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EX-4.2 - EXHIBIT 4.2 - Lightstone Value Plus Real Estate Investment Trust, Inc.lightstonereit_ex4-2.htm
EX-99.1 - EXHIBIT 99.1 - Lightstone Value Plus Real Estate Investment Trust, Inc.lightstonereit_ex99-1.htm
EX-32.2 - EXHIBIT 32.2 - Lightstone Value Plus Real Estate Investment Trust, Inc.lightstonereit_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - Lightstone Value Plus Real Estate Investment Trust, Inc.lightstonereit_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Lightstone Value Plus Real Estate Investment Trust, Inc.lightstonereit_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Lightstone Value Plus Real Estate Investment Trust, Inc.lightstonereit_ex31-1.htm
EX-23.1 - EXHIBIT 23.1 - Lightstone Value Plus Real Estate Investment Trust, Inc.lightstonereit_ex23-1.htm
EX-21.1 - EXHIBIT 21.1 - Lightstone Value Plus Real Estate Investment Trust, Inc.lightstonereit_ex21-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

☒ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For The Fiscal Year Ended December 31, 2020

 

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   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

1985 Cedar Bridge Avenue, Suite 1, Lakewood, NJ   08701
(Address of principal executive offices)   (Zip code)

 

Registrant’s telephone number, including area code:  732-367-0129

 

Securities registered under Section 12(b) of the Exchange Act:

 

Title of Each Class   Name of Each Exchange on Which Registered
None   None

 

Securities registered under Section 12(g) of the Exchange Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

There is no established market for the Registrant’s common shares. As of June 30, 2020, the last business day of the most recently completed second quarter, there were 22.3 million shares of the registrant’s common stock held by non-affiliates of the registrant. On December 3, 2020 the board of directors of the Registrant approved an estimated value per share of the Registrant’s common stock of $11.18 per share (after allocations to the holder of subordinated profits interests in our operating partnership) derived from the estimated value of the Registrant’s assets less the estimated value of the Registrant’s liabilities, divided by the number of shares outstanding, all as of September 30, 2020. For a full description of the methodologies used to value the Registrant’s assets and liabilities in connection with the calculation of the estimated value per share, see Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Market Information.” As of March 15, 2021, there were 22.3 million shares of common stock held by non-affiliates of the registrant.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

 

 

 

 

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.

 

Table of Contents

 

    Page
PART I    
     
Item 1. Business 1
     
Item 2. Properties 6
     
Item 3. Legal Proceedings 6
     
Item 4. Mine Safety Disclosures 6
     
PART II    
     
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities 7
     
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
     
Item 8. Financial Statements and Supplementary Data F-1
     
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 37
     
Item 9A. Controls and Procedures 37
     
Item 9B. Other Information 38
     
PART III    
     
Item 10. Directors and Executive Officers of the Registrant 38
     
Item 11. Executive Compensation 40
     
Item 12. Security Ownership of Certain Beneficial Owners and Management 41
     
Item 13. Certain Relationships and Related Transactions 41
     
Item 14. Principal Accounting Fees and Services 46
     
PART IV    
     
Item 15. Exhibits and Financial Statement Schedules 50
     
Item 16. Form 10-K Summary 50
     
  Signatures 51

 

  i 

 

 

Special Note Regarding Forward-Looking Statements  

 

This annual report on Form 10-K, together with other statements and information publicly disseminated by Lightstone Value Plus Real Estate Investment Trust, Inc. (the “Lightstone REIT”) contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Lightstone REIT intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe the Lightstone REIT ’s future plans, strategies and expectations, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond the Lightstone REIT’s control and which could materially affect actual results, performances or achievements. Factors which may cause actual results to differ materially from current expectations include, but are not limited to, (i) general economic and local real estate conditions including uncertainties regarding the impact of the current COVID-19 pandemic, (ii) the inability of major tenants to continue paying their rent obligations due to bankruptcy, insolvency or general downturn in their business, (iii) financing risks, such as the inability to obtain equity, debt, or other sources of financing on favorable terms, (iv) changes in governmental laws and regulations, (v) the level and volatility of interest rates and foreign currency exchange rates, (vi) the availability of suitable acquisition opportunities and (vii) increases in operating costs. Accordingly, there is no assurance that the Lightstone REIT’s expectations will be realized.

 

PART I.

 

ITEM 1. BUSINESS:

 

General Description of Business

 

Structure

 

The Lightstone REIT is a Maryland corporation, formed on June 8, 2004, which has elected to be taxed, and qualify as a real estate investment trust for U.S. federal income tax purposes (“REIT”). The Lightstone REIT was formed primarily for the purpose of engaging in the business of investing in and owning commercial and residential real estate properties and making other real estate-related investments located throughout the United States.

 

The Lightstone REIT is structured as an umbrella partnership real estate investment trust, (“UPREIT”), and substantially all of its current and future business is and will be conducted through Lightstone Value Plus REIT, L.P. (the “Operating Partnership”), a Delaware limited partnership formed on July 12, 2004. As of December 31, 2020, we held a 98% general partnership interest in our Operating Partnership’s common units.

 

The Lightstone REIT and the Operating Partnership and its subsidiaries are collectively referred to as the “Company” and the use of “we,” “our,” “us” or similar pronouns in this annual report refers to the Lightstone REIT, its Operating Partnership or the Company as required by the context in which such pronoun is used. 

 

Through our Operating Partnership, we own, operate and develop commercial, residential, and hospitality properties and make real estate-related investments, principally in the United States. Our real estate investments are held by us alone or jointly with other parties. We also originate or acquire mortgage loans secured by real estate. Although most of our investments are of these types, we may invest in whatever types of real estate or real estate-related investments that we believe are in our best interests. Because of the composition of the Company’s real estate and real estate investments, the Company evaluates all of its real estate investments as one operating segment.

 

As of December 31, 2020, we have ownership interests in (i) two consolidated operating properties, (ii) three consolidated development properties and (iii) seven unconsolidated operating properties. With respect to our consolidated operating properties, we wholly own the St. Augustine Outlet Center, a retail property containing approximately 0.3 million square feet of gross leasable area, and have a majority ownership interest of approximately 59.2% in Gantry Park Landing, a multi-family residential property containing 199 apartment units. With respect to our consolidated development properties, we wholly own three projects consisting of the Lower East Side Moxy Hotel, the Exterior Street Project and the Santa Clara Data Center. We also hold a 2.5% ownership interest in seven hotel properties through a joint venture (the “Joint Venture”) which we account for using a measurement alternative under which the Joint Venture is measured at cost, adjusted for observable price changes and impairments, if any. The Joint Venture is between us and the operating partnership of Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone II”), a real estate investment trust also sponsored by our Sponsor, which has a 97.5% ownership interest in the Joint Venture. Furthermore, we have other real estate-related investments, including several agreements with various related party entities that provide for us to make preferred contributions pursuant to certain instruments (the “Preferred Investments”) and nonrecourse promissory notes made to unaffiliated third-parties. Our real estate investments have been and are expected to continue to be held by the Company alone or jointly with other parties.

 

  1 

 

 

Our advisor is Lightstone Value Plus REIT, LLC (the “Advisor”), which is majority owned by David Lichtenstein. On July 6, 2004, the Advisor contributed $2,000 to the Operating Partnership in exchange for 200 limited partner common units (“Common Units”) in the Operating Partnership. Our Advisor also owns 20,000 shares of our common stock (“Common Shares”) which were issued on July 6, 2004 for $200,000, or $10.00 per share. Mr. Lichtenstein also is the majority owner of the equity interests of The Lightstone Group, LLC. The Lightstone Group, LLC served as the sponsor (the ’’Sponsor’’) during our initial public offering (the “Offering”), which terminated on October 10, 2008. Our Advisor, together with our board of directors (the “Board of Directors”) and pursuant to the terms of an advisory agreement, has the primary responsibility for making investment decisions on our behalf and managing our day-to-day operations. Through his ownership and control of The Lightstone Group, LLC, Mr. Lichtenstein is the indirect owner and manager of Lightstone SLP, LLC, a Delaware limited liability company, which owns an aggregate of $30.0 million of special general partner interests (“SLP Units”) in the Operating Partnership which were purchased, at a cost of $100,000 per unit, in connection with our Offering. Mr. Lichtenstein also acts as our Chairman and Chief Executive Officer. As a result, he exerts influence over but does not control the Lightstone REIT or the Operating Partnership.

 

We do not have any employees. The Advisor receives compensation and fees for services related to the investment and management of our assets.

 

Our Advisor has affiliates which may manage and develop certain of our properties. However, we also contract with other unaffiliated third-party property managers.

 

Our Common Shares are not currently listed on a national securities exchange. We may seek to list our stock for trading on a national securities exchange only if a majority of our independent directors believe listing would be in the best interest of our stockholders. We do not intend to list our shares at this time. We do not anticipate that there would be any market for our shares of common stock until they are listed for trading.

 

Noncontrolling Interests

 

Partners of Operating Partnership

 

On July 6, 2004, the Advisor contributed $2,000 to the Operating Partnership in exchange for 200 Common Units. The Advisor has the right to convert the Common Units into cash or, at the option of the Company, an equal number of Common Shares.

 

In connection with the Offering, Lightstone SLP, LLC, an affiliate of the Advisor, purchased an aggregate of $30.0 million of SLP Units in the Operating Partnership at a cost of $100,000 per unit. As the majority owner of the SLP Units, Mr. Lichtenstein is the beneficial owner of a 99% interest in such SLP Units and thus receives an indirect benefit from any distributions made in respect thereof. These SLP Units may be entitled to a portion of any regular and liquidation distributions that we make to our stockholders, but only after our stockholders have received a stated preferred return.

 

In addition, an aggregate of 497,209 Common Units were issued to other unrelated parties during the years ended December 31, 2008 and 2009 and remain outstanding as of December 31, 2020.

 

Other Noncontrolling Interests in Consolidated Subsidiaries

 

As of December 31, 2020, the other noncontrolling interests in consolidated subsidiaries include ownership interests in (i) Pro-DFJV Holdings LLC (“PRO”) held by the Company’s Sponsor, (ii) 50-01 2nd St. Associates LLC (the “2nd Street Joint Venture”), held by the Company’s Sponsor and other affiliates and (iii) various joint ventures held by affiliates of our Sponsor that have originated promissory notes to unaffiliated third parties. PRO’s holdings principally consist of Marco OP Units and Marco II OP Units. The 2nd Street Joint Venture owns Gantry Park Landing.

 

Related Party

 

Our Advisor and its affiliates, and Lightstone SLP, LLC are related parties of the Company. Certain of these entities are entitled to compensation for services related to the investment, management and disposition of our assets. The compensation is based on the cost of acquired properties/investments and the annual revenue earned from such properties/investments, and other such fees and expense reimbursements as outlined in each of the respective agreements.

 

  2 

 

 

Primary Investment Objectives  

 

Our primary objective is to achieve capital appreciation with a secondary objective of income without subjecting principal to undue risk.

 

Acquisition and Investment Policies 

 

We have, to date, acquired and/or developed residential, commercial and hospitality properties principally, all of which are located in the United States and also made other real estate-related investments. Our acquisitions have included both portfolios and individual properties. Our current operating properties consist of one retail property (the St. Augustine Outlet Center) and one multi-family residential property (Gantry Park Landing). We have also acquired various parcels of land and air rights related to the development and construction of real estate properties. Additionally, we have made preferred investments in related parties and originated nonrecourse loans to unaffiliated third-party borrowers.

 

We may acquire the following types of real estate interests:

 

Fee interests in market-rate, middle market multifamily properties at a discount to replacement cost located either in emerging markets or near major metropolitan areas. We will attempt to identify those sub-markets with job growth opportunities and demand demographics which support potential long-term value appreciation for multifamily properties.

 

Fee interests in well-located, multi-tenant, community, power and lifestyle shopping centers and malls located in highly trafficked retail corridors, in selected high-barrier to entry markets and submarkets. We will attempt to identify those sub-markets with constraints on the amount of additional property supply will make future competition less likely.

 

Fee interests in improved, multi-tenant, industrial properties located near major transportation arteries and distribution corridors with limited management responsibilities.

 

Fee interests in improved, multi-tenant, office properties located near major transportation arteries in urban and suburban areas.

 

Fee interests in lodging properties located near major transportation arteries in urban and suburban areas.

 

All of the properties are owned by subsidiary limited partnerships or limited liability companies. These subsidiaries are single-purpose entities that we created to own a single property, and each have no assets other than the property it owns. These entities represent a useful means of shielding our Operating Partnership from liability under state laws and will make the underlying properties easier to transfer. However, tax law disregards single-member LLCs and so it will be as if the Operating Partnership owns the underlying properties for tax purposes. Use of single-purpose entities in this manner is customary for REITs. Our independent directors are not required to approve all transactions involving the creation of subsidiary limited liability companies and limited partnerships that we use for investment in properties on our behalf. These subsidiary arrangements are intended to ensure that no environmental or other liabilities associated with any particular property can be attributed against other properties that the Operating Partnership or we will own. The limited liability aspect of a subsidiary’s form will shield parent and affiliated (but not subsidiary) companies, including the Operating Partnership and us, from liability assessed against it. No additional fees are imposed upon the REIT by the subsidiary companies’ managers and these subsidiaries are not affected our stockholders’ voting rights.

 

We have not and do not intend to make significant investments in single family residential properties; leisure home sites; farms; ranches; timberlands; unimproved properties not intended to be developed; or mining properties.

 

Not more than 10% of our total assets may be invested in unimproved real property. For purposes of this paragraph, “unimproved real properties” does not include properties acquired for the purpose of producing rental or other operating income, properties under construction and properties for which development or construction is planned within one year. Additionally, we do not invest in contracts for the sale of real estate unless in recordable form and appropriately recorded.

 

Although we are not limited as to the geographic area where we may conduct our operations, we have invested and may continue to invest in properties located near the existing operations of our Sponsor, in order to achieve economies of scale where possible.

 

Financing Strategy and Policies

 

We utilize leverage when acquiring and developing our properties. The number of different properties we acquire are affected by numerous factors, including, the amount of funds available to us. When interest rates on loans are high or financing is otherwise unavailable on terms that are satisfactory to us, we may purchase certain properties for cash with the intention of obtaining a loan for a portion of the purchase price or development costs at a later time. However, we have and intend to continue to limit our aggregate long-term permanent borrowings to 75% of the aggregate fair market value of all properties unless any excess borrowing is approved by a majority of the independent directors and is disclosed to our stockholders.

 

  3 

 

 

Our charter provides that the aggregate amount of borrowing, both secured and unsecured, may not exceed 300% of net assets in the absence of a satisfactory showing that a higher level is appropriate, the approval of our Board of Directors and disclosure to stockholders. Net assets means our total assets, other than intangibles, at cost before deducting depreciation or other non-cash reserves less our total liabilities, calculated at least quarterly on a basis consistently applied. Any excess in borrowing over such 300% of net assets level must be approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report to stockholders, along with justification for such excess. As of December 31, 2020, our total borrowings represented 59% of net assets.

 

We have financed our property acquisitions and development activities through a variety of means, including but not limited to individual non-recourse mortgages and through the exchange of an interest in the property for limited partnership units of the Operating Partnership. Generally, though not exclusively, we intend to seek to finance our investments with debt which will be on a non-recourse basis. However, we may, secure recourse financing or provide a guarantee to lenders, if we believe this may result in more favorable terms.

 

Tax Status

 

We elected to be taxed and qualify as a REIT, commencing with the taxable year ended December 31, 2005. If we remain qualified as a REIT, we generally will not be subject to U.S. federal income tax on our net taxable income that we distribute currently to our stockholders. To maintain our REIT qualification under the Internal Revenue Code of 1986, as amended, or the Code, we must meet a number of organizational and operational requirements, including a requirement that we annually distribute to our stockholders at least 90% of our REIT taxable income (which does not equal net income, as calculated in accordance with generally accepted accounting principles in the United States of America, or GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. If we fail to remain qualified for taxation as a REIT in any subsequent year and do not qualify for certain statutory relief provisions, our income for that year will be taxed at regular corporate rates, and we may be precluded from qualifying for treatment as a REIT for the four-year period following our failure to qualify as a REIT. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders. Additionally, even if we qualify as a REIT for U.S. federal income tax purposes, we may still be subject to some U.S. federal, state and local taxes on our income and property and to U.S. federal income taxes and excise taxes on our undistributed income.

 

To maintain our qualification as a REIT, we engage in certain activities such as providing real estate-related services through wholly-owned taxable REIT subsidiaries (“TRSs”). As such, we are subject to U.S. federal and state income and franchise taxes from these activities.

 

As of December 31, 2020 and 2019, we had no material uncertain income tax positions. Additionally, even if we continue to qualify as a REIT for U.S. federal income tax purposes, we may still be subject to some U.S. federal, state and local taxes on our income and property and to U.S. federal income taxes and excise taxes on our undistributed income, if any.   

 

Competition  

 

The commercial, multifamily residential and hospitality real estate markets are highly competitive. We compete in markets with other owners and operators of such properties. The development of new properties intensifies the competition among owners and operators of these types of real estate in many market areas in which we either operate or intend to operate. We compete based on a number of factors that include location, rental rates, security, suitability of the property’s design to prospective tenants’ needs and the manner in which the property is operated and marketed. The number of competing properties in a particular market could have a material effect on our occupancy levels, rental rates and on the operating expenses of certain of our properties.

 

In addition, we compete with other entities engaged in real estate investment activities to locate suitable properties to acquire and/or develop and also to locate tenants and purchasers for our properties. These competitors include other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, lenders, governmental bodies and other entities. There also may be other REITs with asset acquisition objectives similar to ours that may be organized in the future. Some of these competitors, including larger REITs, have substantially greater marketing and financial resources than we have and generally may be able to accept more risk than we can prudently manage, including risks with respect to the creditworthiness of tenants. In addition, these same entities seek financing through similar channels to those sought by us. Therefore, we compete for institutional investors in a market where funds for real estate investment may decrease.

 

Competition from these and other third party real estate investors may limit the number of suitable investment opportunities available to us. It may also result in higher prices, lower yields and a narrower spread of yields over our borrowing costs, making it more difficult for us to acquire new investments on attractive terms.

 

  4 

 

 

We believe that our Sponsor’s experience, coupled with our financing, professionalism, diversity of investments and reputation in the industry enable us to compete with the other real estate investment companies.

 

Because we are organized as an UPREIT, we believe we are well positioned within the industries in which we operate to offer existing property owners the potential opportunity to contribute their properties to us in tax-deferred transactions using our operating partnership units as transactional currency. As a result, we may have a competitive advantage over certain of our competitors that are structured as traditional REITs and non-REITs in pursuing acquisitions with tax-sensitive sellers.

 

COVID-19 Pandemic

 

On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic leading many countries, including the United States, particularly at the individual state level, to subsequently impose various degrees of restrictions and other measures, including, but not limited to, mandatory temporary closures, quarantine guidelines, limitations on travel, and “shelter in place” rules in an effort to reduce its duration and the severity of its spread. Although the COVID-19 pandemic has continued to evolve, most of these previously imposed restrictions and other measures have now been reduced and/or lifted. However, the COVID-19 pandemic remains highly unpredictable and dynamic and its duration and extent is likely dependent on numerous developments such as the regulatory approval, mass production, administration and ultimate effectiveness of vaccines, as well as the timeline to achieve a level of sufficient herd immunity amongst the general population. Accordingly, the COVID-19 pandemic may continue to have negative effects on the overall health of the U.S. economy for the foreseeable future. 

 

As a result of previous restrictions, we closed our St. Augustine Outlet Center from March 20, 2020 through May 7, 2020. Primarily because of the impact of the COVID-19 pandemic on the operating performance of the St. Augustine Outlet Center’s tenancy, especially during the closure period, we have provided forbearance of certain rent payments to various tenants. Additionally, we have seen some deterioration in both the occupancy and rental rates for Gantry Park Landing, which is located on Long Island, New York, as the luxury rental market in the greater New York City metropolitan area has been negatively impacted by the COVID-19 pandemic. However, none of these items have yet materially impacted our results from operations or financial condition.

 

To-date, the COVID-19 pandemic has not had any significant impact on our three development projects. Furthermore, our other real estate-related investments (both our preferred investments in related parties and nonrecourse loans made to unaffiliated third-party borrowers) also relate to various development projects which are at different stages in their respective development process. These investments, which are subject to similar restrictions and other measures, have also not yet been significantly impacted by the COVID-19 pandemic.

 

The extent to which our business may be affected by the ongoing COVID-19 pandemic will largely depend on both current and future developments, all of which are highly uncertain and cannot be reasonably predicted.

 

If our operating properties, development projects and real estate-related investments are negatively impacted for an extended period because (i) occupancy levels and rental rates further decline, (ii) tenants are unable to pay their rent, (iii) borrowers are unable to pay scheduled debt service on notes receivable, (iv) development activities are delayed and/or (v) various related party entities are unable to pay monthly preferred distributions on our preferred investments in related parties, our business and financial results could be materially and adversely impacted.

 

Environmental  

 

As an owner of real estate, we are subject to various environmental laws of federal, state and local governments. Compliance with existing laws has not had a material adverse effect on our financial condition or results of operations, and management does not believe it will have such an impact in the future. However, we cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on properties in which we hold an interest, or on properties that may be acquired or developed in the future.

 

Employees  

 

We do not have employees. We entered into an advisory agreement with our Advisor on April 22, 2005, pursuant to which our Advisor supervises and manages our day-to-day operations and selects our real estate and real estate related investments, subject to oversight by our Board of Directors. We pay our Advisor fees for services related to the investment and management of our assets, and we reimburse our Advisor for certain expenses incurred on our behalf.

 

Available Information  

 

We electronically file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, and proxy statements, with the United States Securities and Exchange Commission (the “SEC”). Stockholders may obtain copies of our filings with the SEC, free of charge, from the website maintained by the SEC at http://www.sec.gov, or at the SEC’s Public Reference Room at 100 F. Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our office is located at 1985 Cedar Bridge Avenue, Lakewood, NJ 08701. Our telephone number is (732) 367-0129. Our website is www.lightstonecapitalmarkets.com.

 

  5 

 

 

ITEM 1B. UNRESOLVED STAFF COMMENTS:

 

None applicable.

