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EX-32.2 - Lightstone Value Plus Real Estate Investment Trust, Inc.v166174_ex32-2.htm
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EX-31.1 - Lightstone Value Plus Real Estate Investment Trust, Inc.v166174_ex31-1.htm

SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

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 333-117367
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.
(Exact Name of Registrant as Specified in Its Charter)

Maryland
 
20-1237795
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)

1985 Cedar Bridge Avenue, Suite 1
   
Lakewood, New Jersey
 
08701
(Address of Principal Executive Offices)
 
(Zip Code)

(732) 367-0129
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 
Yes    ¨     No   þ  
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer   ¨
 
Accelerated filer   ¨
 
Non-accelerated filer    þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ¨  No þ

As of November 6, 2009, there were 31.5 million outstanding shares of common stock of Lightstone Value Plus Real Estate Investment Trust, Inc., including shares issued pursuant to the dividend reinvestment plan.  

 
 

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

INDEX
 
 
    
Page
PART I
FINANCIAL INFORMATION
    
 
   
   
Item 1.
Financial Statements
    
     
 
Consolidated Balance Sheets as of September 30, 2009 (unaudited) and December 31, 2008
3
     
 
Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2009 and 2008
4
 
   
   
 
Consolidated Statement of Stockholders’ Equity and Other Comprehensive Loss (unaudited) for the Nine Months Ended September 30, 2009
5
 
   
   
 
Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2009 and 2008
6
     
 
Notes to Consolidated Financial Statements
7
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
34
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
51
     
Item 4T.
Controls and Procedures
52
     
PART II
OTHER INFORMATION
    
     
Item 1.
Legal Proceedings
52
     
Item 1A.
Risk Factors
53
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
54
     
Item 3.
Defaults Upon Senior Securities
55
     
Item 4.
Submission of Matters to a Vote of Security Holders
55
     
Item 5.
Other Information
55
   
 
Item 6.
Exhibits
56

 
2

 

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

  
 
September 30, 2009
   
December 31, 2008
 
   
(unaudited)
       
Assets
           
Investment property:
           
Land 
  $ 55,979,164     $ 65,050,624  
Building
    231,832,643       273,255,468  
Construction in progress
    347,181       3,318,021  
                 
Gross investment property
    288,158,988       341,624,113  
Less accumulated depreciation
    (14,051,674 )     (17,287,242 )
Net investment property
    274,107,314       324,336,871  
                 
Investments in unconsolidated affiliated real estate entities   
    132,333,242       21,375,908  
Investment in affiliate, at cost   
    8,283,336       10,150,000  
Cash and cash equivalents   
    22,705,537       66,106,067  
Marketable securities
    879,996       11,450,565  
Restricted escrows
    7,185,113       7,773,705  
Tenant accounts receivable, net
    1,203,686       2,073,756  
Other accounts receivable, primarily escrow receivable
    17,763       1,238,894  
Note receivable, related party
    -       48,500,000  
Acquired in-place lease intangibles (net of accumulated amortization of $1,924,752 and $1,849,234, respectively)
    732,522       1,141,538  
Acquired above market lease intangibles (net of accumulated amortization of $813,675 and $710,720, respectively)
    274,155       439,939  
Deferred intangible leasing costs (net of accumulated amortization of $919,288 and $832,824, respectively)
    459,954       695,016  
Deferred leasing costs (net of accumulated amortization of $288,268 and $158,792, respectively)
    1,247,013       1,019,225  
Deferred financing costs (net of accumulated amortization of $931,225 and $634,612, respectively)
    1,461,347       1,723,093  
Interest receivable from related parties
    1,001,884       1,815,279  
Prepaid expenses and other assets
    2,776,162       1,969,384  
                 
Total Assets
  $ 454,669,024     $ 501,809,240  
  
               
Liabilities and Equity
               
Mortgage payable
  $ 237,287,774     $ 239,243,982  
Note payable
    7,358,445       7,416,941  
Accounts payable and accrued expenses
    4,489,283       8,518,275  
Due to sponsor and other affiliates
    11,696,163       1,145,890  
Tenant allowances and deposits payable
    1,255,732       5,673,760  
Distributions payable
    5,519,406       -  
Prepaid rental revenues
    1,291,907       978,648  
Acquired below market lease intangibles (net of accumulated amortization of $2,476,823 and $2,258,021, respectively)
    752,008       1,204,434  
                 
Total Liabilities
    269,650,718       264,181,930  
                 
Commitments and contingencies
               
                 
Equity
               
Company's stockholders' equity:
               
                 
Preferred shares, $1 Par value, 10,000,000 shares authorized,  none outstanding
    -       -  
Common stock, $0.01 par value; 60,000,000 shares authorized, 31,279,146 and 30,985,544 shares issued and outstanding, respectively   
    312,791       309,855  
Additional paid-in-capital   
    278,408,582       275,589,300  
Accumulated other comprehensive gain/(loss)
    364,582       (4,212,454 )
Accumulated distributions in addition to net loss   
    (135,255,187 )     (57,173,374 )
Total Company's stockholder’s equity
    143,830,768       214,513,327  
Noncontrolling interests
    41,187,538       23,113,983  
Total Equity
    185,018,306       237,627,310  
Total Liabilities and Equity   
  $ 454,669,024     $ 501,809,240  

The Company’s notes are an integral part of these consolidated financial statements.

 
3

 

PART I. FINANCIAL INFORMATION, CONTINUED:  
ITEM 1. FINANCIAL STATEMENTS, CONTINUED:
 
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)  

   
Three Months Ended
   
Nine Months Ended
 
   
September 30, 2009
   
September 30,
2008
   
September 30,
2009
 
September 30, 2008
 
                         
Revenues:
                       
Rental income
  $ 8,863,816     $ 9,191,180     $ 27,326,273     $ 26,841,456  
Tenant recovery income
    1,277,035       1,075,673       3,684,443       3,136,626  
                                 
Total revenues
    10,140,851       10,266,853       31,010,716       29,978,082  
                                 
Expenses:
                               
Property operating expenses
    4,029,502       4,712,463       11,907,805       12,951,925  
Real estate taxes
    1,093,325       1,030,937       3,319,905       3,117,564  
General and administrative costs
    1,891,522       1,335,185       5,818,245       8,299,384  
Impairment of long lived assets, net of gain on disposal
    44,960,800       -       44,960,800       -  
Depreciation and amortization
    2,694,337       2,136,873       7,568,009       6,539,587  
                                  
Total operating expenses
    54,669,486       9,215,458       73,574,764       30,908,460  
                                 
Operating (loss) income
    (44,528,635 )     1,051,395       (42,564,048 )     (930,378 )
                                 
Other income, net
    145,453       120,873       510,474       385,512  
Interest income
    1,038,464       1,550,433       3,076,695       3,528,156  
Interest expense
    (3,653,893 )     (3,492,802 )     (10,816,747 )     (10,473,022 )
Gain/(loss) on sale of marketable securities
    1,187,620       (7,454 )     343,724       (7,454 )
Other than temporary impairment - marketable securities
    -       (9,733,015 )     (3,373,716 )     (9,733,015 )
Loss from investments in unconsolidated affiliated real estate entities
    (3,508,079 )     (676,194 )     (4,248,298 )     (2,236,511 )
                                 
                                 
Net loss
    (49,319,070 )     (11,186,764 )     (57,071,916 )     (19,466,712 )
                                 
Less: net loss attributable to noncontrolling interests
    673,924       173       767,040       322  
                                 
                                 
Net loss attributable to Company's common shares
  $ (48,645,146 )   $ (11,186,591 )   $ (56,304,876 )   $ (19,466,390 )
                                 
Net loss per Company's common share, basic and diluted
  $ (1.55 )   $ (0.44 )   $ (1.80 )   $ (0.97 )
                                 
Weighted average number of common shares outstanding, basic and diluted
    31,297,445       25,464,696       31,204,618       20,058,683  

The Company’s notes are an integral part of these consolidated financial statements.

