10-K 1 lightstonereit5_10k.htm 10-K

 

 

 

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

 

Commission File Number: 000-53650

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

(Exact name of registrant as specified in its charter)

 

Maryland

  20-8198863
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     

1985 Cedar Bridge Avenue, Suite 1, Lakewood, New Jersey 

  08701
(Address of principal executive offices)   (Zip Code)

 

(888) 808-7348

(Registrant’s telephone number, including area code)

 

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

None

 

Securities registered pursuant to section 12(g) of the Act:

Common Stock, $.0001 par value per share

(Title of class)

 

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 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 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 stock. The Registrant has adopted a Policy for Estimation of Common Stock Value (the “Estimated Valuation Policy”) pursuant to which it has estimated the net asset value per share of its common stock (“NAV per Share”).  As of September 30, 2020, the estimated NAV per Share was $9.42. For a full description of the methodologies used to estimate the NAV per Share of the Registrant’s common stock, see Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities-Market Information” included in this Annual Report on Form 10-K. There were 20.2 million shares of common stock outstanding as of June 30, 2020, the last business day of the Registrant’s most recently completed second fiscal quarter. As of March 15, 2021, the registrant had 20.2 million shares of common stock outstanding.

 

 

 

 

 

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST V, INC.

FORM 10-K

Year Ended December 31, 2020

 

  

Page
  PART I  
     
Item 1. Business. 1
     
Item 2. Properties. 5
     
Item 3. Legal Proceedings. 5
     
Item 4. Mine Safety Disclosures 5
     
  PART II  
     
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. 6
     
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 14
     
Item 8. Financial Statements and Supplementary Data. 26
     
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. 26
     
Item 9A. Controls and Procedures. 27
     
Item 9B. Other Information. 27
     
  PART III  
     
Item 10. Directors, Executive Officers and Corporate Governance. 28
     
Item 11. Executive Compensation. 32
     
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 33
     
Item 13. Certain Relationships and Related Transactions, and Director Independence. 33
     
Item 14. Principal Accounting Fees and Services. 36
     
  PART IV  
     
Item 15. Exhibits, Financial Statement Schedules. 38
     
Item 16. Form 10-K Summary. 38
     
Signatures.   39

 

i

 

 

Forward-Looking Statements

 

Certain statements in this Annual Report on Form 10-K constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  These forward-looking statements include discussion and analysis of the financial condition of Lightstone Value Plus Real Estate Investment Trust V, Inc. and our subsidiaries (which may be referred to herein as the “Company,” “we,” “us” or “our”), including our ability to make accretive real estate or real estate-related investments, rent space on favorable terms, to address our debt maturities and to fund our liquidity requirements, to sell our assets when we believe advantageous to achieve our investment objectives, our anticipated capital expenditures, the amount and timing of anticipated future cash distributions to our stockholders, the estimated net asset value per share of our common stock (“NAV per Share”), and other matters.  Words such as “may,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should” and variations of these words and similar expressions are intended to identify forward-looking statements.

 

These forward-looking statements are not historical facts but reflect the intent, belief or current expectations of our management based on their knowledge and understanding of the business and industry, the economy and other future conditions. These statements are not guarantees of future performance, and we caution stockholders not to place undue reliance on forward-looking statements. Actual results may differ materially from those expressed or forecasted in the forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to the factors described below:

 

market and economic challenges experienced by the U.S. and global economies or real estate industry as a whole and the local economic conditions in the markets in which our investments are located. Additionally, our business and financial performance may be adversely affected by current and future economic and other conditions; such as recession, political upheaval or uncertainty, terrorism and acts of war, natural and man-made disasters, cybercrime, and outbreaks of contagious diseases;
uncertainties regarding the impact of the current COVID-19 pandemic, and restrictions and other measures intended to prevent its spread on our business and the economy generally;
the availability of cash flow from operating activities for distributions, if any;
conflicts of interest arising out of our relationships with our advisor and its affiliates;
our ability to retain our executive officers and other key individuals who provide advisory and property management services to us;
our level of debt and the terms and limitations imposed on us by our debt agreements;
the availability of credit generally, and any failure to obtain debt financing at favorable terms or a failure to satisfy the conditions and requirements of that debt;
our ability to make accretive investments in a diversified portfolio of assets;
future changes in market factors that could affect the ultimate performance of any development or redevelopment projects, including but not limited to construction costs, plan or design changes, schedule delays, availability of construction financing, performance of developers, contractors and consultants and growth in rental rates and operating costs;
our ability to secure leases at favorable rental rates;
our ability to sell our assets at a price and on a timeline consistent with our investment objectives;
impairment charges;
unfavorable changes in laws or regulations impacting our business, our assets or our key relationships; and
factors that could affect our ability to qualify as a real estate investment trust.