 

ITEM 2. PROPERTIES:

 

Operating Properties

  

   Location  Year Built
(Range
of years
built)
   Date
Acquired
  Gross
Leasable Area
(“GLA”) in
Square Feet/
Leaseable
Units
   Percentage Occupied
as of
December 31,
2020
   Annualized Revenues based on rents at
December 31,
2020
  Annualized Revenues per square foot/unit at
December 31,
2020
   
St. Augustine Outlet Center (Retail Outlet Mall)  St. Augustine,
Florida
   1998   March
2006
   328,125 GLA   73.6%   $2.0 million  $8.12 sqft  
Gantry Park Landing (Multi-Family Apartment Building)  Queens,
New York
   2013   August
2013
   199 units   81.9%   $7.8 million  $47,619 unit  

 

Annualized revenue is defined as the minimum monthly payments due as of December 31, 2020 annualized, excluding periodic contractual fixed increases and rents calculated based on a percentage of tenants’ sales. The annualized base rent disclosed in the table above includes all concessions, abatements and reimbursements of rent to tenants.

 

Development Properties

 

Lower East Side Moxy Hotel

 

On December 3, 2018, we acquired three adjacent parcels of land located at 147-151 Bowery, New York, New York on which we are developing and constructing a 296-room Marriott Moxy hotel (the “Lower East Side Moxy Hotel”).

 

Exterior Street Project

 

On February 27, 2019, we, acquired two adjacent parcels of land located at 355 and 399 Exterior Street, New York, New York, on which we are developing and constructing a multi-family residential property (the “Exterior Street Project”).

 

Santa Clara Data Center

 

On January 10, 2019, we acquired a parcel of land located at 2175 Martin Avenue, Santa Clara, California (the “Martin Avenue Land”). We have completed certain predevelopment activities associated with the potential development and construction of a data center (the “Santa Clara Data Center”) on the Martin Avenue Land.

 

The following is a summary of the amounts incurred and capitalized to construction in progress for our development projects as of December 31, 2020:

 

Development Projects    
Lower East Side Moxy Hotel  $98,608 
Exterior Street Project   74,230 
Santa Clara Data Center   13,350 
Total Development Projects  $186,188 

 

ITEM 3. LEGAL PROCEEDINGS:  

 

From time to time in the ordinary course of business, we may become subject to legal proceedings, claims or disputes.

 

As of the date hereof, we are not a party to any material pending legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on our results of operations or financial condition, which would require accrual or disclosure of the contingency and possible range of loss.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

  6 

 

 

PART II.

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES:

 

Shareholder Information

 

As of March 15, 2021, we had approximately 22.3 million common shares outstanding, held by a total of 5,960 stockholders. The number of stockholders is based on the records of DST Systems Inc., which serves as our registrar and transfer agent.

 

Market Information 

 

The Company’s common stock is not currently listed on a national securities exchange. The Company may seek to list its common stock for trading on a national securities exchange only if a majority of its independent directors believe listing would be in the best interest of its stockholders. The Company does not intend to list its shares at this time. The Company does not anticipate that there would be any market for its shares of common stock until they are listed for trading.

 

Estimated Net Asset Value (“NAV”) and NAV per Share of Common Stock (“NAV per Share”)

 

On December 3, 2020, our board of directors determined and approved our estimated NAV of approximately $296.2 million and resulting estimated NAV per Share of $11.18, after allocations of value to special general partner interests, or SLP Units, in our Operating Partnership, held by Lightstone SLP, LLC, an affiliate of our Advisor, assuming a liquidation event, both as of September 30, 2020. From our inception through the termination of our initial public offering on October 10, 2008, Lightstone SLP, LLC, an affiliate of our Advisor, contributed cash of $30.0 million in exchange for 300 SLP Units, at a cost of $100,000 per unit.

 

The estimated NAV of our shares was calculated as of a particular point in time. The estimated NAV of our shares will fluctuate over time in response to developments related to individual assets in the portfolio and the management of those assets and in response to the real estate and finance markets. There is no assurance of the extent to which the current estimated valuation should be relied upon for any purpose after its effective date regardless that it may be published on any statement issued by us or otherwise.

 

Process and Methodology

 

Our Advisor, along with any necessary material assistance or confirmation of a third-party valuation expert or service, is responsible for calculating our estimated NAV and resulting NAV per Share, which we currently expect will be done on an annual basis unless our Common Shares are approved for listing on a national securities exchange. Our board of directors will review and approve each estimate of NAV and resulting NAV per Share.

 

Our estimated NAV and resulting NAV per Share as of September 30, 2020 were calculated with the assistance of both our Advisor and Robert A. Stanger & Co, Inc. (“Stanger”), an independent third-party valuation firm engaged by us to assist with the valuation of our assets, liabilities and any allocations of value to SLP Units. Our Advisor recommended and our board of directors established the estimated NAV per Share as of September 30, 2020 based upon the analysis and reports provided by our Advisor and Stanger. The process for estimating the value of our assets, liabilities and allocations of value to SLP Units, is performed in accordance with the provisions of the Investment Program Association Practice Guideline 2013-01, “Valuations of Publicly Registered Non-Listed REITs.” We believe that our valuations were developed in a manner reasonably designed to ensure their reliability.

 

The engagement of Stanger with respect to our estimated NAV and resulting NAV per Share as of September 30, 2020 was approved by our board of directors, including all of our independent directors. Stanger has extensive experience in conducting asset valuations, including valuations of commercial real estate, debt, properties and real estate-related investments.

 

With respect to our estimated NAV and resulting NAV per Share as of September 30, 2020, Stanger prepared appraisal reports (the “Stanger Appraisal Reports”), summarizing key inputs and assumptions, on one of our two consolidated operating properties and all three of our consolidated development properties (collectively, the “Stanger Appraised Properties”) as of September 30, 2020. The Stanger Appraised Properties consist of the St. Augustine Outlet Center, a wholly owned and consolidated operating retail property and (ii) three wholly owned and consolidated development properties (the “Lower East Side Moxy Hotel”, the “Exterior Street Project” and the “Santa Clara Data Center”).

 

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Stanger also prepared a NAV report (the “September 2020 NAV Report”) which estimates our NAV per Share as of September 30, 2020. The September 2020 NAV Report relied upon (i) the Stanger Appraisal Reports for the Stanger Appraised Properties, (ii) an appraisal report prepared by another independent third-party valuation firm for Gantry Park Landing, our majority-owned and consolidated operating multi-family residential property, (iii) Stanger’s estimated value of our outstanding indebtedness, (iv) our Advisor’s value opinion with respect to our 2.5% non-managing ownership interest in an unconsolidated joint venture (the “Joint Venture”), assuming a liquidation pursuant to the terms of the Joint Venture’s operating agreement, and our other investments in related parties, (vi) Stanger’s estimate of the allocation of value to the SLP Units, and (vii) our Advisor’s estimate of the value of our cash and cash equivalents, marketable securities, restricted escrows, other assets, other liabilities and other non-controlling interests, to calculate estimated NAV per Share, all as of September 30, 2020.

 

The table below sets forth the calculation of our estimated NAV and resulting NAV per Share as of September 30, 2020, as well as the comparable calculation as of September 30, 2019 and 2018, respectively. Certain amounts are reflected net of noncontrolling interests, as applicable. Dollar and share amounts are presented in thousands, except per share data.

 

   As of
September 30, 2020
   As of
September 30, 2019
   As of
September 30, 2018
 
   Value  Per Share   Value   Per Share   Value   Per Share 
Net Assets:                              
Real Estate Properties  $287,124   $12.60   $256,288   $11.00   $167,688   $6.84 
Non-Real Estate Assets:                              
Cash and cash equivalents   56,521         22,249         61,185      
Investments in related parties   15,657         77,038         114,806      
Marketable securities, available for sale   36,192         54,161         118,575      
Restricted escrows   2,419         1,472         9,025      
Notes receivable, net   51,258         33,251         -      
Other assets   1,337         1,038         1,883      
Total non-real estate assets   163,384    7.17    189,209    8.12    305,474    12.46 
Total Assets   450,508    19.77    445,497    19.12    473,162    19.30 
Liabilities:                              
Mortgage notes payable   (140,441)        (113,120)        (87,536)     
Notes payable   -         -         (18,625)     
Other liabilities   (13,282)        (8,166)        (27,473)     
Total liabilities   (153,723)   (6.75)   (121,286)   (5.21)   (133,634)   (5.45)
Other noncontrolling interests   (617)   (0.02)   (617)   (0.02)   (617)   (0.02)
Net Asset Value before Allocations to SLP Units   296,168    13.00    323,594    13.89    338,911    13.83 
Allocations to SLP Units   (41,499)   (1.82)   (48,209)   (2.07)   (49,147)   (2.01)
Net Asset Value  $254,669   $11.18   $275,385   $11.82   $289,764   $11.82 
                               
Shares of Common Stock Outstanding(1)   22,784         23,290         24,509      

 

Note:

(1)Includes approximately 0.5 million shares of our common stock assuming the conversion of an equal number of common units of limited partnership interest in our Operating Partnership (“common units”).

 

Use of Independent Valuation Firm:

 

As discussed above, our Advisor is responsible for calculating our NAV. In connection with determining our NAV, our Advisor may rely on the material assistance or confirmation of a third-party valuation expert or service. In this regard, Stanger was selected by our board of directors to assist our Advisor in the calculation of our estimated NAV and resulting NAV per Share as of September 30, 2020. Stanger’s service included appraising the Stanger Appraised Properties and preparing the September 2020 NAV Report. Stanger is engaged in the business of appraising commercial real estate properties and is not affiliated with us or our Advisor. The compensation we paid to Stanger was based on the scope of work and not on the appraised values of our real estate properties. The appraisals were performed in accordance with the Code of Ethics and the Uniform Standards of Professional Appraisal Practice, or USPAP, the real estate appraisal industry standards created by The Appraisal Foundation. The Stanger Appraisal Reports were reviewed, approved, and signed by an individual with the professional designation of MAI licensed in the state where each real property is located. The use of the reports is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. In preparing its reports, Stanger did not, and was not requested to; solicit third-party indications of interest for our common stock in connection with possible purchases thereof or the acquisition of all or any part of us.

 

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Stanger collected reasonably available material information that it deemed relevant in appraising our real estate properties. Stanger relied in part on property-level information provided by our Advisor, including (i) property historical and projected operating revenues and expenses; (ii) property lease agreements and/or lease abstracts; and (iii) information regarding recent or planned capital expenditures.

 

In conducting their investigation and analyses, Stanger took into account customary and accepted financial and commercial procedures and considerations as they deemed relevant. Although Stanger reviewed information supplied or otherwise made available by us or the Advisor for reasonableness, they assumed and relied upon the accuracy and completeness of all such information and of all information supplied or otherwise made available to them by any other party and did not independently verify any such information. Stanger has assumed that any operating or financial forecasts and other information and data provided to or otherwise reviewed by or discussed with Stanger were reasonably prepared in good faith on bases reflecting the best currently available estimates and judgments of our management, our board of directors, and/or our Advisor. Stanger relied on us to advise them promptly if any information previously provided became inaccurate or was required to be updated during the period of their review.

 

In performing its analyses, Stanger made numerous other assumptions as of various points in time with respect to industry performance, general business, economic, and regulatory conditions, and other matters, many of which are beyond their control and our control. Stanger also made assumptions with respect to certain factual matters. For example, unless specifically informed to the contrary, Stanger assumed that we have clear and marketable title to each real estate property appraised, that no title defects exist, that any improvements were made in accordance with law, that no hazardous materials are present or were present previously, that no significant deed restrictions exist, and that no changes to zoning ordinances or regulations governing use, density, or shape are pending or being considered. Furthermore, Stanger’s analyses, opinions, and conclusions were necessarily based upon market, economic, financial, and other circumstances and conditions existing as of or prior to the date of the Stanger Appraisal Reports, and any material change in such circumstances and conditions may affect Stanger’s analyses and conclusions. The Stanger Appraisal Reports contain other assumptions, qualifications, and limitations that qualify the analyses, opinions, and conclusions set forth therein. Furthermore, the prices at which our real estate properties may actually be sold could differ from Stanger’s analyses.

 

Stanger is actively engaged in the business of appraising commercial real estate properties similar to those owned by us in connection with public security offerings, private placements, business combinations, and similar transactions. We do not believe that there are any material conflicts of interest between Stanger, on the one hand, and us, our Sponsor, our Advisor, and our affiliates, on the other hand. Our Advisor engaged Stanger on behalf of our board of directors to deliver their reports to assist in the NAV calculation as of September 30, 2020 and Stanger received compensation for those efforts. In addition, we agreed to indemnify Stanger against certain liabilities arising out of this engagement. In the two years prior to the date of this filing, Stanger was previously engaged by us for appraisal and valuation services in connection with our financial reporting requirements. Stanger has received usual and customary fees in connection with those services. Stanger may from time to time in the future perform other services for us and our Sponsor or other affiliates of the Sponsor, so long as such other services do not adversely affect the independence of Stanger as certified in the applicable Appraisal Reports. During the past two years Stanger has also been engaged to provide appraisal services to another non-traded REIT sponsored by our Sponsor for which it was paid usual and customary fees.

 

Although Stanger considered any comments received from us and our Advisor relating to their reports, the final appraised values of the Stanger Appraised Properties were determined by Stanger. The reports are addressed to our board of directors to assist our board of directors in calculating our estimated NAV per Share as of September 30, 2020. The reports are not addressed to the public, may not be relied upon by any other person to establish our estimated NAV per Share, and do not constitute a recommendation to any person to purchase or sell any shares of our common stock.

 

Our goal in calculating our estimated NAV is to arrive at values that are reasonable and supportable using what we deem to be appropriate valuation methodologies and assumptions. The reports, including the analysis, opinions, and conclusions set forth in such reports, are qualified by the assumptions, qualifications, and limitations set forth in the respective reports. The following is a summary of our valuation methodologies used to value our assets and liabilities by key component:

 

Real estate properties:

 

As of September 30, 2020, we have ownership interests in two consolidated operating properties and three consolidated development properties (collectively, the “Real Estate Properties). With respect to our consolidated operating properties, we wholly own the St. Augustine Outlet Center, a retail property containing approximately 0.3 million square feet of gross leasable area, and have a majority ownership interest of approximately 59.2% in Gantry Park Landing, a multi-family residential property containing 199 apartment units. With respect to our consolidated development properties, we wholly own three development projects consisting of the Lower East Side Moxy Hotel, the Exterior Street Project and the Santa Clara Data Center.

 

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As described above, we engaged Stanger to provide an appraisal of the Stanger Appraised Properties consisting of four of the five consolidated properties in which we held ownership interests as of September 30, 2020. The Stanger Appraised Properties consist of (i) the St. Augustine Outlet Center; and (ii) our three development properties. We also engaged another independent third-party valuation firm to provide an appraisal report for Gantry Park Landing, a multi-family apartment building which we majority own and consolidate. In preparing their appraisal reports, Stanger and the other independent third-party valuation firm, among other things:

 

  Performed a site visit of each property in connection with this assignment or other assignments;
     
  Interviewed our officers or our Advisor’s personnel to obtain information relating to the physical condition of each appraised property, including known environmental conditions, status of ongoing or planned property additions and reconfigurations, and other factors for such leased properties;
     
  Reviewed lease agreements for those properties subject to a long-term lease and discussed with us or the Advisor certain lease provisions and factors on each property; and
     
  Reviewed the acquisition criteria and parameters used by real estate investors for properties similar to the subject properties, including a search of real estate data sources and publications concerning real estate buyer’s criteria, discussions with sources deemed appropriate, and a review of transaction data for similar properties.

 

Stanger and the other independent third-party valuation firm employed the income approach and/or the sales comparison approach to estimate the value of the appraised properties. The income approach involves an economic analysis of the property based on its potential to provide future net annual income. As part of the valuation, a discounted cash flow analysis (“DCF Analysis”) and/or direct capitalization analysis was used in the income approach to determine the value of our interest in the portfolio. The indicated value by the income approach represents the amount an investor may pay for the expectation of receiving the net cash flow from the property.

 

The direct capitalization analysis is based upon the net operating income of the property capitalized at an appropriate capitalization rate for the property based upon property characteristics and competitive position and market conditions at the date of the appraisal.

 

In applying the DCF Analysis, pro forma statements of operations for the property including revenues and expenses are analyzed and projected over a multi-year period. The property is assumed to be sold at the end of the multi-year holding period. The reversion value of the property which can be realized upon sale at the end of the holding period is calculated based on the capitalization of the estimated net operating income of the property in the year of sale, utilizing a capitalization rate deemed appropriate in light of the age, anticipated functional and economic obsolescence and competitive position of the property at the time of sale. Net proceeds to owners are determined by deducting appropriate costs of sale. The discount rate selected for the DCF Analysis is based upon estimated target rates of return for buyers of similar properties.

 

The sales comparison approach utilizes indices of value derived from actual or proposed sales of comparable properties to estimate the value of the subject property. The appraiser analyzed such comparable sale data as was available to develop a market value conclusion for the subject property.

 

Stanger prepared the Stanger Appraisal Reports and the other independent third-party valuation firm prepared an appraisal report for Gantry Park Landing, summarizing key inputs and assumptions, for each of the appraised properties using financial information provided by us and our Advisor. From such review, Stanger and the other independent third-party valuation firm selected the appropriate cash flow discount rate, residual discount rate, and terminal capitalization rate in the DCF Analysis, if applicable, the appropriate capitalization rate in the direct capitalization analysis and the appropriate price per unit in the sales comparison analysis. As for those properties consolidated on our financials, and for which we do not own 100% of the ownership interest, the property value was adjusted to reflect our ownership interest in such property after consideration of the distribution priorities associated with such property.

 

The estimated values for our investments in real estate may or may not represent current market values and do not equal the book values of our real estate investments in accordance with U.S. GAAP. Our consolidated investments in real estate are currently carried in our consolidated financial statements at their amortized cost basis, adjusted for any loss impairments and bargain purchase gains recognized to date. Our unconsolidated investments in real estate are currently accounted for using a measurement alternative under which the Joint Venture is measured at cost, adjusted for observable price changes and impairments, if any. of accounting in our consolidated financial statements.

 

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Operating Properties

 

As of September 30, 2020, our ownership interests in our two consolidated operating properties were valued at an aggregate of $102.8 million. The following summarizes the key assumptions that were used in the discounted cash flow models to estimate the value of (i) the St. Augustine Outlet Center, our operating retail property, and (ii) Gantry Park Landing, our operating multi-family residential property, which are included in our Real Estate Properties as of September 30, 2020:

 

       Gantry 
   St. Augustine   Park Landing 
   Outlet Center   (multi-family 
   (retail)   residential) 
Weighted-average:        
Exit capitalization rate   10.00%   4.25%
Discount rate   11.00%   5.25%
Annual market rent growth rate   3.17%   2.81%
Annual net operating income growth rate   18.73%   2.43%
Holding period (in years)   13.0    11.0 

 

While we believe that the assumptions made by Stanger and the other independent third-party appraisal firm are reasonable, a change in these assumptions would impact the calculations of the estimated value of these two operating properties included in our Real Estate Properties. The table below represents the estimated increase or decrease to our estimated NAV per Share resulting from a 25-basis point increase and decrease in the capitalization rates and discount rates for the two consolidated operating properties we own. The table is presented to provide a hypothetical illustration of the possible results if only one change in assumptions was made, with all other factors remaining constant. Further, each of these assumptions could change by more or less than 25 basis points or not at all.

 

   Change in NAV per Share 
   Increase of   Decrease of 
   25 basis points   25 basis points 
Exit capitalization rate  $(0.18)  $0.20 
Discount rate  $(0.06)  $0.06 

 

Development Properties

 

As of September 30, 2020, we wholly own and consolidate three development properties as follows:

 

Lower East Side Moxy Hotel

 

In December 2018, we acquired three adjacent parcels of land located at 147-151 Bowery, New York, New York (collectively, the “Bowery Land”). Additionally, in December 2018, we acquired certain air rights located at 329 Broome Street, New York, New York (the “Air Rights”). We are using the Bowery Land and the Air Rights in connection with the development and construction of the Lower East Side Moxy Hotel. As of September 30, 2020, the Lower East Side Moxy Hotel was under development and Stanger deemed it appropriate to determine its fair value of approximately $93.7 million as of that date based on the aggregate estimated fair value of the land parcels of $58.7 million (using a sales comparison approach) plus other development costs incurred of $35.0 million.

 

Exterior Street Project

 

In February 2019, we acquired two adjacent parcels of land located at 355 and 399 Exterior Street, New York, New York (collectively, the “Exterior Street Land”). We are using the Exterior Street Land in connection with the development and construction of the Exterior Street Project, a multi-family residential property. As of September 30, 2020, the Exterior Street Project was under development and Stanger deemed it appropriate to determine its fair value of approximately $76.9 million as of that date based on the aggregate estimated fair value of the land parcels of $65.5 million (using a sales comparison approach) plus other development costs incurred of $11.4 million.

 

Santa Clara Data Center

 

In January 2019, we acquired a parcel of land located at 2175 Martin Avenue, Santa Clara, CA (the “Martin Avenue Land”). We intend to use the Martin Avenue Land in connection with the development and construction of the Santa Clara Data Center. The Santa Clara Data Center was under development as of September 30, 2020 and Stanger deemed it appropriate to determine its fair value of approximately $13.8 million as of that date based on the estimated fair value of the land parcel of $10.9 million (using a sales comparison approach) plus other development costs incurred of $2.9 million.

 

The aggregate fair value of our Real Estate Properties of $287.1 million compared to their aggregate cost of $281.1 million, both as of September 30, 2020, equates to an increase in value of 1.2%.

 

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Cash and cash equivalents: The estimated values of our cash and cash equivalents approximate their carrying values due to their short maturities.

 

Investments in related parties: As of September 30, 2020, we had various investments in related parties, which were classified as investments in related parties in our consolidated balance sheets, as follows:

 

  As of September 30, 2020, we have a 2.5% non-managing ownership interest in the Joint Venture, which owns seven hospitality properties. The Joint Venture is between us and the operating partnership of Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone II”), a real estate investment trust also sponsored by our Sponsor, which has a 97.5% managing ownership interest in the Joint Venture. We do not consolidate our ownership interest in the Joint Venture but rather account for it under the cost method of accounting. As of September 30, 2020, our Advisor estimated the fair value of our ownership interest in the Joint Venture was approximately $1.2 million based on a hypothetical liquidation of the estimated value of the Joint Venture’s net assets, which approximated our carrying value.
     