 
4

 

PART I. FINANCIAL INFORMATION:    
ITEM 1. FINANCIAL STATEMENTS.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND OTHER COMPREHENSIVE GAIN/(LOSS)
(UNAUDITED)

   
Preferred Shares
   
Common Shares
                               
   
Preferred
Shares
   
Amount
   
Common
Shares
   
Amount
   
Additional
Paid-In
Capital
   
Accumulated Other
Comprehensive
Gain/(Loss)
   
Accumulated
Distributions in
Excess of Net Loss
   
Total
Noncontrolling
Interests
   
Total
Equity
 
BALANCE,    December 31, 2008
    -     $ -       30,985,544     $ 309,855     $ 275,589,300     $ (4,212,454 )   $ (57,173,374 )   $ 23,113,983     $ 237,627,310  
                                                                         
Comprehensive loss:
                                                                       
Net loss
    -       -       -       -       -        -       (56,304,876 )     (767,040 )     (57,071,916 )
                                                                         
Unrealized gain on available for sale securities
    -       -       -       -       -        499,314       -       49,395       548,709  
                                                                         
Reclassification adjustment for loss realized in net loss
    -       -       -       -       -        4,077,722       -       (122 )     4,077,600  
Total comprehensive loss
                                                                    (52,445,607 )
                                                                         
Distributions declared
    -       -       -       -       -        -       (21,776,937 )     -       (21,776,937 )
                                                                         
Distributions paid to noncontrolling interests
    -       -       -       -       -        -       -       (3,200,003 )     (3,200,003 )
Proceeds from special general partner interest units
    -       -       -       -       -        -       -       6,982,534       6,982,534  
                                                                         
Redemption and cancellation of shares
    -       -       (453,167 )     (4,532 )     (4,267,550 )                     -       (4,272,082 )
Shares issued from distribution reinvestment program
    -       -       746,769       7,468       7,086,832        -       -       -       7,094,300  
                                                                         
Issuance of equity in subsidiary in exchange for payment of acquisition fee (see Note 13)
    -       -       -       -       -        -       -       6,878,087       6,878,087  
                                                                         
Units issued to noncontrolling interest in exchange for investment in unconsolidated affiliated real estate entity
    -       -       -       -       -        -       -       78,988,411       78,988,411  
Note receivable secured by noncontrolling interest units
    -       -       -       -       -        -       -       (70,857,707 )     (70,857,707 )
BALANCE,  September 30, 2009
    -     $ -       31,279,146     $ 312,791     $ 278,408,582     $ 364,582     $ (135,255,187 )   $ 41,187,538     $ 185,018,306  

The Company’s notes are an integral part of these consolidated financial statements.

 
5

 

PART I. FINANCIAL INFORMATION, CONTINUED:
ITEM 1. FINANCIAL STATEMENTS, CONTINUED:
 
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

   
Nine Months Ended
   
Nine Months Ended
 
   
September 30, 2009
   
September 30, 2008
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
  $ (57,071,916 )   $ (19,466,712 )
Adjustments to reconcile net loss to net cash  provided by operating activities:
               
Depreciation and amortization
    7,140,070       6,100,190  
Impairment of long lived assets, net of gain on disposal
    44,960,800       -  
(Gain)/loss on sale of marketable securities
    (343,724 )     7,454  
Realized loss on impairment of marketable securities
    3,373,716       9,733,015  
Amortization of deferred financing costs
    284,657       368,625  
Amortization of deferred leasing costs
    427,939       439,397  
Amortization of above and below-market lease intangibles
    (286,641 )     (632,518 )
Equity in loss from investments in unconsolidated affiliated real estate entities
    4,248,298       2,236,511  
Provision for bad debts
    785,987       990,613  
Changes in assets and liabilities:
               
Decrease/(increase) in prepaid expenses and other assets
    154,085       (1,567,703 )
Decrease/(increase) in tenant and other accounts receivable
    980,160       (1,032,029 )
Increase in tenant allowance and security deposits payable
    250,023       31,335  
Decrease)/increase in accounts payable and accrued expenses
    (2,450,934 )     9,882,151  
Increase/(decrease) in due to sponsor
    132,485       (3,209,190 )
(Decrease)/increase in prepaid rental revenues
    313,259       (26,645 )
Net cash provided by operating activities
    2,898,264       3,854,494  
                 
CASH FLOWS FROM INVESTING ACTIVITIES: 
               
Purchase of investment property, net
    (7,875,155 )     (22,656,237 )
Purchase of marketable securities
    -       (9,290,458 )
Proceeds from sale of marketable securities
    12,166,886       83,562  
Issuance of note receivables, related party
    -       (49,500,000 )
Investment in unconsolidated affiliated real estate entity
    -       (10,150,000 )
Distribution from investments in unconsolidated affiliate
    1,866,664       -  
Purchase of investment in unconsolidated affiliated real estate entity
    (18,997,677 )     -  
Funding of restricted escrows
    588,592       (407,832 )
Net cash used in investing activities
    (12,250,690 )     (91,920,965 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES: 
               
Proceeds from mortgage financing
    -       3,187,177  
Mortgage payments
    (2,014,703 )     (230,947 )
Payment of loan fees and expenses
    (22,911 )     (441,509 )
Proceeds from issuance of common stock
    -       152,146,559  
Redemption and cancellation of common stock
    (4,272,082 )     -  
Proceeds from issuance of special general partnership units
    6,982,534       12,292,129  
Payment of offering costs
    -       (15,853,449 )
Issuance of note receivable to noncontrolling interest
    (22,357,708 )     (17,640,000 )
Distributions paid to noncontrolling interests
    (3,200,003 )     (482,697 )
Distributions paid to Company's common stockholders
    (9,163,231 )     (4,951,117 )
Net cash (used in) provided by financing activities
    (34,048,104 )     128,026,146  
                 
Net change in cash and cash equivalents
    (43,400,530 )     39,959,675  
Cash and cash equivalents, beginning of period
    66,106,067       29,589,815  
Cash and cash equivalents, end of period
  $ 22,705,537     $ 69,549,490  
                 
Cash paid for interest
  $ 10,633,573     $ 10,667,126  
Dividends declared
  $ 21,776,937     $ 10,645,812  
Non cash purchase of investment property
  $ 232,952     $ 5,725,735  
Value of shares issued from distribution reinvestment program
  $ 7,094,300     $ 3,447,577  
                 
Issuance of equity for payment of acquisition fee obligation (See Note 13)
  $ 6,878,087     $ -  
                 
Issuance of units in exchange for investment in unconsolidated affiliated real estate entities
  $ 78,988,411     $ 19,600,000  

The Company’s notes are an integral part of these consolidated financial statements.

 
6

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)

 
1.
Organization
 
Lightstone Value Plus Real Estate Investment Trust, Inc., a Maryland corporation (“Lightstone REIT” and, together with the Operating Partnership (as defined below), the “Company”) was formed on June 8, 2004 and subsequently qualified as a real estate investment trust (“REIT”) during the year ending December 31, 2006. The Company was formed primarily for the purpose of engaging in the business of investing in and owning commercial and residential real estate properties located throughout the United States and Puerto Rico.

