,467,325 was recognized as deferred revenue on our consolidated balance sheets. Monthly distributions, net of the amount subject to the shortfall provision, are recognized as pool revenue on our consolidated statements of operations.
Depreciation expense was $976,088 for the year ended December 31, 2016.
(7) | Investment in Joint Ventures |
On December 19, 2011, a joint venture owned 40% by us and 60% by Fund Fifteen agreed to purchase an offshore support vessel, the AMC Ambassador (f/k/a the Lewek Ambassador), from Ezram LLC, a wholly-owned subsidiary of Ezra Holdings Limited ("Ezra"). On December 20, 2011, the joint venture funded $9,000,000 of the purchase price through a combination of debt and equity, with the remaining portion to be funded upon delivery of the vessel. Simultaneously with the initial funding, the joint venture entered into a bareboat charter with Gallatin Marine Management, LLC ("Gallatin") for a period of nine years to commence on the delivery date of the vessel. Gallatin's obligations under the bareboat charter are guaranteed by Ezra. The vessel was delivered on June 4, 2012 and the purchase price was set at $24,869,000. The joint venture financed the remaining purchase price with non-recourse long-term debt totaling $17,500,000. As of December 31, 2016, the joint venture’s notes payable to us and Fund Fifteen were $2,597,674 and $3,896,511, respectively. As of December 31, 2015, the joint venture's notes payable to us and Fund Fifteen were $2,614,691 and $3,922,035, respectively. The notes bear interest at 15.5% per year and mature on June 4, 2019. The note payable to us is presented as note receivable from joint venture, net of a credit loss of $1,514,498 (as further described below), on our consolidated balance sheets (see also Note 10).
76
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2016
In May 2016, Gallatin began paying its monthly charter payments late and all charter payments have ceased since the payment due in December 2016. In December 2016, Ezra hired a restructuring advisor. In January 2017, our Investment Manager was informed that, following a deterioration of Ezra’s and its affiliated companies’ financial condition during the fourth quarter of 2016, payments under the bareboat charter could no longer be reasonably expected to be made. On February 6, 2017, EMAS Chiyoda Subsea Limited (“EMAS”), the time charterer of the vessel, filed a petition in Singapore to wind up and liquidate the company. In addition, Ezra may become subject to a winding up order in Singapore. On February 27, 2017, both Gallatin and EMAS commenced voluntary Chapter 11 proceedings in the Bankruptcy Court in the Southern District of Texas. On March 7, 2017, Gallatin and EMAS filed a motion with the bankruptcy court to reject the bareboat and time charters. On March 18, 2017, Ezra commenced a voluntary Chapter 11 proceeding in the Bankruptcy Court in the Southern District of New York. Our Investment Manager is currently considering certain options, which include, without limitation, repossessing and selling the vessel.
Consequently, as of December 31, 2016, our Investment Manager assessed the joint venture’s collectability of the finance lease based on the estimated fair market value of the vessel provided by an independent third party appraiser. As a result, the joint venture recorded a credit loss of $7,271,958 to write down its net investment in finance lease related to the vessel to $8,000,000. We were only allocated $1,306,625 of such credit loss as our investment in the joint venture was written down to zero. An additional credit loss may be recorded by the joint venture in future periods if the collectability assessment of the finance lease continues to be based on collateral value and the fair market value of the vessel decreases from its current estimate. To the extent our investment in the joint venture remains at zero, we will not be allocated any additional credit loss recorded by the joint venture. However, any additional credit loss recorded by the joint venture may result in an additional credit loss being recorded on our note receivable due from the joint venture. During the three months ended December 31, 2016, the joint venture placed the lease on non-accrual status and ceased to recognize finance income. Additionally, as collectability of the remaining lease payments is in doubt, finance income will be recognized by the joint venture only to the extent cash receipts are in excess of all contractual lease payments due. For the years ended December 31, 2016, 2015 and 2014, the joint venture recognized finance income of $1,424,846, $2,164,054 and $2,407,228, respectively, of which no amount was recognized on cash basis, prior to the finance lease being considered impaired. As of December 31, 2016 and 2015, the total net investment in finance lease held by the joint venture was $8,000,000 and $17,517,912, respectively, and our total investment in the joint venture was $0 and $1,353,519, respectively. As a result of the credit loss recorded on the joint venture’s finance lease, our Investment Manager determined to record a credit loss of $1,514,498 on the related party note receivable due to us from the joint venture as a result of the fair market value of the vessel and the balance of the joint venture’s non-recourse long-term debt of $6,250,000 associated with the vessel, which has priority over our related party note receivable. The related party note receivable was placed on non-accrual status during the three months ended December 31, 2016. For the years ended December 31, 2016, 2015 and 2014, we recognized interest income prior to the related party note receivable being considered impaired of $307,885, $411,509 and $407,970, respectively, of which no amount was recognized on a cash basis. The interest income is included in finance income on our consolidated statements of operations.
Information as to the results of operations of this joint venture is summarized as follows:
Years Ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Revenue | $ | 1,424,846 | $ | 2,164,054 | $ | 2,407,228 | ||||||
Net (loss) income | $ | (7,302,320 | ) | $ | 572,157 | $ | 690,167 | |||||
Our share of net (loss) income | $ | (1,318,770 | ) | $ | 228,863 | $ | 276,067 | |||||
On December 20, 2012, ICON Hoegh, LLC (“ICON Hoegh”), a joint venture owned 20% by us and 80% by Fund Fifteen, purchased a car carrier vessel, the Hoegh Copenhagen. The vessel was acquired for $20,800,000 in cash, $53,000,000 of financing through non-recourse long-term debt and $8,200,000 of financing through a subordinated, non-interest-bearing seller’s credit. The vessel was simultaneously bareboat chartered to Hoegh Autoliners Shipping AS for a period of eight years. Our contribution to the joint venture was $4,690,802.
On June 8, 2016, an unaffiliated third party purchased 100% of the limited liability company interests of ICON Hoegh for net sales proceeds of $21,007,515. As a result, we recorded a gain on sale of investment in joint venture of $284,448. For the years ended December 31, 2016, 2015 and 2014, our share of pre-tax income recognized by ICON Hoegh was $216,980, $469,463 and $421,802, respectively.
77
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2016
On February 15, 2013, a joint venture owned 38% by us, 58% by Fund Fifteen and 4% by ICON ECI Partners L.P. (“ECI Partners”), an entity also managed by our Investment Manager, purchased onshore oil field services equipment from Go Frac, LLC (“Go Frac”) for $11,803,985. Simultaneously, the equipment was leased to Go Frac for a period of 45 months, which was scheduled to expire on November 30, 2016. On July 19, 2013, the joint venture purchased additional onshore oil field services equipment from Go Frac for $165,382, which was leased to Go Frac for a period of 45 months and was scheduled to expire on April 30, 2017. Our total contribution to the joint venture was $3,605,911. On December 30, 2013, the joint venture assigned the remaining 35 and 40 monthly rental payments totaling $7,028,793 due to the joint venture from Go Frac to Element Financial Corp. (“Element”) in exchange for Element making a $6,464,372 non-recourse loan to the joint venture. The non-recourse loan bore interest at a fixed rate of 6.0% and was scheduled to mature on April 30, 2017.
During the three months ended December 31, 2014, declining energy prices negatively impacted Go Frac’s financial performance resulting in its failure to satisfy its lease payment obligations to the joint venture in February 2015. In early February 2015, our Investment Manager was informed that Go Frac was ceasing its operations. During the three months ended December 31, 2014, the joint venture recognized an impairment charge of $4,026,090 based on a third-party appraised fair market value of the leased equipment as of December 31, 2014. The fair market value provided by the independent appraiser was derived based on a combination of the cost approach and the sales comparison approach. During the three months ended March 31, 2015, our Investment Manager obtained quotes from multiple auctioneers and subsequently an auctioneer was engaged to sell the equipment at an auction. As of March 31, 2015, the equipment met the criteria to be classified as assets held for sale and the joint venture recognized an additional impairment charge to write down the equipment to its estimated fair value less cost to sell. We were not allocated any impairment loss during the three months ended March 31, 2015 as our investment in the joint venture was reduced to zero as of December 31, 2014. On May 14, 2015, the equipment was sold at an auction for $5,542,000. After deducting selling costs of $538,786, the joint venture recognized a gain on sale of assets of $983,474. In addition, as a result of Go Frac’s default on the lease and the joint venture’s repossession and ultimate sale of the equipment, the joint venture recognized additional rental income of $2,638,850, primarily due to the extinguishment of the joint venture’s obligation to return a security deposit to Go Frac pursuant to the terms of the lease. Income generated by the joint venture for the three months ended June 30, 2015, which was primarily a result of the gain on sale of assets and additional rental income, was not allocated to us as such income did not exceed the net losses previously not recognized by us. However, we recognized income of $269,965 during the three months ended June 30, 2015, which represents our share of the net proceeds received by the joint venture from its sale of the equipment after repayment of the non-recourse long-term debt related to such equipment.