  We have entered into agreements with various related party entities pursuant to which we have made aggregate outstanding contributions of $14.5 million to affiliates of our Sponsor which have either developed or are developing various residential and hospitality projects located in the New York City and Miami metropolitan areas. These contributions were made pursuant to instruments (the “Preferred Investments”) that entitle us to monthly preferred distributions at 12% per annum and are classified as held-to-maturity securities and are recorded at cost. As of September 30, 2020, the aggregate estimated value of our Preferred Investments of $14.5 million approximated their carrying values based on market rates for similar instruments.

 

Marketable securities, available for sale: The estimated values of our marketable securities, available for sale, are based on Level 1 and Level 2 inputs. Level 1 inputs are inputs that are observable, either directly or indirectly, such as quoted prices in active markets for identical assets or liabilities. Level 2 inputs are inputs 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. All of our marketable securities measured using Level 2 inputs were valued based on a market approach using readily available quoted market prices for similar assets.

 

Restricted escrows: The estimated values of our restricted escrows approximate their carrying values due to their short maturities.

 

Notes receivable, net: The estimated values of our notes receivable generally approximate their carrying values as of September 30, 2020 based on current market rates for similar instruments.

 

Other assets: Our other assets consist of tenant accounts receivable and prepaid expenses and other assets. The estimated values of these items approximate their carrying values due to their short maturities. Certain other items, primarily straight-line rent receivable, intangibles and deferred costs, have been eliminated for the purpose of the valuation because those items are already considered in our valuation of the respective investments in real estate properties or financial instruments.

 

Mortgage notes payable: We have mortgage notes payable that bear interest at both variable and fixed rates. The estimated values of our variable-rate mortgage loans were deemed to approximate their carrying values because their interest rates move in conjunction with changes to market interest rates. The estimated values for our fixed-rate mortgage loans were estimated using a discounted cash flow analysis, which used inputs based on the remaining loan terms and estimated current market interest rates for mortgage loans with similar characteristics, including remaining loan term and loan-to-value ratios. The current market interest rates for our fixed-rate mortgage loans were generally determined based on market rates for available comparable debt. The estimated current market interest rates for our fixed-rate mortgage loans ranged from 2.42% to 2.95%.

 

Other liabilities: Our other liabilities consist of our accounts payable and accrued expenses, amounts due to our Sponsor, tenant allowances and deposits payable, distributions payable and deferred rental income. The carrying values of these items were considered to equal their fair value due to their short maturities. Certain other items, primarily intangibles, have been eliminated for the purpose of the valuation because those items are already considered in our valuation of the respective Real Estate Properties or financial instruments.

 

Other noncontrolling interests: Our other noncontrolling interests consist of accrued distributions on common units and SLP Units.

 

Allocations of value to SLP units: The carrying value of the SLP Units held by Lightstone SLP, LLC, an affiliate of our Advisor, are classified in noncontrolling interests on our consolidated balance sheet. The IPA’s Practice Guideline 2013—01 provides for adjustments to the NAV for preferred securities, special interests and incentive fees based on the aggregate NAV of the company and payable to the sponsor in a hypothetical liquidation of the company as of the valuation date in accordance with the provisions of the partnership or advisory agreements and the terms of the preferred securities. Because certain distributions related to our SLP Units are only payable to their holder in a liquidation event, we believe they should be valued for our NAV in accordance with these provisions.

 

Our operating agreement provides for distributions to be made during our liquidating stage to our stockholders and the holder of the SLP Units at certain prescribed thresholds. In connection with our initial public offering of common stock, Lightstone SLP, LLC purchased an aggregate of $30.0 million of SLP Units. In the calculation of our estimated NAV, an approximately $41.5 million allocation of value was made to the SLP Units representing the amount of estimated distributions which would have been payable to the holder of the SLP Units, assuming a liquidation event as of September 30, 2020.

 

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Historical Estimated NAV and NAV per Share

 

Additional information on our historical reported estimated NAV and NAV per Share for the preceding two years may be found in the following referenced filings:

 

As of September 30, 2019 – Current Report on Form 8-K filed on December 12, 2019

As of September 30, 2018 – Current Report on Form 8-K filed on December 13, 2018

 

Limitations and Risks

 

As with any valuation methodology, the methodology used to determine our estimated NAV and resulting estimated NAV per Share is based upon a number of estimates and assumptions that may prove later not to be accurate or complete. Further, different participants with different property-specific and general real estate and capital market assumptions, estimates, judgments and standards could derive a different estimated NAV per Share, which could be significantly different from the estimated NAV per Share approved by our board of directors. The estimated NAV per Share approved by our board of directors does not represent the fair value of our assets and liabilities in accordance with GAAP, and such estimated NAV per Share is not a representation, warranty or guarantee that:

 

  A stockholder would be able to resell his or her shares at the estimated NAV per Share;

 

  A stockholder would ultimately realize distributions per share of common stock equal to the estimated NAV per Share upon liquidation of our assets and settlement of our liabilities or a sale of the Company;

 

  Our shares of common stock would trade at the estimated NAV per Share on a national securities exchange;

 

  An independent third-party appraiser or other third-party valuation firm would agree with the estimated NAV per Share; or

 

  The methodology used to estimate our NAV per Share would be acceptable to FINRA or under the Employee Retirement Income Security Act with respect to their respective requirements.

 

The Internal Revenue Service and the Department of Labor do not provide any guidance on the methodology an issuer must use to determine its estimated NAV per share. FINRA guidance provides that NAV valuations be derived from a methodology that conforms to standard industry practice.

 

As with any valuation methodology, our methodology is based upon a number of estimates and assumptions that may not be accurate or complete. Different parties with different assumptions and estimates could derive different estimated NAVs and resulting NAVs per share, and these differences could be significant. The estimated NAV per Share is not audited and does not represent the fair value of our assets less our liabilities in accordance GAAP, nor do they represent an actual liquidation value of our assets and liabilities or the amount shares of our common stock would trade at on a national securities exchange. As of the date of this filing, although we have not sought stockholder approval to adopt a plan of liquidation of the Company, certain distributions may be payable to Lightstone SLP, LLC for its SLP Units in connection with a liquidation event. Accordingly, our estimated NAV reflects any allocations of value to the SLP Units representing the amount that would be payable to Lightstone SLP, LLC in connection with a liquidation event pursuant to the guidelines for estimating NAV contained in IPA Practice Guideline 2013-01, ’‘Valuation of Publicly Registered Non-Listed REITs.’’ Our estimated NAV per Share is based on the estimated value of our assets less the estimated value of our liabilities and other non-controlling interests less any allocations to the SLP Units divided by the number of our diluted shares of common stock outstanding, all as of the date indicated. Our estimated NAV per Share does not reflect a discount for the fact we are externally managed, nor does it reflect a real estate portfolio premium/discount versus the sum of the individual property values. Our estimated NAV per Share does not take into account estimated disposition costs or fees or penalties, if any, that may apply upon the prepayment of certain of our debt obligations or the impact of restrictions on the assumption of certain debt. Our estimated NAV per Share will fluctuate over time as a result of, among other things, future acquisitions or dispositions of assets, developments related to individual assets and the management of those assets and changes in the real estate and capital markets. Different parties using different assumptions and estimates could derive different NAVs and resulting estimated NAVs per share, and these differences could be significant. Markets for real estate and real estate-related investments can fluctuate and values are expected to change in the future. We currently expect that our Advisor will estimate our NAV on at least an annual basis. Our board of directors will review and approve each estimate of NAV and resulting estimated NAV per Share.

 

The following factors may cause a stockholder not to ultimately realize distributions per share of common stock equal to the estimated NAV per Share upon liquidation:

 

  The methodology used to determine estimated NAV per Share includes a number of estimates and assumptions that may not prove to be accurate or complete as compared to the actual amounts received in the liquidation;

 

  13 

 

 

  In a liquidation, certain assets may not be liquidated at their estimated values because of transfer fees and disposition fees, which are not reflected in the estimated NAV calculation;

 

  In a liquidation, debt obligations may have to be prepaid and the costs of any prepayment penalties may reduce the liquidation amounts. Prepayment penalties are not included in determining the estimated value of liabilities in determining estimated NAV;

 

  In a liquidation, the real estate assets may derive a portfolio premium which premium is not considered in determining estimated NAV;

 

  In a liquidation, the potential buyers of the assets may use different estimates and assumptions than those used in determining estimated NAV;

 

  If the liquidation occurs through a listing of the common stock on a national securities exchange, the capital markets may value the Company’s net assets at a different amount than the estimated NAV. Such valuation would likely be based upon customary REIT valuation methodology including funds from operation (’‘FFO’’) multiples of other comparable REITs, FFO coverage of dividends and adjusted FFO payout of the Company’s anticipated dividend; and

 

  If the liquidation occurs through a merger of the Company with another REIT, the amount realized for the common stock may not equal the estimated NAV per Share because of many factors including the aggregate consideration received, the make-up of the consideration (e.g., cash, stock or both), the performance of any stock received as part of the consideration during the merger process and thereafter, the reception of the merger in the market and whether the market believes the pricing of the merger was fair to both parties.

 

Share Repurchase Program

 

Our share repurchase program may provide eligible stockholders with limited, interim liquidity by enabling them to sell shares back to us, subject to restrictions and applicable law. A selling stockholder must be unaffiliated with us, and must have beneficially held the shares for at least one year prior to offering the shares for sale to us through the share repurchase program. Subject to the limitations described in the Registration Statement, we will also redeem shares upon the request of the estate, heir or beneficiary of a deceased stockholder.

 

Originally, the prices at which stockholders who held shares for the required one-year period could sell shares back to us was the lesser of (i) the share price as determined by our Board of Directors or (ii) the purchase price per share if purchased at a reduced price.

 

On May 10, 2018, the Board of Directors amended the share repurchase program to (i) change to the price for all purchases under our share repurchase program from $10.00 per share to 92% of the NAV per Share (previously the purchase price was $10.00 per share) and (ii) increase the number of shares repurchased during any calendar year from two (2.0%) of the weighted average number of shares outstanding during the prior calendar year to five (5.0%) of the weighted average number of shares outstanding during the previous twelve months.

 

A stockholder must have beneficially held the shares for at least one year prior to offering them for sale to us through the share repurchase program, although if a stockholder redeems all of its shares our Board of Directors has the discretion to exempt shares purchased pursuant to the distribution reinvestment plan from this one year requirement. Other affiliates will not be eligible to participate in share repurchase program.

 

Pursuant to the terms of the share repurchase program, we will make repurchases, if requested, at least once quarterly. Subject to funds being available, we will limit the number of shares repurchased during any calendar year to two (2.0%) of the weighted average number of shares outstanding during the prior calendar year. Funding for the share repurchase program will come exclusively from proceeds we receive from the sale of shares under our distribution reinvestment plan and other operating funds, if any, as the Board of Directors, at its sole discretion, may reserve for this purpose.

 

For the period from January 1 through March 24, 2020, we repurchased 287,987 shares of common stock for $10.87 per share, pursuant to our share repurchase program. During the year ended December 31, 2019, we repurchased 1.1 million shares of common stock at an average price per share of $10.65.

 

Our Board of Directors, at its sole discretion, has the power to terminate the share repurchase program, change the price per share under the share repurchase program or reduce the number of shares purchased under the program, if it determines that the funds allocated to the share repurchase program are needed for other purposes, such as the acquisition, maintenance or repair of properties, or for use in making a declared distribution. A determination by our Board of Directors to eliminate or reduce the share repurchase program requires the unanimous affirmative vote of the independent directors.

 

On March 25, 2020, the Board of Directors determined to suspend the share repurchase program effective immediately.

 

Effective March 15, 2021, the Board of Directors reopened the share repurchase program solely for redemptions submitted in connection with a stockholder’s death and set the price for all such purchases to $11.18, which is 100% of the NAV per Share. Deaths that occurred subsequent to January 1, 2020 are eligible for consideration. Beginning January 1, 2022, requests for redemptions in connection with a stockholder’s death must be submitted and received by us within one year of the stockholder’s date of death for consideration.

 

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On an annual basis, we will not redeem in excess of 0.5% of the number of shares outstanding as of the end of the preceding year. Death redemption requests are expected to be processed on a quarterly basis and may be subject to pro ration if death redemption requests exceed the annual limitation.

 

Tender Offers

 

2019 Tender Offer

 

We commenced a tender offer on April 19, 2019, pursuant to which we offered to acquire up to 0.5 million shares of our common stock at a purchase price of $7.00 per share, or $3.5 million in the aggregate (the “2019 Tender Offer”). Pursuant to the terms of the 2019 Tender Offer, which expired on June 14, 2019, we repurchased approximately 0.1 million shares of our common stock at $7.00 per share, or an aggregate of approximately $0.4 million.

 

2020 Tender Offer

 

We commenced a tender offer on June 15, 2020, pursuant to which we offered to acquire up to 225,000 of our shares of common stock at a purchase price of $5.00 per share, or approximately $1.1 million in the aggregate (the “2020 Tender Offer”). Pursuant to the terms of the 2020 Tender Offer, which expired on July 24, 2020, we repurchased approximately 0.1 million shares of our common stock for an aggregate of approximately $0.3 million in August 2020.

 

Dividend Reinvestment Program

 

Our distribution reinvestment program (“DRIP”) provides our shareholders with an opportunity to purchase additional shares of our common stock at a discount by reinvesting distributions. Under our distribution reinvestment program, a shareholder may acquire, from time to time, additional shares of our common stock by reinvesting cash distributions payable by us to such shareholder, without incurring any brokerage commission, fees or service charges.

 

The DRIP had been suspended since 2015 until our DRIP Registration Statement on Form S-3D was filed and became effective as amended and restated, under the Securities Act of 1933 on October 25, 2018.

 

Pursuant to the DRIP following its reactivation, our stockholders who elect to participate may invest all or a portion of the cash distributions that we pay them on shares of our common stock in additional shares of our common stock without paying any fees or commissions. The purchase price for shares under the DRIP will be equal to 95% of our current NAV per Share, as determined by the Company’s board of directors and reported by the Company from time to time. On December 3, 2020, our Board of Directors determined our NAV per Share of $11.18 as of September 30, 2020, which resulted in a purchase price for shares under the DRIP of $10.62 per share. As of December 31, 2020, we had 9.9 million shares available for issuance under our DRIP. 

 

Our Board of Directors reserves the right to terminate the DRIP for any reason without cause by providing written notice of the termination to all participants.

 

Distributions

 

Distributions on Common Shares

 

Our Board of Directors commenced declaring and we began paying regular quarterly distributions on our Common Shares at the pro rata equivalent of an annual distribution of $0.70 per share, or an annualized rate of 7.0% assuming a purchase price of $10.00 per share, beginning February 1, 2006. Subsequently, our Board of Directors has declared regular quarterly distributions at the annualized rate of 7.0% assuming a purchase price of $10.00 per share, with the exception of the three-month period ended June 30, 2010. The distributions for the three-month period ended June 30, 2010 were at an aggregate annualized rate of 8% based on the share price of $10.00. Through December 31, 2020, we have paid aggregate distribution in the amount of $250.1 million, which includes cash distributions paid to stockholders and common stock issued under our DRIP.

 

Total distributions declared during the years ended December 31, 2020 and 2019 were $15.6 million and $16.1 million, respectively.

 

On March 15, 2021, our Board of Directors authorized and declared a Common Share distribution of $0.175 per share for the quarterly period ending March 31, 2021. The quarterly distribution is the pro rata equivalent of an annual distribution of $0.70 per share, or an annualized rate of 7.0% assuming a purchase price of $10.00 per share. The distribution will be paid on or about the 15th day of the month following the quarter-end to stockholders of record at the close of business on the last day of the quarter-end. The stockholders have an option to elect the receipt of shares under the Company’s DRIP.

 

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Distributions on SLP Units

 

From our inception through March 31, 2010, cumulative distributions declared to Lightstone SLP, LLC were $4.9 million, all of which had been paid as of April 2010. For the three months ended June 30, 2010, the Operating Partnership did not declare a distribution related to the SLP Units as the distribution to the stockholders was less than 7% for this period. On August 30, 2010, the Company declared additional distributions to the stockholders to bring the annualized distribution to at least 7%. As such, the Company as of August 30, 2010 recommenced declaring distributions to Lightstone SLP, LLC at the 7% annualized rate, except for the three months ended June 30, 2010 which was at an 8% annualized rate which represents the same rate paid to the stockholders.

 

During each of the years ended December 31, 2020 and 2019, distributions of $2.1 million were declared and distributions of $2.1 million were paid related to the SLP Units and are part of noncontrolling interests. Since inception through December 31, 2020, cumulative distributions declared were $27.6 million, of which $27.1 million have been paid. Such distributions, paid currently at a 7% annualized rate of return to Lightstone SLP, LLC through December 31, 2020, with the exception of the distribution related to the three months ended June 30, 2010, which was paid at an 8% annualized rate  will always be subordinated until stockholders receive a stated preferred return, as described below.

 

Additionally, on March 15, 2021, our Board of Directors declared a quarterly distribution for the quarterly period ending March 31, 2021 on the SLP Units at an annualized rate of 7.0%. Any future distributions on the SLP Units will always be subordinated until stockholders receive a stated preferred return.

 

Recent Sales of Unregistered Securities  

 

During the period covered by this Form 10-K, we did not sell any equity securities that were not registered under the Securities Act of 1933.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:

 

You should read the following discussion and analysis together with our consolidated financial statements and notes thereto included in this Annual Report on Form 10-K. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results may differ materially from those expressed or implied by the forward-looking statements. Please see “Special Note Regarding Forward-Looking Statements” above for a description of these risks and uncertainties.  Dollar amounts are presented in thousands, except per share data and where indicated in millions.

 

Overview

 

Lightstone Value Plus Real Estate Investment Trust, Inc. (the “Lightstone REIT”), (together with the Operating Partnership (as defined below), the “Company”, also referred to as “we”, “our” or “us” herein) has and expects to continue to acquire and operate or develop in the future, commercial, residential and hospitality properties and/or make real estate-related investments, principally in the United States. Our acquisitions and investments are, principally conducted through the Operating Partnership, and may include both portfolios and individual properties.

 

As of December 31, 2020, we have ownership interests in (i) two consolidated operating properties, (ii) three consolidated development properties and (iii) seven unconsolidated operating properties. With respect to our consolidated operating properties, we wholly own the St. Augustine Outlet Center, a retail property containing approximately 0.3 million square feet of gross leasable area, and have a majority ownership interest of approximately 59.2% in Gantry Park Landing, a multi-family residential property containing 199 apartment units. With respect to our consolidated development properties, we wholly own three projects consisting of the Lower East Side Moxy Hotel, the Exterior Street Project and the Santa Clara Data Center. We also hold a 2.5% ownership interest in seven hotel properties through a joint venture (the “Joint Venture”) which we account for using a measurement alternative under which the Joint Venture is measured at cost, adjusted for observable price changes and impairments, if any. The Joint Venture is between us and the operating partnership of Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone II”), a real estate investment trust also sponsored by our Sponsor, which has a 97.5% ownership interest in the Joint Venture. Furthermore, we have other real estate-related investments, including preferred contributions that were made pursuant to agreements with various related party entities (the “Preferred Investments”) and nonrecourse promissory notes made to unaffiliated third-parties. Our real estate investments have been and are expected to continue to be held by the Company alone or jointly with other parties.

 

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We do not have employees. We entered into an advisory agreement pursuant to which the Advisor supervises and manages our day-to-day operations and selects our real estate and real estate related investments, subject to oversight by our Board of Directors. We pay the Advisor fees for services related to the investment and management of our assets, and we will reimburse the Advisor for certain expenses incurred on our behalf.

 

To maintain our qualification as a REIT, we engage in certain activities through taxable REIT subsidiaries (“TRSs”). As such, we may still be subject to U.S. federal and state income and franchise taxes from these activities.

 

Acquisitions and Investment Strategy

 

We have, to date, acquired and/or developed residential, commercial and hospitality properties principally, all of which are located in the United States and also made other real estate-related investments. Our acquisitions have included both portfolios and individual properties. Our current operating properties consist of one retail property (the St. Augustine Outlet Center) and one multi-family residential property (Gantry Park Landing). We have also acquired various parcels of land and air rights related to the development and construction of real estate properties. Additionally, we have made preferred investments in related parties and originated nonrecourse loans to unaffiliated third-party borrowers.

 

Investments in real estate are generally made through the purchase of all or part of a fee simple ownership, or all or part of a leasehold interest. We may also purchase limited partnership interests, limited liability company interests and other equity securities. We may also enter into joint ventures with related parties for the acquisition, development or improvement of properties as well as general partnerships, co-tenancies and other participations with real estate developers, owners and others for the purpose of developing, owning and operating real properties. We will not enter into a joint venture to make an investment that we would not be permitted to make on our own. Not more than 10% of our total assets will be invested in unimproved real property. For purposes of this paragraph, “unimproved real properties” does not include properties acquired for the purpose of producing rental or other operating income, properties under construction and properties for which development or construction is planned within one year.

 

Current Environment

 

Our operating results are substantially impacted by the overall health of local, U.S. national and global economies and may be influenced by market and other challenges. Additionally, our business and financial performance may be adversely affected by current and future economic and other conditions; including, but not limited to, availability or terms of financings, financial markets volatility, political upheaval or uncertainty, natural and man-made disasters, terrorism and acts of war, unfavorable changes in laws and regulations, outbreaks of contagious diseases, cybercrime, loss of key relationships, and recession.

