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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2024

 

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: 001-38010

CLIPPER REALTY INC.

(Exact name of Registrant as specified in its charter)  

Maryland

47-4579660

(State or other jurisdiction of incorporation or

organization)

(I.R.S. Employer Identification No.)

 

4611 12th Avenue, Suite 1L

Brooklyn, New York 11219

(Address of principal executive offices) (Zip Code)

(718) 438-2804

(Registrant's telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $0.01 per share

CLPR

New York Stock Exchange

 

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 ☒

 

 

As of October 31, 2024, there were 16,077,290 shares of the Registrant’s Common Stock outstanding.

 

 

 

 

 

TABLE OF CONTENTS

 

   

Page

CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

2

     

PART I – FINANCIAL INFORMATION

 
     

ITEM 1.

CONDENSED FINANCIAL STATEMENTS

 
 

CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2024 (UNAUDITED) AND DECEMBER 31, 2023

4
 

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 (UNAUDITED)

5
 

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 (UNAUDITED)

6
 

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 (UNAUDITED)

7
 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

8

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

23

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

30

ITEM 4.

CONTROLS AND PROCEDURES

30
     
     

PART II – OTHER INFORMATION

 
     

ITEM 1.

LEGAL PROCEEDINGS

30

ITEM 1A.

RISK FACTORS

31

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

31

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

31

ITEM 4.

MINE SAFETY DISCLOSURES

31

ITEM 5.

OTHER INFORMATION

31

ITEM 6.

EXHIBITS

32

SIGNATURES

33
 

 

2

 

 

 

CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

 

All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q for Clipper Realty Inc. (the “Company”), including, without limitation, statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” regarding the Company’s financial position, business strategy and the plans, objectives, expectations, or assumptions of management for future operations, are forward-looking statements. When used in this Quarterly Report on Form 10-Q, words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “believe,” “expect,” “intend,” “continue,” “potential,” “plan,” “goal” or other words that convey the uncertainty of future events or outcomes are intended to identify forward-looking statements, which are generally not historical in nature. These statements involve risks and uncertainties that could cause actual results to differ materially from those described in such statements. These risks, contingencies and uncertainties include, but are not limited to, the following:

 

 

our dependency on certain agencies of the City of New York, as a single government tenant in our office buildings, could cause an adverse effect on us, including our results of operations and cash flow, when these agencies opt to early terminate or opt not to renew their leases, as applicable.

 

 

the impact of the recent increase in inflation in the United States which could increase the cost of acquiring, replacing and operating our properties

 

 

market and economic conditions affecting occupancy levels, rental rates, the overall market value of our properties, our access to capital and the cost of capital and our ability to refinance indebtedness;

 

 

economic or regulatory developments in New York City;

 

 

changes in rent stabilization regulations or claims by tenants in rent-stabilized units that their rents exceed specified maximum amounts under current regulations;

 

 

our ability to control operating costs to the degree anticipated;

 

 

the risk of damage to our properties, including from severe weather, natural disasters, climate change, and terrorist attacks;

 

 

risks related to financing, cost overruns, and fluctuations in occupancy rates and rents resulting from development or redevelopment activities and the risk that we may not be able to pursue or complete development or redevelopment activities or that such development or redevelopment activities may not be profitable;

 

 

concessions or significant capital expenditures that may be required to attract and retain tenants;

 

 

the relative illiquidity of real estate investments;

 

 

competition affecting our ability to engage in investment and development opportunities or attract or retain tenants;

 

 

unknown or contingent liabilities in properties acquired in formative and future transactions;

 

 

the possible effects of departure of key personnel in our management team on our investment opportunities and relationships with lenders and prospective business partners;

 

 

conflicts of interest faced by members of management relating to the acquisition of assets and the development of properties, which may not be resolved in our favor;

 

 

a transfer of a controlling interest in any of our properties that may obligate us to pay transfer tax based on the fair market value of the real property transferred;

 

 

the need to establish litigation reserves, costs to defend litigation and unfavorable litigation settlements or judgments; and

 

 

other risks and risk factors or uncertainties identified from time to time in our filings with the SEC.

 

These forward-looking statements speak only as of the date of this report, and the Company undertakes no obligation to revise or update these statements to reflect subsequent events or circumstances.

 

3

 

 

 

PART I FINANCIAL INFORMATION

 

ITEM 1.  CONDENSED FINANCIAL STATEMENTS

 

Clipper Realty Inc.

 

Consolidated Balance Sheets

(In thousands, except for share and per share data)

 

   

September 30,
2024

   

December 31,
2023

 
   

(unaudited)

         

ASSETS

               

Investment in real estate

               

Land and improvements

  $ 571,988     $ 571,988  

Building and improvements

    735,208       726,273  

Tenant improvements

    3,366       3,366  

Furniture, fixtures and equipment

    13,758       13,278  

Real estate under development

    137,685       87,285  

Total investment in real estate

    1,462,005       1,402,190  

Accumulated depreciation

    (235,817

)

    (213,606

)

Investment in real estate, net

    1,226,188       1,188,584  

Cash and cash equivalents

    18,622       22,163  

Restricted cash

    17,472       14,062  

Tenant and other receivables, net of allowance for doubtful accounts of $252 and $234, respectively

    6,317       5,181  

Deferred rent

    2,191       2,359  

Deferred costs and intangible assets, net

    5,783       6,127  

Prepaid expenses and other assets

    10,444       10,854  

TOTAL ASSETS

  $ 1,287,017     $ 1,249,330  
                 

LIABILITIES AND EQUITY (DEFICIT)

               

Liabilities:

               

Notes payable, net of unamortized loan costs of $10,115 and $13,405, respectively

  $ 1,257,731     $ 1,205,624  

Accounts payable and accrued liabilities

    21,768       20,994  

Security deposits

    9,044       8,765  

Other liabilities

    7,937       6,712  

TOTAL LIABILITIES

    1,296,480       1,242,095  

Equity (Deficit):

               

Preferred stock, $0.01 par value; 100,000 shares authorized (including 140 shares of 12.5% Series A cumulative non-voting preferred stock), zero shares issued and outstanding

           

Common stock, $0.01 par value; 500,000,000 shares authorized, 16,077,290 and 16,063,228 shares issued and outstanding, at September 30, 2024 and December 31, 2023, respectively

    160       160  

Additional paid-in-capital

    89,818       89,483  

Accumulated deficit

    (93,562

)

    (86,899

)

Total stockholders’ equity

    (3,584 )     2,744  

Non-controlling interests

    (5,879 )     4,491  

TOTAL EQUITY (DEFICIT)

    (9,463 )     7,235  

TOTAL LIABILITIES AND EQUITY (DEFICIT)

  $ 1,287,017     $ 1,249,330  

 

See accompanying notes to these consolidated financial statements.

 

4

 

 

 

Clipper Realty Inc.