On April 2, 2013, two joint ventures each owned 45% by us and 55% by Fund Fifteen purchased two chemical tanker vessels, the Ardmore Capella and the Ardmore Calypso, from wholly-owned subsidiaries of Ardmore Shipholding Limited (“Ardmore”). Simultaneously, the vessels were bareboat chartered to the Ardmore subsidiaries for a period of five years. The aggregate purchase price for the vessels was funded by $8,850,000 in cash, $22,750,000 of financing through non-recourse long-term debt and $5,500,000 of financing through subordinated, non-interest-bearing seller’s credits. Our total contribution to the joint ventures was $4,361,088.
On April 5, 2016, Ardmore, in accordance with the terms of the bareboat charters, exercised its options to purchase the vessels from the two joint ventures for an aggregate purchase price of $26,990,000. In addition, Ardmore paid all break costs and legal fees incurred by the joint ventures with respect to the sale of the vessels. No significant gain or loss was recorded as a result of these sales.
On March 4, 2014, a joint venture owned 15% by us, 60% by Fund Twelve, 15% by Fund Fifteen and 10% by Fund Sixteen purchased mining equipment from an affiliate of Blackhawk Mining, LLC (“Blackhawk”). Simultaneously, the mining equipment was leased to Blackhawk and its affiliates for four years. The aggregate purchase price for the mining equipment of $25,359,446 was funded by $17,859,446 in cash and $7,500,000 of non-recourse long-term debt. Our contribution to the joint venture was $2,693,395. On October 27, 2015, the joint venture amended the lease with Blackhawk to waive Blackhawk’s breach of a financial covenant during the nine months ended September 30, 2015 in consideration for a partial prepayment of $3,502,514, which included an amendment fee of $75,000. In addition, corresponding amendments were made to certain payment and repurchase provisions of the lease to account for the partial prepayment. On December 8, 2015 and December 7, 2016, the joint venture further amended the lease with Blackhawk to, among other things, add, revise and/or waive Blackhawk’s breach of certain financial covenants and received additional amendment fees of $75,000 and $150,000, respectively.
78
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2016
On September 4, 2014, a joint venture owned 33.5% by us, 52% by Fund Sixteen and 14.5% by ECI Partners purchased certain land-based seismic testing equipment for $10,677,018. Simultaneously, the seismic testing equipment was leased to Geokinetics Inc., Geokinetics USA, Inc. and Geokinetics Acquisition Company (collectively, “Geokinetics”) for three years. Our contribution to the joint venture was $3,666,221. During the years ended December 31, 2016 and 2015, due to damage to certain of the assets on lease, the joint venture received a total of $48,076 and $216,023, respectively, based on the stipulated loss values of such assets pursuant to the lease agreement. As a result, future minimum rents receivable and residual values were reduced and the joint venture recognized additional finance income of $4,760 and $11,083 during the years ended December 31, 2016 and 2015, respectively, of which our share was $1,595 and $3,713, respectively.
On February 15, 2017, Fund Sixteen purchased all of ECI Partners’ limited liability company interests in the joint venture. As a result, the joint venture is owned 33.5% by us and 66.5% by Fund Sixteen.
On July 10, 2015, ICON Challenge, LLC (“ICON Challenge”), a joint venture owned 40% by us, 50% by Fund Fifteen and 10% by Fund Sixteen, purchased auxiliary support equipment and robots used in the production of certain automobiles for $9,934,118, which were simultaneously leased to Challenge Mfg. Company, LLC and certain of its affiliates (collectively, “Challenge”) for 60 months. Our contribution to ICON Challenge was $3,993,515.
On June 8, 2016, an unaffiliated third party purchased 100% of the limited liability company interests of ICON Challenge for net sales proceeds of $9,004,214. No significant gain or loss was recorded by us as a result of the sale. For the years ended December 31, 2016 and 2015, our share of pre-tax income recognized by ICON Challenge was $192,863 and $204,973, respectively.
On December 23, 2015, a joint venture owned 15% by us, 75% by Fund Fifteen and 10% by Fund Sixteen, through two indirect subsidiaries, entered into memoranda of agreement to purchase two geotechnical drilling vessels, the Fugro Scout and the Fugro Voyager (collectively, the “Fugro Vessels”), from affiliates of Fugro N.V. (“Fugro”) for an aggregate purchase price of $130,000,000. The Fugro Scout and the Fugro Voyager were delivered on December 24, 2015 and January 8, 2016, respectively. The Fugro Vessels were bareboat chartered to affiliates of Fugro for a period of 12 years upon delivery of each respective vessel, although such charters can be terminated by the indirect subsidiaries after year five. On December 24, 2015, the Fugro Scout was acquired for (i) $8,250,000 in cash, (ii) $45,500,000 of financing through a senior secured loan from ABN AMRO Bank N.V. (“ABN AMRO”), Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. (“Rabobank”) and NIBC Bank N.V. (“NIBC”) and (iii) a seller's credit of $11,250,000. As of December 31, 2015, the cash portion of the purchase price for the Fugro Voyager of approximately $10,221,000 was being held by the applicable indirect subsidiary of the joint venture until delivery of the vessel. On January 8, 2016, the Fugro Voyager was also acquired for $8,250,000 in cash, $45,500,000 of financing through a senior secured loan from ABN AMRO, Rabobank and NIBC and a seller's credit of $11,250,000. The senior secured loans bear interest at LIBOR plus 2.95% per year and mature on December 31, 2020. On February 8, 2016, the two indirect subsidiaries entered into interest rate swap agreements to effectively fix the interest rate of the senior secured loans from a variable rate of LIBOR plus 2.95% per year to a fixed rate of 4.117% per year. Our contribution to the joint venture totaling $3,565,875 was made in December 2015.
As a result of Fugro obtaining additional third party financing, effective December 31, 2016, the indirect subsidiaries and the affiliates of Fugro amended the bareboat charters to, among other things, increase the daily charter rate and provide for additional security deposits. Also, effective December 31, 2016, the indirect subsidiaries amended the facility agreement with ABN AMRO, Rabobank and NIBC to, among other things, increase the interest rate on the senior secured loans to share the economic benefits of the amended bareboat charters.
(8) | Long-Term Debt |
As of December 31, 2016 and 2015, we had the following long-term debt:
79
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2016
December 31, | ||||||||||||
Counterparty | 2016 | 2015 | Maturity | Rate | ||||||||
DVB Bank SE | $ | 35,862,500 | $ | 120,239,692 | 2021 | LIBOR + 3.50% and LIBOR + 3.85% | ||||||
Wafra Investment Advisory Group, Inc. | — | 1,985,726 | N/A | N/A | ||||||||
35,862,500 | 122,225,418 | |||||||||||
Less: debt issuance costs | 677,115 | 1,394,344 | ||||||||||
Total long-term debt | $ | 35,185,385 | $ | 120,831,074 | ||||||||
As of December 31, 2016, our non-recourse long-term debt obligations were $35,185,385. As of December 31, 2015, our long-term debt obligations of $120,831,074 consisted of non-recourse and recourse long-term debt of $117,331,074 and $3,500,000, respectively. During the year ended December 31, 2015, we provided a guarantee on the debt related to the Amazing and the Fantastic of up to an aggregate of $5,000,000, which was reduced in accordance with the terms of the guarantee. As of December 31, 2015, the debt balance shortfall that we were guaranteeing was an aggregate of $3,500,000. The guarantee was terminated in July 2016 upon consummation of a refinancing transaction (as further described below). All of our non-recourse long-term debt obligations consist of notes payable in which the lender has a security interest in the underlying assets. If the borrower was to default on the underlying lease or loan, resulting in our default on the non-recourse long-term debt, the assets could be foreclosed upon and the proceeds would be remitted to the lender in extinguishment of that debt. As of December 31, 2016, the total carrying value of assets subject to non-recourse long-term debt was $67,607,658. As of December 31, 2015, the total carrying value of assets subject to long-term debt was $197,828,244, of which $91,753,624 was related to non-performing assets associated with Geden.
