Explain why some of the interest paid by Morguard is expensed on the income statement and some of the interest is capitalized on the balance sheet?

What percentage of total interest incurred was capitalized?

Consider the criteria for capitalizing interest expense

BALANCE SHEETS In thousands of Canadian dollars As at December 31 Note 2018 2017 ASSETS Non-current assets Real estate properties $9,645,596 $8,655,651 Hotel properties 666,078 669,026 Equity-accounted and other fund investments 281,464 280,853 Other assets 285,103 246,440 10,878,241 ,851,970 Current assets Mortgages and loans receivable 10 1,686 27,257 Amounts receivable 76,879 77,227 Prepaid expenses and other 15.551 21,082 Cash 110,401 134,450 204,517 260,016 $11,082,758 $10,111,986 LIABILITIES AND EQUITY Non-current liabilities Mortgages payable 11 $3,573,185 $3,440,069 Unsecured debentures 12 597,697 398, 152 Convertible debentures 13 225,936 147,701 Morguard Residential REIT Units 14 417,481 365,438 Deferred income tax liabilities 24 717,943 646,884 5,532,242 4,998,244 Current liabilities Mortgages payable 11 789,516 615,959 Unsecured debentures 12 134,755 Convertible debentures 13 2,063 88,674 Construction financing payable 15 36,476 Loans payable 23 60,309 Accounts payable and accrued liabilities 16 244,670 253,859 Bank indebtedness 17 225,160 49,650 1,321,718 1,179,373 Total liabilities 6.853.960 6,177,617 EQUITY Shareholders' equity 3,431,366 3,082,673 Non-controlling interest 797,432 851,696 Total equity 4,228,798 3,934,369 $11,082,758 $10,111,986NOTE 20 INTEREST EXPENSE The components of interest expense are as follows: For the years ended December 31 2018 2017 Interest on mortgages $159,717 $155,893 Interest on Unsecured Debentures (Note 12) 27,063 16,124 Interest on convertible debentures, net of accretion (Note 13) 14,742 21,417 Interest on bank indebtedness 6,275 2,614 Interest on construction loans 756 1,249 Interest on loans payable and other 4,115 696 Amortization of mark-to-market adjustments on mortgages, net (7,480) (10,640) Amortization of deferred financing costs 6,971 6,390 212,159 193,743 Less: Interest capitalized to properties under development (1,695) (1,778) $210,464 $191,965STATEMENTS OF INCOME In thousands of Canadian dollars, except per common share amounts For the years ended December 31 Note 2018 2017 Revenue from real estate properties 19 $841,497 $790,535 Revenue from hotel properties 19 237,938 237,116 Land rent arbitration settlement 28 17,250 Property operating expenses Property operating costs (184,986) (174,440) Utilities (57,160) (52,986) Realty taxes (126,076) (1 10,644) Hotel operating expenses (180,488) (175,714) Net operating income 547,975 513,867 OTHER REVENUE Management and advisory fees 19 62,096 71,786 Interest and other income 10.947 8,907 Sales of product and land 5,400 5,430 78,443 86, 123 EXPENSES Interest 20 210,464 191,965 Property management and corporate 92,665 82,862 Cost of sales of product and land 3,698 3,524 Amortization of hotel properties 6 25,342 26,640 Amortization of capital assets and other 6,518 4,228 Provision for impairment 6 29,668 24,590 368,355 333,809 OTHER INCOME (EXPENSE) Fair value gain, net 21 167,235 139,898 Equity loss from investments (22,654) (10,227) Other income 22 13,424 3,885 158,005 133,556 Income before income taxes 416.06 399,737 Provision for income taxes 24 Current 15,216 21,187 Deferred 56,794 34,183 72,010 55,370 Net income for the year $344,058 $344,367Net income attributable to: Common shareholders $319,851 $310,120 Non-controlling interest 24.207 34,247 $344,058 $344,367 Net income per common share attributable to: Common shareholders - basic and diluted 25 $27.96 $26.10STATEMENTS OF COMPREHENSIVE INCOME In thousands of Canadian dollars For the years ended December 31 Note 2018 2017 Net income for the year $344,058 $344,367 OTHER COMPREHENSIVE INCOME (LOSS) Items that may be reclassified subsequently