 

Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

 

   

Three Months Ended
September 30,

   

Nine Months Ended
September 30,

 
   

2024

   

2023

   

2024

   

2023

 

REVENUES

                               

Residential rental income

  $ 27,846     $ 25,501     $ 81,700     $ 74,481  

Commercial rental income

    9,776       9,627       29,028       28,857  

TOTAL REVENUES

    37,622       35,128       110,728       103,338  
                                 

OPERATING EXPENSES

                               

Property operating expenses

    8,482       7,930       26,098       22,811  

Real estate taxes and insurance

    7,562       7,374       22,137       24,610  

General and administrative

    3,370       3,340       10,380       10,029  

Transaction pursuit costs

    -       -       -       357  

Depreciation and amortization

    7,456       7,282       22,289       21,376  

TOTAL OPERATING EXPENSES

    26,870       25,926       80,904       79,183  
                                 

INCOME FROM OPERATIONS

    10,752       9,202       29,824       24,155  
                                 

Interest expense, net

    (11,840

)

    (11,527

)

    (35,320 )     (32,996 )

Loss on extinguishment of debt

    -       -       -       (3,868 )
                                 

Net loss

    (1,088 )     (2,325 )     (5,496 )     (12,709 )
                                 

Net loss attributable to non-controlling interests

    676       1,444       3,414       7,892  

Net loss attributable to common stockholders

  $ (412 )   $ (881 )   $ (2,082 )   $ (4,817 )
                                 

Basic and diluted net loss per share

  $ (0.05

)

  $ (0.09

)

  $ (0.20 )   $ (0.36 )

 

See accompanying notes to these consolidated financial statements.

 

5

 

 

 

Clipper Realty Inc.

 

Consolidated Statements of Changes in Equity

(In thousands, except for share data)

(Unaudited)

 

   

Number of
common
shares

   

Common
stock

   

Additional
paid-in-
capital

   

Accumulated
deficit

   

Total
stockholders’
equity

   

Non-
controlling
interests

   

Total
equity

 

Balance December 31, 2023

    16,063,228     $ 160     $ 89,483     $ (86,899

)

  $ 2,744     $ 4,491     $ 7,235  

Amortization of LTIP grants

                                  561       561  

Dividends and distributions

                      (1,526

)

    (1,526

)

    (2,870

)

    (4,396

)

Net loss

                      (1,011

)

    (1,011

)

    (1,655

)

    (2,666

)

Reallocation of noncontrolling interests

                72             72       (72

)

     

Balance March 31, 2024

    16,063,228     $ 160     $ 89,555     $ (89,436

)

  $ 279     $ 455     $ 734  

Amortization of LTIP grants

                                  713       713  

Conversion of LTIP units

    14,062                                      

Dividends and distributions

                      (1,527 )     (1,527 )     (2,869 )     (4,396 )

Net loss

                      (660 )     (660 )     (1,083 )     (1,743 )

Reallocation of noncontrolling interests

                130             130       (130 )      

Balance June 30, 2024

    16,077,290     $ 160     $ 89,685     $ (91,623 )   $ (1,778 )   $ (2,914 )   $ (4,692 )

Amortization of LTIP grants

                                  713       713  

Dividends and distributions

                      (1,527 )     (1,527 )     (2,869 )     (4,396 )

Net loss

                      (412 )     (412 )     (676 )     (1,088 )

Reallocation of noncontrolling interests

                133             133       (133 )      

Balance September 30, 2024

    16,077,290     $ 160     $ 89,818     $ (93,562 )   $ (3,584 )   $ (5,879 )   $ (9,463 )

 

 

   

Number of
common
shares

   

Common
stock

   

Additional
paid-in-
capital

   

Accumulated
deficit

   

Total
stockholders’
equity

   

Non-
controlling
interests

   

Total
equity

 

Balance December 31, 2022

    16,063,228     $ 160     $ 88,829     $ (74,895 )   $ 14,094     $ 23,085     $ 37,179  

Amortization of LTIP grants

                                  648       648  

Dividends and distributions

                      (1,526 )     (1,526 )     (2,822 )     (4,348 )

Net loss

                      (2,687 )     (2,687 )     (4,402 )     (7,089 )

Reallocation of noncontrolling interests

                123             123       (123 )      

Balance March 31, 2023

    16,063,228     $ 160     $ 88,952     $ (79,108 )   $ 10,004     $ 16,386     $ 26,390  

Amortization of LTIP grants

                                  783       783  

Dividends and distributions

                      (1,526 )     (1,526 )     (2,822 )     (4,348 )

Net loss

                      (1,249 )     (1,249 )     (2,046 )     (3,295 )

Reallocation of noncontrolling interests

                175             175       (175 )      

Balance June 30, 2023

    16,063,228     $ 160     $ 89,127     $ (81,883 )   $ 7,404     $ 12,126     $ 19,530  

Amortization of LTIP grants

                                  783       783  

Dividends and distributions

                      (1,526 )     (1,526 )     (2,822 )     (4,348 )

Net loss

                      (881 )     (881 )     (1,444 )     (2,325 )

Reallocation of noncontrolling interests

                175             175       (175 )      

Balance September 30, 2023

    16,063,228     $ 160     $ 89,302     $ (84,290 )   $ 5,172     $ 8,468     $ 13,640  

 

See accompanying notes to these consolidated financial statements.

 

6

 

 

 

Clipper Realty Inc.

 

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

   

Nine Months Ended September 30,

 
   

2024

   

2023

 

CASH FLOWS FROM OPERATING ACTIVITIES

               

Net loss

  $ (5,496

)

  $ (12,709

)

Adjustments to reconcile net loss to net cash provided by operating activities:

               

Depreciation

    22,211       21,296  

Amortization of deferred financing costs

    1,591       1,098  

Amortization of deferred costs and intangible assets

    440       441  

Amortization of above- and below-market leases

    -       (18 )

Loss on extinguishment of debt

    -       3,868  

Deferred rent

    168       66  

Stock-based compensation

    1,987       2,214  

Bad debt (recovery) expense

    24       (120 )

Changes in operating assets and liabilities:

               

Tenant and other receivables

    (1,160 )     (103 )

Prepaid expenses, other assets and deferred costs

    315       3,328  

Accounts payable and accrued liabilities

    (247

)

    (4,366

)

Security deposits

    279       713  

Other liabilities

    1,225       1,422  

Net cash provided by operating activities

    21,337       17,130  
                 

CASH FLOWS FROM INVESTING ACTIVITIES

               

Additions to land, buildings, and improvements

    (57,097

)

    (27,783

)

Net cash used in investing activities

    (57,097 )     (27,783 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES

               

Payments of mortgage notes

    (1,483 )     (84,241 )

Proceeds from mortgage notes

    50,300       124,858  

Dividends and distributions

    (13,188 )     (13,044 )

Loan issuance and extinguishment costs

    -       (10,232 )

Net cash provided by financing activities

    35,629       17,341  
                 

Net (decrease)increase in cash and cash equivalents and restricted cash

    (131 )     6,688  

Cash and cash equivalents and restricted cash - beginning of period

    36,225       30,666  

Cash and cash equivalents and restricted cash - end of period

  $ 36,094     $ 37,354  
                 

Cash and cash equivalents and restricted cash – beginning of period:

               

Cash and cash equivalents

  $ 22,163     $ 18,152  

Restricted cash

    14,062       12,514  

Total cash and cash equivalents and restricted cash – beginning of period

  $ 36,225     $ 30,666  
                 

Cash and cash equivalents and restricted cash – end of period:

               

Cash and cash equivalents

  $ 18,622     $ 22,450  

Restricted cash

    17,472       14,904  

Total cash and cash equivalents and restricted cash – end of period

  $ 36,094     $ 37,354  
                 

Supplemental cash flow information:

               

Cash paid for interest, net of capitalized interest of $2,343 and $2,382 in 2024 and 2023, respectively

  $ 32,672     $ 32,924  

Non-cash interest capitalized to real estate under development

    1,698       339  

Additions to investment in real estate included in accounts payable and accrued liabilities

    10,504       5,102  

 

See accompanying notes to these consolidated financial statements.