On October 1, 2010, we entered into a loan agreement with DVB Bank SE ("DVB") and Norddeutsche Landesbank Girozentrale (“Nord LB”, and together with DVB, the “lenders”) under which we borrowed $43,500,000 to finance the acquisition of the Amazing and the Fantastic. The loan was scheduled to mature on September 30, 2017 and initially bore interest at a fixed rate of 4.9825% for the first four years. The lenders had a security interest in the Amazing and the Fantastic and an assignment of the charter hire. We paid and capitalized approximately $653,000 in debt financing costs. Subsequently, we restructured the long-term debt associated with the Amazing and the Fantastic on March 31, 2014 to amend the repayment stream and financial covenants. The interest rate and maturity date remained the same for the loan. Beginning September 29, 2014, the interest rate was floating at LIBOR plus 3.85% as part of the original agreement. During 2015, due to a change in the fair market value of the Amazing and the Fantastic, we were in non-compliance with a financial covenant. On July 8, 2015, we amended the loan agreement associated with the Amazing and the Fantastic to provide a guarantee of up to $2.5 million for each vessel to cover any debt balance shortfall and to revise certain financial covenants. During the three months ended December 31, 2015, we were notified by our lenders of non-compliance with a financial covenant as a result of a decrease in the fair market value of the Amazing and the Fantastic.
On July 6, 2016, we repaid $10,000,000 to satisfy in full the portion of the outstanding balance of the loan due to Nord LB, net of a discount of $2,427,602. As a result of the discounted repayment, we recognized a gain on extinguishment of debt of $2,343,762 during the year ended December 31, 2016. In addition, on July 6, 2016, we refinanced the existing outstanding balance of the loan due to DVB of $10,700,000 with a new $10,700,000 facility agreement that we entered into with DVB on June 30, 2016. This refinancing transaction was consummated to coincide with redelivery of the vessels to us by Geden, renaming the vessels "Bulk Progress" and "Bulk Power," and our entry into new five-year charters with Americas Bulk, effective July 6, 2016. During 2016, prior to this refinancing transaction, we made repayments on the outstanding balance of the long-term debt related to the Amazing and the Fantastic totaling $14,727,602. The new facility matures on April 30, 2021 and bears interest at LIBOR plus 3.85%. As part of this refinancing, we incurred loan origination fees of $300,000. Upon repayment in full of the long-term debt associated with the Amazing and the Fantastic with the proceeds from the new facility, we cured our non-compliance with the long-term debt covenant under the prior facility and the debt balance shortfall guarantee that we issued to the senior lender as part of the prior facility was terminated. As of December 31, 2016, we were in compliance with all covenants related to the non-recourse long-term debt associated with the Bulk Progress and the Bulk Power.
On June 21, 2011, we borrowed $44,000,000 in connection with the acquisition of the crude oil tanker, the Center. The loan was for a period of five years and bore interest at 3.500% per year through September 21, 2011. The interest rate after that date had been fixed pursuant to a swap agreement at 5.235% per year through the maturity of the debt. The loan was secured by the Center. On March 19, 2014, we restructured the non-recourse long-term debt associated with the Center to amend the repayment stream and financial covenants. The interest rate and maturity date remained the same for the loan. The
80
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2016
loan was scheduled to mature on June 21, 2016, but was extended to coincide with the consummation of the July 2016 refinancing transaction with the senior lender (as further described below). In June 2016, upon maturity of the interest rate swap on the non-recourse long-term debt, we made a payment of $104,511. On June 30, 2016, we and the senior lender entered into a new $26,000,000 facility agreement for the purpose of refinancing the long-term debt related to the Center. This refinancing transaction was consummated to coincide with redelivery of the vessel to us by Geden, renaming the vessel "Shamrock," and placing the vessel in the Stena Pooling Arrangement. During 2016, prior to this refinancing transaction, we made repayments on the outstanding balance of the long-term debt related to the Center totaling $4,770,000. On July 18, 2016, we drew down the full principal amount of the new facility to repay in full the then long-term debt balance of $26,000,000 under the prior facility. The new facility matures on March 31, 2021 and bears interest at LIBOR plus 3.50%. As part of this refinancing, we incurred loan origination fees of $390,000. As of December 31, 2016, we were in compliance with all covenants related to the non-recourse long-term debt associated with the Shamrock.
On March 29, 2011, we, through certain subsidiaries of ICON AET, borrowed $128,000,000 (the “Senior Debt”) in connection with the acquisition of the AET Vessels. The $18,000,000 of debt relating to the aframax tankers accrued interest at a rate of 3.3075% per year through June 29, 2011. The interest rate after that date was fixed pursuant to a swap agreement at 4.5550% per year through the maturity of the debt on March 29, 2014. The $110,000,000 of debt relating to the VLCCs accrued interest at a rate of 3.3075% per year through June 29, 2011. The interest rate after that date was fixed pursuant to a swap agreement at 6.3430% per year through the maturity of the debt on March 29, 2021. The lender had a security interest in the AET Vessels.
On April 5, 2011, ICON AET borrowed $22,000,000 of subordinated non-recourse long-term debt (the "Sub Debt") from Wafra Investment Advisory Group, Inc. (“Wafra”) related to the investment in the AET Vessels. The loan bore interest at 12%, was for a period of 60 months and, at ICON AET’s option, could have been extended for an additional 12 months. The loan was secured by an interest in the equity of ICON AET.
On April 20, 2012, ICON AET was notified of an event of default on the Senior Debt. Due to a change in the fair value of the AET Vessels, a provision in the Senior Debt loan agreement restricted our ability to utilize cash generated by the charters of the AET Vessels as of January 12, 2012 for purposes other than paying the Senior Debt. Charter payments in excess of the Senior Debt loan service were held in reserve by the Senior Debt lender until such time as the restriction was cured. Once cured, the reserves were to be released to us. While this restriction was in place, we were prevented from applying the charter proceeds to the Sub Debt.
On March 31, 2014, we satisfied the Senior Debt obligations in connection with the Eagle Otome and the Eagle Subaru by making a final payment of $5,682,978. This satisfaction cured any default related to these vessels associated with the Senior Debt. On April 14, 2014 and May 21, 2014, the Eagle Otome and the Eagle Subaru were sold and the proceeds were used to partially pay down the outstanding principal and interest related to the Sub Debt.
As of December 31, 2015, we had Senior Debt and Sub Debt obligations totaling $61,614,488 and $1,985,726, respectively, related to the Eagle Vermont and the Eagle Virginia. At December 31, 2015, $1,000,000, representing the minimum cash requirement under the Senior Debt loan agreement, was included in restricted cash. During the year ended December 31, 2015 and the three months ended March 31, 2016, due to curing the covenant breach that resulted in the restriction on our ability to utilize cash generated by the charters for purposes other than paying the Senior Debt, proceeds from rental income receipts that were previously restricted were used to partially pay down outstanding principal and interest under the Sub Debt with Wafra in an aggregate amount of $10,112,821 and $1,530,000, respectively. On June 8, 2016, simultaneously with the sale of 100% of the limited liability company interests of ICON AET to an unaffiliated third party, we satisfied in full the outstanding balance of the Sub Debt of $529,660. In addition, as part of the sale of interests of ICON AET, the third party purchaser assumed all outstanding Senior Debt obligations of $60,786,199 associated with the Eagle Vermont and the Eagle Virginia.
On October 31, 2013, we borrowed $5,850,000 of non-recourse long-term debt from NXT Capital, LLC (“NXT”) secured by our interest in the secured term loan to and collateral from Cenveo. The non-recourse loan was scheduled to mature on October 1, 2018 and bore interest at LIBOR plus 6.5% per year. As a result of the partial prepayment by Cenveo, on July 7, 2014, we partially paid down our non-recourse long-term debt with NXT by making a prepayment of $575,113. On September 30, 2015, as a result of the prepayment in full by Cenveo, we satisfied our non-recourse long-term debt obligations with NXT in full by making a prepayment of $3,455,535.
81
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2016
As of December 31, 2016 and 2015, we had capitalized net debt financing costs of $677,115 and $1,394,344, respectively. For the years ended December 31, 2016, 2015 and 2014, we recognized additional interest expense of $381,865, $669,846 and $374,707, respectively, related to the amortization of the debt financing costs.
The aggregate maturities of long-term debt over the next five years and thereafter were as follows at December 31, 2016:
Years Ending December 31, | |||
2017 | $ | 3,350,000 | |
2018 | 3,412,500 | ||
2019 | 3,925,000 | ||
2020 | 4,900,000 | ||
2021 | 20,275,000 | ||
Thereafter | — | ||
$ | 35,862,500 | ||
(9) | Revolving Line of Credit, Recourse |
We had an agreement with California Bank & Trust (“CB&T”) for a revolving line of credit through March 31, 2015 of up to $15,000,000 (the “Facility”), which was secured by all of our assets not subject to a first priority lien. On March 31, 2015, we extended the Facility through May 30, 2017 and the amount available under the Facility was revised to $12,500,000. As part of such amendment, we paid debt financing costs of $47,500. Amounts available under the Facility were subject to a borrowing base that was determined, subject to certain limitations, by the present value of the future receivables under certain loans and lease agreements in which we had a beneficial interest.