The Lightstone REIT is structured as an umbrella partnership real estate investment trust, or UPREIT, and substantially all of the Lightstone REIT’s current and future business is and will be conducted through Lightstone Value Plus REIT, L.P., a Delaware limited partnership formed on July 12, 2004 (the “Operating Partnership”). The Lightstone REIT is managed by Lightstone Value Plus REIT, LLC (the “Advisor”), an affiliate of the Lightstone Group (the “Sponsor”), under the terms and conditions of an advisory agreement. The Sponsor and Advisor are owned and controlled by David Lichtenstein, the Chairman of the Company’s board of directors and its Chief Executive Officer.

The Company commenced an initial public offering to sell a maximum of 30,000,000 shares of common shares on May 23, 2005, at a price of $10 per share (exclusive of 4 million shares available pursuant to the Company’s dividend reinvestment plan, 600,000 shares that could be obtained through the exercise of selling dealer warrants when and if issued and 75,000 shares that are reserved for issuance under the Company’s stock option plan). The Company’s Registration Statement on Form S-11 (the “Registration Statement”) was declared effective under the Securities Act of 1933 on April 22, 2005, and on May 24, 2005, the Lightstone REIT began offering its common shares for sale to the public. Lightstone Securities, LLC (the “Dealer Manager”), an affiliate of the Sponsor, is serving as the dealer manager of the Company’s public offering (the “Offering”).
 
The Company sold 20,000 shares to the Advisor on July 6, 2004, for $10 per share. The Company invested the proceeds from this sale in the Operating Partnership, and as a result, held a 99.9% general partnership interest in the Operating Partnership.  

The Offering terminated on October 10, 2008 when all shares offered where sold.   However, the shares continued to be sold to existing stockholders pursuant to the Company’s dividend reinvestment plan.   As of September 30, 2009, cumulative gross offering proceeds of approximately $308.9 million, which includes redemptions and $14.8 million of proceeds from the dividend reinvestment plan, have been released to the Lightstone REIT and used for the purchase of a 98.4% general partnership interest in the common units of the Operating Partnership.
 
Noncontrolling Interest – Partners of Operating Partnership

On July 6, 2004, the Advisor also contributed $2,000 to the Operating Partnership in exchange for 200 limited partner units in the Operating Partnership. The limited partner has the right to convert operating partnership units into cash or, at the option of the Company, an equal number of common shares of the Company, as allowed by the limited partnership agreement.

Lightstone SLP, LLC, an affiliate of the Advisor, purchased special general partner interests (“SLP Units”) in the Operating Partnership at a cost of $100,000 per unit for each $1.0 million in offering subscriptions. As of September 30, 2009, the Company has received proceeds of $30.0 million from the sale of SLP Units, of which approximately $7.0 million was received during the three months ended March 31, 2009 and none thereafter.

On  June 26,  2008, the Operating Partnership issued (i) 96,000 units of common limited partnership interest in the Operating Partnership (“Common Units”) and 18,240 Series A preferred limited partnership units in the Operating Partnership (the “Series A Preferred Units”) with an aggregate liquidation preference of $18,240,000 to Arbor Mill Run JRM, LLC, a Delaware limited liability company (“Arbor JRM”) and (ii) 2,000 Common Units and 380 Series A Preferred Units with an aggregate liquidation preference of $380,000 to Arbor National CJ, LLC, a New York limited liability company (“Arbor CJ”) in exchange for a 22.54% membership interest in Mill Run LLC (Mill Run) (See Note 3). The total aggregate value of the Common Units and Series A Preferred Units issued by the Operating Partnership in exchange for the 22.54% membership interest in Mill Run was $19,600,000.

On March 30, 2009, the Operating Partnership issued 284,209 Common Units and 53,146 Series A Preferred Units with an aggregate liquidation preference of $53,146,000 to AR Prime Holdings LLC, a Delaware limited liability company (“AR Prime”) in exchange for a 25% membership interest in Prime Outlets Acquisitions Company (“POAC”) (See Note 3).

 
7

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)

On August 25, 2009, the Operating Partnership issued  a total of 115,000 Common Units and 21,850 Series A Preferred Units with an aggregate liquidation preference of $21,850,000 to TRAC Central Jersey LLC, a Delaware limited liability company (“TRAC”), Central Jersey Holdings II, LLC, a New York limited liability company (“Central Jersey”) and  JT Prime LLC, a Delaware limited liability company (“JT Prime”), in exchange for an additional 14.26% membership interest in Mill Run and for an additional 15% membership interest in POAC (See Note 3).

See Note 13 for further discussion of noncontrolling interests.

Operating Partnership Activity
Through its Operating Partnership, the Company will seek to acquire and operate commercial, residential, and hospitality properties, principally in the United States. The Company’s commercial holdings will consist of retail (primarily multi-tenanted shopping centers), lodging (primarily extended stay hotels), industrial and office properties.   All such properties may be acquired and operated by the Company alone or jointly with another party. Since inception, the Company has completed the following acquisitions and investments:

2006
The Company completed the acquisition of the Belz Factory Outlet World in St. Augustine, Florida, four multi-family communities in Southeast Michigan, a retail power center and raw land in Omaha, Nebraska and a portfolio of industrial and office properties located in New Orleans, LA (5 industrial and 2 office properties), Baton Rouge, LA (3 industrial properties) and San Antonio, TX (4 industrial properties).

2007
 The Company has made an investment in a sub-leasehold interest in a ground lease to an office building located at 1407 Broadway in New York, NY, purchased a land parcel in Lake Jackson, TX on which it completed the development of a retail power center in the first quarter of 2008, an 8.5-acre parcel of undeveloped land, including development rights, which is intended to be used for further development of the adjacent Belz Factory Outlet World in St. Augustine, Florida, five apartment communities located in Tampa, FL (one property), Charlotte, North Carolina (two properties) and Greensboro, North Carolina (two properties), and two hotels located in Houston, TX .

2008
The Company has made a preferred equity contribution in exchange for membership interests of a wholly owned subsidiary of Park Avenue Funding, LLC, an affiliated real estate lending company and acquired a 22.54% interest in Mill Run, which consists of two retail properties located in Orlando, Florida.

2009
On March 30, 2009, the Company acquired a 25% interest in POAC which has a portfolio of 18 retail outlet malls and two development projects located in 15 different states across the United States.  On August 25, 2009, the Company acquired an additional 14.26% interest in Mill Run and an additional 15% interest in POAC.  As of September 30, 2009, the Company’s membership interest in Mill Run was 36.8% and 40% in POAC.

All of the acquired properties and development activities are managed by affiliates of Lightstone Value Plus REIT Management LLC (the “Property Manager”).

The Company’s Advisor, Property Manager and Dealer Manager are each related parties. Each of these entities has received compensation and fees for services related to the offering and will continue to receive compensation and fees and services for the investment and management of the Company’s assets. These entities will receive fees during the offering (which was completed on October 10, 2008), acquisition, operational and liquidation stages. The compensation levels during the offering, acquisition and operational stages are based on percentages of the offering proceeds sold, the cost of acquired properties and the annual revenue earned from such properties, and other such fees outlined in each of the respective agreements (See Note 14).
   
 
2.
Summary of Significant Accounting Policies
 
Basis of Presentation
 
The consolidated financial statements include the accounts of the Company and the Operating Partnership and its subsidiaries (over which Lightstone REIT exercises financial and operating control). As of September 30, 2009, the Company had a 98.4% general partnership interest in the common units of the Operating Partnership. All inter-company balances and transactions have been eliminated in consolidation.  