 

7

 

 

 

Clipper Realty Inc.

Notes to Condensed Consolidated Financial Statements

(In thousands, except for share and per share data and as noted)

(Unaudited)

 

 

INTRODUCTION TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The unaudited condensed consolidated financial statements of Clipper Realty Inc. and subsidiaries (the “Company” or “we”) and subsidiaries have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("GAAP") have been condensed or omitted pursuant to such rules and regulations. We believe that the disclosures are adequate to make the information presented not misleading when read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 14, 2024. Note that any references to square footage and unit count are outside the scope of our Independent registered public accounting firm’s review.

 

The financial information presented reflects all adjustments (consisting of normal recurring adjustments) which are, in our opinion, necessary for a fair presentation of the results of operations, cash flows and financial position for the interim periods presented. These results are not necessarily indicative of a full year’s results of operations.

 

 

 

1. Organization

 

As of September 30, 2024, the properties owned by the Company consist of the following (collectively, the “Properties”):

 

 

Tribeca House in Manhattan, comprising two buildings, one with 21 stories and one with 12 stories, containing residential and retail space with an aggregate of approximately 483,000 square feet of residential rental Gross Leasable Area (“GLA”) and 77,000 square feet of retail rental and parking GLA;

 

 

Flatbush Gardens in Brooklyn, a 59-building residential housing complex with 2,494 rentable units and approximately 1,749,000 square feet of residential rental GLA;

 

 

141 Livingston Street in Brooklyn, a 15-story office building with approximately 216,000 square feet of GLA;

 

 

250 Livingston Street in Brooklyn, a 12-story office and residential building with approximately 370,000 square feet of GLA (fully remeasured);

 

 

Aspen in Manhattan, a 7-story building containing residential and retail space with approximately 166,000 square feet of residential rental GLA and approximately 21,000 square feet of retail rental GLA;

 

 

Clover House in Brooklyn, a 11-story residential building with approximately 102,000 square feet of residential rental GLA;

 

 

10 West 65th Street in Manhattan, a 6-story residential building with approximately 76,000 square feet of residential rental GLA;

 

 

1010 Pacific Street in Brooklyn, 9-story residential building with approximately 119,000 square feet of residential rental GLA; and

 

 

the Dean Street property in Brooklyn, which the Company plans to redevelop as a 9-story residential building with approximately 160,000 square feet of residential rental GLA and approximately 9,000 square feet of retail rental GLA.

 

8

 

 

The operations of Clipper Realty Inc. and its consolidated subsidiaries are carried on primarily through Clipper Realty L.P., the Company’s operating partnership subsidiary (the "Operating Partnership”). The Company has elected to be taxed as a Real Estate Investment Trust ("REIT”) under Sections 856 through 860 of the Internal Revenue Code (the "Code”). The Company is the sole general partner of the Operating Partnership and the Operating Partnership is the sole managing member of the limited liability companies (the "LLCs”) that comprised the predecessor of the Company (the "Predecessor”).

 

At September 30, 2024, the Company’s interest, through the Operating Partnership, in the LLCs that own the properties generally entitles it to 37.9% of the aggregate cash distributions from, and the profits and losses of, the LLCs.

 

The Company determined that the Operating Partnership and the LLCs are variable interest entities (“VIEs”) and that the Company was the primary beneficiary. The assets and liabilities of these VIEs represented substantially all of the Company’s assets and liabilities.

 

 

 

2. Significant Accounting Policies

 

Segments

 

At September 30, 2024, the Company had two reportable operating segments, Residential Rental Properties and Commercial Rental Properties. The Company’s chief operating decision maker may review operational and financial data on a property basis.

 

Basis of Consolidation

 

The accompanying consolidated financial statements of the Company are prepared in accordance with GAAP. The effect of all intercompany balances has been eliminated. The consolidated financial statements include the accounts of all entities in which the Company has a controlling interest. The ownership interests of other investors in these entities are recorded as non-controlling interests.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from these estimates.

 

Investment in Real Estate

 

Real estate assets held for investment are carried at historical cost and consist of land, buildings and improvements, furniture, fixtures and equipment. Expenditures for ordinary repair and maintenance costs are charged to expense as incurred. Expenditures for improvements, renovations, and replacements of real estate assets are capitalized and depreciated over their estimated useful lives if the expenditures qualify as betterment or the life of the related asset will be substantially extended beyond the original life expectancy.

 

9

 

 

In accordance with ASU 2018-01, "Business Combinations – Clarifying the Definition of a Business,” the Company evaluates each acquisition of real estate or in-substance real estate to determine if the integrated set of assets and activities acquired meets the definition of a business and needs to be accounted for as a business combination. If either of the following criteria is met, the integrated set of assets and activities acquired would not qualify as a business:

 

 

Substantially all of the fair value of the gross assets acquired is concentrated in either a single identifiable asset or a group of similar identifiable assets; or

 

 

The integrated set of assets and activities is lacking, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs (i.e., revenue generated before and after the transaction).

 

An acquired process is considered substantive if:

 

 

The process includes an organized workforce (or includes an acquired contract that provides access to an organized workforce) that is skilled, knowledgeable and experienced in performing the process:

 

 

The process cannot be replaced without significant cost, effort or delay; or

 

 

The process is considered unique or scarce.

 

Generally, the Company expects that acquisitions of real estate or in-substance real estate will not meet the revised definition of a business because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e., land, buildings and related intangible assets) or because the acquisition does not include a substantive process in the form of an acquired workforce or an acquired contract that cannot be replaced without significant cost, effort or delay.

 

Upon acquisition of real estate, the Company assesses the fair values of acquired tangible and intangible assets including land, buildings, tenant improvements, above-market and below-market leases, in-place leases and any other identified intangible assets and assumed liabilities. The Company allocates the purchase price to the assets acquired and liabilities assumed based on their fair values. In estimating fair value of tangible and intangible assets acquired, the Company assesses and considers fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates, estimates of replacement costs, net of depreciation, and available market information. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant.

 

The Company records acquired above-market and below-market lease values initially based on the present value, using a discount rate which reflects the risks associated with the leases acquired based on the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed renewal options for the below-market leases. Other intangible assets acquired include amounts for in-place lease values and tenant relationship values (if any) that are based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with the respective tenant. Factors to be considered by management in its analysis of in-place lease values include an estimate of carrying costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, management considers leasing commissions, legal and other related expenses.

 

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. A property’s value is impaired if management’s estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property is less than the carrying value of the property. To the extent impairment has occurred, a write-down is recorded and measured by the amount of the difference between the carrying value of the asset and the fair value of the asset. In the event that the Company obtains proceeds through an insurance policy due to impairment, the proceeds are offset against the write-down in calculating gain/loss on disposal of assets. Management of the Company does not believe that any of its properties within the portfolio are impaired as of September 30, 2024.