The interest rate on general advances under the Facility was CB&T’s prime rate. We could have elected to designate up to five advances on the outstanding principal balance of the Facility to bear interest at LIBOR plus 2.5% per year. In all instances, borrowings under the Facility were subject to an interest rate floor of 4.0% per year. In addition, we were obligated to pay an annualized 0.5% fee on unused commitments under the Facility. At December 31, 2015, we had $4,500,000 outstanding under the Facility. On July 15, 2016, we repaid the outstanding balance under the Facility of $6,000,000. On October 31, 2016, we and CB&T terminated the Facility.
As of December 31, 2015, we had capitalized net debt financing costs relating to our Facility of $31,058, which was included in other assets on our consolidated balance sheets. Upon termination of the Facility in October 2016, we fully amortized the remaining debt financing costs. For the years ended December 31, 2016, 2015 and 2014, we recognized additional interest expense of $31,058, $23,567 and $28,500, respectively, related to the amortization of debt financing costs on our Facility.
(10) | Transactions with Related Parties |
We have entered into certain agreements with our General Partner, our Investment Manager and CION Securities, whereby we pay or paid certain fees and reimbursements to these parties. CION Securities was entitled to receive a 3% dealer-manager fee from the gross proceeds from sales of our Interests.
We pay or paid our Investment Manager (i) a management fee of up to 3.50% of the gross periodic payments due and paid from our investments and (ii) acquisition fees, through the end of the operating period, equal to 2.50% of the purchase price of each investment we made in Capital Assets.
In addition, we reimbursed our General Partner and its affiliates for organizational and offering expenses incurred in connection with our organization and offering. The reimbursement of these expenses was capped at the lesser of 1.44% of the gross offering proceeds (assuming all of the Interests are sold in the offering) and the actual costs and expenses incurred by our General Partner and its affiliates. Our General Partner also has a 1% interest in our profits, losses, distributions and liquidation proceeds.
82
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2016
In addition, our General Partner and its affiliates are reimbursed for administrative expenses incurred in connection with our operations. Administrative expense reimbursements are costs incurred by our General Partner or its affiliates that are necessary to our operations. These costs include our General Partner’s and its affiliates’ legal, accounting, investor relations and operations personnel costs, as well as professional fees and other costs that are charged to us based upon the percentage of time such personnel dedicate to us. Excluded are salaries and related costs, office rent, travel expenses and other administrative costs incurred by individuals with a controlling interest in our General Partner.
We paid distributions to our General Partner of $104,550, $209,100 and $209,102 for the years ended December 31, 2016, 2015 and 2014, respectively. Our General Partner’s interest in our net loss for December 31, 2016, 2015 and 2014 was $141,043, $370,610 and $65,511, respectively.
Fees and other expenses incurred by us to our General Partner or its affiliates were as follows:
Years Ended December 31, | ||||||||||||||||
Entity | Capacity | Description | 2016 | 2015 | 2014 | |||||||||||
ICON Capital, LLC | Investment Manager | Acquisition fees (1) | $ | — | $ | 586,841 | $ | 922,917 | ||||||||
ICON Capital, LLC | Investment Manager | Management fees (2) | 869,053 | 2,033,788 | 2,478,049 | |||||||||||
ICON Capital, LLC | Investment Manager | Administrative expense reimbursements (2) | 1,519,571 | 1,597,312 | 1,675,514 | |||||||||||
$ | 2,388,624 | $ | 4,217,941 | $ | 5,076,480 | |||||||||||
(1) Amount capitalized and amortized to operations.
(2) Amount charged directly to operations.
At December 31, 2016 and 2015, we had a net payable of $204,430 and $903,809, respectively, due to our General Partner and affiliates. At December 31, 2016, the payable primarily consisted of administrative expense reimbursements due to our Investment Manager. At December 31, 2015, the payable primarily consisted of acquisition fees and administrative expense reimbursements due to our Investment Manager. In addition, during the year ended December 31, 2015, a payable of $142,500 due to Fund Twelve by our consolidated joint venture, which is 25% owned by Fund Twelve, was settled by converting it into an additional contribution to the joint venture. Our and Fund Twelve’s proportionate ownership in the joint venture did not change as a result of this conversion.
At December 31, 2016, we had a note receivable from a joint venture of $1,329,483, after netting a credit loss reserve of $1,514,498. As of December 31, 2015, the principal balance of the note receivable from the joint venture and related accrued interest was $2,614,691 and $30,396, respectively. The accrued interest was included in other assets on our consolidated balance sheets. During the three months ended December 31, 2016, the joint venture wrote down its net investment in finance lease (see Note 7). As a result, our Investment Manager assessed the collectability of the note receivable due from the joint venture by considering the fair market value of the vessel and the balance of the joint venture’s non-recourse long-term debt associated with the vessel, which has priority over our related party note receivable. A credit loss reserve of $1,514,498 was recorded based on such assessment and the related party note receivable was placed on non-accrual status during the three months ended December 31, 2016. For the years ended December 31, 2016, 2015 and 2014, we recognized interest income prior to the related party note receivable being considered impaired of $307,885, $411,509 and $407,970, respectively, of which no amount was recognized on a cash basis. The interest income is included in finance income on our consolidated statements of operations.
In June 2016, we sold our interests in certain of our subsidiaries and joint ventures to unaffiliated third parties. In connection with the sales, the third parties required that an affiliate of our Investment Manager provides bookkeeping and administrative services related to such assets for a fee.
(11) | Derivative Financial Instruments |
We entered into derivative financial instruments for purposes of hedging specific financial exposures, including movements in foreign currency exchange rates and changes in interest rates on our long-term debt. We entered into these instruments only for hedging underlying exposures. We did not hold or issue derivative financial instruments for purposes other than hedging, except for warrants, which are not hedges. Certain derivatives did not meet the established criteria to be designated as qualifying accounting hedges, even though we believed that these were effective economic hedges.
83
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2016
We recognized all derivative financial instruments as either assets or liabilities on our consolidated balance sheets and measured those instruments at fair value. Changes in the fair value of such instruments were recognized immediately in earnings unless certain criteria were met. These criteria demonstrated that the derivative was expected to be highly effective at offsetting changes in the fair value or expected cash flows of the underlying exposure at both the inception of the hedging relationship and on an ongoing basis and included an evaluation of the counterparty risk and the impact, if any, on the effectiveness of the derivative. If these criteria were met, which we documented and assessed at inception and on an ongoing basis, we recognized the changes in fair value of such instruments in accumulated other comprehensive income (loss), a component of equity on our consolidated balance sheets. Changes in the fair value of the ineffective portion of all derivatives were recognized immediately in earnings.
U.S. GAAP and relevant International Swaps and Derivatives Association, Inc. agreements permit a reporting entity that is a party to a master netting agreement to offset fair value amounts recognized for derivative instruments that have been offset under the same master netting agreement. We elected to present the fair value of derivative contracts on a gross basis on our consolidated balance sheets.
Interest Rate Risk
Our objectives in using interest rate derivatives were to add stability to interest expense and to manage our exposure to interest rate movements on our variable non-recourse debt. Our strategy to accomplish these objectives was to match the projected future cash flows with the underlying debt service. Each interest rate swap involved the receipt of floating-rate interest payments from a counterparty in exchange for us making fixed-rate interest payments over the life of the agreement without exchange of the underlying notional amount.
Counterparty Risk
We managed exposure to possible defaults on derivative financial instruments by monitoring the concentration of risk that we had with any individual bank and through the use of minimum credit quality standards for all counterparties. We did not require collateral or other security in relation to derivative financial instruments. Since it was our policy to enter into derivative contracts only with banks of internationally acknowledged standing and the fair value of our derivatives was in a liability position, we considered the counterparty risk to be remote.
Credit Risk
Derivative contracts may contain credit-risk related contingent features that can trigger a termination event, such as maintaining specified financial ratios. As of December 31, 2016, we had no derivative contracts. In the event that we would have been required to settle our obligations under the derivative contracts as of December 31, 2015, the termination value would have been $4,232,593.
Non-designated Derivatives
As of December 31, 2015, we had three interest rate swaps with DVB that were not designated and not qualifying as cash flow hedges with an aggregate notional amount of $97,070,000. These interest rate swaps were not speculative and were used to meet our objectives in using interest rate derivatives to add stability to interest expense and to manage our exposure to interest rate movements. All changes in the fair value of the interest rate swaps not designated as hedges were recorded directly in earnings, which was included in loss on derivative financial instruments on our consolidated statement of operations.