 
8

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during a reporting period. The most significant assumptions and estimates relate to the valuation of real estate, depreciable lives of fixed assets, amortizable lives of intangibles, revenue recognition, the collectability of trade accounts receivable and the realizability of deferred tax assets. Application of these assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates.

The unaudited consolidated statements of operations for interim periods are not necessarily indicative of results for the full year.  The December 31, 2008 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.  For further information, refer to consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2008.

Investments in real estate entities where the Company has the ability to exercise significant influence, but does not exercise financial and operating control, are accounted for using the equity method.

 Cash and Cash Equivalents
 
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. All cash and cash equivalents are held in money market funds or commercial paper.  To date, the Company has not experienced any losses on its cash and cash equivalents.
 
Marketable Securities

Marketable securities consist of equity securities and corporate bonds that are designated as available-for-sale and are recorded at fair value. Unrealized holding gains or losses are reported as a component of accumulated other comprehensive income (loss). Realized gains or losses resulting from the sale of these securities are determined based on the specific identification of the securities sold. An impairment charge is recognized when the decline in the fair value of a security below the amortized cost basis is determined to be other-than-temporary. We consider various factors in determining whether to recognize an impairment charge, including the duration and severity of any decline in fair value below our amortized cost basis, any adverse changes in the financial condition of the issuers’ and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. The Board has authorized the Company from time to time to invest the Company’s available cash in marketable securities of real estate related companies. The Board of Directors has approved investments up to 30% of the Company’s total assets to be made at the Company’s discretion, subject to compliance with any REIT or other restrictions.  See Note 5.

Revenue Recognition
 
Minimum rents are recognized on a straight-line accrual basis, over the terms of the related leases. The capitalized above-market lease values and the capitalized below-market lease values are amortized as an adjustment to rental income over the initial lease term. Percentage rents, which are based on commercial tenants’ sales, are recognized once the sales reported by such tenants exceed any applicable breakpoints as specified in the tenants’ leases. Recoveries from commercial tenants for real estate taxes, insurance and other operating expenses, and from residential tenants for utility costs, are recognized as revenues in the period that the applicable costs are incurred.  Room revenue for the hotel properties are recognized as stays occur, using the accrual method of accounting. Amounts paid in advance are deferred until stays occur.
  
Accounts Receivable
 
The Company makes estimates of the uncollectability of its accounts receivable related to base rents, expense reimbursements and other revenues. The Company analyzes accounts receivable and historical bad debt levels, customer credit worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. In addition, tenants in bankruptcy are analyzed and estimates are made in connection with the expected recovery of pre-petition and post-petition claims. The Company’s reported net income or loss is directly affected by management’s estimate of the collectability of accounts receivable. The total allowance for doubtful accounts was approximately $0.3 million and $0.2 million at September 30, 2009 and December 31, 2008, respectively.

 
9

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)

Investment in Real Estate
 
Accounting for Acquisitions
 
The fair value of the real estate acquired is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases for acquired in-place leases and the value of tenant relationships, based in each case on their fair values. Purchase accounting is applied to assets and liabilities related to real estate entities acquired based upon the percentage of interest acquired. Fees incurred related to acquisitions are expensed as incurred within general and administrative costs within the consolidated statements of operation.  Transaction costs incurred related to the Company’s investment in unconsolidated real estate entities, accounted for under the equity method of accounting, and are capitalized as part of the cost of the investment.

Upon the acquisition of real estate operating properties, the Company estimates the fair value of acquired tangible assets and identified intangible assets and liabilities and assumed debt at the date of acquisition, based on evaluation of information and estimates available at that date. Based on these estimates, the Company allocates the initial purchase price to the applicable assets, liabilities and noncontrolling interests, if any.  As final information regarding fair value of the assets acquired, liabilities assumed and noncontrolling interests is received and estimates are refined, appropriate adjustments are made to the purchase price allocation. The allocations are finalized as soon as all the information necessary is available and in no case later than within twelve months from the acquisition date.
In determining the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease values and the capitalized below-market lease values are amortized as an adjustment to rental income over the initial non-cancelable lease term.
 
The aggregate value of in-place leases is determined by evaluating various factors, including an estimate of carrying costs during the expected lease-up periods, current market conditions and similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses, and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute similar leases including leasing commissions, legal and other related costs. The value assigned to this intangible asset is amortized over the remaining lease terms ranging from one month to approximately 11 years. Optional renewal periods are not considered.
 
The aggregate value of other acquired intangible assets includes tenant relationships. Factors considered by management in assigning a value to these relationships include: assumptions of probability of lease renewals, investment in tenant improvements, leasing commissions and an approximate time lapse in rental income while a new tenant is located. The value assigned to this intangible asset is amortized over the remaining lease terms ranging from one month to approximately 11 years.
 
Carrying Value of Assets
 
The amounts to be capitalized as a result of periodic improvements and additions to real estate property, and the periods over which the assets are depreciated or amortized, are determined based on the application of accounting standards that may require estimates as to fair value and the allocation of various costs to the individual assets. Differences in the amount attributed to the assets can be significant based upon the assumptions made in calculating these estimates.
   
Impairment Evaluation   
 
Management evaluates the recoverability of its investments in real estate assets at the lowest identifiable level. Long-lived assets are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss is recognized only if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value.

 
10

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)

The Company evaluates the long-lived assets on a quarterly basis and will record an impairment charge when there is an indicator of impairment and the undiscounted projected cash flows are less than the carrying amount for a particular property. The estimated cash flows used for the impairment analysis and the determination of estimated fair value are based on the Company’s plans for the respective assets and the Company’s views of market and economic conditions. The estimates consider matters such as current and historical rental rates, occupancies for the respective properties and comparable properties, and recent sales data for comparable properties. Changes in estimated future cash flows due to changes in the Company’s plans or views of market and economic conditions could result in recognition of impairment losses, which, under the applicable accounting guidance, could be substantial.  See Note 7.
   
Depreciation and Amortization
 
Depreciation expense for real estate assets is computed based on the straight-line method using a weighted average composite life of thirty-nine years for buildings and improvements and five to ten years for equipment and fixtures. Expenditures for tenant improvements and construction allowances paid to commercial tenants are capitalized and amortized over the initial term of each lease, currently one month to 11 years. Maintenance and repairs are charged to expense as incurred.
 
Deferred Costs
 
The Company capitalizes initial direct costs.  The costs are capitalized upon the execution of the loan or lease and amortized over the initial term of the corresponding loan or lease. Amortization of deferred loan costs begins in the period during which the loan was originated. Deferred leasing costs are not amortized to expense until the earlier of the store opening date or the date the tenant’s lease obligation begins.
 
Investments in Unconsolidated Affiliated Real Estate Entities

The Company evaluates all joint venture arrangements for consolidation.  The percentage interest in the joint venture, evaluation of control and whether a variable interest entity (“VIE”) exists are all considered in determining if the arrangement qualifies for consolidation.

The Company accounts for its investments in unconsolidated real estate entities using the equity or cost method of accounting.  Under the equity method, the cost of an investment is adjusted for the Company’s share of equity in net income or loss beginning on the date of acquisition and reduced by distributions received.  The income or loss of each joint venture investor is allocated in accordance with the provisions of the applicable operating agreements.  The allocation provisions in these agreements may differ from the ownership interest held by each investor.  Differences between the carrying amount of the Company’s investment in the respective joint venture and the Company’s share of the underlying equity of such unconsolidated entities are amortized over the respective lives of the underlying assets as applicable.   These items are reported as a single line item in the consolidated statements of operations as income or loss from investments in unconsolidated affiliated real estate entities.  Under the cost of accounting, the dividends earned from the underlying entities are recorded to interest income.