 

10

 

 

For long-lived assets to be disposed of, impairment losses are recognized when the fair value of the assets less estimated cost to sell is less than the carrying value of the assets. Properties classified as real estate held-for-sale generally represent properties that are actively marketed or contracted for sale with closing expected to occur within the next twelve months. Real estate held-for-sale is carried at the lower of cost, net of accumulated depreciation, or fair value less cost to sell, determined on an asset-by-asset basis. Expenditures for ordinary repair and maintenance costs on held-for-sale properties are charged to expense as incurred. Expenditures for improvements, renovations and replacements related to held-for-sale properties are capitalized at cost. Depreciation is not recorded on real estate held-for-sale.

 

If a tenant vacates its space prior to the contractual termination of the lease and no rental payments are being made on the lease, any unamortized balances of the related intangibles are written off. The tenant improvements and origination costs are amortized to expense over the remaining life of the lease (or charged against earnings if the lease is terminated prior to its contractual expiration date).

 

Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:

 

Building and improvements (in years)

    10   -   44  

Tenant improvements

 

Shorter of useful life or lease term

 

Furniture, fixtures and equipment (in years)

    3   -   15  

 

The capitalized above-market lease values are amortized as a reduction to base rental revenue over the remaining terms of the respective leases, and the capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any below-market fixed rate renewal options of the respective leases. The value of in-place leases is amortized to expense over the remaining initial terms of the respective leases.

 

Cash and Cash Equivalents

 

Cash and cash equivalents are defined as cash on hand and in banks, plus all short-term investments with a maturity of three months or less when purchased. The Company maintains some of its cash in bank deposit accounts, which, at times, may exceed the federally insured limit. No losses have been experienced related to such accounts.

 

Restricted Cash

 

Restricted cash generally consists of escrows for future real estate taxes and insurance expenditures, repairs, capital improvements, loan reserves and security deposits.

 

Tenant and Other Receivables and Allowance for Doubtful Accounts

 

Tenant and other receivables are comprised of amounts due for monthly rents and other charges less allowance for doubtful accounts. In accordance with Accounting Standards Codification ("ASC”) 842 "Leases,” the Company performed a detailed review of amounts due from tenants to determine if accounts receivable balances and future lease payments were probable of collection, wrote off receivables not probable of collection and recorded a general reserve against revenues for receivables probable of collection for which a loss can be reasonably estimated. If management determines that the tenant receivable is not probable of collection it is written off against revenues. In addition, the Company records a general reserve under ASC 450.

 

11

 

 

Deferred Costs

 

Deferred lease costs consist of fees incurred to initiate and renew operating leases. Lease costs are being amortized using the straight-line method over the terms of the respective leases.

 

Deferred financing costs represent commitment fees, legal and other third-party costs associated with obtaining financing. These costs are amortized over the term of the financing and are recorded in interest expense in the consolidated statements of operations. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financing transactions which do not close are expensed in the period the financing transaction is terminated.

 

Comprehensive Income (Loss)

 

Comprehensive income (loss) is comprised of net income (loss) adjusted for changes in unrealized gains and losses, reported in equity, for financial instruments required to be reported at fair value under GAAP. For the three and nine months ended September 30, 2024 and 2023, the Company did not own any financial instruments for which the change in value was not reported in net income (loss); accordingly, its comprehensive income (loss) was its net income (loss) as presented in the consolidated statements of operations.

 

Revenue Recognition

 

As mentioned above under Tenant and Other Receivables and Allowance for Doubtful Accounts the Company records lease income under ASC842,"Leases” which replaces the guidance under ASC 840. ASC 842 applies to the Company principally as lessor; as a lessee, the Company’s leases are immaterial. The Company has determined that all its leases as lessor are operating leases. The Company has elected to not bifurcate lease and non-lease components under a practical expedient provision. With respect to collectability, the Company has written off all receivables not probable of collection and related deferred rent, and has recorded income for those tenants on a cash basis. When the probability assessment has changed for these receivables, the Company has recognized lease income to the extent of the difference between the lease income that would have been recognized if collectability had always been assessed as probable and the lease income recognized to date. For remaining receivables probable of collection, the Company has recorded a general reserve under ASC450.

 

For the three months ended September 30, 2024 and 2023, the Company charged revenue in the amount of $1,286 and $855, respectively, for residential receivables not deemed probable of collection and recognized revenue of $46 and $199, respectively, for a reassessment of collectability of residential receivables previously not deemed probable of collection.

 

For the nine months ended September 30, 2024 and 2023, the Company charged revenue in the amount of $3,006 and $3,302, respectively, for residential receivables not deemed probable of collection and recognized revenue of $276 and $1,313, respectively, for a reassessment of collectability of residential receivables previously not deemed probable of collection.

 

In accordance with the provisions of ASC 842, rental revenue for commercial leases is recognized on a straight-line basis over the terms of the respective leases. Deferred rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with lease agreements. Rental income attributable to residential leases and parking is recognized as earned, which is not materially different from the straight-line basis. Leases entered by residents for apartment units are generally for one-year terms, renewable upon consent of both parties on an annual or monthly basis.

 

Reimbursements for operating expenses due from tenants pursuant to their lease agreements are recognized as revenue in the period the applicable expenses are incurred. These costs generally include real estate taxes, utilities, insurance, common area maintenance costs and other recoverable costs and are recorded as part of commercial rental income in the condensed consolidated statements of operations.

 

12

 

 

Stock-based Compensation

 

The Company accounts for stock-based compensation pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718, “Compensation — Stock Compensation.” As such, all equity-based awards are reflected as compensation expense in the Company’s consolidated statements of operations over their vesting period based on the fair value at the date of grant. In the event of a forfeiture, the previously recognized expense would be reversed.

 

As of September 30, 2024, and December 31, 2023, there were 3,879,616 and 3,391,904 long-term incentive plan (“LTIP”) units outstanding, respectively, with a weighted average grant date fair value of $8.29 and $8.80 per unit, respectively. As of September 30, 2024, and December 31, 2023, there was $10.1 million and $10.2 million, respectively, of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under share incentive plans. As of September 30, 2024, the weighted-average period over which the unrecognized compensation expense will be recorded is approximately three and a half years.

 

In March 2024, the Company granted employees and non-employee directors 320,172 and 181,602 LTIP units, respectively, with a weighted-average grant date value of $4.90 per unit. The grants vesting period range from up to one year for those granted to the non-employee directors and from one to 2.5 years to those granted to employees as 2023 bonus and long-term incentive compensation.

 

In March 2023, the Company granted employees and non-employee directors 274,911 and 157,731 LTIP units, respectively, with a weighted-average grant date value of $5.62 per unit. The grants vesting period range from up to one year for those granted to the non-employee directors and from one to 2.5 years to those granted to employees as 2022 bonus and long-term incentive compensation.

 

Transaction Pursuit Costs

 

Transaction pursuit costs primarily reflect costs incurred for abandoned acquisition, disposition or other transaction pursuits.

 

During the nine-month periods ended September 30, 2023 transaction pursuit costs include $357 of costs related to the Article 11 Agreement.

 

Income Taxes

 

The Company elected to be taxed and to operate in a manner that will allow it to qualify as a REIT under the Code. To qualify as a REIT, the Company is required to distribute dividends equal to at least 90% of the REIT taxable income (computed without regard to the dividends paid deduction and net capital gains) to its stockholders, and meet the various other requirements imposed by the Code relating to matters such as operating results, asset holdings, distribution levels and diversity of stock ownership. Provided the Company qualifies for taxation as a REIT, it is generally not subject to U.S. federal corporate-level income tax on the earnings distributed currently to its stockholders. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to U.S. federal and state income tax on its taxable income at regular corporate tax rates and any applicable alternative minimum tax. In addition, the Company may not be able to re-elect as a REIT for the four subsequent taxable years. The entities comprising the Predecessor are limited liability companies and are treated as pass-through entities for income tax purposes. Accordingly, no provision has been made for federal, state or local income or franchise taxes in the accompanying consolidated financial statements.