 

Forward-looking statements in this Annual Report on Form 10-K reflect our management’s view only as of the date of this Report, and may ultimately prove to be incorrect. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results, except as required by applicable law. We intend for these forward-looking statements to be covered by the applicable safe harbor provisions created by Section 27A of the Securities Act and Section 21E of the Exchange Act.

 

Cautionary Note

 

The representations, warranties, and covenants made by us in any agreement filed as an exhibit to this Annual Report on Form 10-K are made solely for the benefit of the parties to the agreement, including, in some cases, for the purpose of allocating risk among the parties to the agreement, and should not be deemed to be representations, warranties, or covenants to or with any other parties. Moreover, these representations, warranties, or covenants should not be relied upon as accurately describing or reflecting the current state of our affairs.

 

ii

 

 

PART I

 

Item 1. Business.

 

Organization

 

Lightstone Value Plus Real Estate Investment Trust V, Inc., which was formerly known as Behringer Harvard Opportunity REIT II, Inc. prior to July 20, 2017, (which may be referred to as the “Company,” “we,” “us,” or “our”) was organized as a Maryland corporation on January 9, 2007 and has elected to be taxed, and currently qualifies, as a real estate investment trust (“REIT”) for federal income tax purposes.

 

We were formed primarily to acquire and operate commercial real estate and real estate-related assets on an opportunistic and value-add basis.  In particular, we have and expect to continue to focus generally on acquiring commercial properties with significant possibilities for capital appreciation, such as those requiring development, redevelopment, or repositioning, those located in markets and submarkets with high growth potential, and those available from sellers who are distressed or face time-sensitive deadlines. We have and expect to continue to acquire a wide variety of commercial properties, including office, industrial, retail, hospitality, and multifamily. We have and expect to continue to purchase existing, income-producing properties, and newly-constructed properties. Additionally, we have and may continue to invest in other real estate related investments, such as mortgage and mezzanine loans. We currently intend to hold our various real properties until such time as our board of directors determines that a sale or other disposition appears to be advantageous to achieve our investment objectives or until it appears that the objectives will not be met. We currently have one operating segment. As of December 31, 2020, we had eight real estate investments (five wholly owned properties and three properties consolidated through investments in joint ventures) and one real estate-related investment (mezzanine loan).

 

Substantially all of our business is conducted through Lightstone REIT V OP LP, a limited partnership organized in Delaware (the “Operating Partnership”). As of December 31, 2020, our wholly-owned subsidiary, BHO II, Inc., a Delaware corporation, owned a 0.1% partnership interest in the Operating Partnership as its sole general partner. As of December 31, 2020, our wholly-owned subsidiary, BHO Business Trust II, a Maryland business trust, was the sole limited partner of the Operating Partnership and owned the remaining 99.9% interest in the Operating Partnership.

 

Our business is managed by an external advisor since the commencement of our initial public offering and we have no employees. Effective February 10, 2017, we engaged affiliates of The Lightstone Group, LLC (“Lightstone”), LSG-BH II Advisor LLC and LSG Development Advisor LLC (collectively, the “Advisor”), to provide advisory services to us. Lightstone is majority owned by the chairman of our board of directors, David Lichtenstein. Pursuant to the terms of an advisory agreement and subject to the oversight of our board of directors, the Advisor is responsible for managing our day-to-day affairs and for services related to our acquisition, financing and disposition activities.

 

Our office is located at 1985 Cedar Bridge Avenue, Suite 1, Lakewood, New Jersey 08701 and our toll-free telephone number is (888) 808-7348.

 

In connection with our initial capitalization, we issued 22,500 shares of our common stock and 1,000 shares of our convertible stock to our previous advisor on January 19, 2007.  The 1,000 shares of convertible stock were transferred to an affiliate of Lightstone on February 10, 2017 and remain outstanding. As of December 31, 2020, we had 20.2 million shares of common stock outstanding. 

 

Our common stock is not currently listed on a national securities exchange. The timing of a liquidity event for our stockholders will depend upon then prevailing market conditions. Our board of directors previously targeted June 30, 2023 as the commencement of a liquidity event, however, on January 9, 2020, our board of directors elected to extend the targeted timeline until June 30, 2028 based on their assessment of our investment objectives and liquidity options for our stockholders. We can provide no assurances as to the actual timing of the commencement of a liquidity event for our stockholders or our ultimate liquidation. We will seek stockholder approval prior to liquidating our entire portfolio.

