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Office of Foreign Assets Control (OFAC)

Posted: March 27th, 2018

The Office of Foreign Assets Control (OFAC) of the US Department of the Treasury administers and enforces economic and trade sanctions based on United States foreign policy and national security goals against targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy or economy of the United States. Many of OFAC’s sanctions are based on United Nations and other international mandates, are multilateral in scope, and involve close cooperation with allied governments.

The publicly listed real estate investment trust Douglas Emmett (NYSE: DEI) filed a 2017 annual report with the Securities and Exchange Commission (SEC) in February of 2018. In the annual report, Douglas Emmett mentioned OFAC as part of its risk disclosure. It was just the second time that Douglas Emmett has mentioned the Office of Foreign Assets Control in an annual report to shareholders (the first time was in the 2016 10-K).

The disclosure reads as follows:

We face risks associated with contractual counterparties being designated “Prohibited Persons” by the Office of Foreign Assets Control.

The OFAC of the US Department of the Treasury maintains a list of persons designated as terrorists or who are otherwise blocked or banned (“Prohibited Persons”). The OFAC regulations and other laws prohibit conducting business or engaging in transactions with Prohibited Persons. Some of our agreements require us and the other party to comply with the OFAC Requirements. If a party with whom we contract is placed on the OFAC list we may be required by the OFAC regulations to terminate the agreement, which could result in a losses or a damage claim by the other party that the termination was wrongful.

No further elaboration was given by Douglas Emmett.

Douglas Emmett has previously mentioned OFAC in only 13 other stock filings according to a search of the SEC’s Edgar database, often to say that Douglas Emmett and its partners were not involved with any OFAC-sanctioned parties, or to say that the company must abide by anti-money laundering laws and OFAC sanctions per American law. However, the disclosure quoted above was only the second known expression of risk by Douglas Emmett pertaining to OFAC (again, the first was the 2016 10-K).

New Business Variable

What about Douglas Emmett’s operating practices changed where OFAC was featured under the company’s “Risk Factors” beginning in 2016?

One noteworthy change was DE’s joint venture with the Qatari sovereign wealth fund called QIA. Douglas Emmett and QIA made their first joint acquisition of the Westwood Office portfolio in March 2016 for $1.34 billion. In an associated 8-K filing with the SEC, dated 4 March 2016, Douglas Emmett explained:

Neither Buyer nor, to Buyer’s Knowledge, its Affiliates, is acting, directly or indirectly, on behalf of terrorists, terrorist organizations or narcotics traffickers, including those persons or entities that appear on the Annex to the Executive Order, or are included on any relevant lists maintained by the Office of Foreign Assets Control of U.S. Department of Treasury, U.S. Department of State, or other U.S. government agencies, all as may be amended from time to time.

The “buyer” in the text above refers to a joint venture between Douglas Emmett and QIA. And the “Executive Order” refers to Executive Order No. 13224 signed by George W. Bush in September of 2001 which mandates the OFAC to keep a list of prohibited persons called “Specially Designated Nationals” with whom Americans are not allowed to conduct business.

Based on the 8-K and supplementary public records, was able to determine that in March 2016, QIA and Douglas Emmett via a joint venture vehicle (JV) purchased the Westwood Office portfolio in Los Angeles—a 1.7 million square foot Class A office portfolio consisting in four buildings. The purchase price was $1.34 billion, consisting of $760 million in the partners’ capital and a $580 million loan. The seller was Blackstone Group LP. The deal marks one of the largest office sales on the West Coast in recent years.

The Westwood Offices are outlined below.

Address Purchase Date JV Vehicle Square Feet (Type) Value
10940 Wilshire Blvd March 2016 DE Park Avenue 10940 LLC 581,384 SF (office property) $168M purchase
10880 Wilshire Blvd March 2016 DE Park Avenue 10940 LLC 581,384 SF (office property) $433.5M purchase
1100 Glendon Ave (Westwood Center) March 2016 DE Park Avenue 10940 LLC 332,163 (office property) $217M Purchase
10960 Wilshire Blvd March 2016 DE Park Avenue 10960 LLC 590,558 SF (office property) $476.5 purchase

For its part, Douglas Emmett manages the office portfolio. And, according to SEC filings, Douglas Emmett plans to retain 20 percent or 30 percent equity in the office portfolio.

Because Douglas Emmett’s new partnership with QIA fell within the reporting years 2016, and because Douglass Emmett’s 8-K about the new joint venture with QIA emphasized OFAC compliance, this would suggest that the risk warning pertaining to OFAC may stem from Douglas Emmett’s relationship with the Qatar Investment Authority.

In June 2017, the Middle East erupted in controversy as Qatar’s powerful neighbors including Saudi Arabia and the United Arab Emirates broke off diplomatic, commercial, and financial ties to Qatar. The measure even went so far as to cut off land, air and sea travel to and from Qatar. Read more HERE.

We will continue to review Douglas Emmett’s public filings and filings submitted by the QIA across numerous international jurisdictions.