 

In accordance with FASB ASC Topic 740, the Company believes that it has appropriate support for the income tax positions taken and, as such, does not have any uncertain tax positions that, if successfully challenged, could result in a material impact on its financial position or results of operations. The prior three years’ income tax returns are subject to review by the Internal Revenue Service.

 

Fair Value Measurements

 

Refer to Note 6, “Fair Value of Financial Instruments”.

 

13

 

 

Derivative Financial Instruments

 

FASB derivative and hedging guidance establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by FASB guidance, the Company records all derivatives on the consolidated balance sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation.

 

Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecast transactions, are considered cash flow hedges. For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (loss) (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in the fair value or cash flows of the derivative hedging instrument with the changes in the fair value or cash flows of the designated hedged item or transaction. For derivatives not designated as hedges, changes in fair value would be recognized in earnings. As of September 30, 2024 and December 31, 2023, the Company has no derivatives for which it applies hedge accounting.

 

Loss Per Share

 

Basic and diluted net loss per share is computed by dividing net loss attributable to common stockholders by the weighted average common shares outstanding. As of September 30, 2024 and 2023, the Company had unvested LTIP units which provide for non-forfeitable rights to dividend-equivalent payments. Accordingly, these unvested LTIP units are considered participating securities and are included in the computation of basic and diluted net loss per share pursuant to the two-class method. The Company did not have dilutive securities as of September 30, 2024 or 2023.

 

The effect of the conversion of the 26,317 Class B LLC units outstanding is not reflected in the computation of basic and diluted net loss per share, as the effect would be anti-dilutive. The net loss allocable to such units is reflected as non-controlling interests in the accompanying consolidated financial statements.

 

The following table sets forth the computation of basic and diluted net loss per share for the periods indicated (unaudited):

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 

(in thousands, except per share amounts)

 

2024

   

2023

   

2024

   

2023

 

Numerator

                               

Net loss attributable to common stockholders

  $ (412

)

  $ (881

)

  $ (2,082 )   $ (4,817 )

Less: income attributable to participating securities

    (369

)

    (322

)

    (1,107 )     (967 )

Subtotal

  $ (1,149

)

  $ (1,203

)

  $ (3,189 )   $ (5,784 )

Denominator

                               

Weighted-average common shares outstanding

    16,077       16,063       16,072       16,063  
                                 

Basic and diluted net loss per share attributable to common stockholders

  $ (0.05

)

  $ (0.09

)

  $ (0.20 )   $ (0.36 )

 

Recently Issued Pronouncements

 

On August 23, 2023, the FASB issued ASU 2023-05 that will require a joint venture, upon formation, to measure its assets and liabilities at fair value in its standalone financial statements. A joint venture will recognize the difference between the fair value of its equity and the fair value of its identifiable assets and liabilities as goodwill (or an equity adjustment, if negative) using the business combination accounting guidance regardless of whether the net assets meet the definition of a business. The new accounting standard is intended to reduce diversity in practice. This ASU will apply to joint ventures that meet the definition of a corporate joint venture under GAAP, thus limiting its scope to joint ventures not controlled and therefore not consolidated by any joint venture investor. We currently have no material joint ventures and as such do not expect it to have a material impact on our consolidated financial statements. This accounting standard will become effective for joint ventures with a formation date on or after January 1, 2025, with early adoption permitted. We expect to adopt this ASU on January 1, 2025.

 

14

 

On November 27, 2023, the FASB issued ASU 2023-07 to require the disclosure of segment expenses if they are (i) significant to the segment, (ii) regularly provided to the chief operating decision maker (“CODM”), and (iii) included in each reported measure of a segment’s profit or loss. Public entities will be required to provide this disclosure quarterly. In addition, this ASU requires an annual disclosure of the CODM’s title and a description of how the CODM uses the segment’s profit/loss measure to assess segment performance and to allocate resources. Compliance with these and certain other disclosure requirements will be required for our annual report on Form 10-K for the year 2024, and for subsequent quarterly and annual reports, with early adoption permitted. The Company is currently evaluating the impact of this standard on our current disclosures.

 

 

 

3. Deferred Costs and Intangible Assets

 

Deferred costs and intangible assets consist of the following:

 

   

September 30,
2024

   

December 31,
2023

 
   

(unaudited)

         

Deferred costs

  $ 348     $ 348  

Lease origination costs

    1,570       1,474  

In-place leases

    428       428  

Real estate tax abatements

    9,142       9,142  

Total deferred costs and intangible assets

    11,488       11,392  

Less accumulated amortization

    (5,705

)

    (5,265

)

Total deferred costs and intangible assets, net

  $ 5,783     $ 6,127  

 

Amortization of deferred costs, lease origination costs and in-place lease intangible assets was $26 and $28 for the three months ended September 30, 2024 and 2023, respectively, and $79 and $79 for the nine months ended September 30, 2024 and 2023, respectively; Amortization of real estate tax abatements of $120 and $120 for the three months ended September 30, 2024 and 2023, respectively, and $361 and $361 for the nine months ended September 30, 2024 and 2023, is included in real estate taxes and insurance in the consolidated statements of operations.

 

Deferred costs and intangible assets as of September 30, 2024, amortize in future years as follows:

 

2024 (Remainder)

  $ 147  

2025

    581  

2026

    552  

2027

    534  

2028

    520  

Thereafter

    3,449  

Total

  $ 5,783  

 

15

 

 

 

4. Notes Payable

 

The mortgages, loans and mezzanine notes payable collateralized by the properties, or the Company’s interest in the entities that own the properties and assignment of leases, are as follows:

 

Property

Maturity

 

Interest Rate

   

September 30,
2024

   

December 31,
2023

 
                           

Flatbush Gardens, Brooklyn, NY(a)

6/1/2032

    3.125 %   $ 329,000     $ 329,000  

250 Livingston Street, Brooklyn, NY(b)

6/6/2029

    3.63 %     125,000       125,000  

141 Livingston Street, Brooklyn, NY(c)

3/6/2031

    3.21 %     100,000       100,000  

Tribeca House, Manhattan, NY(d)

3/6/2028

    4.506 %     360,000       360,000  

Aspen, Manhattan, NY(e)

7/1/2028

    3.68 %     59,812       61,004  

Clover House, Brooklyn, NY(f)

12/1/2029

    3.53 %     82,000       82,000  

10 West 65th Street, Manhattan, NY(g)

11/1/2027

    SOFR + 2.50 %     31,545       31,836  

1010 Pacific Street, Brooklyn, NY(h)

9/15/2025

    5.55 %     60,000       60,000  

1010 Pacific Street, Brooklyn, NY(h)

9/15/2025

    6.37 %     20,000       20,000  

953 Dean Street, Brooklyn, NY(i)

8/10/2026

    SOFR + 4 %     91,173       42,909  

953 Dean Street, Brooklyn, NY(i)

8/10/2026

    SOFR + 10 %     9,316       7,280  

Total debt

          $ 1,267,846     $ 1,219,029  

Unamortized debt issuance costs

            (10,115

)

    (13,405

)

Total debt, net of unamortized debt issuance costs

          $ 1,257,731     $ 1,205,624  

 

(a) The $329,000 mortgage note agreement with New York Community Bank (“NYCB”), entered into on May 8, 2020, matures on June 1, 2032, and bears interest at 3.125% through May 2027 and thereafter at the prime rate plus 2.75%, subject to an option to fix the rate. The note requires interest-only payments through May 2027, and monthly principal and interest payments thereafter based on a 30-year amortization schedule. The Company has the option to prepay all (but not less than all) of the unpaid balance of the note prior to the maturity date, subject to certain prepayment premiums, as defined.