 

1

 

 

2020 Highlights

 

During 2020, we completed the following key transactions:

 

On January 15, 2020, we and the noncontrolling member completed the disposition of the Gardens Medical Pavilion for a contractual sales price of $24.3 million. In connection with the disposition of the Gardens Medical Pavilion, we recognized a gain on the sale of investment property of approximately $5.5 million during the year ended December 31, 2020. Approximately $12.6 million of the proceeds were used towards the repayment in full of a mortgage loan (the “Gardens Medical Mortgage”) secured by the Gardens Medical Pavilion. Additionally, approximately $1.8 million of the remaining proceeds were distributed to the noncontrolling member.
On March 17, 2020, we acquired a 280-unit multifamily property located in Noblesville, Indiana (the “Autumn Breeze Apartments”) from an unrelated third party for a contractual purchase price of $43.0 million. In connection with the acquisition, we subsequently entered into a 10-year $29.9 million non-recourse mortgage loan (the “Autumn Breeze Apartments Loan”) scheduled to mature on April 1, 2030. The Autumn Breeze Apartments Loan bears interest at 3.39% and requires monthly interest-only payments through June 30, 2023 and monthly principal and interest payments of approximately $0.1 million thereafter, through its stated maturity. The Autumn Breeze Apartments Loan is collateralized by the Autumn Breeze Apartments.
On June 26, 2020, we and the noncontrolling member entered into a 10-year, $35.7 million non-recourse mortgage loan (the "Lakes of Margate Loan") scheduled to mature on July 1, 2030. The Lakes of Margate Loan bears interest at LIBOR + 2.98% and requires monthly interest-only payments through the first four years of the term and thereafter, monthly payments of principal and interest based upon a 30-year amortization schedule. The Lakes of Margate Loan is collateralized by the Lakes of Margate. Additionally, approximately $1.4 million of the financing proceeds were distributed to the noncontrolling member.

 

For further information regarding our consolidated real estate properties, see Item 2. Additionally, see Note 9 of the Notes to Consolidated Financial Statements for further information related to subsequent events during the period from January 1, 2021 through the date of this filing.

 

Investment Objectives

 

Our primary investment objectives are:

 

to realize growth in the value of our investments; and
generate income without subjecting our investors’ capital contribution to undue risk.

 

Investment Policies

 

We have and expect to continue to invest in commercial properties, such as office, industrial, retail, hospitality, multifamily, and student housing, and other real estate-related investments such as mortgage loans and mezzanine loans. Our investments may be in existing income-producing properties and newly-constructed properties that are initially identified as opportunistic and value-add investments with significant possibilities for capital appreciation due to their property-specific characteristics or their market characteristics.

 

We have and expect to continue to generally make our real estate investments in fee title or a long-term leasehold estate through the Operating Partnership or indirectly through special purpose limited liability companies or through investments in joint ventures, partnerships, co-tenancies, or other co-ownership arrangements with the developers of the properties or other persons.

 

Borrowing Policies

 

There is no limitation on the amount we may invest in or borrow related to any single property or other investment. Under our charter, the maximum amount of our indebtedness cannot exceed 300% of our “net assets” (as defined by the Statement of Policy Regarding Real Estate Investment Trusts adopted by the North American Securities Administrators Association on May 7, 2007) as of the date of any borrowing; however, we may exceed that limit if approved by a majority of our independent directors. In addition to our charter limitation, our board of directors has adopted a policy to generally limit our aggregate borrowings to approximately 75% of the aggregate value of our assets unless substantial justification exists that borrowing a greater amount is in our best interests. Our board of directors must review our aggregate borrowings at least quarterly. As of December 31, 2020, we had an aggregate debt leverage ratio of approximately 62.4% of the aggregate value of our assets.

 

2

 

 

Disposition Policies

 

As each of our investments reaches what we believe to be the asset’s optimum value during the expected life of the program, we will consider disposing of the investment and may do so for the purpose of reinvesting the net sales proceeds into real estate and real estate-related investments, distributing the net sale proceeds to our stockholders or satisfying our obligations. A property may be sold before or after the expected holding period if, in the judgment of our Advisor and our independent board, the sale of the property is determined to be in our best interest and the best interests of our stockholders.

 

Distribution Policy

 

We made an election to qualify as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2008. U.S. federal tax law requires a REIT to distribute at least 90% of its annual REIT taxable income (which does not equal net income, as calculated in accordance with generally accepted accounting principles, or GAAP) determined without regard to the deduction for dividends paid and excluding any net capital gain. In order to continue to qualify for REIT status, we may be required to make distributions in excess of cash available. Distributions, if any, are authorized at the discretion of our board of directors based on their analysis of our performance over the previous periods and expectations of performance for future periods. Such analyses may include actual and anticipated operating cash flow, capital expenditure needs, general financial and market conditions, proceeds from asset sales and other factors that our board of directors deems relevant. Our board of directors’ decisions will be substantially influenced by their obligation to ensure that we maintain our federal tax status as a REIT. We cannot provide assurance that we will pay distributions at any particular level, or at all.