 

COVID-19 Pandemic

 

On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic leading many countries, including the United States, particularly at the individual state level, to subsequently impose various degrees of restrictions and other measures, including, but not limited to, mandatory temporary closures, quarantine guidelines, limitations on travel, and “shelter in place” rules in an effort to reduce its duration and the severity of its spread. Although the COVID-19 pandemic has continued to evolve, most of these previously imposed restrictions and other measures have now been reduced and/or lifted. However, the COVID-19 pandemic remains highly unpredictable and dynamic and its duration and extent is likely dependent on numerous developments such as the regulatory approval, mass production, administration and ultimate effectiveness of vaccines, as well as the timeline to achieve a level of sufficient herd immunity amongst the general population. Accordingly, the COVID-19 pandemic may continue to have negative effects on the overall health of the U.S. economy for the foreseeable future. 

 

As a result of previous restrictions, we closed our St. Augustine Outlet Center from March 20, 2020 through May 7, 2020. Primarily because of the impact of the COVID-19 pandemic on the operating performance of the St. Augustine Outlet Center’s tenancy, especially during the closure period, we have provided forbearance of certain rent payments to various tenants. Additionally, we have seen some deterioration in both the occupancy and rental rates for Gantry Park Landing, which is located on Long Island, New York, as the luxury rental market in the greater New York City metropolitan area has been negatively impacted by the COVID-19 pandemic. However, none of these items have yet materially impacted our results from operations or financial condition.

 

To-date, the COVID-19 pandemic has not had any significant impact on our three development projects. Furthermore, our other real estate-related investments (both our preferred investments in related parties and nonrecourse loans made to unaffiliated third-party borrowers) also relate to various development projects which are at different stages in their respective development process. These investments, which are subject to similar restrictions and other measures, have also not yet been significantly impacted by the COVID-19 pandemic.

 

The extent to which our business may be affected by the ongoing COVID-19 pandemic will largely depend on both current and future developments, all of which are highly uncertain and cannot be reasonably predicted.

 

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If our operating properties, development projects and real estate-related investments are negatively impacted for an extended period because (i) occupancy levels and rental rates further decline, (ii) tenants are unable to pay their rent, (iii) borrowers are unable to pay scheduled debt service on notes receivable, (iv) development activities are delayed and/or (v) various related party entities are unable to pay monthly preferred distributions on our preferred investments in related parties, our business and financial results could be materially and adversely impacted.

 

We are not currently aware of any other material trends or uncertainties, favorable or unfavorable, that may be reasonably anticipated to have a material impact on either capital resources or the revenues or income to be derived from our operations, other than those referred to above or throughout this Form 10-K. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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.

 

Critical Accounting Estimates and Policies

 

General

 

Our consolidated financial statements, included in this annual report, include our accounts, the Operating Partnership and its subsidiaries (over which we exercise financial and operating control). All inter-company balances and transactions have been eliminated in consolidation.

 

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our financial statements requires us to make estimates and judgments about the effects of matters or future events that are inherently uncertain. These estimates and judgments may affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

 

On an ongoing basis, we evaluate our estimates, including contingencies and litigation. We base these estimates on historical experience and on various other assumptions that we believe to be reasonable in the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

To assist in understanding our results of operations and financial position, we have identified our critical accounting policies and discussed them below. These accounting policies are most important to the portrayal of our results and financial position, either because of the significance of the financial statement items to which they relate or because they require our management’s most difficult, subjective or complex judgments.  

 

Revenue Recognition

 

Our revenue, which is comprised largely of rental income, includes rents that tenants pay in accordance with the terms of their respective leases reported on a straight-line basis over the initial term of the lease. Since our leases may provide for rental increases at specified intervals, straight-line basis accounting requires us to record as an asset, and include in revenue, unbilled rent that we only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease.

 

In addition, we will defer the recognition of contingent rental income, such as percentage rents, until the specific target which triggers the contingent rental income is achieved. Cost recoveries from tenants will be included in tenant recovery income in the period the related costs are incurred.

 

Investments in Real Estate    

 

We generally record investments in real estate at cost and capitalize improvements and replacements when they extend the useful life or improve the efficiency of the asset. We expense costs of ordinary repairs and maintenance as incurred. We compute depreciation using the straight-line method over the estimated useful lives of the applicable real estate asset. We generally use estimated useful lives of up to thirty-nine years for buildings and improvements, five to ten years for furniture and fixtures and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.

 

We make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in real estate. These assessments have a direct impact on our net income because, if we were to shorten the expected useful lives of our investments in real estate, we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.

 

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We record assets and groups of assets and liabilities which comprise disposal groups as “held for sale” when all of the following criteria are met: a decision has been made to sell, the assets are available for sale immediately, the assets are being actively marketed at a reasonable price in relation to the current fair value, a sale has been or is expected to be concluded within twelve months of the balance sheet date, and significant changes to the plan to sell are not expected. The assets and disposal groups held for sale are valued at the lower of book value or fair value less disposal costs. For sales of real estate or assets classified as held for sale, we evaluate whether a disposal transaction meets the criteria of a strategic shift and will have a major effect on our operations and financial results to determine if the results of operations and gains on sale of real estate will be presented as part of our continuing operations or as discontinued operations in our consolidated statements of operations. If the disposal represents a strategic shift, it will be classified as discontinued operations for all periods presented; if not, it will be presented in continuing operations.

 

We evaluate the recoverability of our investments in real estate assets at the lowest identifiable level, the individual property level. An impairment loss is recognized only if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value.

 

We evaluate the long-lived assets for potential impairment whenever events or changes in circumstances indicate that the undiscounted projected cash flows are less than the carrying amount for a particular property. No single indicator would necessarily result in us preparing an estimate to determine if a long-lived asset’s future undiscounted cash flows are less than its book value.  We use judgment to determine if the severity of any single indicator, or the fact there are a number of indicators of less severity that when combined, would result in an indication that a long-lived asset requires an estimate of the undiscounted cash flows to determine if an impairment has occurred. Relevant facts and circumstances include, among others, significant underperformance relative to historical or projected future operating results and significant negative industry or economic trends. The estimated cash flows used for the impairment analysis are subjective and require us to use our judgment and the determination of estimated fair value are based on our plans for the respective assets and our views of market and economic conditions.  The estimates consider matters such as future operating income, market and other applicable trends and residual value, as well as the effects of demand, competition, and recent sales data for comparable properties. Changes in estimated future cash flows due to changes in our plans or views of market and economic conditions could result in recognition of impairment losses, which, under the applicable accounting guidance, may be substantial. 

 

Accounting for Asset Acquisitions

 

The cost of the acquisition in an asset acquisition 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, and certain liabilities such as assumed debt and contingent liabilities on the basis of their relative fair values. Fees incurred related to asset acquisitions are capitalized as part of the cost of the investment.

 

Accounting for Business Combinations

 

Upon acquisition of real estate operating properties that meet the definition of a business, we estimate the fair value of acquired tangible assets and identified intangible assets and liabilities and assumed debt and contingent liabilities at the date of acquisition, based upon an evaluation of information and estimates available at that date. Based on these estimates, we evaluate the existence of goodwill or a gain from a bargain purchase and allocate the initial purchase price to the applicable assets, liabilities and noncontrolling interest, if any. As final information regarding fair value of the assets acquired and liabilities assumed and noncontrolling interest 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.

 

Accounting for Development Projects

 

We incur a variety of costs in the development of a property. The costs of land and building under development include specifically identifiable costs. The capitalized costs include, but are not limited to, pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes and other costs incurred during the period of development. We cease capitalization when the development project is substantially complete and placed in service, which may occur in phases. Determination of when a development project is substantially complete and capitalization must cease involves a degree of judgment.

 

Once the development project is placed in service, which may occur in phases or for an entire building or project, the costs capitalized to construction in progress are transferred to land and improvements, buildings and improvements, and furniture and fixtures on our consolidated balance sheets at the historical cost of the property.

 

Notes Receivable and Preferred Investments

 

Notes receivable and preferred investments that we intend to hold to maturity are carried at cost, net of any unamortized origination costs, fees, discounts, premiums and unfunded commitments.

 

Investment income will be recognized on an accrual basis and any related premium, discount, origination costs and fees are amortized over the life of the investment using the effective interest method. The amortization is reflected as an adjustment to investment income in the Company’s statements of operations.

 

Income recognition is suspended when, in the opinion of management, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal is not in doubt, contractual interest is recorded as investment income when received, under the cash basis method, until an accrual is resumed when the instrument becomes contractually current and performance is demonstrated to be resumed.

 

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Credit Losses and Impairment on Notes Receivable

 

Notes receivable are considered impaired when, based on current information and events, it is probable that we will not be able to collect principal and interest amounts due according to the contractual terms. We assess the credit quality of our notes receivable and adequacy of reserves on a quarterly basis, or more frequently as necessary. Significant judgment of management is required in this analysis. We consider the estimated net recoverable value of the notes receivable as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the quality and financial condition of the borrower and the competitive situation of the area where the underlying collateral is located. Because this determination is based on projections of future economic events, which are inherently subjective, the amount ultimately realized may differ materially from the carrying value as of the balance sheet date. If upon completion of the assessment, the estimated fair value of the underlying collateral is less than the net carrying value of the notes receivable, a reserve is recorded with a corresponding charge to investment income. The reserve for each note receivable is maintained at a level that is determined to be adequate by management to absorb probable losses.

 

Credit Losses and Impairment on Preferred Investments

 

Preferred investments that are accounted for as held to maturity are assessed for impairment at the individual investment level when there is a decline in fair value below the amortized cost basis that is deemed to be other than temporary. In making the determination of an other-than-temporary impairment assessment, the Company considers all available information relevant to the collectability of the investment, including information about past events, current conditions, and reasonable and supportable forecasts when developing the estimate of cash flows expected to be collected. This information includes the remaining redemption terms of the investment, financial condition of the issuer, expected defaults and the value of any underlying collateral. In assessing whether the entire amortized cost basis of the investment will be recovered, the Company compares the present value of cash flows expected to be collected from the investment with the amortized cost basis and records an impairment based on the amount by which the present value of cash flows expected to be collected is less than the amortized cost basis of the investment.

 

Inflation

 

We are exposed to inflation risk as income from long-term leases is one of the primary sources of our cash flows from operations. Most of our long-term leases contain provisions to mitigate the adverse impact of inflation on our operating results. Such provisions include clauses entitling us to receive scheduled base rent increases and base rent increases based upon the consumer price index.  In addition, most of our leases require tenants to pay a negotiated share of operating expenses, including maintenance, real estate taxes, insurance and utilities, thereby reducing our exposure to increases in cost and operating expenses resulting from inflation.  

 

Treatment of Management Compensation, Expense Reimbursements and Operating Partnership Participation Interest

 

Management of our operations is outsourced to our Advisor and certain other affiliates of our Sponsor. Fees related to each of these services are accounted for based on the nature of such service and the relevant accounting literature. Such fees include acquisition fees associated with the purchase of interests in affiliated real estate entities; asset management fees paid to our Advisor and property management fees paid to our Property Manager, which manage certain of the properties we acquire, or to other unaffiliated third-party property managers, principally for the management of our hospitality properties. These fees are expensed or capitalized to the basis of acquired assets, as appropriate.

 

Our Property Manager may also perform fee-based construction management services for both our re-development activities and tenant construction projects. These fees are considered incremental to the construction effort and will be capitalized to the associated real estate project as incurred. Costs incurred for tenant construction will be depreciated over the shorter of their useful life or the term of the related lease. Costs related to redevelopment activities will be depreciated over the estimated useful life of the associated project.

 

Leasing activity at certain of our properties has also been outsourced to our Property Manager. Any corresponding leasing fees we pay are capitalized and amortized over the life of the related lease.

 

Expense reimbursements made to both our Advisor and Property Manager will be expensed or capitalized to the basis of acquired assets, as appropriate.

 

Through March 31, 2009, Lightstone SLP, LLC, an affiliate of the Advisor, purchased an aggregate of $30.0 million of SLP Units in the Operating Partnership at a cost of $100,000 per unit and none thereafter.

 

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Income Taxes  

 

We elected to be taxed and qualify as a REIT commencing with the taxable year ended December 31, 2005. If we remain qualified as a REIT, we generally will not be subject to U.S. federal income tax on our net taxable income that we distribute currently to our stockholders. To maintain our REIT qualification under the Internal Revenue Code of 1986, as amended, or the Code, we must meet a number of organizational and operational requirements, including a requirement that we annually distribute to our stockholders at least 90% of our REIT taxable income (which does not equal net income, as calculated in accordance with generally accepted accounting principles in the United States of America, or GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. If we fail to remain qualified for taxation as a REIT in any subsequent year and do not qualify for certain statutory relief provisions, our income for that year will be taxed at regular corporate rates, and we may be precluded from qualifying for treatment as a REIT for the four-year period following our failure to qualify as a REIT. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders.

 

To maintain our qualification as a REIT, we engage in certain activities through taxable REIT subsidiaries (“TRSs”). As such, we may still be subject to U.S. federal and state income and franchise taxes from these activities.

 

As of December 31, 2020 and 2019, we had no material uncertain income tax positions. Additionally, even if we continue to qualify as a REIT for U.S. federal income tax purposes, we may still be subject to some U.S. federal, state and local taxes on our income and property and to U.S. federal income taxes and excise taxes on our undistributed income.

 

Results of Operations  

 

Dispositions - Continuing Operations

 

The following disposition did not represent a strategic shift that had a major effect on our operations and financial results and therefore did not qualify to be reported as discontinued operations and its operating results are reflected in our results from continuing operations in the consolidated statements of operations for all periods presented through the date of disposition:

 

DePaul Plaza

 

On September 20, 2019, we disposed of a retail center located in Bridgeton, Missouri (“DePaul Plaza”), to an unrelated third party for aggregate consideration of approximately $19.8 million, excluding closing and other related costs. In connection with the disposition, we recorded a gain on the disposition of real estate of approximately $1.0 million during the year ended December 31, 2019.

 

Dispositions - Discontinued Operations

 

The following dispositions qualified to be reported as discontinued operations and their operating results are classified as discontinued operations in the consolidated statements of operations for all periods presented through their respective dates of disposition:

 

Disposition Transactions related to Gulf Coast Industrial Portfolio

 

We had an outstanding non-recourse mortgage loan (the “Gulf Coast Industrial Portfolio Mortgage Loan”) which was originated in February 2007 and subsequently transferred during the third quarter of 2012 to a special servicer that discontinued scheduled debt service payments and notified us that the loan was in default and due on demand. The Gulf Coast Industrial Portfolio Mortgage Loan was initially cross-collateralized by a portfolio of 14 industrial properties (collectively, the “Gulf Coast Industrial Portfolio”) including 10 properties located in Louisiana (seven properties located in New Orleans and three properties located in Baton Rouge, and collectively, the “Louisiana Assets”) and four properties located in San Antonio, Texas (the “San Antonio Assets”).

 

Foreclosure of San Antonio Assets

 

On June 5, 2018, the special servicer completed a partial foreclosure of the Gulf Coast Industrial Portfolio pursuant to which it foreclosed on the San Antonio Assets. The San Antonio Assets were sold in a foreclosure sale by the special servicer for an aggregate amount of approximately $20.7 million.

   

Assignment of Ownership in Louisiana Assets to Lender

 

On February 12, 2019, we and the lender of the Gulf Coast Industrial Portfolio Mortgage entered into an assignment agreement (the “Assignment Agreement”) pursuant to which we assigned our membership interests in the Louisiana Assets to the lender with an effective date of February 7, 2019. Under the terms of the Assignment Agreement, the lender assumed the significant risks and rewards of ownership and took legal title and physical possession of the Louisiana Assets and assumed all the other assets and related liabilities, including the Gulf Coast Industrial Mortgage and its accrued and unpaid interest, and released us of any claims against the liabilities assumed.

 

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As a result of the Assignment Agreement, we have fully satisfied all of our obligations with respect to the Gulf Coast Industrial Portfolio Mortgage and all amounts accrued but not paid for interest (including default interest) and no amounts are due to the lender. Additionally, we have no continuing involvement with the Louisiana Assets. 

 

The aggregate carrying value of the assets transferred and the liabilities extinguished in connection with our assignment of our ownership interests in the Louisiana Assets to the lender was approximately $37.0 million and $49.6 million, respectively.

 

Since our performance obligations were met upon the assignment of our ownership interests in the Louisiana Assets to the lender and we have no continuing involvement with the Louisiana Assets, an aggregate gain on debt extinguishment of approximately $13.6 million was recognized during the first quarter of 2019.

 

The disposition of the Louisiana Assets, which comprised all of our remaining industrial properties, represented a strategic shift that had a major effect on our operations and financial results.

 

As a result, the operating results of the Louisiana Assets have been classified as discontinued operations in our consolidated statements of operations for all periods presented through their date of disposition.

 

For the Year Ended December 31, 2020 vs. December 31, 2019

 

Consolidated – Continuing Operations

 

Revenues

 

Our revenues are comprised of rental income and tenant recovery income. Total revenues decreased by approximately $3.9 million to $11.3 million for the year ended December 31, 2020 compared to $15.2 million for the same period in 2019. Excluding the effect of the disposition of DePaul Plaza, revenues decreased by $1.9 million primarily attributable to reduced occupancy at both our St. Augustine Outlet Center and Gantry Park Landing during the 2020 period resulting from the COVID-19 pandemic.

 

Property operating expenses

 

Property operating expenses decreased by approximately $0.7 million to $4.0 million for the year ended December 31, 2020 compared to $4.7 million for the same period in 2019. Excluding the effect of the disposition of DePaul Plaza, property operating expenses decreased by $0.3 million.

 

Real estate taxes

 

Real estate taxes decreased by approximately $0.5 million to $0.6 million for the year ended December 31, 2020 compared to $1.1 million for the same period in 2019. Excluding the effect of the disposition of DePaul Plaza, real estate taxes were flat.

 

General and administrative expenses

 

General and administrative expenses increased by approximately $0.5 million to $3.1 million for the year ended December 31, 2020 compared to $2.6 million for the same period in 2019 principally due to an increase in professional fees.

 

Depreciation and amortization

 

Depreciation and amortization decreased by approximately $0.8 million to $4.0 million for the year ended December 31, 2020 compared to $4.8 million for the same period in 2019. Excluding the effect of the disposition of DePaul Plaza, depreciation and amortization decreased by $0.1 million.

 

Gain on disposition of real estate

 

On April 6, 2020, we completed the disposition of a parcel of land adjacent to the St. Augustine Outlet Center for a contractual sales price of $2.1 million and recognized a gain on the disposition of real estate of approximately $1.6 million during the year ended December 31, 2020. During the year ended December 31, 2019, we recognized a gain on disposition of real estate of approximately $1.0 million related to the disposition of DePaul Plaza.

 

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Interest and dividend income

 

Interest and dividend income decreased by approximately $3.8 million to $13.0 million for the year ended December 31, 2020 compared to $16.8 million for the same period in 2019. The decrease primarily reflects lower investment income of $7.4 million from our Preferred Investments and a decrease in dividend and interest income from our investments in marketable securities of $1.5 million, partially offset by an increase in interest income earned on our notes receivable of $5.1 million.

 

Interest expense

 

Interest expense, including amortization of deferred financing costs, increased by approximately $1.3 million to $3.0 million for the year ended December 31, 2020 compared to $1.7 million for the same period in 2019. This increase reflects higher interest expense resulting from an increase in the amount of debt outstanding during the 2020 period. During the years ended December 31, 2020 and 2019, $7.8 million and $8.2 million, respectively, of interest was capitalized to construction in progress for our development projects.

 

Unrealized loss on marketable equity securities

 

During the years ended December 31, 2020 and 2019, we recorded unrealized losses on marketable equity securities of $12.2 million and $3.8 million, respectively, which represented the change in the fair value of our marketable equity securities during those periods.

 

Noncontrolling interests

 

The net earnings allocated to noncontrolling interests relates to (i) parties of the Company that hold units in the Operating Partnership, (ii) the interest in PRO-DFJV Holdings LLC (“PRO”) held by our Sponsor, (iii) the ownership interests in 50-01 2nd St. Associates LLC (the “2nd Street Joint Venture”) held by our Sponsor and other affiliates and (iv) the ownership interest in various joint ventures held by affiliates of our Sponsor that have originated nonrecourse loans to unaffiliated third-party borrowers.

 

Financial Condition, Liquidity and Capital Resources  

 

Overview:

 

Rental income, interest and dividend income and borrowings are our principal source of funds to pay operating expenses, scheduled debt service, routine capital expenditures and distributions.

 

We expect to meet our short-term liquidity requirements, including the costs of our expected non-recurring capital expenditures, including development activities, and scheduled debt service generally through working capital, redemptions of our Preferred Investments, repayments of our outstanding notes receivable and/or new borrowings and refinancing of existing debt. We ultimately expect to obtain construction financing to fund a substantial portion of our development projects’ future development costs. However, there can be no assurance we will be successful in obtaining construction financing at favorable terms, if at all.  As of December 31, 2020, we had approximately $44.4 million of cash and cash equivalents on hand and $46.1 million of marketable securities, available for sale. We believe that these cash resources will be sufficient to satisfy our cash requirements for the foreseeable future, and we do not anticipate a need to raise funds from other than these sources within the next 12 months.

 

Our borrowings consist of single-property mortgages as well as mortgages cross-collateralized by a pool of properties. We typically have obtained level payment financing, meaning that the amount of debt service payable would be substantially the same each year. As such, most of the mortgages on our properties provide for a so-called “balloon” payment and are at a fixed interest rate.

 

Additionally, in order to leverage our investments in marketable securities and seek a higher rate of return, we have access to borrowings under a margin loan and line of credit collateralized by the securities held with the financial institution that provided the margin loan and line of credit as well as a portion of our Marco OP Units. These loans are due on demand and any outstanding balance must be paid upon the liquidation of securities.

 

Our charter provides that the aggregate amount of borrowing, both secured and unsecured, may not exceed 300% of net assets in the absence of a satisfactory showing that a higher level is appropriate, the approval of our Board of Directors and disclosure to stockholders. Net assets means our total assets, other than intangibles, at cost before deducting depreciation or other non-cash reserves less our total liabilities, calculated at least quarterly on a basis consistently applied. Any excess in borrowing over such 300% of net assets level must be approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report to stockholders, along with justification for such excess. As of December 31, 2020, our total borrowings of $193.5 million represented 59% of net assets.