 

(b) The $125,000 mortgage note agreement with Citi Real Estate Funding Inc., entered into on May 31, 2019, matures on June 6, 2029, bears interest at 3.63% and requires interest-only payments for the entire term. The Company has the option to prepay all (but not less than all) of the unpaid balance of the note within three months of maturity, without a prepayment premium.

 

In connection with the termination of the City of New York 342,496 square foot lease, pursuant to the terms of the Loan Agreement, the Company expects to establish a cash management account shortly for the benefit of the lender into which the Company will be obligated to deposit all revenue generated by the building. All amounts remaining in such cash management account after the lender’s allocations set forth in the loan agreement will be disbursed to the Company once the tenant cure conditions are satisfied under the loan agreement.

 

(c) The $100,000 mortgage note agreement with Citi Real Estate Funding Inc., entered into on February 18, 2021, matures on March 6, 2031, bears interest at 3.21% and requires interest-only payments for the entire term. The Company has the option to prepay all (but not less than all) of the unpaid balance of the note within three months of maturity, without a prepayment premium.

 

The Company and the City of New York are negotiating the terms of a five-year extension of its current lease upon its termination in December of 2025. There can be no assurance that the negotiations will conclude with an agreement. Should the lease not be extended for a minimum of five years, in accordance with the terms of the mortgage note, the Company will be required to either fund an escrow account in the amount of $10,000 payable in equal monthly payments over the 18 months after lease expiration or deliver to the lender a letter of credit in the amount of $10,000

 

On October 28, 2024 the Company received notice that as of October 7, 2024 the servicing of the mortgage note was transferred to a special servicer (“Special Servicer”) due to, they contend, our failure to make certain required payments under the loan, including, but not limited to, the reserve monthly deposit. The Special Servicer has demanded that the Company pay $2,222 of reserve payments into an escrow account immediately and continued monthly payments of $555 for an additional 14 months, $1,166 of default interest and late charges through October 7, 2024, and an additional $10 per diem interest for each day thereafter. The Company contends the Special Servicer has misinterpreted the terms of the loan agreement requiring monthly reserve payments beginning on July 7, 2024, and that the Company has no obligation to make reserve payments at this time under the terms of the loan agreement. The Company continues to discuss this issue with the Special Servicer.

 

(d) The $360,000 loan with Deutsche Bank, entered into on February 21, 2018, matures on March 6, 2028, bears interest at 4.506% and requires interest-only payments for the entire term. The Company has the option to prepay all (but not less than all) of the unpaid balance of the loan prior to the maturity date, subject to a prepayment premium if it occurs prior to December 6, 2027.

 

(e) The $70,000 mortgage note agreement with Capital One Multifamily Finance LLC matures on July 1, 2028, and bears interest at 3.68%. The note required interest-only payments through July 2017, and monthly principal and interest payments of $321 thereafter based on a 30-year amortization schedule. The Company has the option to prepay the note prior to the maturity date, subject to a prepayment premium.

 

16

 

 

(f) The $82,000 mortgage note agreement with MetLife Investment Management, entered into on November 8, 2019, matures on December 1, 2029, bears interest at 3.53% and requires interest-only payments for the entire term. The Company has the option, commencing on January 1, 2024, to prepay the note prior to the maturity date, subject to a prepayment premium if it occurs prior to September 2, 2029.

 

(g) The $31,545 mortgage note agreement with NYCB entered into in connection with the acquisition of the property matures on November 1, 2027. Through October 2022 the Company paid a fixed interest rate of 3.375% and thereafter was scheduled to pay interest at the prime rate plus 2.75%, subject to an option to fix the rate. On August 26, 2022, the Company and NYCB amended the note to replace prime plus 2.75% rate with SOFR plus 2.5% (7.75% at September 30, 2024). The note required interest-only payments through November 2019, and monthly principal and interest payments thereafter based on a 30-year amortization schedule. The Company has the option to prepay all (but not less than all) of the unpaid balance of the note prior to the maturity date, subject to certain prepayment premiums, as defined. 

 

(h) On August 10, 2021, the Company entered into a group of loans with AIG Asset Management (U.S.), LLC, succeeding a property acquisition loan, providing for maximum borrowings of $52,500 to develop the property. The notes had a 36-month term, bore interest at 30 day LIBOR plus 3.60% (with a floor of 4.1%). The notes were scheduled to mature on September 1, 2024 and could have been extended until September 1, 2026. The Company could have prepaid the unpaid balance of the note within five months of maturity without penalty.

 

On February 9, 2023, the Company refinanced this construction loan with a mortgage loan with Valley National Bank which provided for maximum borrowings of $80,000. The loan provided initial funding of $60,000 and a further $20,000 subject to achievement of certain financial targets. The loan has a term of five years and an initial annual interest rate of 5.7% subject to reduction by up to 25 basis points upon achievement of certain financial targets (during the quarter ended June 30, 2023, the Company achieved the applicable financial target, and the interest rate was reduced to 5.55%). The interest rate on subsequent fundings will be fixed at the time of any funding. The loan requires interest-only payments for the first two years and principal and interest thereafter based on a 30-year amortization schedule. The Company has the option to prepay in full, or in part, the unpaid balance of the note prior to the maturity date. Prior to the second anniversary of the date of the note prepayment is subject to certain prepayment premiums, as defined. After the second anniversary of the date of the note the prepayment is not subject to a prepayment premium.

 

On September 15, 2023, the Company borrowed an additional $20,000 from Valley National Bank. The additional borrowing has a term of twenty-four months and an annual interest rate of 6.37%. The loan is interest only subject to the maintenance of certain financial targets after the first 16 months of the term. In conjunction with the additional borrowing, the Company and the bank agreed to amend the expiration date of the initial $60,000 to expire at the same time as the additional borrowing. No change was made to the interest rate on the initial borrowing.

 

In conjunction with the refinancing the Company incurred $3,868 of loan extinguishment costs related to prepayment penalties, writing off unamortized deferred financed costs of the previous loan and other fees. These costs are included in the consolidated statement of operations for the nine-month period ended September 30, 2023.

 

(i) On December 22, 2021, the Company entered into a $30,000 mortgage note agreement with Bank Leumi, N.A. related to the Dean Street acquisition. The notes original maturity was December 22, 2022 and was subsequently extended to September 22, 2023. The note required interest-only payments and bears interest at the prime rate (with a floor of 3.25%) plus 1.60%. In April 2022, the Company borrowed an additional $6,985 under the mortgage note in connection with the acquisition of additional parcels of land in February and April 2022.