The Company annually reviews its investment in unconsolidated real estate entities for other than temporary declines in market value.  Any decline that is not considered temporary will result in the recording of an impairment charge to the investment.

Income Taxes

The Company made an election in 2006 to be taxed as a real estate investment trust (a “REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), beginning with its first taxable year, which ended December 31, 2005.
 
The Company elected and qualified to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code in conjunction with the filing of the 2006 federal tax return. To maintain its status as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its ordinary taxable income to stockholders. As a REIT, the Company generally will not be subject to federal income tax on taxable income that it distributes to its stockholders. If the Company fails to qualify as a REIT in any taxable year, it will then be subject to federal income taxes on its taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service grants the Company relief under certain statutory provisions. Such an event could materially adversely affect the Company’s net income and net cash available for distribution to stockholders. Through September 30, 2009, the Company has complied with the requirements for maintaining its REIT status.

 
11

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)

The Company has net operating loss carryforwards for Federal income tax purposes through the year ended December 31, 2006. The availability of such loss carryforwards will begin to expire in 2026. As the Company does not consider it likely that it will realize any future benefit from its loss carry-forward, any deferred asset resulting from the final determination of its tax loss carryforwards will be fully offset by a valuation allowance of the same amount.

In 2007, to maintain the Company’s qualification as a REIT, the Company engages in certain activities through LVP Acquisitions Corp. (“LVP Corp”), a wholly-owned taxable REIT subsidiary (“TRS”).  As such, the Company is subject to federal and state income and franchise taxes from these activities.

As of September 30, 2009, the Company had no material uncertain income tax positions. The tax years 2005 through 2008 remain open to examination by the major taxing jurisdictions to which the Company is subject.
 
Financial Instruments

The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate their fair values because of the short maturity of these instruments. The fair value of the mortgage debt and notes payable as of September 30, 2009 was approximately $237.7 million compared to the book value of approximately $244.7 million. The fair value of the mortgage debt and notes payable as of December 31, 2008 was approximately $239.8 million compared to the book value of approximately $246.7 million. The fair value of the mortgage debt and notes payable was determined by discounting the future contractual interest and principal payments by a market interest rate.

Accounting for Derivative Financial Investments and Hedging Activities.

The Company may enter into derivative financial instrument transactions in order to mitigate interest rate risk on a related financial instrument. We may designate these derivative financial instruments as hedges and apply hedge accounting. The Company will account for derivative and hedging activities, following Topic 815 - “Derivative and Hedging” in the Accounting Standards Codification (“ASC”).  The Company records all derivative instruments at fair value on the consolidated balance sheet.

Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, will be considered cash flow hedges. The Company will formally document all relationships between hedging instruments and hedged items, as well as our risk- management objective and strategy for undertaking each hedge transaction. The Company will periodically review the effectiveness of each hedging transaction, which involves estimating future cash flows. Cash flow hedges will be accounted for by recording the fair value of the derivative instrument on the consolidated balance sheet as either an asset or liability, with a corresponding amount recorded in other comprehensive income (loss) within stockholders’ equity. Amounts will be reclassified from other comprehensive income (loss) to the consolidated statement of operations in the period or periods the hedged forecasted transaction affects earnings. Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, will be considered fair value hedges.  The effective portion of the derivatives gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into earnings when the transaction affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately.

Stock-Based Compensation

The Company has a stock-based incentive award plan for our directors.  The Company accounts for the incentive award plan in accordance with Topic 718 – “Compensation-Stock Compensation” in the ASC.  Awards are granted at the fair market value on the date of the grant with fair value estimated using the Black-Scholes-Merton option valuation model, which incorporates assumptions surrounding the volatility, dividend yield, the risk-free interest rate, expected life, and the exercise price as compared to the underlying stock price on the grant date.  The tax benefits associated with these share-based payments are classified as financing activities in the consolidated statement of cash flows as required under previous regulations.  For the three and nine months ended September 30, 2009 and 2008, the Company had no material compensation costs related to the incentive award plan.

Concentration of Risk
 
The Company maintains its cash in bank deposit accounts, which, at times, may exceed federally insured limits.  The Company has not experienced any losses in such accounts.  The Company believes it is not exposed to any significant credit risk on cash and cash equivalents.

 
12

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)

Net Loss per Share
 
Net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding. As of September 30, 2009, the Company has 27,000 options issued and outstanding, and does not have any warrants outstanding. As such, the numerator and the denominator used in computing both basic and diluted net loss per share allocable to common stockholders for each year presented are equal due to the net operating loss.  The 27,000 options are not included in the dilutive calculation as they are anti dilutive as a result of the net  loss attributable to Company’s common shares. 
 
New Accounting Pronouncements
  
 In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141R, a revision of SFAS No. 141, “Accounting for Business Combinations,” which was primarily codified into Topic 805 – “Business Combinations” in the ASC.  This standard establishes principles and requirements for how the acquirer shall recognize and measure in its financial statements the identifiable assets acquired, liabilities assumed, any noncontrolling interest in the acquiree and goodwill acquired in a business combination. One significant change includes expensing acquisition fees instead of capitalizing these fees as part of the purchase price.  This will impact the Company’s recording of acquisition fees associated with the purchase of wholly-owned entities on a prospective basis.  This statement is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  The Company adopted this standard on January 1, 2009 and the adoption of this statement did not have a material effect on the consolidated results of operations or financial position.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements an amendment to ARB No. 51” which was primarily codified into Topic 810 - “Consolidation” in the ASC.  This standard establishes and expands accounting and reporting standards for minority interests, which will be recharacterized as noncontrolling interests, in a subsidiary and the deconsolidation of a subsidiary. The Company will also be required to present net income allocable to the noncontrolling interests and net income attributable to the stockholders of the Company separately in its consolidated statements of operations. Prior to the implementation of  this standard, noncontrolling interests (minority interests) were reported between liabilities and stockholders’ equity in the Company’s statement of financial position and the related income attributable to minority interests was reflected as an expense/income in arriving at net income/loss. This standard requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of this standard are to be applied prospectively. The Company adopted this standard on January 1, 2009 and the presentation and disclosure requirements were applied retrospectively. Other than the change in presentation of noncontrolling interests, the adoption of this standard did not have a material effect on the consolidated results of operations or financial position.

In February 2008, the FASB issued Staff Position No. FAS 157-2 which provides for a one-year deferral of the effective date of SFAS No. 157, “Fair Value Measurements,”  which was primarily codified into Topic 820 - “Fair Value Measurements and Disclosures” in the ASC.  This guidance is for non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis.  The Company adopted this guidance and it did not have a material impact to the Company’s financial position or consolidated results of operations.

In November 2008, the FASB ratified EITF Issue No.  08-6, “Equity Method Investment Accounting Considerations”, which was primarily codified into Topic 323 – “Investments-Equity Method” in the ASC.  This guidance clarifies the accounting for certain transactions and impairment considerations involving equity method investments and is effective for fiscal years beginning on or after December 15, 2008 to be applied on a prospective basis. The Company adopted the provisions of this standard on January 1, 2009.  The adoption of this guidance changed the Company’s accounting for transaction costs related to equity investments.  Prior to the adoption of this guidance, the Company expensed these transaction costs to general and administrative expense as incurred.  Beginning January 1, 2009,  transaction costs incurred related to the Company’s investment in unconsolidated affiliated real estate entities accounted for under the equity method of accounting  are capitalized as part of the cost of  the investment.  For the three  and nine months ended September 30, 2009, the Company capitalized $13.3 million and $25.8 million, respectively of transaction costs incurred during the related period related to its investments in POAC and Mill Run (see Note 3).