 

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Any future properties that we may acquire or investments we may make may be funded through a combination of borrowings, proceeds generated from the sale and redemption of our marketable securities, available for sale, proceeds received from the selective disposition of our properties and proceeds received from the redemption of our preferred investments in related parties. These borrowings may consist of single-property mortgages as well as mortgages cross-collateralized by a pool of properties. Such mortgages may be put in place either at the time we acquire a property or subsequent to our purchasing a property for cash. In addition, we may acquire properties that are subject to existing indebtedness where we choose to assume the existing mortgages. Generally, though not exclusively, we intend to seek to encumber our properties with debt, which will be on a non-recourse basis. This means that a lender’s rights on default will generally be limited to foreclosing on the property. However, we may, at our discretion, secure recourse financing or provide a guarantee to lenders if we believe this may result in more favorable terms. When we give a guaranty for a property owning entity, we will be responsible to the lender for the satisfaction of the indebtedness if it is not paid by the property owning entity.

 

We may also obtain lines of credit to be used to acquire properties or real estate-related assets. These lines of credit will be at prevailing market terms and will be repaid from proceeds from the sale or refinancing of properties, working capital or permanent financing. Our Sponsor or its affiliates may guarantee the lines of credit although they will not be obligated to do so.

 

In addition to meeting working capital needs and distributions, if any, to our stockholders, our capital resources are used to make certain payments to our Advisor and our Property Manager, including payments related to asset acquisition fees, development fees and leasing commissions, asset management fees, the reimbursement of acquisition related expenses to our Advisor and property management fees. We also reimburse our Advisor and its affiliates for actual expenses it incurs for administrative and other services provided to us. Additionally, the Operating Partnership may be required to make distributions to Lightstone SLP, LLC, an affiliate of the Advisor.

 

The following table represents the fees incurred associated with the payments to our Advisor and our Property Manager:

 

   For the Year Ended 
   December 31,
2020
   December 31,
2019
 
     
Acquisition fees (capitalized and are reflected in the carrying value of the investment)  $-   $1,823 
Asset management fees (general and administrative costs)   919    1,237 
Property management fees (property operating expenses)   388    264 
Development cost reimbursement (1)   1,337    585 
Development fees and leasing commissions (2)   -    167 
Total  $2,644   $4,076 

 

(1)Development costs that the we reimburse our Advisor for are capitalized and are included in the carrying value of the associated development project and classified as construction in progress on the consolidated balance sheets.

 

(2)Generally, capitalized and amortized over the estimated useful life of the associated asset.

 

Our charter states that our operating expenses, excluding offering costs, property operating expenses and real estate taxes, as well as acquisition fees and non-cash related items (“Qualified Operating Expenses”) are to be less than the greater of 2% of our average invested net assets or 25% of net income. For the year ended December 31, 2020, our Qualified Operating Expenses were less than the greater of 2% of our average invested net assets or 25% of net income.

 

In addition, our charter states that our acquisition fees and expenses shall not exceed 6% of the contractual purchase price or in the case of a mortgage, 6% of funds advanced unless approved by a majority of the independent directors. For the year ended December 31, 2019, the acquisition fees and acquisition expenses were less than 6% of each of the contract prices.

 

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Summary of Cash Flows.

 

The following summary discussion of our cash flows is based on the consolidated statements of cash flows and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below:

 

   Year Ended
December 31,
2020
   Year Ended
December 31,
2019
 
         
Cash flows provided by operating activities  $10,144   $19,199 
Cash flows used in investing activities   (54,493)   (6,956)
Cash flows provided by financing activities   11,390    27,701 
Net change in cash, cash equivalents and restricted cash   (32,959)   39,944 
Cash , cash equivalents and restricted cash, beginning of year   79,800    39,856 
Cash, cash equivalents and restricted cash, end of year  $46,841   $79,800 

 

Our principal sources of cash flow are derived from the operation of our rental properties, interest and dividend income on our marketable securities and real estate-related investments, as well as loan proceeds and proceeds from redemptions of Preferred Investments. We intend that our properties and real estate-related investments will provide a relatively consistent stream of cash flow that provides us with resources to fund operating expenses, debt service and quarterly distributions if authorized by our board of directors.

 

Our principal demands for liquidity are (i) our property operating expenses, (ii) real estate taxes, (iii) insurance costs, (iv) leasing costs and related tenant improvements, (v) capital expenditures, (vi) acquisition and development activities (vii) funding of notes receivable, (viii) scheduled debt service and (viii) distributions to our stockholders and noncontrolling interests. The principal sources of funding for our operations are operating cash flows and proceeds from (i) the sale and redemption of marketable securities, (ii) the selective disposition of properties or interests in properties, (iii) redemptions of our Preferred Investments, (iv) the issuance of equity and debt securities and (v) the placement of mortgage loans or other indebtedness.

 

Operating activities

 

The net cash provided by operating activities of $10.1 million for the year ended December 31, 2020 consists of the following:

 

cash inflows of approximately $9.3 million from our net loss after adjustment for non-cash items; and

 

cash inflows of approximately $0.8 million associated with the net changes in operating assets and liabilities.

 

Investing activities

 

The net cash used in investing activities of $54.5 million for the year ended December 31, 2020 consists primarily of the following:

 

purchases of investment property of approximately $29.4 million;

 

net funding of notes receivable of $43.5 million;

 

proceeds from the sale of investment property of $2.1 million;

 

proceeds from Preferred Investments of $20.0 million; and

 

net purchases of marketable securities of $3.8 million.

 

Financing activities

 

The net cash provided by financing activities of approximately $11.4 million for the year ended December 31, 2020 is primarily related to the following:

 

net proceeds from mortgages payable of $27.2 million;

 

debt principal payments $1.3 million;

 

contributions received from noncontrolling interests of $22.3 million;

 

redemptions and cancellation of common stock of $3.4 million;

 

distributions to our noncontrolling interests of $18.1 million; and

 

distributions to our common shareholders of $15.4 million.

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Development Properties

 

Lower East Side Moxy Hotel

 

On December 3, 2018, we, through a subsidiary of the Operating Partnership, acquired three adjacent parcels of land located at 147-151 Bowery, New York, New York (collectively, the “Bowery Land”) from 151 Emmet Properties LLC and 145-149 Bowery LLC, both unaffiliated third parties, for aggregate consideration of approximately $56.5 million, excluding closing and other acquisition related costs. Additionally, on December 6, 2018, we, though a subsidiary of the Operating Partnership, acquired certain air rights located at 329 Broome Street, New York, New York (the “Air Rights”) from B.R.P. Realty Corp., an unaffiliated third party, for approximately $2.4 million, excluding closing and other acquisition related costs. We are using the Bowery Land and Air Rights in connection with the development and construction of a 296-room Marriott Moxy hotel (the “Lower East Side Moxy Hotel”).

 

On December 3, 2018, we entered into a mortgage loan collateralized by the Lower East Side Moxy Hotel (the “Lower East Side Moxy Mortgage”) for approximately $35.6 million. The Lower East Side Moxy Mortgage had an initial term of two years, bears interest at LIBOR + 4.25%, subject to a 6.63% floor, and requires monthly interest-only payments through its stated maturity with the entire unpaid balance due upon maturity. In November 2020 the maturity date of Lower East Side Moxy Mortgage was extended to March 3, 2021 and in March 2021 it was further extended until June 3, 2021. Through December 31, 2020, we received aggregate proceeds of $35.2 million under the Lower East Side Moxy Mortgage.

 

Exterior Street Project

 

On February 27, 2019, we, through subsidiaries of the Operating Partnership, acquired two adjacent parcels of land located at 355 and 399 Exterior Street, New York, New York (collectively, the “Exterior Street Land”), from Borden Realty Corp and 399 Exterior Street Associates LLC, unaffiliated third parties, for an aggregate purchase price of approximately $59.0 million, excluding closing and other acquisition related costs. We are using the Exterior Street Land for the development and construction of a multi-family residential property (the “Exterior Street Project”).

 

On March 29, 2019, we entered into a $35.0 million loan (the “Exterior Street Loan”) which initially bore interest at 4.50% and was scheduled to mature on April 9, 2020. However, because we have already exercised the second of two six-month extension options, the current maturity date is now April 9, 2021 and upon the exercise of the second extension option on October 9, 2020, the interest rate became LIBOR + 2.25%. The Exterior Street Loan requires monthly interest payments through its maturity date and is collateralized by the Exterior Street Project.

 

Santa Clara Data Center

 

On January 10, 2019, we, through subsidiaries of the Operating Partnership, acquired a parcel of land located at 2175 Martin Avenue, Santa Clara, California (the “Martin Avenue Land”) from The Chioini Living Trust, an unaffiliated third party, for approximately $10.6 million, excluding closing and other acquisition related costs. We have completed certain pre-development activities associated with the potential development and construction of a data center (the “Santa Clara Data Center”) on the Martin Avenue Land.

 

The following is a summary of the amounts incurred and capitalized to construction in progress for our development projects as of December 31, 2020:

 

Development Projects    
Lower East Side Moxy Hotel  $98,608 
Exterior Street Project   74,230 
Santa Clara Data Center   13,350 
Total Development Projects  $186,188 

 

To-date the COVID-19 pandemic has not had any significant impact on our three development projects. We intend to obtain construction financing on our development projects to fund a substantial portion of their future development costs. However, the COVID-19 pandemic may (i) affect our ability to obtain construction financing, and/or (ii) cause delays or increase costs associated with building materials or construction services necessary for construction, which could adversely impact our ability to either ultimately commence and/or complete construction as planned, on budget or at all for our development projects.

 

We currently believe our capital resources are sufficient to fund our expected development activities related to the Lower East Side Moxy Hotel, the Exterior Street Project and the Santa Clara Data Center for the next 12 months. However, we ultimately expect to finance a substantial portion of our development costs through construction loans. Due to the uncertainty in capital and financial markets in the United States because of the current COVID-19 pandemic, there can be no assurance we will be successful in obtaining construction financing at favorable terms, if at all.

 

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Preferred Investments

 

We have Preferred Investments that entitle us to monthly preferred distributions. The Preferred Investments had an aggregate balance of $14.5 million and $34.5 million as of December 31, 2020 and 2019, respectively, and are classified as held-to-maturity securities, recorded at cost and included in investments in related parties on the consolidated balance sheets. The fair value of these investments approximated their carrying values based on market rates for similar instruments.

 

During the year ended December 31, 2020, we (i) redeemed $11.0 million of the 40 East End Avenue Preferred Investment and the entire remaining Miami Moxy Preferred Investment of $9.0 million.

 

The Preferred Investments are summarized as follows:

 

       Preferred Investment Balance   Investment Income(1) 
   Dividend   As of
December 31,
   As of
December 31,
   For the Year Ended
December 31,
 
Preferred Investments  Rate   2020   2019   2020   2019 
40 East End Avenue   12%  $6,000   $17,000   $886   $3,609 
30-02 39th Avenue   12%   -    -    -    140 
East 11th Street   12%   8,500    8,500    1,040    3,433 
Miami Moxy   12%   -    9,000    45    2,263 
Total Preferred Investments       $14,500   $34,500   $1,971   $9,445 

 

Note:

(1)– Included in interest and dividend income on the statements of operations.

 

Notes Receivable

 

Beginning in 2019, we formed certain joint ventures (collectively, the “NR Joint Ventures”) between wholly-owned subsidiaries of the Operating Partnership (collectively, the “NR Subsidiaries”) and affiliates of the Sponsor (the “NR Affiliates”) which have originated nonrecourse loans (collectively, the “Joint Venture Promissory Notes”) to unaffiliated third-party borrowers (collectively, the “Joint Venture Borrowers”).

 

We determined that the NR Joint Ventures are VIEs and the NR Subsidiaries are the primary beneficiaries.  Since the NR Subsidiaries are the primary beneficiaries, beginning on the applicable date of formation, we consolidated the operating results and financial condition of the NR Joint Ventures and accounted for the respective ownership interests of the NR Affiliates as noncontrolling interests.

 

The Joint Venture Promissory Notes provide for monthly interest at a prescribed variable rate, subject to a floor. In connection with funding of the Joint Venture Promissory Notes, the NR Joint Ventures have received origination fees (1.00% - 1.50%) based on the principal amount of the loan and retained a portion of the loan proceeds to establish a reserve for interest and other items (the “Loan Reserves”). The Joint Venture Promissory Notes are recorded in notes receivable, net on the consolidated balance sheets.

 

The Joint Venture Promissory Notes generally have an initial term of one or two years and may provide for additional one-year extension options subject to satisfaction of certain prescribed conditions, including the funding of an additional reserve for interest and payment of an extension fee. The Joint Venture Promissory Notes are collateralized by either the membership interests of the Joint Venture Borrowers in the borrowing entity or the underlying real property being developed by the Joint Venture Borrower.

 

The Joint Venture Promissory Notes are recorded in notes receivable, net on the consolidated balance sheets. The origination fees received are presented in the consolidated balance sheets as a direct deduction from the carrying value of the Joint Venture Promissory Notes and are amortized into interest income, using a straight-line method that approximates the effective interest method, over the initial term of the Joint Venture Promissory Notes. The Loan Reserves are presented in the consolidated balance sheets as a direct deduction from the carrying value of the Joint Venture Promissory Notes and are applied against the monthly interest due over the initial term.

 

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The Notes Receivable are summarized as follows:

 

                        As of December 31, 2020 
   Company’s   Loan             Contractual          Unamortized         
   Ownership   Commitment   Origination   Origination  Maturity  Interest  Outstanding       Origination   Carrying   Unfunded 
Joint Venture/Lender  Percentage   Amount   Fee   Date  Date  Rate  Principal   Reserves   Fee   Value   Commitment 
LSC 162nd Capital I LLC   45.45%  $4,234    1.50%  February 5,
2019
  September 11,
2021
  LIBOR + 7.50%
(Floor of 11%)
  $4,076   $(338)  $(33)  $3,705   $- 
                                                  
LSC 162nd Capital II LLC   45.45%   9,166    1.50%  February 5,
2019
  September 11,
2021
  LIBOR + 7.50%
(Floor of 11%)
   8,824    (732)   (71)   8,021    - 
                                                  
LSC 1543 7th LLC   50%   20,000    1.00%  August 27,
2019
  August 26,
 2021
  LIBOR + 5.40%
(Floor of 7.90%)
   20,000    -    (33)   19,967    - 
                                                  
LSC 1650 Lincoln LLC   50%   24,000    1.00%  August 27,
2019
  August 26,
2021
  LIBOR + 5.40%
(Floor of 7.90%)
   24,000    -    (40)   23,960    - 
                                                  
LSC 11640 Mayfield LLC   50%   18,000    1.50%  March 4,
2020
  March 1,
2022
  LIBOR + 10.50%
(Floor of 12.50%)
   10,750    (2,369)   (158)   8,223    7,250 
                                                  
LSC 87 Newkirk LLC   50%   42,700    1.25%  July 2,
 2020
  December 1,
2021
  LIBOR + 6.00%
(Floor of 7.00%)
   42,700    (1,597)   (355)   40,748    - 
                                                  
Total                          $110,350   $(5,036)  $(690)  $104,624   $7,250 

 

The following summarizes the interest earned (included in interest and dividend income on the consolidated statements of operations) for each of the Joint Venture Promissory Notes during the periods indicated:

 

   For the Year   For the Year 
   Ended   Ended 
   December 31,   December 31, 
Joint Venture/Lender  2020   2019 
         
LSC 162nd Capital I LLC  $641   $445 
           
LSC 162nd Capital II LLC   1,387    964 
           
LSC 47-16 Greenpoint LLC   -    965 
           
LSC 1543 7th LLC   1,770    609 
           
LSC 1650 Lincoln LLC   2,124    731 
           
LSC 11640 Mayfield LLC   1,243    - 
           
LSC 87 Newkirk LLC   1,625    - 
           
Total  $8,790   $3,714 

 

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Stockholder’s Equity

 

Share Repurchase Program

 

Our share repurchase program may provide eligible stockholders with limited, interim liquidity by enabling them to sell shares back to us, subject to restrictions and applicable law. A selling stockholder must be unaffiliated with us, and must have beneficially held the shares for at least one year prior to offering the shares for sale to us through the share repurchase program. Subject to the limitations described in the Registration Statement, we will also redeem shares upon the request of the estate, heir or beneficiary of a deceased stockholder.

 

Originally, the prices at which stockholders who held shares for the required one-year period could sell shares back to us was the lesser of (i) the share price as determined by our Board of Directors or (ii) the purchase price per share if purchased at a reduced price.

 

On May 10, 2018, the Board of Directors amended the share repurchase program to (i) change to the price for all purchases under our share repurchase program from $10.00 per share to 92% of the NAV per Share (previously the purchase price was $10.00 per share) and (ii) increase the number of shares repurchased during any calendar year from two (2.0%) of the weighted average number of shares outstanding during the prior calendar year to five (5.0%) of the weighted average number of shares outstanding during the previous twelve months.

 

A stockholder must have beneficially held the shares for at least one year prior to offering them for sale to us through the share repurchase program, although if a stockholder redeems all of its shares our Board of Directors has the discretion to exempt shares purchased pursuant to the distribution reinvestment plan from this one year requirement. Other affiliates will not be eligible to participate in share repurchase program.

 

Pursuant to the terms of the share repurchase program, we will make repurchases, if requested, at least once quarterly. Subject to funds being available, we will limit the number of shares repurchased during any calendar year to two (2.0%) of the weighted average number of shares outstanding during the prior calendar year. Funding for the share repurchase program will come exclusively from proceeds we receive from the sale of shares under our distribution reinvestment plan and other operating funds, if any, as the Board of Directors, at its sole discretion, may reserve for this purpose.

 

For the period from January 1 through March 24, 2020, we repurchased 287,987 shares of common stock for $10.87 per share, pursuant to our share repurchase program. During the year ended December 31, 2019, we repurchased 1.1 million shares of common stock at an average price per share of $10.65.

 

Our Board of Directors, at its sole discretion, has the power to terminate the share repurchase program, change the price per share under the share repurchase program or reduce the number of shares purchased under the program, if it determines that the funds allocated to the share repurchase program are needed for other purposes, such as the acquisition, maintenance or repair of properties, or for use in making a declared distribution. A determination by our Board of Directors to eliminate or reduce the share repurchase program requires the unanimous affirmative vote of the independent directors.

 

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On March 25, 2020, the Board of Directors determined to suspend the share repurchase program effective immediately.

 

Effective March 19, 2021, the Board of Directors reopened the share repurchase program solely for redemptions submitted in connection with a stockholder’s death and set the price for all such purchases to 100% of the NAV per Share ($11.18 as of September 30, 2020). Deaths that occurred subsequent to January 1, 2020 are eligible for consideration. Beginning January 1, 2022, requests for redemptions in connection with a stockholder’s death must be submitted one year after the date of death for consideration. In addition, we will not redeem in excess of 1% of the weighted-average number of shares outstanding during the 12-month period immediately prior to the effective date of redemption.

 

Tender Offers

 

2019 Tender Offer

 

We commenced a tender offer on April 19, 2019, pursuant to which we offered to acquire up to 0.5 million shares of our common stock at a purchase price of $7.00 per share, or $3.5 million in the aggregate (the “2019 Tender Offer”). Pursuant to the terms of the 2019 Tender Offer, which expired on June 14, 2019, we repurchased approximately 0.1 million shares of our common stock at $7.00 per share, or an aggregate of approximately $0.4 million.

 

2020 Tender Offer

 

We commenced a tender offer on June 15, 2020, pursuant to which we offered to acquire up to 225,000 of our shares of common stock at a purchase price of $5.00 per share, or approximately $1.1 million in the aggregate (the “2020 Tender Offer”). Pursuant to the terms of the 2020 Tender Offer, which expired on July 24, 2020, we repurchased approximately 0.1 million shares of our common stock for an aggregate of approximately $0.3 million in August 2020.

 

Distribution Reinvestment Program (“DRIP”)

 

Our DRIP provides our shareholders with an opportunity to purchase additional shares of our common stock at a discount by reinvesting distributions. Under our distribution reinvestment program, a shareholder may acquire, from time to time, additional shares of our common stock by reinvesting cash distributions payable by us to such shareholder, without incurring any brokerage commission, fees or service charges.

 

Our Registration Statement on Form S-3D was filed and became effective as amended and restated, under the Securities Act of 1933 on October 25, 2018.

 

Pursuant to the DRIP, our stockholders who elect to participate may invest all or a portion of the cash distributions that we pay them on shares of our common stock in additional shares of our common stock without paying any fees or commissions. The purchase price for shares under the DRIP will be equal to 95% of the Company’s current estimated per-share net asset value (the “Estimated Per-Share NAV”), as determined by the Company’s board of directors and reported by the Company from time to time. On December 3, 2020, our Board of Directors determined our Estimated Per-Share NAV of $11.18 as of September 30, 2020, which resulted in a purchase price for shares under the DRIP of $10.62 per share. As of December 31, 2020, we had approximately 9.9 million shares available for issuance under our DRIP. 

 

Our Board of Directors reserves the right to terminate the DRIP for any reason without cause by providing written notice of termination of the DRIP to all participants.

 

Distributions Declared by our Board of Directors

 

Common Shares

 

During the years ended December 31, 2020 and 2019, distributions on our Common Shares were declared quarterly, for each calendar quarter end, at the pro rata equivalent of an annual distribution of $0.70 per share, or an annualized rate of 7.0% assuming a purchase price of $10.00 per share, to stockholders of record at the close of business on the last day of the quarter-end. All distributions were paid on or about the 15th day of the month following the quarter-end.

 

  30 

 

 

Total distributions declared during the years ended December 31, 2020 and 2019 were $15.6 million and $16.1 million, respectively.

 

On March 15, 2021, our Board of Directors authorized and declared a Common Share distribution of $0.175 per share for the quarterly period ending March 31, 2021. The quarterly distribution is the pro rata equivalent of an annual distribution of $0.70 per share, or an annualized rate of 7.0% assuming a purchase price of $10.00 per share. The distribution will be paid on or about the 15th day of the month following the quarter-end to stockholders of record at the close of business on the last day of the quarter-end. The stockholders have an option to elect the receipt of shares under the Company’s DRIP.

 

SLP Units

 

For the years ended December 31, 2020 and 2019, total distributions declared and paid on the SLP Units were both $2.1 million. Additionally, on March 15, 2021, our Board of Directors declared a quarterly distribution for the quarterly period ending March 31, 2021 on the SLP Units at an annualized rate of 7.0%. Any future distributions on the SLP Units will always be subordinated until stockholders receive a stated preferred return.