 

On August 10, 2023, the Company refinanced its $37,000 mortgage on its Dean Street development with a senior construction loan (“Senior Loan”) with Valley National Bank that permits borrowings up to $115,000 and a mezzanine loan (the “Mezzanine Loan”) with BADF 953 Dean Street Lender LLC that permits borrowings up to $8,000.

 

The Senior Loan allows maximum borrowings of $115,000 for a 30-month term, has two 6-month extension options, and bears interest at 1-Month Term SOFR plus 4.00%, with an all-in floor of 5.50% (9.20% at September 30, 2024). The Senior Loan consists of a land loan, funded at closing to refinance the existing loan totaling $36,985, a construction loan of up to $62,400 and a project loan of up to $15,600. The Company has provided a 30% payment guarantee of outstanding borrowings among other standard indemnities. As of September 30,2024, the Company has drawn $44,203 from the construction loan and $9,985 from the project loan.

 

The Mezzanine Loan allows maximum borrowings of $8,000 for a 30-month term, have two 6-month extension options, and bears interest at 1-Month Term SOFR plus 10%, with an all-in floor of 13% (15.20% at September 30, 2024). Interest shall accrue on the principal, is compounded monthly and is due at the end of the term of the loan. At closing, $4,500 was funded to cover closing costs incurred on the construction loans. As of September 30,2024, the remaining $3,500 was drawn for ongoing construction costs.

 

During the three and Nine months ended September 30, 2024, the Company incurred $355 and $101, respectively, in interest and is included in the balance of the Notes Payable in the Consolidated Balance Sheet.

 

On August 10, 2023 the Company entered into a $5,000 corporate line of credit with Valley National Bank. The line of credit bears interest of Prime + 1.5%. The Company has not drawn on the line of credit as of September 30, 2024.

 

The Company has provided limited guaranties for the mortgage notes at several of its properties. The Company’s loan agreements contain customary representations, covenants and events of default. Certain loan agreements require the Company to comply with affirmative and negative covenants, including the maintenance of debt service coverage and debt yield ratios. In the event they are not compliant, certain lenders may require cash sweeps of rent until the conditions are cured. The Company believes it is not in default on any of its loan agreements.

 

The following table summarizes principal payment requirements under the terms of the mortgage notes as of September 30, 2024:

 

2024 (Remainder)

  $ 512  

2025

    82,100  

2026

    102,687  

2027

    33,442  

2028

    416,554  

Thereafter

    632,551  

Total

  $ 1,267,846  

 

17

 

 

 

5. Rental Income under Operating Leases

 

The Company’s commercial properties are leased to commercial tenants under operating leases with fixed terms of varying lengths. As of September 30, 2024, the minimum future cash rents receivable (excluding tenant reimbursements for operating expenses) under non-cancelable operating leases for the commercial tenants in each of the next five years and thereafter are as follows:

 

2024 (Remainder)

  $ 7,696  

2025

    25,119  

2026

    4,854  

2027

    4,355  

2028

    3,331  

Thereafter

    21,074  

Total

  $ 66,429  

 

The Company has commercial leases with the City of New York that comprised approximately 22% and 23% of total revenues for the three months ended September 30, 2024 and 2023, respectively, and 23% and 23% of total revenues for the nine months ended September 30, 2024 and 2023, respectively. As of February 23, 2024, the City of New York notified the Company of its intention to terminate its lease for 342,496 square feet of office space located at 240-250 Livingston Street effective August 23, 2025. The Lease generally provides for rent payments in the amount of $13,700 through the end of the term. Additionally, the Company and the City of New York are negotiating the terms of a five-year extension of its current 206,084 square foot lease at 141 Livingston Street that expires in December of 2025. There can be no assurance that the negotiations will conclude with an agreement. The current lease at 141 Livingston Street provides for $10,304 rent per annum.

 

 

 

6. Fair Value of Financial Instruments

 

GAAP requires the measurement of certain financial instruments at fair value on a recurring basis. In addition, GAAP requires the measure of other financial instruments and balances at fair value on a non-recurring basis (e.g., carrying value of impaired real estate and long-lived assets). Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The GAAP fair value framework uses a three-tiered approach. Fair value measurements are classified and disclosed in one of the following three categories:

 

 

Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;

 

 

Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and

 

 

Level 3: prices or valuation techniques where little or no market data is available that require inputs that are both significant to the fair value measurement and unobservable.

 

When available, the Company utilizes quoted market prices from an independent third-party source to determine fair value and classifies such items in Level 1 or Level 2. In instances where the market for a financial instrument is not active, regardless of the availability of a nonbinding quoted market price, observable inputs might not be relevant and could require the Company to make a significant adjustment to derive a fair value measurement. Additionally, in an inactive market, a market price quoted from an independent third party may rely more on models with inputs based on information available only to that independent third party. When the Company determines the market for a financial instrument owned by the Company to be illiquid or when market transactions for similar instruments do not appear orderly, the Company uses several valuation sources (including internal valuations, discounted cash flow analysis and quoted market prices) and establishes a fair value by assigning weights to the various valuation sources.

 

Changes in assumptions or estimation methodologies can have a material effect on these estimated fair values. In this regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in an immediate settlement of the instrument.

 

18

 

 

The financial assets and liabilities in the consolidated balance sheets include cash and cash equivalents, restricted cash, receivables, prepaid expenses, accounts payable and accrued liabilities, security deposits and notes payable. The carrying amount of cash and cash equivalents, restricted cash, receivables, prepaid expenses, accounts payable and accrued liabilities, and security deposits reported in the consolidated balance sheets approximates fair value due to the short-term nature of these instruments. The fair value of notes payable, which are classified as Level 2, is estimated by discounting the contractual cash flows of each debt instrument to their present value using adjusted market interest rates.

 

The carrying amount and estimated fair value of the notes payable are as follows:

 

   

September 30,
2024

   

December 31,
2023

 
   

(unaudited)

         

Carrying amount (excluding unamortized debt issuance costs)

  $ 1,267,846     $ 1,219,029  

Estimated fair value

  $ 1,196,707     $ 1,160,393  

 

 

7. Commitments and Contingencies

 

Legal

 

On July 3, 2017, the Supreme Court of the State of New York (the “Court”) ruled in favor of 41 present or former tenants of apartment units at the Company’s buildings located at 50 Murray Street and 53 Park Place in Manhattan, New York (the Tribeca House property), who brought an action (the “Kuzmich” case) against the Company alleging that they were subject to applicable rent stabilization laws with the result that rental payments charged by the Company exceeded amounts permitted under these laws because the buildings were receiving certain tax abatements under Real Property Tax Law (“RPTL”) 421-g. The Court also awarded the plaintiffs- tenants their attorney’s fees and costs. After various court proceedings and discussions from 2018-2022, on March 4, 2022 the court issued a ruling, finalized on May 9, 2022, on the rent overcharges to which the plaintiffs are entitled. While the court ruled that the overcharges to which the plaintiffs are entitled total $1.2 million, the court agreed with the Company’s legal arguments that rendered the overcharge liability lower than it could have been, and therefore the Company did not appeal the ruling. On June 23, 2022, the court ruled that the plaintiffs are entitled to attorneys’ fees incurred through February 28, 2022, in the amount of $0.4 million. The only remaining outstanding issues of which the Company is aware relate to the proper form of rent-stabilized renewal leases for the six plaintiffs who remain as tenants in the building. The parties are seeking judicial intervention to resolve this remaining issue. On July 17, 2023, a hearing was held at which the Judicial Hearing Officer (“JHO”) determined five (5) of the tenant’s lease renewal amounts, term and form. The amount of the lease renewal concerning the sixth plaintiff was made on August 28, 2023. On June 14, 2024, the Court amended its August 28, 2023 decision, holding that no renewal lease had been entered into by one of the remaining tenants who claimed to have entered into a renewal lease at a preferential rent. On July 20, 2024, Plaintiff filed a notice of appeal from the June 14, 2024 decision.  Renewal leases for certain of the remaining tenants are outstanding. 