On June 8, 2016, as part of the sale of 100% of the limited liability company interests of ICON AET to an unaffiliated third party, the purchaser assumed two interest rate swaps with DVB related to the non-recourse long-term debt associated with the Eagle Vermont and the Eagle Virginia. On June 21, 2016, an interest rate swap with DVB related to the non-recourse long-term debt associated with the Center matured. As a result, as of December 31, 2016, we had no interest rate swaps on our consolidated balance sheets.
The table below presents the fair value of our derivative financial instruments as well as their classification within our consolidated balance sheets as of December 31, 2016 and 2015:
84
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2016
Liability Derivatives | |||||||||
December 31, | |||||||||
2016 | 2015 | ||||||||
Balance Sheet Location | Fair Value | Fair Value | |||||||
Derivatives not designated as hedging instruments: | |||||||||
Interest rate swaps | Derivative financial instruments | $ | — | $ | 4,005,922 | ||||
Our derivative financial instruments not designated as hedging instruments generated a loss on derivative financial instruments on the consolidated statements of operations for the years ended December 31, 2016, 2015 and 2014 of $1,211,654, $1,422,647 and $2,344,725, respectively. The losses recorded for the years ended December 31, 2016 and 2015 were related to interest rate swaps. The loss recorded for the year ended December 31, 2014 was comprised of losses of $2,298,408 relating to interest rate swaps and $46,317 relating to warrants.
(12) | Fair Value Measurements |
Assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:
· Level 1: Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
· Level 2: Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
· Level 3: Pricing inputs that are generally unobservable and are supported by little or no market data.
Financial Liabilities Measured on a Recurring Basis
Financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our Investment Manager’s assessment, on our behalf, of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the liabilities being measured and their placement within the fair value hierarchy.
As of December 31, 2016, we had no financial liabilities measured at fair value on a recurring basis.
The following table summarizes the valuation of our financial liabilities measured at fair value on a recurring basis as of December 31, 2015:
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Liabilities: | |||||||||||||||
Interest rate swaps | $ | — | $ | 4,005,922 | $ | — | $ | 4,005,922 | |||||||
Our interest rate swaps were valued using models based on readily observable market parameters for all substantial terms of our derivative financial instruments and were classified within Level 2. In accordance with U.S. GAAP, we used market prices and pricing models for fair value measurements of our derivative financial instruments.
Interest Rate Swaps
We utilized a model that incorporated common market pricing methods as well as underlying characteristics of the particular swap contract. Interest rate swaps were modeled by incorporating such inputs as the term to maturity, LIBOR swap curves, Overnight Index Swap curves and the payment rate on the fixed portion of the interest rate swap. Such inputs were classified within Level 2. Thereafter, we compared third party quotations received to our own estimate of fair value to evaluate for reasonableness. The fair value of the interest rate swaps was recorded in derivative financial instruments within our consolidated balance sheets.
Assets Measured at Fair Value on a Nonrecurring Basis
85
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2016
We are required, on a nonrecurring basis, to adjust the carrying value or provide valuation allowances for certain assets using fair value measurements. To determine the fair value when impairment indicators exist, we utilize different valuation approaches based on transaction-specific facts and circumstances to determine fair value, including, but not limited to, discounted cash flow models and the use of comparable transactions. The valuation of our financial assets, such as notes receivable or finance leases, is included below only when fair value has been measured and recorded based on the fair value of the underlying collateral.
The following tables summarize the valuation of our material financial assets measured at fair value on a nonrecurring basis, which is presented as of the date the credit loss was recorded, while the carrying value of the assets is presented as of December 31, 2016 or 2015:
Credit loss for the | |||||||||||||||||||
Carrying Value at | Fair Value at Impairment Date | Year Ended | |||||||||||||||||
December 31, 2016 (1) | Level 1 | Level 2 | Level 3 | December 31, 2016 | |||||||||||||||
Net investment in finance leases | $ | — | $ | — | $ | — | $ | 21,000,000 | (2) | $ | 2,645,555 | ||||||||
(1) Upon redelivery to us in July 2016, we reclassified the Amazing and the Fantastic from net investment in finance leases to leased equipment at cost on our consolidated balance sheet.
(2) There were nonrecurring fair value measurements in relation to the credit loss and reversal of the credit loss recorded as of March 31, 2016 and June 30, 2016, respectively, related to the Amazing and the Fantastic, of which the related leases have since been terminated (see Note 4). As of March 31, 2016 and June 30, 2016, the aggregate fair value was $14,200,000 and $21,000,000, respectively.
Our collateral dependent finance leases related to the Amazing and the Fantastic were valued using inputs that are generally unobservable and are supported by little or no market data and were classified within Level 3. For the credit loss of $2,645,555 recorded during the year ended December 31, 2016, the values of the collateral dependent finance leases related to the Amazing and the Fantastic were based on the fair values of the collateral provided by an independent third-party appraiser.
Credit loss for the | |||||||||||||||||||
Carrying Value at | Fair Value at Impairment Date | Year Ended | |||||||||||||||||
December 31, 2016 (1) | Level 1 | Level 2 | Level 3 | December 31, 2016 | |||||||||||||||
Net investment in finance leases | $ | — | $ | — | $ | — | $ | 48,000,000 | (2) | $ | 6,943,517 | ||||||||
(1) Upon redelivery to us in June 2016, we reclassified the Center from net investment in finance leases to vessel on our consolidated balance sheet.
(2) There were nonrecurring fair value measurements in relation to the credit loss as of March 31, 2016 and June 30, 2016 related to the Center, of which the related lease has since been terminated (see Note 4). As of March 31, 2016 and June 30, 2016, the fair value was $55,000,000 and $48,000,000, respectively.
Our collateral dependent finance lease related to the Center was valued using inputs that are generally unobservable and are supported by little or no market data and were classified within Level 3. For the credit loss of $6,943,517 recorded during the year ended December 31, 2016, the value of the collateral dependent finance lease related to the Center was based primarily on the fair value of the collateral provided by an independent third-party appraiser.
Carrying Value at | Fair Value at Impairment Date | Credit loss for the Year | ||||||||||||||||||
December 31, 2015 | Level 1 | Level 2 | Level 3 | Ended December 31, 2015 | ||||||||||||||||
Net investment in notes receivable | $ | — | $ | — | $ | — | $ | 806,924 | (1 | ) | $ | 2,092,154 | ||||||||
(1) There were nonrecurring fair value measurements in relation to impairments recognized as of March 31, 2015 and June 30, 2015 related to VAS. As of March 31, 2015 and June 30, 2015, the fair value was $1,811,085 and $806,924, respectively.
86
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2016
For the credit loss recorded for the year ended December 31, 2015, our collateral dependent note receivable related to VAS was valued using inputs that are generally unobservable and are supported by little or no market data and are classified within Level 3. For the credit loss of $1,087,993 recorded during the three months ended March 31, 2015, the collateral dependent note receivable related to VAS was valued based primarily on the liquidation value of the collateral provided by an independent third-party appraiser. In July 2015, we sold all of our interest in the note receivable to a third party (see Note 3). For the credit loss of $1,004,161 recorded during the three months ended June 30, 2015, our note receivable related to VAS was valued based upon the agreed sales price of our interest in the note receivable with a third party.
Assets and Liabilities for which Fair Value is Disclosed
Certain of our financial assets and liabilities, which include fixed-rate notes receivable, for which fair value is required to be disclosed, were valued using inputs that are generally unobservable and are supported by little or no market data and are therefore classified within Level 3. Under U.S. GAAP, we use projected cash flows for fair value measurements of these financial assets and liabilities. Fair value information with respect to certain of our other assets and liabilities is not separately provided since (i) U.S. GAAP does not require fair value disclosures of lease arrangements and (ii) the carrying value of financial assets and liabilities, other than lease-related investments, approximates fair value due to their short-term maturities and/or variable interest rates.
The estimated fair value of our fixed-rate notes receivable was based on the discounted value of future cash flows related to the loans at inception, adjusted for changes in certain variables, including, but not limited to, credit quality, industry, financial markets and other recent comparables. The fair value of the principal outstanding on fixed-rate notes receivable was derived using discount rates ranging between 8.00% and 25.86% as of December 31, 2016.
December 31, 2016 | |||||||
Fair Value | |||||||
Carrying Value | (Level 3) | ||||||
Principal outstanding on fixed-rate notes receivable | $ | 13,240,973 | $ | 12,972,324 | |||
(13) | Concentrations of Risk |
In the normal course of business, we are exposed to two significant types of economic risk: credit and market. Credit risk is the risk of a lessee, borrower or other counterparty’s inability or unwillingness to make contractually required payments. Concentrations of credit risk with respect to lessees, borrowers or other counterparties are dispersed across different industry segments within the United States and throughout the world.