 

Contractual Obligations  

 

The following is a summary of our contractual obligations outstanding over the next five years and thereafter as of December 31, 2020.

 

Contractual Obligations  2021   2022   2023   2024   2025   Thereafter   Total 
Mortgage Payable  $96,496   $28,889   $1,454   $66,697   $     -   $            -   $193,536 
Interest Payments 1,2   6,571    3,134    3,065    2,917    -    -    15,687 
                                    
Total Contractual Obligations  $103,067   $32,023   $4,519   $69,614   $-   $-   $209,223 

 

1)These amounts represent future interest payments related to mortgage payable obligations based on the fixed and variable interest rates specified in the associated debt agreement. All variable rate debt agreements are based on the one month LIBOR rate. For purposes of calculating future interest amounts on variable interest rate debt the one month LIBOR rate as of December 31, 2020 was used.

 

Notes Payable

 

Margin Loan

 

We have access to a margin loan (the “Margin Loan”) from a financial institution that holds custody of certain of our marketable securities. The Margin Loan, which is due on demand, bears interest at LIBOR + 0.85% (0.99% as of December 31, 2020) and is collateralized by the marketable securities in our account. The amounts available to us under the Margin Loan are at the discretion of the financial institution and not limited to the amount of collateral in our account. There were no amounts outstanding under the Margin Loan as of December 31, 2020 and 2019.

 

Line of Credit

 

We have a non-revolving credit facility (the “Line of Credit”) that provides for borrowings up to a maximum of $20.0 million, subject to a 55% loan-to-value ratio based on the fair value of the underlying collateral, matures on June 19, 2021 and bears interest at LIBOR + 1.35% (1.49% as of December 31, 2020). The Line of Credit is collateralized by 209,243 of Marco OP Units and Marco II OP Units and is guaranteed by PRO. As of December 31, 2020, the amount of borrowings available to be drawn under the Line of Credit was approximately $9.8 million. No amounts were outstanding under the Line of Credit as of December 31, 2020 and 2019.

 

Debt Maturities

 

The Exterior Street Loan (outstanding principal balance of $35.0 million as of December 31, 2020) initially matures on April 9, 2021. We currently intend to extend or refinance the Exterior Street Loan on or before its maturity date.

 

  31 

 

 

The Lower East Side Moxy Mortgage (outstanding principal balance of $35.2 million as of December 31, 2020) matures on June 3, 2021. We currently intend to seek to refinance the Lower East Side Moxy Mortgage with construction financing on or before its maturity date.

 

On November 12, 2019, we, through LSC 1543 7th LLC and LSC 1650 Lincoln LLC (collectively, the “Santa Monica Joint Ventures”), entered into a $25.0 million loan (the “Santa Monica Loan”) (outstanding principal balance of $25.0 million as of December 31, 2020) which bears interest at LIBOR + 3.75%, subject to a 5.50% floor, and matures on August 12, 2021. The Santa Monica Loan requires monthly interest-only payments with the outstanding principal balance due at its maturity date and is cross-collateralized by two nonrecourse loans originated by the Santa Monica Joint Ventures. We currently intend to seek to refinance the Santa Monica Loan on or before its maturity date.

 

On July 22, 2020, we, through LSC 87 Newkirk LLC (the “87 Newkirk Joint Venture”), entered into a $27.5 million loan (the “87 Newkirk Loan”) (outstanding principal balance of $27.5 million as of December 31, 2020) which bears interest at LIBOR + 3.80%, subject to a 4.80% floor, and is scheduled to initially mature on January 1, 2022 but may be further extended through the exercise of two, six-month extension options, which the 87 Newkirk Joint Venture may exercise by providing the lender with advance written notice. The 87 Newkirk Loan requires monthly interest-only payments with the outstanding principal balance due in full at its maturity date and is collateralized by a nonrecourse loan originated by the 87 Newkirk Joint Venture. We currently intend to seek to extend or refinance the 87 Newkirk Loan on or before its maturity date.

 

However, if we are unable to extend or refinance any of our maturing indebtedness at favorable terms, we will look to repay the then outstanding balance with available cash and/or proceeds from selective asset sales. We have no additional significant maturities of mortgage debt over the next 12 months.

 

Funds from Operations and Modified Funds from Operations

 

The historical accounting convention used for real estate assets requires straight-line depreciation of buildings, improvements, and straight-line amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time. We believe that, because real estate values historically rise and fall with market conditions, including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using the historical accounting convention for depreciation and certain other items may be less informative.

 

Because of these factors, the National Association of Real Estate Investment Trusts (“NAREIT”), an industry trade group, has published a standardized measure of performance known as funds from operations (“FFO”), which is used in the REIT industry as a supplemental performance measure. We believe FFO, which excludes certain items such as real estate-related depreciation and amortization, is an appropriate supplemental measure of a REIT’s operating performance. FFO is not equivalent to our net income or loss as determined under GAAP.

 

We calculate FFO, a non-GAAP measure, consistent with the standards established over time by the Board of Governors of NAREIT, as restated in a White Paper approved by the Board of Governors of NAREIT effective in December 2018 (the “White Paper”). The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding depreciation and amortization related to real estate, gains and losses from the sale of certain real estate assets, gains and losses from change in control and impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. Our FFO calculation complies with NAREIT’s definition.

 

We believe that the use of FFO provides a more complete understanding of our performance to investors and to management, and reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income.

 

  32 

 

 

Changes in the accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT’s definition of FFO, such as the change to expense as incurred rather than capitalize and depreciate acquisition fees and expenses incurred for business combinations, have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed under GAAP across all industries. These changes had a particularly significant impact on publicly registered, non-listed REITs, which typically have a significant amount of acquisition activity in the early part of their existence, particularly during the period when they are raising capital through ongoing initial public offerings.

 

Because of these factors, the Investment Program Association (the “IPA”), an industry trade group, published a standardized measure of performance known as modified funds from operations (“MFFO”), which the IPA has recommended as a supplemental measure for publicly registered, non-listed REITs. MFFO is designed to be reflective of the ongoing operating performance of publicly registered, non-listed REITs by adjusting for those costs that are more reflective of acquisitions and investment activity, along with other items the IPA believes are not indicative of the ongoing operating performance of a publicly registered, non-listed REIT, such as straight-lining of rents as required by GAAP. We believe it is appropriate to use MFFO as a supplemental measure of operating performance because we believe that both before and after we have deployed all of our offering proceeds and are no longer incurring a significant amount of acquisition fees or other related costs, it reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. MFFO is not equivalent to our net income or loss as determined under GAAP.

 

We define MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the “Practice Guideline”) issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for acquisition and transaction-related fees and expenses and other items. In calculating MFFO, we follow the Practice Guideline and exclude acquisition and transaction-related fees and expenses (which includes costs incurred in connection with strategic alternatives), amounts relating to deferred rent receivables and amortization of market lease and other intangibles, net (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), accretion of discounts and amortization of premiums on debt investments and borrowings, mark-to-market adjustments included in net income (including gains or losses incurred on assets held for sale), gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. Certain of the above adjustments are also made to reconcile net income (loss) to net cash provided by (used in) operating activities, such as for the amortization of a premium and accretion of a discount on debt and securities investments, amortization of fees, any unrealized gains (losses) on derivatives, securities or other investments, as well as other adjustments.

 

MFFO excludes non-recurring impairment of real estate-related investments. We assess the credit quality of our investments and adequacy of reserves on a quarterly basis, or more frequently as necessary. Significant judgment is required in this analysis. We consider the estimated net recoverable value of a loan as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the prospects for the borrower and the competitive situation of the region where the borrower does business.

 

We believe that, because MFFO excludes costs that we consider more reflective of acquisition activities and other non-operating items, MFFO can provide, on a going-forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring properties and once our portfolio is stabilized. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry and allows for an evaluation of our performance against other publicly registered, non-listed REITs.

 

Not all REITs, including publicly registered, non-listed REITs, calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs, including publicly registered, non-listed REITs, may not be meaningful. Furthermore, FFO and MFFO are not indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as determined under GAAP as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance. FFO and MFFO should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The methods utilized to evaluate the performance of a publicly registered, non-listed REIT under GAAP should be construed as more relevant measures of operational performance and considered more prominently than the non-GAAP measures, FFO and MFFO, and the adjustments to GAAP in calculating FFO and MFFO.

 

Neither the SEC, NAREIT, the IPA nor any other regulatory body or industry trade group has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, NAREIT, the IPA or another industry trade group may publish updates to the White Paper or the Practice Guidelines or the SEC or another regulatory body could standardize the allowable adjustments across the publicly registered, non-listed REIT industry, and we would have to adjust our calculation and characterization of FFO or MFFO accordingly.

 

  33 

 

 

The below table illustrates the items deducted in the calculation of FFO and MFFO. Items are presented net of non-controlling interest portions where applicable.

 

  

For the Years Ended

 
   December 31,
2020
   December 31,
2019
 
Net (loss)/income  $(1,087)  $27,160 
FFO adjustments:          
Depreciation and amortization   3,956    4,849 
Gain on disposal of real estate, net   (1,562)   (987)
Discontinued Operations:          
Depreciation and amortization   -    121 
Gain on disposal of investment property   -    (70)
           
FFO   1,307    31,073 
MFFO adjustments:          
Other adjustments:          
Acquisition and other transaction related costs expensed(1)   -    (22)
Noncash adjustments:          
Amortization of above or below market leases and liabilities(2)   -    (105)
Mark to market adjustments (3)   12,204    4,011 
Non-recurring (gain)/loss from extinguishment/sale of debt, derivatives or securities holdings(4)   -    (13,615)
Loss on sale of marketable securities   230    724 
           
MFFO   13,741    22,066 
Straight-line rent (5)   104    39 
MFFO - IPA recommended format  $13,845   $22,105 
           
Net (loss)/income  $(1,087)  $27,160 
           
Less: income attributable to noncontrolling interests   (3,202)   (2,910)
Net (loss)/income applicable to Company’s common shares  $(4,289)  $24,250 
Net (loss)/income per common share, basic and diluted  $(0.19)  $1.05 
           
FFO  $1,307   $31,073 
           
Less: FFO attributable to noncontrolling  interests   (1,697)   (3,094)
FFO attributable to Company’s common shares  $(390)  $27,979 
FFO per common share, basic and diluted  $(0.02)  $1.21 
           
MFFO - IPA recommended format  $13,845   $22,105 
           
Less: MFFO attributable to noncontrolling  interests   (3,634)   (3,638)
MFFO attributable to Company’s common shares  $10,211   $18,467 
           
Weighted average number of common shares outstanding, basic and diluted   22,337    23,039 

 

Notes:

 

(1)The purchase of properties, and the corresponding expenses associated with that process, is a key operational feature of our business plan to generate operational income and cash flows in order to make distributions to investors. In evaluating investments in real estate, management differentiates the costs to acquire the investment from the operations derived from the investment. Such information would be comparable only for non-listed REITs that have completed their acquisition activity and have other similar operating characteristics. By excluding expensed acquisition costs, management believes MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management’s analysis of the investing and operating performance of our properties. Acquisition fees and expenses include payments to our advisor or third parties. Acquisition fees and expenses under GAAP are considered operating expenses and as expenses included in the determination of net income and income from continuing operations, both of which are performance measures under GAAP. Such fees and expenses are paid in cash, and therefore such funds will not be available to distribute to investors. Such fees and expenses negatively impact our operating performance during the period in which properties are being acquired. Therefore, MFFO may not be an accurate indicator of our operating performance, especially during periods in which properties are being acquired. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to the property. Acquisition fees and expenses will not be paid or reimbursed, as applicable, to our advisor even if there are no further proceeds from the sale of shares in our offering, and therefore such fees and expenses would need to be paid from either additional debt, operational earnings or cash flows, net proceeds from the sale of properties or from ancillary cash flows.

  34 

 

 

(2)Under GAAP, certain intangibles are accounted for at cost and reviewed at least annually for impairment, and certain intangibles are assumed to diminish predictably in value over time and amortized, similar to depreciation and amortization of other real estate related assets that are excluded from FFO. However, because real estate values and market lease rates historically rise or fall with market conditions, management believes that by excluding charges relating to amortization of these intangibles, MFFO provides useful supplemental information on the performance of the real estate.

 

(3)Management believes that adjusting for mark-to-market adjustments is appropriate because they are nonrecurring items that may not be reflective of ongoing operations and reflects unrealized impacts on value based only on then current market conditions, although they may be based upon current operational issues related to an individual property or industry or general market conditions. The need to reflect mark-to-market adjustments is a continuous process and is analyzed on a quarterly and/or annual basis in accordance with GAAP.

 

(4)Management believes that adjusting for gains or losses related to extinguishment/sale of debt, derivatives or securities holdings is appropriate because they are items that may not be reflective of ongoing operations. By excluding these items, management believes that MFFO provides supplemental information related to sustainable operations that will be more comparable between other reporting periods.

 

(5)Under GAAP, rental receipts are allocated to periods using various methodologies. This may result in income recognition that is significantly different than underlying contract terms. By adjusting for these items (to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments, providing insight on the contractual cash flows of such lease terms and debt investments, and aligns results with management’s analysis of operating performance.

 

The table below presents our cumulative distributions paid and cumulative FFO:

 

   From inception through 
   December 31,
2020
 
     
FFO attributable to Company’s common shares  $235,651 
Distributions Paid     $247,371 

 

For the year ended December 31, 2020, we paid cash distributions of $15.4 million. Cash flow from operations was $10.1 million and FFO attributable to Company’s common shares for the year ended December 31, 2020 was negative $0.4 million. For the year ended December 31, 2019, we paid cash distributions of $16.0 million. FFO attributable to Company’s common shares for the year ended December 31, 2019 was $28.0 million and cash flow from operations was $19.2 million.

 

New Accounting Pronouncements  

 

See Note 2 to the Notes to Consolidated Financial Statements for further information concerning accounting standards that we have not yet been required to adopt and may be applicable to our future operations.

 

  35 

 

 

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA  
   
Lightstone Value Plus Real Estate Investment Trust, Inc. and Subsidiaries  
(a Maryland corporation)  
   
Index  
   
  Page
   
Report of Independent Registered Public Accounting Firm F-2
   
Financial Statements:  
   
Consolidated Balance Sheets as of December 31, 2020 and 2019 F-4
   
Consolidated Statements of Operations for the years ended December 31, 2020 and 2019 F-5
   
Consolidated Statements of Comprehensive Income for the years ended December 31, 2020 and 2019 F-6
   
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2020 and 2019 F-7
   
Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019 F-8
   
Notes to Consolidated Financial Statements F-9

 

 F-1 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

Lightstone Value Plus Real Estate Investment Trust, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Lightstone Value Plus Real Estate Investment Trust, Inc. and Subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2020 and 2019, and the consolidated results of their operations and their cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matters

 

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

Investment Property – Indicators of Impairment

 

As of December 31, 2020, the Company had investment property, net of accumulated depreciation of $287.2 million. As more fully described in Note 2 to the consolidated financial statements, the Company reviews its investment properties for impairment at the lowest identifiable level, the individual property level, whenever events or change in circumstances indicate that the carrying value of the investment properties may not be recoverable. When such conditions exist, the Company performs a recoverability analysis to determine if the estimated undiscounted projected cash flows from operations and the estimated proceeds from the ultimate disposition of an investment property exceed the property’s carrying values. The Company estimates undiscounted cash flows of an investment property using observable and unobservable inputs such as historical and projected cash flows, net operating income, current market and other applicable trends, estimated capitalization rates, and residual values. In the event the analysis indicates that a potential impairment exists, the Company will perform an additional analysis to assess the recoverability of the carrying value of the real estate.

 

 F-2 

 

 

We identified the investment property impairment evaluation as a critical audit matter due to estimation uncertainty in determining the undiscounted cash flows of an investment property. In particular, the impairment evaluation for investment property is sensitive to significant assumptions such as forecasted cash flows and net operating income, and estimated capitalization rates, and residual values, all of which can be affected by expectations about future market or economic conditions, demand, and competition. This in turn led to a high degree of auditor judgment and subjectivity and significant audit effort was required in performing procedures to evaluate management’s investment property impairment evaluation.

 

Addressing the matter involved performing procedures and evaluating audit evidence, in connection with forming our overall opinion on the consolidated financial statements. We obtained an understanding and evaluated the design of controls over the Company’s impairment evaluation. Our procedures included, among others, assessing the methodologies applied, evaluating the significant assumptions discussed above and testing the completeness and accuracy of the underlying data used by management in its analysis. In addition, we performed sensitivity analysis over significant estimates and assumptions including future operating income and residual values. We tested estimated undiscounted cash flows by comparing them to historical operating results by property and the reasonableness of key inputs including forecasted net operating income, capitalization rates, and assumed hold periods. We held discussions with management about the current status of each property and management’s judgments to understand the probability of future events that could affect the holding period and other cash flow assumptions for the properties. When assessing the assumptions related to estimated undiscounted cash flows, we evaluated whether the assumptions used were reasonable considering the past and current performance of the property and considered whether they were consistent with evidence obtained in other areas of the audit.

 

Notes Receivable – Indicators of Impairment

 

As of December 31, 2020, the Company had notes receivable, net of reserves, of $104.6 million. As more fully described in Note 2 and 5 to the consolidated financial statements, the Company considers notes receivable impaired when, based on current information and events, it is probable that the Company will not be able to collect principal and interest amounts due according to the contractual terms. The Company considers the estimated net recoverable value of the notes receivable as well as other factors, including but not limited to the fair value of any collateral, the quality and financial condition of the borrower and the competitive situation of the area where the underlying collateral is located.

 

We identified the notes receivable impairment evaluation as a critical audit matter due to significant judgment that was necessary by management when assessing whether it is probable that the debtor will pay the outstanding balances timely and whether it is probable that such repayments will be collected in accordance with their contractual terms. This in turn led to a high degree of auditor judgment and subjectivity and significant audit effort was required in performing procedures to evaluate management’s analysis of the expected recovery of the notes receivable.

 

Addressing the matter involved performing procedures and evaluating audit evidence, in connection with forming our overall opinion on the consolidated financial statements. We obtained an understanding and evaluated the design of controls over the Company’s impairment evaluation. Our procedures included, among others, testing the status of collection of principal and interest according to the contractual terms. We held discussions with management about the current status of each note receivable and management’s judgments to understand the probability of future events that could result in the Company not being able to collect principal and interest. In certain instances, we visited the site of the underlying collateral and reviewed support related to the fair value of the underlying collateral. When assessing the assumptions related the collectability of principal and interest according to the contractual terms we evaluated whether the assumptions used were reasonable and considered whether they were consistent with evidence obtained in other areas of the audit.

 

/s/ EisnerAmper LLP

 

We have served as the Company’s auditor since 2010.

 

EISNERAMPER LLP

New York, New York

March 19, 2021

 

 F-3 

 

 

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

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per share data)

  

   As of
December 31,
2020
   As of
 December 31, 2019
 
Assets          
           
Investment property:          
    Land and improvements  $30,143   $30,664 
    Building and improvements   101,492    101,827 
    Furniture and fixtures   2,453    2,404 
    Construction in progress   186,196    152,896 
Gross investment property   320,284    287,791 
Less accumulated depreciation   (33,038)   (29,685)
Net investment property   287,246    258,106 
Investments in related parties   15,590    35,738 
Cash and cash equivalents   44,446    77,569 
Marketable securities and other investments   46,071    54,738 
Restricted cash   2,395    2,231 
Notes receivable, net   104,624    55,723 
Prepaid expenses and other assets   1,869    2,075 
           
Total Assets  $502,241   $486,180 
           
Liabilities and Stockholders' Equity          
Mortgages payable, net  $192,385   $164,705 
Accounts payable, accrued expenses and other liabilities   8,641    4,380 
Due to related parties   241    244 
Tenant allowances and deposits payable   487    594 
Distributions payable   3,905    3,960 
Deferred rental income   399    524 
           
Total Liabilities   206,058    174,407 
           
Commitments and contingencies          
           
Stockholders' equity:          
Company's Stockholders Equity:          
Preferred shares, $0.01 par value, 10.0 million shares authorized,  none issued and outstanding   -    - 
Common stock, $0.01 par value; 60.0 million shares authorized, 22.3 million and 22.6 million shares issued and outstanding, respectively   223    226 
Additional paid-in-capital   169,649    172,749 
Accumulated other comprehensive income   378    408 
Accumulated surplus   89,639    109,559 
           
Total Company's stockholders' equity   259,889    282,942 
    -    - 
Noncontrolling interests   36,294    28,831 
           
Total Stockholders' Equity   296,183    311,773 
           
Total Liabilities and Stockholders' Equity  $502,241   $486,180 

 

The accompanying notes are an integral part of these consolidated financial statements.

 F-4 

 

 

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

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

 

   For the Years Ended December 31, 
   2020   2019 
         
Revenues:          
Rental income  $10,972   $14,137 
Tenant recovery income   288    1,028 
Total revenues   11,260    15,165 
           
Expenses:          
Property operating expenses   3,967    4,652 
Real estate taxes   555    1,065 
General and administrative costs   3,144    2,598 
Depreciation and amortization   3,956    4,849 
Total operating expenses   11,622    13,164 
           
Operating (loss)/income   (362)   2,001 
           
Interest and dividend income   13,008    16,828 
Interest expense   (2,978)   (1,674)
Gain on disposition of real estate, net   1,562    987 
Loss on sale and redemption of marketable securities   (230)   (724)
Unrealized loss on marketable equity securities   (12,204)   (3,849)
Other income, net   117    110 
Net (loss)/income from continuing operations   (1,087)   13,679 
           
Net income from discontinued operations   -    13,481 
Net (loss)/income   (1,087)   27,160 
           
Less: net income attributable to noncontrolling interests   (3,202)   (2,910)
           
Net (loss)/income attributable to Company’s common shares  $(4,289)  $24,250 
           
Basic and diluted net (loss)/income per Company’s common share:          
Continuing operations  $(0.19)  $0.46 
Discontinued operations   -    0.59 
Net (loss)/income per Company’s common shares, basic and diluted  $(0.19)  $1.05 
           
Weighted average number of common shares outstanding, basic and diluted   22,337    23,039 

 

The accompanying notes are an integral part of these consolidated financial statements.

