NOTE 5 – SALES OF PROPERTIES AND PROPERTY HELD FOR SALE
Sales of Properties
On June 17, 2021, the Company sold a retail property and related parking lot located in West Hartford, Connecticut for approximately $39,491,000, net of closing costs. The sale resulted in a gain of $21,491,000 which was recorded as Gain on sale of real estate, net, in the consolidated statements of income for the three and six months ended June 30, 2021. In connection with the sale, the Company paid-off the $15,403,000 mortgage and incurred a $799,000 fee in connection with the early termination of the interest rate swap derivative (see Note 12), which was recorded as Prepayment costs on debt in the consolidated statements of income for the three and six months ended June 30, 2021. As a result of the sale, the Company also wrote-off, as a reduction to Gain on sale of real estate, net, $1,148,000 of unbilled rent receivable and $967,000 of unamortized intangible lease assets.
In 2020, the Company sold a retail property located in Onalaska, Wisconsin for approximately $7,093,000, net of closing costs. The sale resulted in a gain of $4,252,000 which was recorded as Gain on sale of real estate, net, in the consolidated statement of income for the six months ended June 30, 2020. In connection with the sale, the Company paid-off the $3,332,000 mortgage and incurred a $290,000 debt prepayment cost which was recorded as Prepayment costs on debt in the consolidated statement of income for the six months ended June 30, 2020. As a result of the sale, the Company also wrote-off, as a reduction to Gain on sale of real estate, net, $170,000 of unbilled rent receivable.
Property Held-for-Sale
In April 2021, the Company entered into a contract to sell a retail property located in Philadelphia, Pennsylvania for a gross sales price of $8,300,000; the property, which has been vacant since January 2020, is owned by a consolidated joint venture in which the Company holds a 90% interest. The buyer’s right to terminate the contract without penalty expired on June 7, 2021. At June 30, 2021, the Company classified the $6,446,000 net book value of the property’s land, building and improvements as Property held-for-sale in the accompanying balance sheet. The property was sold on July 1, 2021 and resulted in a gain of approximately $1,299,000; the non-controlling interest’s share of the gain was approximately $130,000. In connection with the sale, the Company paid-off the $3,574,000 mortgage.
NOTE 6 – VARIABLE INTEREST ENTITIES, CONTINGENT LIABILITY AND CONSOLIDATED JOINT VENTURES
Variable Interest Entity – Ground Lease
The Company determined it has a variable interest through its ground lease at its Beachwood, Ohio property (The Vue Apartments) and the owner/operator is a VIE because its equity investment at risk is insufficient to finance its activities without additional subordinated financial support. The Company further determined that it is not the primary beneficiary of this VIE because the Company does not have power over the activities that most significantly impact the owner/operator’s economic performance and therefore, does not consolidate this VIE for financial statement purposes. Accordingly, the Company accounts for this investment as land and the revenues from the ground lease as Rental income, net. Ground lease rental income amounted to $243,000 and $486,000 for the three and six months ended June 30, 2020, respectively. No ground lease rental income was collected during the three and six months ended June 30, 2021.
As of June 30, 2021, the VIE’s maximum exposure to loss was $15,108,000 which represented the carrying amount of the land. In purchasing the property in 2016, the owner/operator obtained a mortgage for $67,444,000 from a third party which, together with the Company’s purchase of the land, provided substantially all of the funds to acquire the multi-family property. The Company provided its land as collateral for the owner/operator’s mortgage loan; accordingly, the land position is subordinated to the mortgage. The mortgage balance was $66,590,000 as of June 30, 2021.
Pursuant to the ground lease, as amended, the Company agreed, in its discretion, to fund 78% of (i) any operating expense shortfalls at the property and (ii) any capital expenditures required at the property. The Company funded $702,000 and $1,132,000 during the three and six months ended June 30, 2021, respectively, and an additional $11,000 from July 1 through August 2, 2021. These amounts are included as part of the carrying amount of the land.