 
13

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)

In April 2009, FASB, issued FASB Staff Position, or FSP, No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, which was primarily codified into Topic 320 – “Investments-Debt and Equity Securities” in the ASC.  This guidance is intended to provide greater clarity to investors about the credit and noncredit component of an other-than-temporary impairment event and to more effectively communicate when an other-than-temporary impairment event has occurred.  The guidance applies to fixed maturity securities only and requires separate display of losses related to credit deterioration and losses related to other market factors.  When an entity does not intend to sell the security and it is more likely than not that an entity will not have to sell the security before recovery of its cost basis, it must recognize the credit component of an other-than-temporary impairment in earnings and the remaining portion in other comprehensive income.  In addition, upon adoption of the guidance, an entity will be required to record a cumulative-effect adjustment as of the beginning of the period of adoption to reclassify the noncredit component of a previously recognized other-than-temporary impairment from retained earnings to accumulated other comprehensive income.  The guidance is effective for the Company for the quarter ended June 30, 2009.  The Company adopted the guidance during the quarter ended June 30, 2009 and the adoption did not have a material effect on the consolidated results of operations or financial position.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events”, which was primarily codified into Topic 855 - “Subsequent Events” in the ASC. This standard sets forth: 1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; 2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and 3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The standard is effective for interim and annual periods ending after June 15, 2009. The Company adopted the standard in the quarter ended June 30, 2009. The standard did not impact the consolidated results of operations or financial position. See Note 17.

In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles", which was primarily codified into Topic 105 - "Generally Accepted Accounting Standards" in the ASC. This standard will become the single source of authoritative nongovernmental U.S. GAAP, superseding existing FASB, American Institute of Certified Public Accountants, EITF, and other related accounting literature. This standard condenses the thousands of GAAP pronouncements into approximately 90 accounting topics and displays them using a consistent structure. Also included is relevant Securities and Exchange Commission guidance organized using the same topical structure in separate sections. This guidance became effective for financial statements issued for reporting periods that ended after September 15, 2009. Beginning in the third quarter of 2009, this guidance impacts the Company's financial statements and related disclosures as all references to authoritative accounting literature reflect the newly adopted codification.

The Company has determined that all other recently issued accounting pronouncements will not have a material impact on its consolidated financial position, results of operations and cash flows, or do not apply to its operations.

 
3.
Investments in Unconsolidated Affiliated Real Estate Entities
  
The entities listed below are partially owned by the Company.  The Company accounted for these investments under the equity method of accounting as the Company exercises significant influence, but does not control these entities. A summary of the Company’s investments in unconsolidated affiliated real estate entities as of September 30, 2009 and December 31, 2008 is as follows:

             
As of
 
Real Estate Entity
 
Dates Acquired
 
Ownership
%
   
September 30,
2009
   
December 31,
2008
 
Prime Outlets Acquistions Company
 
March 30, 2009 & August 25, 2009
    40.00 %   $ 92,271,514     $ -  
Mill Run LLC
 
June 26, 2008 & August 25, 2009
    36.80 %     39,275,600       19,279,406  
1407 Broadway Mezz II LLC
 
January 4, 2007
    49.00 %     786,128       2,096,502  
Total Investments in unconsolidated affiliated real estate entities
              $ 132,333,242     $ 21,375,908  

Prime Outlets Acquisitions Company

On March 30, 2009, the Operating Partnership acquired a 25% membership interest in POAC from AR Prime in exchange for units in the Operating Partnership (see Note 1).  The acquisition price before transaction costs for the 25% membership interest in POAC was approximately $356 million, $56 million in the form of equity and approximately $300 million in the form of indebtedness secured by the POAC properties (18 retail outlet malls and two development projects).

 
14

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)

On August 25, 2009, the Operating Partnership acquired an additional 15% membership interest in POAC from JT Prime in exchange for units in the Operating Partnership (see Note 1).  The acquisition price before transaction costs for the 15% membership interest in POAC was approximately $195 million, $17 million in the form of equity and approximately $178 million in the form of indebtedness secured by the POAC properties.

As of September 30, 2009, the Operating Partnership owns a 40% membership interest in POAC (“POAC Interest”).  The POAC Interest is a non-managing interest, with certain consent rights with respect to major decisions. An affiliate of The Lightstone Group, the Company’s sponsor, is the majority owner and manager of POAC.  Profit and cash distributions will be allocated in accordance with each investor’s ownership percentage.

As the Company has recorded this investment in accordance with the equity method of accounting, the indebtedness is not included in the Company’s investment.   In connection with the transaction, our advisor charged an acquisition fee equal to 2.75% of the acquisition price, or approximately $15.4 million, of which $5.6 million was recorded during the three months ended September 30, 2009 related to the acquisition of the 15% membership interest in POAC (See Note 13). In addition, during the three and nine months ended September 30, 2009, the Company incurred additional transactions costs related to accounting, brokerage, legal and other transaction fees of $5.3 million and $8.0 million respectively.  The total transaction costs incurred during the three and nine months ended September 30, 2009 of $10.9 million and $23.4 million, respectively were capitalized as part of the cost of the Company’s investment in unconsolidated affiliated real estate entity.  Prior to January 1, 2009, the Company incurred and expensed to general and administrative expense transaction costs associated with the investment in POAC of $2.2 million.  Total transactions fees associated with the acquisition of the POAC Interest including the advisor acquisition fee as of September 30, 2009 were $25.6 million.

See Note 13 for discussion of loans issued in connection with the contribution of the POAC Interest and see Note 16 for discussion of the tax protection agreement.

Mill Run Interest

On June 26, 2008, the Operating Partnership acquired a 22.54% membership interest in Mill Run from Arbor JRM and Arbor CJ in exchange for units in the Operating Partnership (see Note 1).  The acquisition price before transaction costs for the 22.54% membership interest in Mill Run was approximately $85 million, $19.6 million in the form of equity and approximately $65.4 million in the form of indebtedness, which matures November 2010 and is secured by the Mill Run properties.

On August 25, 2009, the Operating Partnership acquired an additional 14.26% membership interest in Mill Run from TRAC and Central Jersey in exchange for units in the Operating Partnership (see Note 1).  The acquisition price before transaction costs for the 14.26% membership interest in Mill Run was approximately $56.0 million, $6.0 million in the form of equity, approximately $39.6 million in the form of indebtedness, which matures November 2010 and is secured by the Mill Run properties, plus $10.4 million assumption of TRAC and Central Jersey member interest loans due to Mill Run. These member interest loans are recorded as part of due to sponsor and other affiliates in the consolidated balance sheet as of September 30, 2009. Any distributions to the Company from Mill Run related to the 14.26% membership interest will require the Company to make an equal amount of mandatory repayment on the member interest loans.

As of September 30, 2009, the Operating Partnership owns a 36.8% membership interest in Mill Run (“Mill Run Interest”).  The Mill Run Interest includes Class A and B membership shares and is a non-managing interest, with consent rights with respect to certain major decisions. The Company’s sponsor is the managing member and owns 55% of Mill Run LLC.  Profit and cash distributions will be allocated in accordance with each investor’s ownership percentage after consideration of Class B members adjusted capital balance.