 

On November 18, 2019, the same law firm which filed the Kuzmich case filed a second action involving a separate group of 26 tenants (captioned Crowe et al v 50 Murray Street Acquisition LLC, Supreme Court, New York County, Index No. 161227/19), which action advances essentially the same claims as in Kuzmich. The Company’s deadline to answer or otherwise respond to the complaint in Crowe had been extended to June 30, 2020; on such date, the Company filed its answer to the complaint. Pursuant to the court’s rules, on July 16, 2020, the plaintiffs filed an amended complaint; the sole difference as compared to the initial complaint is that seven new plaintiffs-tenants were added to the caption; there were no substantive changes to the complaint’s allegations. On August 5, 2020, the Company filed its answer to the amended complaint. The case was placed on the court’s calendar and was next scheduled for a discovery conference on November 16, 2022. Counsel for the parties have been engaged in and are continuing settlement discussions. On November 16, 2022, the court held a compliance conference and ordered the plaintiffs to provide rent overcharge calculations in response to proposed calculations previously provided by the Company. On July 12, 2023, the court referred this matter to a JHO to determine the outstanding issues. A hearing before the JHO was held in September 2023 in which the Company and Plaintiffs produced their rent overcharge calculations. In addition, on November 28, 2023, the Court denied the motion for use and occupancy against one of the tenants based on a technical error in Plaintiffs’ amended complaint. The Plaintiff has filed with the Court to correct its error. At this time all parties are continuing to engage in settlement discussions and discussions with the JHO seeking to resolve differences between their rent calculations. 

 

On March 9, 2021, the same law firm which filed the Kuzmich and Crowe cases filed a third action involving another tenant (captioned Horn v 50 Murray Street Acquisition LLC, Supreme Court, New York County, Index No. 152415/21), which action advances the same claims as in Kuzmich and Crowe. The Company filed its answer to the complaint on May 21, 2021. A preliminary conference was held in December 2023 to discuss the calculations for the Horn lease renewal. The parties are currently attempting to settle this matter before the same JHO as in the hearing for the Kuzmich and Crowe matters.

 

19

 

 

As a result of the March 4 and May 9, 2022 decisions which established the probability and ability to reasonably compute amounts owed to tenants for all the cases, the Company recorded a charge for litigation settlement and other of $2.7million in the consolidated statements of operations during the year ended December 31, 2021 comprising rent overcharges, interest and legal costs of plaintiff’s counsel. The Company paid $2.3 million to the plaintiffs related to the Kuzmich case during the year ended December 31, 2022 and $0.4 million related to the Crowe case during the nine month period ended September 30, 2023.

 

In addition to the above, the Company is subject to certain legal proceedings and claims arising in connection with its business. Management believes, based in part upon consultation with legal counsel, that the ultimate resolution of all such claims will not have a material adverse effect on the Company’s consolidated results of operations, financial position or cash flows.

 

The New York City Department of Citywide Administrative Services is currently engaged in an audit of the Company’s operating expense escalation charges for the period of June 2014 to December 2018. Based on the preliminary results of the audit the Company believes it has adequate reserves to cover any adverse conclusions.

 

Commitments

 

On June 29, 2023, the Company entered into the Article 11 Agreement. Under this agreement, the Company has entered into a Housing Repair and Maintenance Letter Agreement in which the Company has agreed to perform certain capital improvements to Flatbush Gardens over the next 3 years. The current estimate is that the costs of that work will be an amount up to $27,000. The Company expects those costs to be offset by the savings provided by a real estate tax exemption and enhanced payments for tenants receiving government assistance. Through September 30, 2024 the Company spent approximately $10,900 on capital improvements required under the HRMLA.

 

The Company is obligated to provide parking availability through August 2025 under a lease with a tenant at the 250 Livingston Street property; the current cost to the Company is approximately $205 per year.

 

Concentrations

 

The Company’s properties are located in the Boroughs of Manhattan and Brooklyn in New York City, which exposes the Company to greater economic risks than if it owned a more geographically dispersed portfolio.

 

The breakdown between commercial and residential revenue is as follows (unaudited):

 

   

Commercial

   

Residential

   

Total

 

Three months ended September 30, 2024

    26

%

    74

%

    100

%

Three months ended September 30, 2023

    27

%

    73

%

    100

%

Nine months ended September 30, 2024

    27 %     73 %     100 %

Nine months ended September 30, 2023

    28 %     72 %     100 %

 

 

 

8. Related-Party Transactions

 

The Company recorded office and overhead expenses pertaining to a related company in general and administrative expense of $112 and $0 for the three months ended September 30, 2024 and 2023, respectively, and $308 and $198 for the nine months ended September 30, 2024 and 2023. The Company recognized a charge/(credit) to reimbursable payroll expense pertaining to a related company in general and administrative expense of $(23) and $(23) for the three months ended September 30, 2024 and 2023, respectively, and $(61) and $(53) for the nine months ended September 30, 2024 and 2023. On October 10, 2024, the Company guaranteed an agreement between the Company's subsidiary, 250 Livingston Owner LLC, and IronHound Management Company LLC, whose principal is the Company's director Roberto Verrone, to provide consulting services regarding the loan related to the 250 Livingston Street property. The initial fee paid upon the agreement is $125 and the agreement also includes restructuring and other fees payable upon certain loan modifications. The arrangement was approved by an independent committee of the Company’s board of directors. During the three months ended September 30, 2024, the Company engaged Greenberg Traurig, in which the Company's director Robert Ivanhoe is a senior partner, regarding the loan to 141 Livingston Street, for a fee of approximately $9.

 

 

 

9. Segment Reporting

 

The Company has classified its reporting segments into commercial and residential rental properties. The commercial reporting segment includes the 141 Livingston Street property and portions of the 250 Livingston Street, Tribeca House, Dean Street and Aspen properties. The residential reporting segment includes the Flatbush Gardens property, the Clover House property, the 10 West 65th Street property, the 1010 Pacific Street property, and portions of the 250 Livingston Street, Tribeca House Aspen properties and the Dean street development

 

20

 

 

The Company’s income from operations by segment for the three and nine months ended September 30, 2024 and 2023, is as follows (unaudited):

 

Three months ended September 30, 2024

 

Commercial

   

Residential

   

Total

 

Rental income

  $ 9,776     $ 27,846     $ 37,622  

Total revenues

  $ 9,776     $ 27,846     $ 37,622  

Property operating expenses

    1,132       7,350       8,482  

Real estate taxes and insurance

    2,910       4,653       7,562  

General and administrative

    594       2,776       3,370  

Transaction pursuit costs

                 

Depreciation and amortization

    1,499       5,956       7,456  

Total operating expenses

    6,135       20,735       26,870  

Income from operations

  $ 3,641     $ 7,111     $ 10,752  

 

Three months ended September 30, 2023

 

Commercial