Market risk reflects the change in the value of debt instruments, derivatives and credit facilities due to changes in interest rate spreads or other market factors. We believe that the carrying value of our investments is reasonable, taking into consideration these risks, along with estimated collateral values, payment history and other relevant information.
At times, our cash and cash equivalents may exceed insured limits. We have placed these funds in high quality institutions in order to minimize the risk of loss relating to exceeding insured limits.
For the year ended December 31, 2016, we had one lessee that accounted for 82.2% of our combined rental and finance income. Our pool revenue for the year ended December 31, 2016 was solely generated by a vessel that we placed into service by participating in a pooling arrangement.
For the year ended December 31, 2015, we had two lessees that accounted for 82.3% of our rental and finance income.
For the year ended December 31, 2014, we had two lessees that accounted for 69.4% of our rental and finance income.
As of December 31, 2016 and 2015, equipment on lease to two lessees accounted for approximately 59.2% and 77.7% of total assets, respectively.
As of December 31, 2016 and 2015, we had one lender that accounted for 90.8% and 84.2% of total liabilities, respectively.
87
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2016
(14) | Geographic Information |
Geographic information for revenue, long-lived assets and other assets deemed relatively illiquid, based on the country of origin, was as follows:
Year Ended December 31, 2016 | |||||||||||||||||||
North | |||||||||||||||||||
America | Europe | Asia | Vessels (a) | Total | |||||||||||||||
Revenue: | |||||||||||||||||||
Finance income | $ | 89,260 | $ | — | $ | — | $ | 1,037,659 | $ | 1,126,919 | |||||||||
Rental income and pool revenue | $ | — | $ | — | $ | — | $ | 11,014,858 | $ | 11,014,858 | |||||||||
Income (loss) from investment in joint ventures | $ | 577,800 | $ | — | $ | — | $ | (257,685 | ) | $ | 320,115 | ||||||||
At December 31, 2016 | |||||||||||||||||||
North | |||||||||||||||||||
America | Europe | Asia | Vessels (a) | Total | |||||||||||||||
Long-lived assets: | |||||||||||||||||||
Vessel | $ | — | $ | — | $ | — | $ | 47,023,912 | $ | 47,023,912 | |||||||||
Leased equipment at cost | $ | — | $ | — | $ | — | $ | 20,583,746 | $ | 20,583,746 | |||||||||
Net investment in notes receivable | $ | 5,138,818 | $ | — | $ | — | $ | 6,432,560 | $ | 11,571,378 | |||||||||
Note receivable from joint venture | $ | — | $ | — | $ | — | $ | 1,329,483 | $ | 1,329,483 | |||||||||
Investment in joint ventures | $ | 2,450,972 | $ | — | $ | — | $ | 6,990,829 | $ | 9,441,801 | |||||||||
(a) Vessels are generally free to trade worldwide.
Year Ended December 31, 2015 | |||||||||||||||||||
North | |||||||||||||||||||
America | Europe | Asia | Vessels (a) | Total | |||||||||||||||
Revenue: | |||||||||||||||||||
Finance income | $ | 1,205,045 | $ | — | $ | 984,108 | $ | 10,013,311 | $ | 12,202,464 | |||||||||
Rental income | $ | 2,542,652 | $ | — | $ | — | $ | 18,870,667 | $ | 21,413,319 | |||||||||
Income from investment in joint ventures | $ | 1,008,071 | $ | — | $ | — | $ | 1,466,087 | $ | 2,474,158 | |||||||||
At December 31, 2015 | |||||||||||||||||||
North | |||||||||||||||||||
America | Europe | Asia | Vessels (a) | Total | |||||||||||||||
Long-lived assets: | |||||||||||||||||||
Net investment in finance leases | $ | — | $ | — | $ | — | $ | 91,753,624 | $ | 91,753,624 | |||||||||
Leased equipment at cost | $ | 2,720,919 | $ | — | $ | — | $ | 106,074,620 | $ | 108,795,539 | |||||||||
Net investment in notes receivable | $ | 2,618,464 | $ | — | $ | 4,772,088 | $ | 5,414,751 | $ | 12,805,303 | |||||||||
Note receivable from joint venture | $ | — | $ | — | $ | — | $ | 2,614,691 | $ | 2,614,691 | |||||||||
Investment in joint ventures | $ | 7,467,149 | $ | — | $ | — | $ | 16,580,992 | $ | 24,048,141 | |||||||||
(a) Vessels are generally free to trade worldwide.
88
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2016
Year Ended December 31, 2014 | |||||||||||||||||||
North | |||||||||||||||||||
America | Europe | Asia | Vessels(a) | Total | |||||||||||||||
Revenue: | |||||||||||||||||||
Finance income | $ | 4,258,336 | $ | — | $ | 3,355,697 | $ | 5,795,207 | $ | 13,409,240 | |||||||||
Rental income | $ | 2,959,550 | $ | — | $ | — | $ | 21,044,446 | $ | 24,003,996 | |||||||||
Income from investment in joint ventures | $ | 392,208 | $ | — | $ | — | $ | 753,308 | $ | 1,145,516 | |||||||||
At December 31, 2014 | |||||||||||||||||||
North | |||||||||||||||||||
America | Europe | Asia | Vessels(a) | Total | |||||||||||||||
Long-lived assets: | |||||||||||||||||||
Net investment in finance leases | $ | — | $ | — | $ | — | $ | 118,005,785 | $ | 118,005,785 | |||||||||
Leased equipment at cost | $ | 7,886,248 | $ | — | $ | — | $ | 114,864,691 | $ | 122,750,939 | |||||||||
Net investment in notes receivable | $ | 25,021,745 | $ | — | $ | 31,976,805 | $ | 5,733,425 | $ | 62,731,975 | |||||||||
Note receivable from joint venture | $ | — | $ | — | $ | — | $ | 2,609,209 | $ | 2,609,209 | |||||||||
Investment in joint ventures | $ | 5,663,777 | $ | — | $ | — | $ | 13,075,348 | $ | 18,739,125 | |||||||||
(a) Vessels are generally free to trade worldwide.
(15) | Commitments and Contingencies |
At the time we acquire or divest our interest in Capital Assets, we may, under very limited circumstances, agree to indemnify the seller or buyer for specific contingent liabilities. Our General Partner believes that any liability of ours that may arise as a result of any such indemnification obligations may or may not have a material adverse effect on our consolidated financial condition or results of operations taken as a whole.
On September 27, 2016, we commenced a legal proceeding against Center Navigation and Geden seeking monetary damages incurred as a result of their failure to meet their payment and performance obligations under the charter and guaranty, respectively, related to the Center.
In connection with certain debt obligations, we are required to maintain restricted cash balances with certain banks. At December 31, 2016, we had restricted cash of $1,500,000.
(16) | Selected Quarterly Financial Data (unaudited) |
The following table is a summary of selected financial data by quarter:
89
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2016
(unaudited) Quarters Ended in 2016 | Year Ended December 31, | ||||||||||||||||||
March 31, | June 30, | September 30, | December 31,(*) | 2016 | |||||||||||||||
Total revenue and other income | $ | 5,881,472 | $ | 13,398,185 | $ | 3,781,800 | $ | (1,111,071 | ) | $ | 21,950,386 | ||||||||
Net (loss) income | $ | (9,945,583 | ) | $ | 2,957,510 | $ | (1,221,917 | ) | $ | (6,675,884 | ) | $ | (14,885,874 | ) | |||||
Net (loss) income attributable to Fund Fourteen allocable to limited partners | $ | (10,002,692 | ) | $ | 1,864,129 | $ | (1,209,346 | ) | $ | (4,615,301 | ) | $ | (13,963,210 | ) | |||||
Weighted average number of limited partnership interests outstanding | 258,761 | 258,761 | 258,761 | 258,761 | 258,761 | ||||||||||||||
Net (loss) income attributable to Fund Fourteen per weighted average limited partnership interest outstanding | $ | (38.66 | ) | $ | 7.20 | $ | (4.67 | ) | $ | (17.83 | ) | $ | (53.96 | ) | |||||
(*) The quarter ended December 31, 2016 includes a classification adjustment relating to the quarter ended June 30, 2016 to the "total revenue and other income" and "net income attributable to noncontrolling interests" line items of $2,012,669, which had no impact on the net loss attributable to Fund Fourteen.