As the Company has recorded this investment in accordance with the equity method of accounting, the indebtedness is not included in the Company’s investment.   In connection with the transaction, our advisor charged an acquisition fee equal to 2.75% of the acquisition price, or approximately $3.6 million, of which $1.3 million was recorded during the three months ended September 30, 2009 related to the acquisition of the 14.26% membership interest in Mill Run (See Note 13). In addition, during the three and nine months ended September 30, 2009, the Company incurred additional transactions costs related to accounting, brokerage, legal and other transaction fees of $1.1 million.  The total transaction costs incurred during the three and nine months ended September 30, 2009 of $2.4 million were capitalized as part of the cost of the Company’s investment in unconsolidated affiliated real estate entity.  Prior to January 1, 2009, the Company incurred and expensed to general and administrative expense transaction costs associated with the investment in Mill Run of $4.1 million.  Total transactions fees associated with the acquisition of the Mill Run Interest including the advisor acquisition fee as of September 30, 2009 were $8.8 million.

 
15

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)

See Note 13 for discussion loans issued in connection with the contribution of the Mill Run Interest and see Note 16 for discussion of the tax protection agreement.

In connection with the contribution of the 14.26% membership interest in Mill Run and the 15% membership interest in POAC, the Company entered into certain letter agreements with the owners of the membership interests of JT Prime, TRAC and Central Jersey pursuant to which the Company agreed to pay an aggregate amount equal to $6.0 million in consideration for certain restrictive covenants and for brokerage services received by the Company in connection with the contribution of the 14.26% membership interest in Mill Run and the 15% membership interest in POAC.  The $6.0 million related to these agreements are included in the total transactions fees discussed above.  $1.1million of the $6.0 million is included in the total transaction fees of $8.8 million for the Mill Run Interest and $4.9 million of the $6.0 million is included in the total transaction fees of $25.6 million for the POAC Interest discussed above.
 
1407 Broadway
 
On January 4, 2007, the Company, through LVP 1407 Broadway LLC, a wholly owned subsidiary of the Operating Partnership, entered into a joint venture with an affiliate of the Sponsor (the “Joint Venture”). On the same date, an indirect, wholly owned subsidiary acquired a sub-leasehold interest in a ground lease to an office building located at 1407 Broadway, New York, New York (the “Sublease Interest”).

Initial equity from the Sponsor, the Company’s co-venturer totaled $13.5 million (representing a 51% ownership interest).  The Company’s initial capital investment of $13.0 million (representing a 49% ownership interest) was funded with proceeds from the Company’s common stock offering.  The acquisition was funded through a combination of $26.5 million of capital and a $106.0 million advance on a $127.3 million variable rate mortgage loan funded by Lehman Brothers Holding, Inc. (“Lehman”).  This mortgage loan matures on January 9, 2010.  The mortgage loan has two one-year extension options for a fee of 0.125% of the amount of the respective loan for each extension, which the Company plans to exercise. Additionally, Lehman will receive a 35% net profit interest in the project, which is contingent upon a capital transaction, as defined as any transaction involving the sale, assignment, transfer, liquidation, condemnation or settlement in lieu thereof, disposition, financing, refinancing or any other conversion to cash of all or any portion of the property or equity or membership interests in Borrower, directly, other than the leasing of space for occupancy and/or any other transaction with respect to the Property or the direct or indirect ownership interests in Borrower outside the ordinary course of business.  To date, the Lender did not share in any net profits of the project.  All other income and cash distributions will be allocated in accordance with each investor’s ownership percentage of the venture.  The Joint Venture plans to continue an ongoing renovation project at the property that consists of lobby, elevator and window redevelopment projects.

Under the mortgage loan, the Joint Venture has available credit of approximately $10.5 million, as of September 30, 2009.  See Note 16.

The original investment was $13.0 million and will be subsequently adjusted for cash contributions and distributions, and the Company’s share of earnings and losses. The Company and the co-venturer contributed an additional $0.6 million in 2007. In addition, during 2008, the Company and the co-venturer each received a distribution of approximately $1.2 million. Earnings for each investment are recognized in accordance with this investment agreement and where applicable, based upon an allocation of the investment’s net assets at book value as if the investment was hypothetically liquidated at the end of each reporting period.

Combined Financial Information

The Company’s carrying value of its Mill Run Interest and POAC Interest differs from its share of member’s equity reported in the condensed combined balance sheet of the unconsolidated affiliated real estate entities due to the Company’s cost of its investments in excess of the historical net book values of the unconsolidated affiliated real estate entities.  The Company’s additional basis allocated to depreciable assets is recognized on a straight-line basis over the lives of the appropriate assets.    The Company’s POAC Interest additional basis allocation to depreciable assets is a preliminary estimate and could change based upon the final fair value to net book value analysis, which is expected to be completed within twelve months from the date of acquisition.

 
16

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)

The following table represents the condensed combined income statement for unconsolidated affiliated real estate entities for the three and nine month period ended September 30, 2009 and September 30, 2008:

   
For the Three Months Ended
   
For the Nine Months Ended
 
                         
   
September 30, 2009
   
September 30, 2008 (1)
   
September 30, 2009 (2)
   
September 30, 2008 (3)
 
   
(unaudited)
   
(unaudited)
 
Revenue
  $ 66,917,202     $ 20,057,911     $ 152,836,646     $ 39,738,193  
                                 
Property operating expenses
    35,419,965       10,720,876       76,653,506       23,772,362  
Depreciation and amortization
    16,534,485       5,491,540       36,369,984       12,112,701  
                                 
Operating income
    14,962,752       3,845,495       39,813,156       3,853,130  
                                 
Interest expense and other, net
    (15,334,759 )     (4,918,293 )     (31,898,077 )     (8,127,027 )
Net (loss)/income
  $ (372,007 )   $ (1,072,798 )   $ 7,915,079     $ (4,273,897 )
                                 
The Company's share of net income/(loss), net of excess basis depreciation of $2.9 million, zero, $5.4 million and zero, respectively
  $ (3,508,079 )   $ (676,194 )   $ (4,248,298 )   $ 2,236,511  

(1)  
Amounts include the three months ended September 30, 2008 for 1407 Broadway Mezz II LLC and Mill Run LLC.
(2)  
Amounts include the nine months ended September 30, 2009 for 1407 Broadway Mezz II LLC and Mill Run LLC plus the period March 30, 2009 through September 30, 2009 related to Prime Outlets Acquisitions Company.
(3)  
Amounts include the nine months ended September 30, 2008 for 1407 Broadway Mezz II LLC and the period June 26, 2008 through September 30, 2008 for Mill Run LLC.


   
As of
   
As of
 
   
September 30, 2009
   
December 31, 2008 (1)
 
   
(unaudited)
 
             
Real estate, at cost, net
  $ 1,166,060,976     $ 381,016,535  
Intangible assets, net
    17,827,431       5,500,334  
Cash and restricted cash
    73,497,484       18,146,318  
Other assets
    63,702,505       34,736,039  
                 
Total Assets
  $ 1,321,088,396     $ 439,399,226  
                 
Mortgage note payable (2)
  $ 1,576,272,795     $ 396,971,167  
Other liabilities
    60,145,904       40,661,034  
Member capital
    (315,330,303 )     1,767,025  
                 
Total liabilities and members' capital
  $ 1,321,088,396     $ 439,399,226  

(1)  
Amounts include the combined balance sheets for 1407 Broadway Mezz II LLC and Mill Run LLC.
(2)  
As of September 30, 2009, the Company’s portion of the $1.6 billion mortgage note payable outstanding is approximately $632.3 million.