to net income: Unrealized gain on investments in real estate funds 194 Unrealized foreign currency translation gain (loss) 112,621 (81,432) Gain on interest rate swap agreement 161 665 112,782 (80,573) Deferred income tax recovery 467 2,429 113,249 (78,144) Items that will not be reclassified subsequently to net income: Actuarial loss on defined benefit pension plans 27 (6,721) (2, 174) Deferred income tax recovery 1,796 283 (4,925) (1,891) Other comprehensive income (loss) 108,324 (80,035) Total comprehensive income for the year $452,382 $264,332 Total comprehensive income attributable to: Common shareholders $420,538 $232,383 Non-controlling interest 31,844 31,949 $452,382 $264,332 See accompanying notes to the consolidated financial statements.NOTE 5 REAL ESTATE PROPERTIES Real estate properties consist of the following: As at December 31 2018 2017 Income producing properties $9,511,302 $8,563,284 Properties under development 56,717 29,729 Land held for development 77,577 62,638 $9,645,596 $8,655,651 Reconciliation of the carrying amounts for real estate properties at the beginning and end of the current financial year are set out below: Income Properties Land Producing Under Held for Properties Development Development Total Balance as at December 31, 2017 $8,563,284 $29,729 $62,638 $8,655,651 Additions: Acquisitions and investments 340,670 14,866 Capital expenditures 77,817 I 355,536 77,817 Development expenditures 57,671 1,794 59,465 Tenant improvements, incentives and leasing commissions 32,724 32,724 Transfers 46,385 (46,385) 5.483 5,483 Dispositions (9,718) (9,718) Fair value gain (loss), net 232,883 (155) 6,245 238,973 Foreign currency translation 226,088 991 1,417 228,496 Other 1,169 1,169 Balance as at December 31, 2018 $9,511,302 $56,717 $77,577 $9,645,596Capitalization Rates As at December 31, 2018 and 2017, the Company had its portfolio internally appraised. In addition, the Company's U.S. portfolio is appraised by independent U.S. real estate appraisal firms on a three-year cycle. The Company determined the fair value of each income producing property based upon, among other things, rental income from current leases and assumptions about rental income from future leases reflecting market conditions at the applicable consolidated balance sheet dates, less future cash outflow pertaining to the respective leases. The Company's multi-suite residential properties are appraised using the direct capitalization of income method. The retail, office and industrial properties are appraised using a number of approaches that typically include a discounted cash flow analysis, a direct capitalization of income method and a direct comparison approach. The discounted cash flow analysis is primarily based on discounting the expected future cash flows, generally over a term of 10 years, including a terminal value based on the application of a capitalization rate to estimated year 11 cash flows. Using the direct capitalization approach, the multi-suite residential, retail, office and industrial properties were valued using capitalization rates in the range of 3.5% to 12.0% (December 31, 2017 - 3.8% to 11.5%), resulting in an overall weighted average capitalization rate of 5.3% (December 31, 2017 - 5.7%). The stabilized capitalization rates by asset type are set out in the following table: December 31, 2018 December 31, 2017 Occupancy Capitalization Occupancy Capitalization As at Rates Rates Rates Rates Weighted Weighted Max. Min. Max. Min. Average Max. Min. Max. Min. Average Multi-suite residential 98.0% 90.0% 7.8% 3.5% 4.5% 98.0% 90.0% 8.0% 3.8% 4.7% Retail 100.0% 80.0% 12.0% 5.3% 6.4% 100.0% 80.0% 11.5% 5.0% 6.6% Office 100.0% 90.0% 7.5% 4.3% 6.0% 100.0% 90.0% 9.0% 4.5% 6.2% Industrial 100.0% 95.0% 7.5% 5.0% 5.8% 100.0% 95.0% 7.3% 5.0% 6.4%The key valuation metrics used in the discounted cash flow method for the retail, office and industrial properties are