(unaudited) Quarters Ended in 2015 | Year Ended December 31, | ||||||||||||||||||
March 31, | June 30, | September 30, | December 31, | 2015 | |||||||||||||||
Total revenue and other income | $ | 9,410,839 | $ | 8,672,736 | $ | 9,533,712 | $ | 8,651,283 | $ | 36,268,570 | |||||||||
Net income (loss) | $ | 130,212 | $ | (14,761,631 | ) | $ | (15,983,914 | ) | $ | (12,111,978 | ) | $ | (42,727,311 | ) | |||||
Net loss attributable to Fund Fourteen allocable to limited partners | $ | (258,586 | ) | $ | (11,047,922 | ) | $ | (14,020,167 | ) | $ | (11,363,753 | ) | $ | (36,690,428 | ) | ||||
Weighted average number of limited partnership interests outstanding | 258,761 | 258,761 | 258,761 | 258,761 | 258,761 | ||||||||||||||
Net loss attributable to Fund Fourteen per weighted average limited partnership interest outstanding | $ | (1.00 | ) | $ | (42.70 | ) | $ | (54.18 | ) | $ | (43.91 | ) | $ | (141.79 | ) | ||||
90
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(A Delaware Limited Partnership)
Notes to Consolidated Financial Statements
December 31, 2016
(unaudited) Quarters Ended in 2014 | Year Ended December 31, | ||||||||||||||||||
March 31, | June 30, | September 30, | December 31, | 2014 | |||||||||||||||
Total revenue and other income | $ | 11,483,214 | $ | 11,688,636 | $ | 9,660,173 | $ | 8,038,008 | $ | 40,870,031 | |||||||||
Net income (loss) | $ | 2,094,596 | $ | 3,961,482 | $ | 3,540,506 | $ | (13,818,393 | ) | $ | (4,221,809 | ) | |||||||
Net income (loss) attributable to Fund Fourteen allocable to limited partners | $ | 1,688,172 | $ | 2,952,158 | $ | 2,906,151 | $ | (14,032,095 | ) | $ | (6,485,614 | ) | |||||||
Weighted average number of limited partnership interests outstanding | 258,771 | 258,761 | 258,761 | 258,761 | 258,764 | ||||||||||||||
Net income (loss) attributable to Fund Fourteen per weighted average limited partnership interest outstanding | $ | 6.52 | $ | 11.41 | $ | 11.23 | $ | (54.23 | ) | $ | (25.06 | ) | |||||||
(17) | Income Tax Reconciliation (unaudited) |
At December 31, 2016 and 2015, the partners’ equity included in the consolidated financial statements totaled $76,049,020 and $100,608,283, respectively. The partners’ capital for federal income tax purposes at December 31, 2016 and 2015 totaled $105,733,512 and $170,102,452, respectively. The difference arises primarily from sales and offering expenses reported as a reduction in the limited partners’ capital accounts for financial reporting purposes, but not for federal income tax reporting purposes, and differences in credit losses, depreciation and amortization, and income or loss from investment in joint ventures between financial reporting purposes and federal income tax purposes.
The following table reconciles net loss attributable to us for financial statement reporting purposes to the net (loss) income attributable to us for federal income tax purposes:
Years Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Net loss attributable to Fund Fourteen per consolidated financial statements | $ | (14,104,253 | ) | $ | (37,061,038 | ) | $ | (6,551,125 | ) | ||
Rental income | — | (184,954 | ) | (302,289 | ) | ||||||
Depreciation and amortization | (508,358 | ) | 285,443 | 854,881 | |||||||
(Income) loss from investment in joint ventures | (4,052,012 | ) | 22,483,126 | (7,046,560 | ) | ||||||
Loss (gain) from sale of assets | — | 4,009,686 | (143,884 | ) | |||||||
Credit loss (deduction) add-back | (27,370,504 | ) | 27,028,482 | (3,042,398 | ) | ||||||
Other | (7,878,735 | ) | (4,980,846 | ) | 14,293,388 | ||||||
Net (loss) income attributable to Fund Fourteen for federal income tax purposes | $ | (53,913,862 | ) | $ | 11,579,899 | $ | (1,937,987 | ) | |||
(18) | Subsequent Event |
On January 24, 2017, Asphalt Carrier Shipping Company Limited satisfied its obligations in connection with a secured term loan scheduled to mature on December 31, 2018 by making a prepayment of $1,731,830, comprised of all outstanding principal, accrued interest and a prepayment fee of $81,400.
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Schedule II – Valuation and Qualifying Accounts | |||||||||||||||||
Description | Balance at Beginning of Year | Additions Charged to Costs and Expenses | Deduction | Balance at End of Year | |||||||||||||
Deducted from asset accounts: | |||||||||||||||||
Year Ended December 31, 2016 | |||||||||||||||||
Credit loss reserve | $ | 65,428,527 | $ | 15,875,657 | $ | 46,396,140 | (a) | $ | 34,908,044 | ||||||||
Year Ended December 31, 2015 | |||||||||||||||||
Credit loss reserve | $ | 18,348,378 | $ | 54,836,335 | $ | 7,756,186 | (b) | $ | 65,428,527 | ||||||||
Year Ended December 31, 2014 | |||||||||||||||||
Credit loss reserve | $ | 5,902,599 | $ | 15,404,574 | $ | 2,958,795 | (c) | $ | 18,348,378 | ||||||||
(a) Represents the write-off of the reserved balance of the finance leases related to the Amazing, the Fantastic and the Center.
(b) Represents the write-off of the fully reserved balance of the loans related to Western Drilling and VAS.
(c) Represents the write-off of the fully reserved balance of the loan related to Kanza Construction, Inc.
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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
In connection with the preparation of this Annual Report on Form 10-K for the year ended December 31, 2016, our General Partner carried out an evaluation, under the supervision and with the participation of the management of our General Partner, including its Co-Chief Executive Officers and the Principal Financial and Accounting Officer, of the effectiveness of the design and operation of our General Partner’s disclosure controls and procedures as of the end of the period covered by this report pursuant to the Securities Exchange Act of 1934, as amended. Based on the foregoing evaluation, the Co-Chief Executive Officers and the Principal Financial and Accounting Officer concluded that our General Partner’s disclosure controls and procedures were effective.
In designing and evaluating our General Partner’s disclosure controls and procedures, our General Partner recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our General Partner’s disclosure controls and procedures have been designed to meet reasonable assurance standards. Disclosure controls and procedures cannot detect or prevent all error and fraud. Some inherent limitations in disclosure controls and procedures include costs of implementation, faulty decision-making, simple error and mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based, in part, upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all anticipated and unanticipated future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with established policies or procedures.
Our General Partner’s Co-Chief Executive Officers and Principal Financial and Accounting Officer have determined that no weakness in disclosure controls and procedures had any material effect on the accuracy and completeness of our financial reporting and disclosure included in this Annual Report on Form 10-K.
Evaluation of internal control over financial reporting
Our General Partner is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended, as a process designed 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 and 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our General Partner assessed the effectiveness of its internal control over financial reporting as of December 31, 2016. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control — Integrated Framework” as issued in 2013.
Based on its assessment, our General Partner believes that, as of December 31, 2016, its internal control over financial reporting is effective.
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Changes in internal control over financial reporting
There were no changes in our General Partner’s internal control over financial reporting during the quarter ended December 31, 2016 that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
Item 9B. Other Information
Not applicable.
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PART III
Item 10. Directors, Executive Officers of the Registrant's General Partner and Corporate Governance
Our General Partner
Our General Partner was formed as a Delaware limited liability company in August 2008 to act as our general partner. Its principal office is located at 3 Park Avenue, 36th Floor, New York, New York 10016, and its telephone number is (212) 418-4700. The sole member of our General Partner is ICON Capital, LLC, a Delaware limited liability company (“ICON Capital”).
Name | Age | Title | ||
Michael A. Reisner | 46 | Co-Chairman, Co-Chief Executive Officer, Co-President and Director | ||
Mark Gatto | 44 | Co-Chairman, Co-Chief Executive Officer, Co-President and Director | ||
Christine H. Yap | 46 | Managing Director and Principal Financial and Accounting Officer | ||
Biographical information regarding the officers and directors of our General Partner follows the table setting forth information regarding our Investment Manager’s current executive officers and directors.
Our Investment Manager
Our Investment Manager, ICON Capital, was formed in 1985. Our Investment Manager's principal office is located at 3 Park Avenue, 36th Floor, New York, New York 10016, and its telephone number is (212) 418-4700.
In addition to the primary services related to our disposing of investments, our Investment Manager provides services relating to the day-to-day management of our investments. These services include collecting payments due from lessees, borrowers, and other counterparties; remarketing Capital Assets that are off-lease; inspecting Capital Assets; serving as a liaison with lessees, borrowers, and other counterparties; supervising equipment maintenance; and monitoring performance by lessees, borrowers, and other counterparties of their obligations, including payment of contractual payments and all operating expenses.