 F-5 

 

 

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

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

 

   For the Years Ended December 31, 
   2020   2019 
Net (loss)/income  $(1,087)  $27,160 
           
Other comprehensive (loss)/income:          
Holding (loss)/gain on available for sale debt securities   (21)   1,992 
Reclassification adjustment for loss included in net income   -    724 
           
Other comprehensive (loss)/income:   (21)   2,716 
           
Comprehensive (loss)/income   (1,108)   29,876 
           
Less: Comprehensive income attributable to noncontrolling interests   (3,211)   (2,967)
           
Comprehensive (loss)/income attributable to the Company’s common shares  $(4,319)  $26,909 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 F-6 

 

 

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

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Amounts in thousands)

  

           Additional   Accumulated
Other
       Total     
   Common   Paid-In   Comprehensive   Accumulated   Noncontrolling     
   Shares   Amount   Capital   (Loss)/Income   Surplus   Interests   Total Equity 
                             
BALANCE, December 31, 2018   23,708    237    184,469    (2,251)   101,382    14,404    298,241 
Net income   -    -    -    -    24,250    2,910    27,160 
Other comprehensive income   -    -    -    2,659    -    57    2,716 
Distributions declared (a)   -    -    -    -    (16,073)   -    (16,073)
Distributions paid to noncontrolling interests   -    -    -    -    -    (21,662)   (21,662)
Contributions received from noncontrolling interests   -    -    -    -    -    33,122    33,122 
Shares issued from distribution reinvestment program   25    -    278    -    -    -    278 
Redemption, cancellation and tender of shares   (1,125)   (11)   (11,998)   -    -    -    (12,009)
BALANCE, December 31, 2019   22,608   $226   $172,749   $408   $109,559   $28,831   $311,773 
                                    
Net loss   -    -    -    -    (4,289)   3,202    (1,087)
Other comprehensive loss   -    -    -    (30)   -    9    (21)
Distributions declared (a)   -    -    -    -    (15,631)   -    (15,631)
Distributions paid to noncontrolling interests   -    -    -    -    -    (18,078)   (18,078)
Contributions received from noncontrolling interests   -    -    -    -    -    22,330    22,330 
Redemption, cancellation and tender of shares   (343)   (3)   (3,429)   -    -    -    (3,432)
Shares issued from distribution reinvestment program   29    -    329    -    -    -    329 
BALANCE, December 31, 2020   22,294   $223   $169,649   $378   $89,639   $36,294   $296,183 

 

(a)Distributions per share were $0.70.

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 F-7 

 

 

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

 

   For the Years Ended December 31, 
   2020   2019 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net (loss)/income  $(1,087)  $27,160 
Less net income – discontinued operations   -    13,481 
Net (loss)/income – continuing operations   (1,087)   13,679 
Adjustments to reconcile net (loss)/income to net cash provided by operating activities:          
Depreciation and amortization   3,956    4,849 
Loss on sale and redemption of marketable securities   230    724 
Noncash interest income   (5,422)   (3,284)
Gain on disposition of real estate   (1,562)   (987)
Unrealized loss on marketable equity securities   12,204    3,849 
Amortization of deferred financing costs   601    34 
Mark to market adjustment on derivative financial instruments   -    162 
Bad debt expense   360    242 
Other non-cash adjustments   14    188 
Changes in assets and liabilities:          
Decrease/(increase) in prepaid expenses and other assets   47    (650)
(Decrease)/increase in tenant allowances and deposits payable   (419)   217 
Increase in accounts payable, accrued expenses and other liabilities   1,350    557 
Decrease in due to related parties   (3)   (188)
Decrease in deferred rental income   (125)   (138)
Net cash provided by operating activities – continuing operations   10,144    19,254 
Net cash used in operating activities – discontinued operations   -    (55)
Net cash provided by operating activities   10,144    19,199 
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of investment property   (29,442)   (87,104)
Purchase of marketable securities   (8,048)   (14,096)
Proceeds from sale of marketable securities   4,260    59,437 
Proceeds from short term investment   -    5,012 
Proceeds from sale of investment property   2,082    19,477 
Investment in joint venture   (129)   (115)
Proceeds from joint venture   263    151 
Investments in related parties   -    (2,267)
Proceeds from preferred investments in related parties   20,000    68,501 
Proceeds from repayment of notes receivable   500    13,000 
Release of reserves on notes receivable   (2,250)   (1,130)
Funding of notes receivable   (41,729)   (64,309)
Net cash used in investing activities – continuing operations   (54,493)   (3,443)
Net cash used in investing activities – discontinued operations   -    (3,513)
Net cash used in investing activities   (54,493)   (6,956)
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from mortgage financing   27,839    62,262 
Mortgage principal payments   (1,260)   (15,285)
Payment of loan fees and expenses   (651)   (2,756)
Proceeds from line of credit   -    18,000 
Repayment of line of credit   -    (18,000)
Redemption, cancellation and tender of shares   (3,432)   (12,009)
Contributions received from noncontrolling interests   22,330    33,122 
Distributions paid to noncontrolling interests   (18,078)   (21,662)
Distributions paid to Company’s stockholders   (15,358)   (15,971)
Net provided by financing activities   11,390    27,701 
Net change in cash, cash equivalents and restricted cash   (32,959)   39,944 
Cash , cash equivalents and restricted cash, beginning of year   79,800    39,856 
Cash, cash equivalents and restricted cash, end of year  $46,841   $79,800 

 

See Note 2 for supplemental cash flow information.

 

The accompanying notes are an integral part of these consolidated financial statement

 

 F-8 

 

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2020 and 2019

(Dollar amounts in thousands, except per share/unit data and where indicated in millions)

 

1. Structure

 

Lightstone Value Plus Real Estate Investment Trust, Inc., a Maryland corporation (“Lightstone REIT”), formed on June 8, 2004, which has elected to be taxed and qualify as a real estate investment trust for U.S. federal income tax purposes (“REIT”). The Lightstone REIT 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.

 

The Lightstone REIT is structured as an umbrella partnership real estate investment trust, or UPREIT, and substantially all of the Company’s current and future business is and will be conducted through Lightstone Value Plus REIT, L.P. (the “Operating Partnership”), a Delaware limited partnership formed on July 12, 2004.  As of December 31, 2020, the Company held a 98% general partnership interest in the Company’s Operating Partnership’s common units (“Common Units”).

 

The Lightstone REIT and the Operating Partnership and its subsidiaries are collectively referred to as the ’‘Company’’ and the use of ’‘we,’’ ’‘our,’’ ’‘us’’ or similar pronouns refers to the Lightstone REIT, its Operating Partnership or the Company as required by the context in which such pronoun is used.

 

Through its Operating Partnership, the Company owns, operates and develops commercial, residential, and hospitality properties and makes real estate-related investments, principally in the United States. The Company’s real estate investments are held alone or jointly with other parties. The Company also originates or acquires mortgage loans secured by real estate. Although most of its investments are of these types, the Company may invest in whatever types of real estate or real estate-related investments that it believes is in its best interests.

 

Since its inception, the Company has owned and managed various commercial and residential properties located throughout the United States. The Company historically operated within four business segments consisting of: (i) retail properties, (ii) multi-family residential properties, (iii) industrial properties and (iv) hospitality properties. Prior to 2018 the Company disposed of substantially all of the ownership interests in its hospitality properties. Additionally, during the first quarter of 2019, the Company disposed of all of its remaining industrial properties and during the third quarter of 2019 the Company disposed of DePaul Plaza, a retail property. Because of the changes in the composition of the Company’s real estate and real estate investments, the Company now evaluates all of its real estate investments as one operating segment.

 

As of December 31, 2020, the Company has ownership interests in (i) two consolidated operating properties, (ii) three consolidated development properties and (iii) seven unconsolidated operating properties. With respect to its consolidated operating properties, the Company wholly owns the St. Augustine Outlet Center, a retail property containing approximately 0.3 million square feet of gross leasable area, and has a majority ownership interest of approximately 59.2% in Gantry Park Landing, a multi-family residential property containing 199 apartment units. With respect to its consolidated development properties, the Company wholly owns three projects consisting of the Lower East Side Moxy Hotel, the Exterior Street Project and the Santa Clara Data Center. The Company also holds a 2.5% ownership interest in seven hotel properties through a joint venture (the “Joint Venture”) which the Company accounts for using a measurement alternative under which the Joint Venture is measured at cost, adjusted for observable price changes and impairments, if any. The Joint Venture is between the Company and the operating partnership of Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone II”), a real estate investment trust also sponsored by the Company’s Sponsor, which has a 97.5% ownership interest in the Joint Venture. Furthermore, the Company has other real estate-related investments, including preferred investments in related parties and nonrecourse loans made to unaffiliated third-party borrowers.

 

The Company’s advisor is Lightstone Value Plus REIT, LLC (the “Advisor”), which is majority owned by David Lichtenstein. On July 6, 2004, the Advisor contributed $2 to the Operating Partnership in exchange for 200 Common Units. The Company’s Advisor also owns 20,000 shares of the Company’s common stock (“Common Shares”) which were issued on July 6, 2004 for $200, or $10.00 per share. Mr. Lichtenstein also is the majority owner of the equity interests of The Lightstone Group, LLC. The Lightstone Group, LLC served as the sponsor (the ’’Sponsor’’) during the Company’s initial public offering (the “Offering”), which terminated on October 10, 2008. The Company’s Advisor, together with its board of directors (the “Board of Directors”), is primarily responsible for making investment decisions on the Company’s behalf and managing its day-to-day operations. Through his ownership and control of The Lightstone Group, LLC, Mr. Lichtenstein is the indirect owner and manager of Lightstone SLP, LLC, a Delaware limited liability company, which owns an aggregate of $30.0 million of special general partner interests (“SLP Units”) in the Operating Partnership which were purchased, at a cost of $100,000 per unit, in connection with the Company’s Offering. Mr. Lichtenstein also acts as the Company’s Chairman and Chief Executive Officer. As a result, he exerts influence over but does not control the Lightstone REIT or the Operating Partnership.

 

 F-9 

 

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2020 and 2019

(Dollar amounts in thousands, except per share/unit data and where indicated in millions)

  

The Company does not have any employees. The Advisor receives compensation and fees for services related to the investment and management of the Company’s assets.

 

The Company’s Advisor has affiliates which may manage and develop certain of its properties. However, the Company also contracts with other unaffiliated third-party property managers.

 

The Company’s Common Shares are not currently listed on a national securities exchange. The Company may seek to list its stock for trading on a national securities exchange only if a majority of independent directors believe listing would be in the best interest of its stockholders. The Company does not intend to list its shares at this time. The Company does not anticipate that there would be any market for its shares of common stock until they are listed for trading.

 

Related Parties:

 

The Advisor and its affiliates, and Lightstone SLP, LLC are related parties of the Company. Certain of these entities are entitled to compensation for services related to the investment, management and disposition of the Company’s assets. The compensation is based on the cost of acquired properties/investments and the annual revenue earned from such properties/investments, and other such fees and expense reimbursements as outlined in each of the respective agreements. See Note 13 for additional information.

 

Discontinued Operations

 

During the first quarter of 2019, a portfolio comprised of the Company’s 10 industrial properties located in Louisiana (seven properties located in New Orleans and three properties located in Baton Rouge, and collectively, the “Louisiana Assets”) met the criteria to be classified as discontinued operations in the consolidated statements of operations for all periods presented, through their date of disposition. The disposition of the Louisiana Assets, which represented all of the Company’s remaining industrial properties, represented a strategic shift that had a major effect on the Company’s operations and financial results and therefore, upon their disposition, the operating results of the Louisiana Assets were classified as discontinued operations in the Company’s consolidated statements of operations for all periods presented through their date of disposition (See Note 9). 

 

Gain on Disposition of Real Estate

 

On April 6, 2020, the Company completed the disposition of a parcel of land adjacent to the St. Augustine Outlet Center for a contractual sales price of $2.1 million and recognized a gain on the disposition of real estate of approximately $1.6 million during the second quarter of 2020.

 

Noncontrolling Interests

 

Partners of Operating Partnership

 

On July 6, 2004, the Advisor contributed $2 to the Operating Partnership in exchange for 200 Common Units in the Operating Partnership. The Advisor has the right to convert the Common Units into cash or, at the option of the Company, an equal number of shares of Common Shares.

 

In connection with the Offering, Lightstone SLP, LLC, an affiliate of the Advisor, purchased an aggregate of $30.0 million of SLP Units. As the majority owner of the SLP Units, Mr. Lichtenstein is the beneficial owner of a 99% interest in such SLP Units and thus receives an indirect benefit from any distributions made in respect thereof. These SLP Units may be entitled to a portion of any regular and liquidation distributions that the Company makes to its stockholders, but only after the Company’s stockholders have received a stated preferred return.

 

In addition, an aggregate 497,209 Common Units were issued to other unrelated parties during the years ended December 31, 2008 and 2009 and remain outstanding as of December 31, 2020.

 

 F-10 

 

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2020 and 2019

(Dollar amounts in thousands, except per share/unit data and where indicated in millions)

 

Other Noncontrolling Interests in Consolidated Subsidiaries

 

Other noncontrolling interests in consolidated subsidiaries include ownership interests in (i) Pro-DFJV Holdings LLC (“PRO”) held by the Company’s Sponsor (see Note 12), (ii) 50-01 2nd St. Associates LLC (the “2nd Street Joint Venture”), held by the Company’s Sponsor and other affiliates (see Note 12) and (iii) various joint ventures held by affiliates of the Sponsor that have originated promissory notes to unaffiliated third parties (see Note 5). PRO’s holdings principally consist of Marco OP Units and Marco II OP Units (see Note 6). The 2nd Street Joint Venture owns Gantry Park Landing, a multi-family apartment building located in Queens, New York.

 

See Note 12 for further discussion of noncontrolling interests.

 

COVID-19 Pandemic

 

On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic leading many countries, including the United States, particularly at the individual state level, to subsequently impose various degrees of restrictions and other measures, including, but not limited to, mandatory temporary closures, quarantine guidelines, limitations on travel, and “shelter in place” rules in an effort to reduce its duration and the severity of its spread. Although the COVID-19 pandemic has continued to evolve, most of these previously imposed restrictions and other measures have now been reduced and/or lifted. However, the COVID-19 pandemic remains highly unpredictable and dynamic and its duration and extent is likely dependent on numerous developments such as the regulatory approval, mass production, administration and ultimate effectiveness of vaccines, as well as the timeline to achieve a level of sufficient herd immunity amongst the general population. Accordingly, the COVID-19 pandemic may continue to have negative effects on the overall health of the U.S. economy for the foreseeable future. 

 

As a result of previous restrictions, the Company closed its St. Augustine Outlet Center from March 20, 2020 through May 7, 2020. Primarily because of the impact of the COVID-19 pandemic on the operating performance of the St. Augustine Outlet Center’s tenancy, especially during the closure period, the Company has provided forbearance of certain rent payments to various tenants. Additionally, the Company has seen some deterioration in both the occupancy and rental rates for Gantry Park Landing, which is located on Long Island, New York, as the luxury rental market in the greater New York City metropolitan area has been negatively impacted by the COVID-19 pandemic. However, none of these items have yet materially impacted the Company’s results from operations or its financial condition.

 

To-date, the COVID-19 pandemic has not had any significant impact on the Company’s three development projects. Furthermore, the Company’s other real estate-related investments (both its preferred investments in related parties and nonrecourse loans made to unaffiliated third-party borrowers) also relate to various development projects which are at different stages in their respective development process. These investments, which are subject to similar restrictions and other measures, have also not yet been significantly impacted by the COVID-19 pandemic.

 

The extent to which the Company’s business may be affected by the ongoing COVID-19 pandemic will largely depend on both current and future developments, all of which are highly uncertain and cannot be reasonably predicted.

 

If the Company’s operating properties, development projects and real estate-related investments are negatively impacted for an extended period because (i) occupancy levels and rental rates further decline, (ii) tenants are unable to pay their rent, (iii) borrowers are unable to pay scheduled debt service on notes receivable, (iv) development activities are delayed and/or (v) various related party entities are unable to pay monthly preferred distributions on the Company’s preferred investments in related parties, the Company’s business and financial results could be materially and adversely impacted.

 

2. Summary of Significant Accounting Policies  

 

Basis of Presentation

 

The consolidated financial statements include the accounts of Lightstone REIT and the Operating Partnership and its subsidiaries (over which the Company exercises financial and operating control). As of December 31, 2020, Lightstone REIT had a 98% general partnership interest in the Operating Partnership. All inter-company balances and transactions have been eliminated in consolidation.  

 

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 and real estate-related investments, depreciable lives, and revenue recognition. Application of these assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates.

 

 F-11 

 

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2020 and 2019

(Dollar amounts in thousands, except per share/unit data and where indicated in millions)

 

Investments in entities where the Company has the ability to exercise significant influence, but does not exercise financial and operating control, and is not considered to be the primary beneficiary of a variable interest entity will be accounted for using the equity method. Investments in entities where the Company has virtually no influence are recorded initially at cost, as investments in unconsolidated joint ventures, and subsequently adjusted for equity in net income/(loss) and cash contributions and distributions. 

 

Cash, Cash Equivalents and Restricted Cash

 

The Company considers all highly liquid investments with an original maturity of three months or less when made to be cash equivalents.

 

As required by the Company’s lenders, restricted cash is held in escrow accounts for anticipated capital expenditures, real estate taxes, and other reserves for certain of its consolidated properties. Capital reserves are typically utilized for non-operating expenses such as tenant improvements, leasing commissions, and major capital expenditures. Alternatively, a lender may require its own formula for an escrow of capital reserves. Restricted cash may also include certain funds temporarily placed in escrow with qualified intermediaries to facilitate potential like-kind exchange transactions in accordance with Section 1031 of the Internal Revenue Code of 1986, as amended.

 

The following is a summary of the Company’s cash, cash equivalents, and restricted cash total as presented in the statements of cash flows for the periods presented:

  

   December 31, 
   2020   2019 
Cash and cash equivalents  $44,446   $77,569 
Restricted cash  2,395   2,231 
Total cash, cash equivalents and restricted cash  $46,841   $79,800 

 

Supplemental cash flow information for the periods indicated is as follows:

  

   For the Years Ended 
  

December 31,

2020

  

December 31,

2019

 
         
Cash paid for interest  $8,860   $7,492 
           
Distributions declared but not paid  $3,905   $3,960 
           
Investment property acquired but not paid  $3,995   $1,082 
           
Assets transferred due to foreclosure  $-   $34,025 
           
Liabilities credited in foreclosure  $-   $50,914 
           
Amortization of deferred financing costs included in construction in progress  $1,151   $2,084 
           
Holding loss/gain on available for sale debt securities  $21   $2,716 
           
Value of shares issued from distribution reinvestment program  $329   $278 

 

Marketable Securities

 

Marketable securities consist of equity and debt securities that are designated as available-for-sale. Marketable debt securities are recorded at fair value and unrealized holding gains or losses are reported as a component of accumulated other comprehensive income. The Company’s marketable equity securities are recorded at fair value and unrealized holding gains and losses are recognized on the consolidated statements of operations.

 

 F-12 

 

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2020 and 2019

(Dollar amounts in thousands, except per share/unit data and where indicated in millions)

 

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. The Company considers 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 of Directors 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 of marketable securities of real estate companies 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.

 

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, including any below-market renewal periods taken into account. 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.

 

Consolidated VIEs

 

The Company consolidates certain joint ventures which have originated nonrecourse loans to unaffiliated third-party borrowers (see Note 5) which are variable interest entities, or VIEs, for which the Company is the primary beneficiary. Generally, a VIE is a legal entity in which the equity investors do not have the characteristics of a controlling financial interest or the equity investors lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. A limited partnership, or legal entities such as an LLC, are considered a VIE when the majority of the limited partners unrelated to the general partner possess neither the right to remove the general partner without cause, nor certain rights to participate in the decisions that most significantly affect the financial results of the partnership. In determining whether the Company is the primary beneficiary of a VIE, the Company considers qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE’s economic performance and which party controls such activities; the amount and characteristics of our investment; the obligation or likelihood for us or other investors to provide financial support; and the similarity with and significance to our business activities and the business activities of the other investors. Significant judgments related to these determinations include estimates about the current and future fair values and performance of real estate held by these VIEs and general market conditions.

 

Investments in Real Estate 

 

Accounting for Asset Acquisitions

 

The cost of the real estate assets acquired in an asset acquisition 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 relative fair values. Fees incurred related to asset acquisitions are capitalized as part of the cost of the investment.

 

Accounting for Business Combinations

 

Upon the acquisition of real estate operating properties that meet the definition of a business, 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 evaluates the existence of goodwill or a gain from a bargain purchase and 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.  

 

 F-13 

 

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2020 and 2019

(Dollar amounts in thousands, except per share/unit data and where indicated in millions)

 

Accounting for Development Projects

 

The Company incurs a variety of costs in the development of a property. The costs of land and building under development include specifically identifiable costs. The capitalized costs include, but are not limited to, pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes and other costs incurred during the period of development. The Company ceases capitalization when the development project is substantially complete and placed in service, which may occur in phases. Determination of when a development project is substantially complete and capitalization must cease involves a degree of judgment.

 

Once the development project is placed in service, which may occur in phases or for an entire building or project, the costs capitalized to construction in progress are transferred to land and improvements, buildings and improvements, and furniture and fixtures on the Company’s consolidated balance sheets at the historical cost of the property.

 

Impairment Evaluation   

 

The Company evaluates the recoverability of its investments in real estate assets at the lowest identifiable level, the individual property level. An impairment loss is recognized only if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value.

 

The Company evaluates the long-lived assets for potential impairment whenever events or changes in circumstances indicate that the undiscounted projected cash flows are less than the carrying amount for a particular property. No single indicator would necessarily result in the Company preparing an estimate to determine if a long-lived asset’s future undiscounted cash flows are less than its book value.  The Company uses judgment to determine if the severity of any single indicator, or the fact there are a number of indicators of less severity that when combined, would result in an indication that a long-lived asset requires an estimate of the undiscounted cash flows to determine if an impairment has occurred. Relevant facts and circumstances include, among others, significant underperformance relative to historical or projected future operating results and significant negative industry or economic trends.   The estimated cash flows used for the impairment analysis are subjective and require the Company to use its judgment 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 future operating income, market and other applicable trends and residual value, as well as the effects of demand, competition, 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, may be substantial. 