set out in the following table: As at December 31, 2018 December 31, 2017 Weighted Weighted Maximum Minimum Average Maximum Minimum Average Retail Discount rate 10.3% 6.0% 6.9% 10.3% 6.0% 7.0% Terminal cap rate 9.5% 5.3% 5.9% 9.5% 5.3% 6.1% Office Discount rate 8.0% 5.1% 6.4% 9.3% 5.5% 6.6% Terminal cap rate 7.3% 4.3% 5.7% 8.5% 4.5% 5.9% Industrial Discount rate 7.3% 6.0% 6.5% 7.5% 6.0% 6.9% Terminal cap rate 6.8% 5.0% 5.8% 7.0% 5.0% 6.3% Fair values are most sensitive to changes in discount rates, capitalization rates and stabilized or forecast net operating income. Generally, an increase in stabilized net operating income will result in an increase in the fair value of the income producing properties, and an increase in capitalization rates will result in a decrease in the fair value of the properties. The capitalization rate magnifies the effect of a change in stabilized net operating income, with a lower capitalization rate resulting in a greater impact on the fair value of the property than a higher capitalization rate. If the weighted average stabilized capitalization rates were to increase or decrease by 25 basis points (assuming no change in stabilized net operating income), the value of the income producing properties as at December 31, 2018, would decrease by $426,998 and increase by $471,596, respectively. The sensitivity of the fair values of the Company's income producing properties as at December 31, 2018 and 2017, is set out in the table below: As at December 31, 2018 December 31, 2017 Change in capitalization rate: 0.25% (0.25%) 0.25% (0.25%) Multi-suite residential ($241,337) $270,194 ($192,310) $213, 190 Retail (94,615) 102,416 (87,742) 94,632 Office (84,780) 92,160 (77,025) 83,518 Industrial (6,266) 6,826 (3,791) 4,099 ($426,998) $471,596 ($360,868) $395,439NOTE 6 HOTEL PROPERTIES Hotel properties consist of the following: Accumulated As at December 31, 2018 Net Book Cost Impairment Accumulated Provision Amortization Value Land $97,111 ($2,407) $- $94,704 Buildings 590,882 (46,382) (34,423) 510,077 Fumiture, fixtures, equipment and other 100,419 (5,469) (33,653) 61,297 $788,412 ($54,258) ($68,076) $666,078 Accumulated As at December 31, 2017 Cost Impairment Accumulated Net Book Provision Amortization Value Land $91,984 ($2,407) $- $89,577 Buildings 533,313 (19,483) (21,462) 492,368 Fumiture, fixtures, equipment and other 83,788 (2,700) (21,272) 59,816 $709,085 ($24,590) ($42,734) $641,761 Hotel property under development 27,265 27,265 $736,350 ($24,590) ($42,734) $669,026Transactions in hotel properties for the year ended December 31, 2018, are summarized as follows: Opening Closing As at December 31, 2018 Net Book Impairment Value Additions Provision Transfer Amortization Net Book Value Land $89,577 S- $- $5,127 $- $94,704 Buildings 492,368 8,082 (26,899) 49,487 (12,961) 510,077 Fumiture, fixtures, equipment and other 59,816 8,947 (2,769) 7,684 (12,381) 61,297 $641,761 $17,029 ($29,668) $62,298 ($25,342) $666,078 Hotel property under development 27,265 35,033 (62,298) $669,026 $52,062 ($29,668) $- ($25,342) $666,078 Transactions in hotel properties for the year ended December 31, 2017, are summarized as follows: Opening Net Book Impairment Closing As at December 31, 2017 Additions Provision Disposals Amortization Net Book Value Value Land $93,334 $- ($2,407) ($1,350) $- $89,577 Buildings 522,189 10,412 (19,483) (7,245) (13,505) 492,368 Fumiture, fixtures, equipment and other 70,001 6,374 (2,700) (724) (13,135) 59,816 $685,524 $16,786 ($24,590) ($9,319) ($26,640) $641,761 Hotel property under development 20,139 7,126 27,265 $705,663 $23,912 ($24,590) ($9,319) ($26,640) $669,026 On December 28, 2018, the Company reached practical completion of the re-development of the dual branded Hilton Garden Inn and Homewood Suites by Hilton in downtown Ottawa, Ontario, and the hotel was transferred from properties under development to hotel properties