Name | Age | Title | ||
Michael A. Reisner | 46 | Co-Chairman, Co-Chief Executive Officer, Co-President and Director | ||
Mark Gatto | 44 | Co-Chairman, Co-Chief Executive Officer, Co-President and Director | ||
Christine H. Yap | 46 | Managing Director and Principal Financial and Accounting Officer | ||
Michael A. Reisner, Co-Chairman, Co-CEO, Co-President and Director, joined ICON Capital in 2001. Prior to purchasing the company in 2008, Mr. Reisner held various positions in the firm, including Executive Vice President and Chief Financial Officer, General Counsel and Executive Vice President of Acquisitions. Before his tenure with ICON Capital, Mr. Reisner was an attorney from 1996 to 2001 with Brodsky Altman & McMahon, LLP in New York, concentrating on commercial transactions. Mr. Reisner received a J.D. from New York Law School and a B.A. from the University of Vermont.
Mark Gatto, Co-Chairman, Co-CEO, Co-President and Director, originally joined ICON Capital in 1999. Prior to purchasing the company in 2008, Mr. Gatto held various positions in the firm, including Executive Vice President and Chief Acquisitions Officer, Executive Vice President - Business Development and Associate General Counsel. Before his tenure with ICON Capital, he was an attorney with Cella & Goldstein in New Jersey, concentrating on commercial transactions and general litigation matters. Additionally, he was Director of Player Licensing for the Topps Company and in 2003, he co-founded a specialty business consulting firm in New York City, where he served as managing partner before re-joining ICON Capital in 2005. Mr. Gatto received an M.B.A. from the W. Paul Stillman School of Business at Seton Hall University, a J.D. from Seton Hall University School of Law, and a B.S. from Montclair State University.
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Christine H. Yap, Managing Director and Principal Financial and Accounting Officer, joined ICON Capital in May 2013 as a Senior Director of Accounting and Finance and was promoted to Principal Financial and Accounting Officer in September 2014. Prior to joining ICON Capital, Ms. Yap was previously a Vice President and Fund Controller at W.P. Carey Inc. from October 2011 to December 2012. Prior to W.P. Carey, from June 1997 to October 2011, Ms. Yap was employed by PricewaterhouseCoopers LLP, rising to the level of Director. Ms. Yap received a B.S. in Accounting from Meredith College and an M.S. in Accounting from the University of Rhode Island and is a certified public accountant.
Code of Ethics
Our Investment Manager, on our behalf, has adopted a code of ethics for its Co-Chief Executive Officers and Principal Financial and Accounting Officer. The Code of Ethics is available free of charge by requesting it in writing from our Investment Manager. Our Investment Manager's address is 3 Park Avenue, 36th Floor, New York, New York 10016.
Item 11. Executive Compensation
We have no directors or officers. Our General Partner and its affiliates were paid or we accrued the following compensation and reimbursement for costs and expenses:
Years Ended December 31, | ||||||||||||||||
Entity | Capacity | Description | 2016 | 2015 | 2014 | |||||||||||
ICON Capital, LLC | Investment Manager | Acquisition fees (1) | $ | — | $ | 586,841 | $ | 922,917 | ||||||||
ICON Capital, LLC | Investment Manager | Management fees (2) | 869,053 | 2,033,788 | 2,478,049 | |||||||||||
ICON Capital, LLC | Investment Manager | Administrative expense reimbursements (2) | 1,519,571 | 1,597,312 | 1,675,514 | |||||||||||
$ | 2,388,624 | $ | 4,217,941 | $ | 5,076,480 | |||||||||||
(1) Amount capitalized and amortized to operations.
(2) Amount charged directly to operations.
Our General Partner also has a 1% interest in our profits, losses, distributions and liquidation proceeds. We paid distributions to our General Partner of $104,550, $209,100 and $209,102 for the years ended December 31, 2016, 2015 and 2014, respectively. Our General Partner’s interest in our net loss for December 31, 2016, 2015 and 2014 was $141,043, $370,610 and $65,511, respectively.
Item 12. Security Ownership of Certain Beneficial Owners and the General Partner and Related Security Holder Matters
(a) We do not have any securities authorized for issuance under any equity compensation plan. No person of record owns, or is known by us to own, beneficially more than 5% of any class of our securities.
(b) As of March 27, 2017, no directors or officers of our General Partner own any of our equity securities.
(c) Neither we nor our General Partner are aware of any arrangements with respect to our securities, the operation of which may at a subsequent date result in a change of control of us.
Item 13. Certain Relationships and Related Transactions, and Director Independence
See “Item 11. Executive Compensation” for a discussion of our related party transactions. See Notes 7 and 10 to our consolidated financial statements for a discussion of our investment in joint ventures and transactions with related parties, respectively.
Because we are not listed on any national securities exchange or inter-dealer quotation system, we have elected to use the Nasdaq Stock Market’s definition of “independent director” in evaluating whether any of our General Partner’s directors are independent. Under this definition, the board of directors of our General Partner has determined that our General Partner does not have any independent directors, nor are we required to have any.
Item 14. Principal Accounting Fees and Services
During the years ended December 31, 2016 and 2015, our auditors provided audit services relating to our Annual Reports on Form 10-K and our Quarterly Reports on Form 10-Q. Additionally, our auditors provided other services in the form of tax
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compliance work. The following table presents the fees for both audit and non-audit services rendered by Ernst & Young LLP for the years ended December 31, 2016 and 2015:
2016 | 2015 | ||||||
Audit fees | $ | 366,867 | $ | 517,436 | |||
Tax fees | 309,662 | 292,978 | |||||
$ | 676,529 | $ | 810,414 | ||||
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PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) 1. Financial Statements
See index to consolidated financial statements included as Item 8 to this Annual Report on Form 10-K hereof.
2. Financial Statement Schedules
Financial Statement Schedule II – Valuation and Qualifying Accounts is filed with this Annual Report on Form 10-K. Schedules not listed above have been omitted because they are not applicable or the information required to be set forth therein is included in the financial statements or notes thereto.
3. Exhibits:
3.1 Certificate of Limited Partnership of Registrant (Incorporated by reference to Exhibit 3.1 to Registrant’s Registration Statement on Form S-1 filed with the SEC on October 3, 2008 (File No. 333-153849)).
4.1 Limited Partnership Agreement of Registrant (Incorporated by reference to Exhibit A to Registrant’s Prospectus filed with the SEC on May 18, 2009 (File No. 333-153849)).
10.1 Investment Management Agreement, by and between ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P. and ICON Capital Corp., dated as of May 18, 2009 (Incorporated by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2009, filed August 13, 2009).
10.2 Commercial Loan Agreement, by and between California Bank & Trust and ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P., dated as of May 10, 2011 (Incorporated by reference to Exhibit 10.8 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011, filed May 16, 2011).
10.3 Loan Modification Agreement, dated as of March 31, 2013, by and between California Bank & Trust and ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P (Incorporated by reference to Exhibit 10.2 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2012, filed March 26, 2013).
10.4 Loan Modification Agreement, by and between California Bank & Trust and ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P., dated as of March 31, 2015 (Incorporated by reference to Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015, filed on May 15, 2015).
31.1 Rule 13a-14(a)/15d-14(a) Certification of Co-Chief Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Co-Chief Executive Officer.
31.3 Rule 13a-14(a)/15d-14(a) Certification of Principal Financial and Accounting Officer.
32.1 Certification of Co-Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Co-Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.3 Certification of Principal Financial and Accounting Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS | XBRL Instance Document. |
101.SCH | XBRL Taxonomy Extension Schema Document. |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB | XBRL Taxonomy Extension Labels Linkbase Document. |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. |
Item 16. Form 10-K Summary
None.
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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.
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(Registrant)
By: ICON GP 14, LLC
(General Partner of the Registrant)
March 30, 2017
By: /s/ Michael A. Reisner
Michael A. Reisner
Co-Chief Executive Officer and Co-President
(Co-Principal Executive Officer)
By: /s/ Mark Gatto
Mark Gatto
Co-Chief Executive Officer and Co-President
(Co-Principal Executive 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.
ICON Equipment and Corporate Infrastructure Fund Fourteen, L.P.
(Registrant)
By: ICON GP 14, LLC
(General Partner of the Registrant)
March 30, 2017
By: /s/ Michael A. Reisner
Michael A. Reisner
Co-Chief Executive Officer, Co-President and Director
(Co-Principal Executive Officer)
By: /s/ Mark Gatto
Mark Gatto
Co-Chief Executive Officer, Co-President and Director
(Co-Principal Executive Officer)
By: /s/ Christine H. Yap
Christine H. Yap
Managing Director
(Principal Financial and Accounting Officer)
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