 

Notes Receivable and Preferred Investments

 

Notes receivable and preferred investments that we intend to hold to maturity are carried at cost, net of any unamortized origination costs, fees, discounts, premiums and unfunded commitments.

 

Investment income will be recognized on an accrual basis and any related premium, discount, origination costs and fees are amortized over the life of the investment using the effective interest method. The amortization is reflected as an adjustment to investment income in the Company’s statements of operations.

 

Income recognition is suspended when, in the opinion of management, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal is not in doubt, contractual interest is recorded as investment income when received, under the cash basis method, until an accrual is resumed when the instrument becomes contractually current and performance is demonstrated to be resumed.

 

Credit Losses and Impairment on Notes Receivable

 

Notes receivable are considered impaired when, based on current information and events, it is probable that we will not be able to collect principal and interest amounts due according to the contractual terms. We assess the credit quality of our notes receivable and adequacy of reserves on a quarterly basis, or more frequently as necessary. Significant judgment of management is required in this analysis. We consider the estimated net recoverable value of the notes receivable as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the quality and financial condition of the borrower and the competitive situation of the area where the underlying collateral is located. Because this determination is based on projections of future economic events, which are inherently subjective, the amount ultimately realized may differ materially from the carrying value as of the balance sheet date. If upon completion of the assessment, the estimated fair value of the underlying collateral is less than the net carrying value of the notes receivable, a reserve is recorded with a corresponding charge to investment income. The reserve for each note receivable is maintained at a level that is determined to be adequate by management to absorb probable losses.

 

 F-14 

 

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2020 and 2019

(Dollar amounts in thousands, except per share/unit data and where indicated in millions)

 

Credit Losses and Impairment on Preferred Investments

 

Preferred investments that are accounted for as held to maturity are assessed for impairment at the individual investment level when there is a decline in fair value below the amortized cost basis that is deemed to be other than temporary. In making the determination of an other-than-temporary impairment assessment, the Company considers all available information relevant to the collectability of the investment, including information about past events, current conditions, and reasonable and supportable forecasts when developing the estimate of cash flows expected to be collected. This information includes the remaining redemption terms of the investment, financial condition of the issuer, expected defaults and the value of any underlying collateral. In assessing whether the entire amortized cost basis of the investment will be recovered, the Company compares the present value of cash flows expected to be collected from the investment with the amortized cost basis and records an impairment based on the amount by which the present value of cash flows expected to be collected is less than the amortized cost basis of the investment.

 

Depreciation and Amortization

 

Depreciation expense is computed based on the straight-line method over the estimated useful life of the applicable real estate asset. The Company generally uses estimated useful lives of up to thirty-nine years for buildings and improvements and five to ten years for furniture and fixtures. Expenditures for tenant improvements and construction allowances paid to commercial tenants are capitalized and amortized over the initial term of each lease or the useful life if shorter. Expenditures for ordinary maintenance and repairs are charged to expense as incurred.

 

Deferred Costs

 

The Company capitalizes initial direct costs associated with financing activities. The costs are capitalized upon the execution of the loan, presented in the consolidated balance sheets as a direct deduction from the carrying value of the corresponding loan and amortized over the initial term of the corresponding loan. Amortization of deferred loan costs begin in the period during which the loan is originated using the effective interest method over the term of the loan. The Company capitalizes initial direct costs associated with leasing activities. The costs are capitalized upon the execution of the lease and amortized over the initial term of the corresponding lease. 

 

Income Taxes

 

The Company has elected to be taxed as a REIT commencing with the taxable year ended December 31, 2005. If the Company qualifies as a REIT, it generally will not be subject to U.S. federal income tax on its taxable income or capital gain that it distributes to its stockholders. To maintain its REIT qualification, the Company must meet a number of organizational and operational requirements, including a requirement that it annually distribute to its stockholders at least 90% of its REIT taxable income (which does not equal net income, as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. If the Company fails to remain qualified for taxation as a REIT in any subsequent year and does not qualify for certain statutory relief provisions, its income for that year will be taxed at the regular corporate rate, and it may be precluded from qualifying for treatment as a REIT for the four-year period following its failure to qualify as a REIT. Such an event could materially adversely affect the Company’s net income and net cash available for distribution to stockholders.

 

To maintain its qualification as a REIT, the Company engages in certain activities through wholly-owned taxable REIT subsidiaries (“TRSs”). As such, the Company is subject to U.S. federal and state income and franchise taxes from these activities.

 

As of December 31, 2020 and 2019, the Company had no material uncertain income tax positions. Additionally, even if the Company continues to qualify as a REIT, it may still be subject to some U.S. federal, state and local taxes on our income and property and to U.S. federal income taxes and excise taxes on its undistributed income.  

 

Fair Value of Financial Instruments

 

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted escrows, tenants’ accounts receivable and accounts payable and accrued expenses approximate their fair values because of the short maturity of these instruments. The carrying amounts of the notes receivable approximate their fair values because the interest rates are variable and reflective of market rates.

 

 F-15 

 

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2020 and 2019

(Dollar amounts in thousands, except per share/unit data and where indicated in millions)

 

The estimated fair value (in millions) of the Company’s mortgage debt is summarized as follows:

 

   As of December 31, 2020   As of December 31, 2019 
   Carrying Amount   Estimated Fair Value   Carrying Amount   Estimated Fair Value 
Mortgages payable  $193.5   $198.0   $167.0   $167.9 

 

The fair value of the mortgages payable was determined by discounting the future contractual interest and principal payments by estimated current market interest rates.

 

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. The Company may designate these derivative financial instruments as hedges and apply hedge accounting. The Company records all derivative instruments at fair value on the consolidated balance sheets and changes in the fair value of the instruments are recorded in the consolidated statements of operations.

 

Stock-Based Compensation

 

The Company had a stock-based incentive award plan for the independent directors of its Board pursuant to which awards were granted at fair market value as of the date of grant. This plan expired in April 2015. For the years ended December 31, 2020 and 2019, the Company had no compensation costs related to the incentive award plan.

 

Concentration of Risk

 

The Company maintains its cash and cash equivalents 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 its cash and cash equivalents.

 

Net Earnings per Share

 

Basic net earnings per share is calculated by dividing net income attributable to common shareholders by the weighted-average number of shares of common stock outstanding during the applicable period. Dilutive income per share includes the potentially dilutive effect, if any, which would occur if our outstanding options to purchase our common stock were exercised. For all periods presented dilutive net income per share is equivalent to basic net income per share.

 

New Accounting Pronouncements

 

In June 2016, the FASB issued an accounting standards update which replaces the incurred loss impairment methodology currently in use with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.  The new guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.  The Company is currently in the process of evaluating the impact the adoption of this standard will have on the Company’s consolidated financial statements.

 

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

 

Reclassifications

 

Certain prior period amounts may have been reclassified to conform to the current year presentation.

 

 F-16 

 

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2020 and 2019

(Dollar amounts in thousands, except per share/unit data and where indicated in millions)

 

3. Development Projects

 

Lower East Side Moxy Hotel

 

On December 3, 2018, the Company, through a subsidiary of the Operating Partnership, acquired adjacent three parcels of land located at 147-151 Bowery, New York, New York (collectively, the “Bowery Land”) from 151 Emmut Properties LLC and 145-149 Bowery LLC, both unaffiliated third parties, for aggregate consideration of approximately $56.5 million, excluding closing and other acquisition related costs. Additionally, on December 6, 2018, the Company, though a subsidiary of the Operating Partnership, acquired certain air rights located at 329 Broome Street, New York, New York (the “Air Rights”) from B.R.P. Realty Corp., an unaffiliated third party, for approximately $2.4 million, excluding closing and other acquisition related costs. The Company is using the Bowery Land and Air Rights for the development and construction of a 296-room Marriott Moxy hotel (the “Lower East Side Moxy Hotel”). 

 

Exterior Street Project

 

On February 27, 2019, the Company, through subsidiaries of the Operating Partnership, acquired two adjacent parcels of land located at 355 and 399 Exterior Street, New York, New York (collectively, the “Exterior Street Land”), from Borden Realty Corp and 399 Exterior Street Associates LLC, unaffiliated third parties, for an aggregate purchase price of approximately $59.0 million, excluding closing and other acquisition related costs. The Company is using the Exterior Street Land for the development and construction of a multi-family residential property (the “Exterior Street Project”).  In connection with the acquisition of the Exterior Street Land, the Advisor earned an acquisition fee equal to 2.75% of the gross aggregate contractual purchase price, which was approximately $1.6 million during the year ended December 31, 2019.

 

Santa Clara Data Center

 

On January 10, 2019, the Company, through subsidiaries of the Operating Partnership, acquired a parcel of land located at 2175 Martin Avenue, Santa Clara, California (the “Martin Avenue Land”) from The Chioini Living Trust, an unaffiliated third party, for approximately $10.6 million, excluding closing and other acquisition related costs. The Company has completed certain pre-development activities associated with the potential development and construction of a data center (the “Santa Clara Data Center”) on the Martin Avenue Land. In connection with the acquisition of the Martin Avenue Land, the Advisor earned an acquisition fee equal to 2.75% of the gross contractual purchase price, which was approximately $0.2 million, during the year ended December 31, 2019.

 

The Company’s carrying value of its development projects are included in construction in progress on the consolidated balance sheets. The following is a summary of the amounts incurred and capitalized to construction in progress as of the dates indicated and the amounts of interest capitalized to construction in progress for the periods indicated:

 

   Amounts Capitalized to Construction in Progress     
   As of   As of   Capitalized Interest 
   December 31,    December 31,    Year Ended December 31, 
Development Projects  2020   2019   2020   2019 
Lower East Side Moxy Hotel  $98,608   $73,776   $4,425   $4,176 
Exterior Street Project   74,230    66,084    3,080    3,646 
Santa Clara Data Center   13,350    13,027    295    414 
Total Development Projects  $186,188   $152,887   $7,800   $8,236 

 

4.Investments in Related Parties

 

Preferred Investments

 

The Company has entered into agreements with various related party entities that provide for it to make preferred contributions pursuant to certain instruments (the “Preferred Investments”) that entitle it to certain prescribed monthly preferred distributions (see below for additional information). The Preferred Investments had an aggregate balance of $14.5 million and $34.5 million as of December 31, 2020 and 2019, respectively, and are classified as held-to-maturity securities, recorded at cost and included in investments in related parties on the consolidated balance sheets. The fair value of these investments approximated their carrying values based on market rates for similar instruments. During the year ended December 31, 2020, the Company redeemed $11.0 million of the 40 East End Avenue Preferred Investment and the entire remaining Miami Moxy Preferred Investment of $9.0 million. Additionally, during the years ended December 31, 2020 and 2019, the Company recognized investment income of $2.0 million and $9.4 million, respectively, which is included in interest and dividend income on the consolidated statements of operations.

 

 F-17 

 

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2020 and 2019

(Dollar amounts in thousands, except per share/unit data and where indicated in millions)

 

The Preferred Investments (dollar amounts in thousands) are summarized as follows:

 

       Preferred Investment Balance   Investment Income(1) 
   Dividend   As of
December 31,
   As of
December 31,
   For the Year Ended December 31, 
Preferred Investments  Rate   2020   2019   2020   2019 
40 East End Avenue   12%  $6,000   $17,000   $886   $3,609 
30-02 39th Avenue   12%   -    -    -    140 
East 11th Street   12%   8,500    8,500    1,040    3,433 
Miami Moxy   12%   -    9,000    45    2,263 
Total Preferred Investments       $14,500   $34,500   $1,971   $9,445 

 

Note:

(1)– Included in interest and dividend income on the statements of operations.

 

40 East End Avenue Preferred Investment

 

In May 2015, the Company entered into an agreement pursuant to which it made aggregate contributions of $30.0 million in 40 East End Ave. Pref Member LLC (the “40 East End Ave. Joint Venture”), a related party entity. The 40 East End Ave. Joint Venture is a joint venture between an affiliate of our Sponsor and Lightstone Real Estate Income Trust Inc. (“Lightstone IV”), a related-party REIT also sponsored by the Company’s Sponsor, which developed and constructed a luxury residential condominium project consisting of 29 units (the “40 East End Avenue Project”) located at the corner of 81st Street and East End Avenue in the Upper East Side neighborhood of New York City. The 40 East End Avenue Project received its final temporary certificates of occupancy, or TCO, in March 2020 and through December 31, 2020, six of the condominium units had been sold.

 

Contributions were made pursuant to an instrument, the “40 East End Avenue Preferred Investment,” that is entitled to monthly preferred distributions, initially at a rate of 8% per annum which increased to 12% per annum upon procurement of construction financing in March 2017, and is redeemable by the Company beginning on April 27, 2022. During the fourth quarter of 2019, the Company redeemed $13.0 million of the 40 East End Avenue Preferred Investment. In February 2020, the Company redeemed an additional $11.0 million of the 40 East End Avenue Preferred Investment which reduced the remaining outstanding balance to $6.0 million.

 

30-02 39th Avenue Preferred Investment

 

In August 2015, the Company entered into certain agreements that were amended on March 31, 2017, pursuant to which it made aggregate contributions of $10.0 million in various affiliates of its Sponsor, which developed and constructed a residential apartment project on a parcel of land located at 30-02 39th Avenue in Long Island City, Queens, New York. Contributions were made pursuant to instruments, the “30-02 39th Avenue Preferred Investment,” that were entitled to monthly preferred distributions between 9% and 12% per annum and were redeemable by the Company upon the occurrence of certain capital transactions. On February 11, 2019, the Company redeemed the entire 30-02 39th Street Preferred Investment of $ 10.0 million.

 

East 11th Street Preferred Investment

 

On April 21, 2016, the Company entered into an agreement, as amended, with various related party entities pursuant to which it to made aggregate contributions of $57.5 million in an affiliate of its Sponsor (the “East 11th Street Developer”) which developed and constructed a Marriott Moxy Hotel located at 112-120 East 11th Street in New York, New York. Contributions were made pursuant to an instrument, the “East 11th Street Preferred Investment,” that entitled us to monthly preferred distributions at a rate of 12% per annum. Upon the consummation of certain capital transactions, the Company may redeem its investment in the East 11th Street Preferred Investment. Additionally, the East 11th Street Developer may redeem the Company’s investment at any time or upon the consummation of any capital transaction. Any redemption by the Company or the East 11th Street Developer under the East 11th Street Preferred Investment will be made at an amount equal to the amount invested by the Company plus a 12.0% annual cumulative, pre-tax, non-compounded return on the aggregate amount invested by the Company. During 2019 and 2018, the Company redeemed $34.5 million and $14.5 million, respectively of the East 11th Street Preferred Investment which reduced the remaining outstanding balance to $8.5 million.

 

 F-18 

 

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2020 and 2019

(Dollar amounts in thousands, except per share/unit data and where indicated in millions)

 

Miami Moxy Preferred Investment

 

On September 30, 2016, the Company entered into an agreement with various related party entities pursuant to which it made aggregate contributions of $20.0 million in an affiliate of its Sponsor (the “Miami Moxy Developer”), which owns parcels of land located at 915 through 955 Washington Avenue in Miami Beach, Florida, on which it is developing and constructing a 205-room Marriott Moxy hotel (the “Miami Moxy”). Contributions were made pursuant to an instrument, the “Miami Moxy Preferred Investment,” that entitled the Company to monthly preferred distributions at a rate of 12% per annum. During the second quarter of 2019, the Company made its final contributions of $2.3 million for the Miami Moxy Preferred Investment. During the fourth quarter of 2019, the Company redeemed $11.0 million of the Miami Moxy Preferred Investment and during the first quarter of 2020, the Company redeemed the entire remaining Miami Moxy Preferred Investment of $9.0 million.

 

The Joint Venture

 

During 2015, the Company formed the Joint Venture with Lightstone II. The Company has a 2.5% membership interest in the Joint Venture and Lightstone II holds the remaining 97.5% membership interest. The Joint Venture previously acquired our membership interests in a portfolio of 11 hotels in a series of transactions completed during 2015. As of January 1, 2019 the Joint Venture held ownership interests in eight hotels. During the second quarter of 2019, the Joint Venture sold its ownership interests in one of the hotels to an unrelated third party. As a result, the Joint Venture now holds ownership interests in seven hotels as of December 31, 2020.

 

The Company accounts for its 2.5% membership interest in the Joint Venture using a measurement alternative under which the Joint Venture is measured at cost, adjusted for observable price changes and impairments, if any, and as of December 31, 2020 and 2019, the carrying value of its investment was $1.1 million and $1.2 million, respectively, which is included in investments in related parties on the consolidated balance sheets. 

 

5. Notes Receivable

 

Beginning in 2019, the Company has formed certain joint ventures (collectively, the “NR Joint Ventures”) between wholly-owned subsidiaries of the Operating Partnership (collectively, the “NR Subsidiaries”) and affiliates of the Sponsor (the “NR Affiliates”) which have originated nonrecourse loans (collectively, the “Joint Venture Promissory Notes”) to unaffiliated third-party borrowers (collectively, the “Joint Venture Borrowers”).

 

The NR Subsidiaries and NR Affiliates have varying ownership interests in the NR Joint Ventures and certain other wholly-owned subsidiaries of the Operating Partnership serve as the manager and are the sole decision-maker for each of the NR Joint Ventures.

 

The Company has determined that the NR Joint Ventures are VIEs and the NR Subsidiaries are the primary beneficiaries.  Since the NR Subsidiaries are the primary beneficiaries, beginning on the applicable date of formation, the Company has consolidated the operating results and financial condition of the NR Joint Ventures and accounted for the respective ownership interests of the NR Affiliates as noncontrolling interests.

 

The Joint Venture Promissory Notes provide for monthly interest at a prescribed variable rate, subject to a floor. In connection with funding of the Joint Venture Promissory Notes, the NR Joint Ventures have received origination fees (1.00% - 1.50%) based on the principal amount of the loan and retained a portion of the loan proceeds to establish a reserve for interest and other items (the “Loan Reserves”). The Joint Venture Promissory Notes are recorded in notes receivable, net on the consolidated balance sheets.

 

The Joint Venture Promissory Notes generally have an initial term of one or two years and may provide for additional extension options subject to satisfaction of certain prescribed conditions, including the funding of an additional Loan Reserves and payment of an extension fee. The Joint Venture Promissory Notes are collateralized by either the membership interests of the Joint Venture Borrowers in the borrowing entity or the underlying real property being developed by the Joint Venture Borrower.

 

The origination fees received are presented in the consolidated balance sheets as a direct deduction from the carrying value of the Joint Venture Promissory Notes and are amortized into interest income, using a straight-line method that approximates the effective interest method, over the initial term of the Joint Venture Promissory Notes. The Loan Reserves are presented in the consolidated balance sheets as a direct deduction from the carrying value of the Joint Venture Promissory Notes and are applied against the monthly interest due over the term.

 

 F-19 

 

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2020 and 2019

(Dollar amounts in thousands, except per share/unit data and where indicated in millions)

 

During year ended December 31, 2020, the NR Subsidiaries and the NR Affiliates made aggregate contributions to the NR Joint Ventures of approximately $22.3 million and $22.3 million, respectively, principally to fund their respective shares of the Joint Venture Promissory Notes that were originated. Additionally, during the year ended December 31, 2020, the NR Joint Ventures made aggregate distributions of approximately $15.0 million to both the NR Subsidiaries and NR Affiliates, based on their respective membership interests. During the year ended December 31, 2019, the NR Subsidiaries and the NR Affiliates made aggregate contributions to the NR Joint Ventures of approximately $32.1 million and $33.1 million, respectively, principally to fund their respective shares of the Joint Venture Promissory Notes that were originated. Additionally, during the year ended December 31, 2019, the NR Joint Ventures made aggregate distributions of approximately $18.4 million to both the NR Subsidiaries and NR Affiliates, based on their respective membership interests.

 

The distributions to the NR Joint Ventures’ members were made from payments received from the NR Borrowers and proceeds from certain financing transactions. See Note 7 for additional information.

 

The Notes Receivable are summarized as follows:

  

   Company’s   Loan              Contractual   As of December 31, 2020 
   Ownership   Commitment   Origination   Origination   Maturity  Interest   Outstanding       Unamortized       Unfunded 
Joint Venture/Lender  Percentage   Amount   Fee   Date   Date  Rate   Principal   Reserves   Origination Fee   Carrying Value   Commitment 
LSC 162nd Capital I LLC   45.45%  $4,234    1.50%   February 5, 2019   September 11, 2021   LIBOR + 7.50% (Floor of 11%)   $4,076   $(338)  $(33)  $3,705   $     - 
LSC 162nd Capital II LLC   45.45%   9,166    1.50%   February 5, 2019   September 11, 2021   LIBOR + 7.50% (Floor of 11%)    8,824    (732)   (71)   8,021    - 
LSC 1543 7th LLC   50%   20,000    1.00%   August 27, 2019   August 26, 2021   LIBOR + 5.40% (Floor of 7.90%)    20,000    -    (33)   19,967    - 
LSC 1650 Lincoln LLC   50%   24,000    1.00%   August 27, 2019   August 26, 2021   LIBOR + 5.40% (Floor of 7.90%)    24,000    -    (40)   23,960    - 
LSC 11640 Mayfield LLC   50%   18,000    1.50%   March 4, 2020   March 1, 2022   LIBOR + 10.50% (Floor of 12.50%)    10,750    (2,369)   (158)   8,223    7,250 
LSC 87 Newkirk LLC   50%   42,700    1.25%   July 2, 2020   December 1, 2021   LIBOR + 6.00% (Floor of 7.00%)    42,700    (1,597)   (355)   40,748    - 
Total                              $110,350   $(5,036)  $(690)  $104,624   $7,250 

 

 F-20 

 

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2020 and 2019

(Dollar amounts in thousands, except per share/unit data and where indicated in millions)

 

   Company’s   Loan              Contractual   As of December 31, 2019 
   Ownership