 
17

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)

 
4.
Investment in Affiliate

 Park Avenue Funding

On April 16, 2008, the Company made a preferred equity contribution of $11.0 million (the “Contribution”) to PAF-SUB LLC (“PAF”), a wholly-owned subsidiary of Park Avenue Funding LLC (“Park Avenue”), in exchange for membership interests of PAF with certain rights and preferences described below (the “Preferred Units”). Park Avenue is a real estate lending company making loans, including first or second mortgages, mezzanine loans and collateral pledges of mortgages, to finance real estate transactions. Property types considered include multi-family, office, industrial, retail, self-storage, parking and land. Both PAF and Park Avenue are affiliates of our Sponsor.
 
PAF’s limited liability company agreement was amended on April 16, 2008 to create the Preferred Units and admit the Company as a member. The Preferred Units are entitled to a cumulative preferred distribution at the rate of 10% per annum, payable quarterly. In the event that PAF fails to pay such distribution when due, the preferred distribution rate will increase to 17% per annum. The Preferred Units are redeemable, in whole or in part, at any time at the option of the Company upon at least 180 days’ prior written notice (the “Redemption”). In addition, the Preferred Units are entitled to a liquidation preference senior to any distribution upon dissolution with respect to other equity interests of PAF in an amount equal to (x) the Contribution plus any accrued but unpaid distributions less (y) any Redemption payments.

In connection with the Contribution, the Company and Park Avenue entered into a guarantee agreement on April 16, 2008, whereby Park Avenue unconditionally and irrevocably guarantees payment of the Redemption amounts when due (the “Guarantee”). Also, Park Avenue agrees to pay all costs and expenses incurred by the Company in connection with the enforcement of the Guarantee.

The Company does not have any voting rights for this investment, and does not have significant influence over this investment. The Company accounts for this investment under the cost method. Total accrued distributions related to this investment totaled $0.1 million at September 30, 2009 and $0.3 million at December 31, 2008, and are included in interest receivable from related parties.   Through September 30, 2009, the Company received redemption payments from PAF of $2.7 million, of which $1.9 million was received during the nine months ended September 30, 2009.  As of September 30, 2009, the Company’s investment in PAF is $8.3 million and is included in investment in affiliate, at cost in the consolidated balance sheet.

 
5.
Marketable Securities and Fair Value Measurements

The following is a summary of the Company’s available for sale securities at September 30, 2009 and December 31, 2008:

   
As of September 30, 2009
   
As of December 31, 2008
 
   
Adjusted Cost
   
Unrealized Gain
   
Fair Value
   
Adjusted Cost
   
Unrealized
Gain/(Loss)
   
Fair Value
 
Corporate Bonds
  $ -     $ -     $ -     $ 9,508,760     $ 147,740     $ 9,656,500  
Equity Securities, primarily REITs
    466,141       413,855       879,996       6,154,259       (4,360,194 )     1,794,065  
                                                 
Total Marketable Securities - available for sale
  $ 466,141     $ 413,855     $ 879,996     $ 15,663,019     $ (4,212,454 )   $ 11,450,565  

The Company, in 2008, during the three months ended September 30, 2008 and December 31, 2008 recorded a write down of $9.7 million and $0.1 million, respectively for other than temporary declines on certain available-for-securities.  During the six months ended June 30, 2009, the Company’s marketable securities and the overall REIT market continued to experience significant declines, which increased the duration and magnitude of the Company’s unrealized losses.  The overall challenges in the economic environment, including near term prospects for certain of the Company’s securities makes a recovery period difficult to project.  Although the Company has the ability to hold these securities until potential recovery, the Company believes certain of the losses for these securities are other than temporary.  As a result, during the three months ended June 30, 2009, the Company recorded a write-down of $3.4 million for other than temporary declines on certain available-for-sale securities, which are included in Other than temporary impairment – marketable securities on the consolidated statements of operations to reflect the additional reduction from 2008 that is considered to be other than temporary. During the three months ended September 30, 2009, no additional impairment charge has been recorded.

 
18

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)

Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:

   
Level 1 – Quoted prices in active markets for identical assets or liabilities.
   
 
   
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
     
   
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets measured at fair value on a recurring basis as of September 30, 2009 are as follows:

   
Fair Value Measurement Using
       
As of September 30, 2009
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Corporate bonds
  $ -     $ -     $ -     $ -  
Equity Securities, primiarily REITs
    879,996     $ -     $ -     $ 879,996  
Total Marketable securities - available for sale
  $ 879,996     $ -     $ -     $ 879,996  

The Company did not have any other significant financial assets or liabilities, which would require revised valuations that are recognized at fair value.

 
6.
Intangible Assets

At September 30, 2009, the Company had intangible assets relating to above-market leases from property acquisitions, intangible assets related to leases in place at the time of acquisition, intangible assets related to leasing costs, and intangible liabilities relating to below-market leases from property acquisitions.
 
The following table sets forth the Company’s intangible assets/ (liabilities) as of September 30, 2009 and December 31, 2008:

   
At September 30, 2009
   
At December 31, 2008
 
   
Cost
   
Accumulated
Amortization
   
Net
   
Cost
   
Accumulated
Amortization
   
Net
 
                                     
Acquired in-place lease intangibles
  $ 2,657,274     $ (1,924,752 )   $ 732,522     $ 2,990,772     $ (1,849,234 )   $ 1,141,538  
                                                 
Acquired above market lease intangibles
    1,087,830       (813,675 )     274,155       1,150,659       (710,720 )     439,939  
                                                 
Deferred intangible leasing costs
    1,379,242       (919,288 )     459,954       1,527,840       (832,824 )     695,016  
                                                 
Acquired below market lease intangibles
    (3,228,831 )     2,476,823       (752,008 )     (3,462,455 )     2,258,021       (1,204,434 )

 
19

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)

During the three and nine months ended  September 30, 2009, the Company wrote off fully amortized acquired intangible assets of approximately $0.3 million and  $0.8 million, respectively, resulting in a reduction of cost and accumulated amortization of intangible assets at September 30, 2009 compared to the December 31, 2008.  There were no additions during the three and nine months ended September 30, 2009.

The following table presents the projected amortization benefit of the acquired above market lease costs and the below market lease costs during the next five years and thereafter at September 30, 2009:

 
Balance
2009
   
2010
   
2011
   
2012
   
2013
   
Thereafter
   
Total
 
Amortization expense/(benefit) of:
                                                       
                                                         
Acquired above market lease value
  $ 39,297     $ 96,735     $ 52,826     $ 23,379     $ 14,425     $ 47,493     $ 274,155  
                                                         
Acquired below market lease value
    (102,403 )     (264,789 )     (125,832 )     (87,911 )     (86,625 )     (84,448 )     (752,008 )
                                                         
Projected future net rental income increase
  $ (63,106 )   $ (168,054 )   $ (73,006 )   $ (64,532 )   $ (72,200 )   $ (36,955 )   $ (477,853 )

 Amortization benefit of acquired above and below market lease values is included in total revenues in our consolidated statements of operations was $0.1 million and $0.3 million for the three months ended September 30, 2009 and 2008, respectively and was $0.2 million and $0.6 million for the nine months ended September 30, 2009 and 2008, respectively.

The following table presents the projected amortization expense of the acquired in-place lease intangibles and acquired leasing costs during the next five years and thereafter at September 30, 2009:

 
Balance
2009
   
2010
   
2011
   
2012