 

Prior to 2012, our board of directors declared distributions on a quarterly basis based on daily record dates, portions of which were paid on a monthly basis. During the first quarter of 2012, our board of directors determined to cease regular, monthly distributions in favor of payment of periodic special distributions.

 

During 2014 and 2015, our board of directors declared a total of $77.1 million, or $3.00 per share of common stock, in special cash distributions, all of which were paid to stockholders during 2014, 2015, and 2016. These special cash distributions were paid with a portion of proceeds from asset sales. No special cash distributions have been declared or paid since 2016.

 

Competition

 

We are subject to significant competition in seeking tenants for the leasing of our properties and buyers for the potential sale of our properties. The competition for creditworthy tenants is intense, and we have been required to provide rent concessions, incur charges for tenant improvements, and provide other inducements in order to lease vacant space at our properties.  Without these inducements, we may not be able to continue to lease vacant space timely, or at all, which would adversely impact our results of operations.  We also compete with sellers of similar properties when we sell properties, which may result in our receiving lower proceeds from the sale of our properties or not being able to sell our properties at prices that will achieve our original return objectives. We compete for buyers and tenants with many third parties engaged in real estate investment activities, including other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, lenders, hedge funds, governmental bodies, and other entities. Many of our competitors, including larger REITs, have greater financial resources than we have and generally may be able to accept more risk. They also may enjoy competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies.

 

Regulations

 

Our investments are subject to various federal, state and local laws, ordinances, and regulations, including, among other things, zoning regulations, land use controls, environmental controls relating to air and water quality, noise pollution, and indirect environmental impacts such as increased motor vehicle activity. We believe that we have all permits and approvals necessary under current law to operate our investments.

 

3

 

 

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.

 

Our consolidated portfolio of properties currently consists of seven multi-family apartment complexes and one student housing complex. Despite past and current restrictions and mitigation strategies, our multi-family properties still have not yet seen any significant impact from the COVID-19 pandemic. Our student housing complex, which consists of the River Club Apartments and the Townhomes at River Club, are located in Athens, Georgia and principally serve as “off-campus” lodging for students attending the University of Georgia (“UGA”). Leases for the River Club Apartments and Townhomes at River Club generally have a term of one year running from August through July. UGA previously transitioned to online instruction during its Spring 2020 semester and for its other course offerings throughout the summer. However, UGA returned to “on-campus” classes beginning with its Fall 2020 semester and has continued “on-campus” classes into the current Spring 2021 semester. Our student housing complex is located “off-campus” and therefore, our tenants are not required to vacate even if UGA does not conduct “on-campus” classes. However, if UGA decides to return to online instruction for its students in lieu of “on-campus” classes in future semesters, it could adversely impact leasing demand, occupancy levels and the operating results of our student housing complex in future periods. Additionally, our note receivable relates to a condominium development project located in New Yok City (the “Condominium Project”), which is subject to similar restrictions and risks. To date, our note receivable has not been significantly impacted by the COVID-19 pandemic.

 

While our business has not yet seen any material impact from the ongoing COVID-19 pandemic, the extent to which we may be affected in future periods will largely depend on both current and future developments, all of which are highly uncertain and cannot be reasonably predicted. 

 

If our properties and real estate-related investments are negatively impacted in future periods for an extended period because (i) tenants are unable to pay their rent, (ii) demand for its student housing complex declines, and (iii) our borrower is unable to pay scheduled debt service on the outstanding note receivable; 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.

 

Employees

 

We have no employees. Our Advisor and its affiliates perform a full range of real estate services for us, including asset management, accounting, legal, and property management, as well as investor relations services.

 

We are dependent on the Advisor and its affiliates for services that are essential to us, including asset management and acquisition, disposition and financing activities, and other general administrative responsibilities. If these companies were unable to provide these services to us, we would be required to provide the services ourselves or obtain the services from other sources.

 

4

 

 

Available Information

 

We electronically submit various filings to the United States Securities and Exchange Commission (the “SEC”) including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports. Copies of our filings with the SEC may be obtained from our website at www.lightstonecapitalmarkets.com or at the SEC’s website at www.sec.gov. Access to these filings is free of charge. We are not incorporating our website or any information from the website into this Annual Report on Form 10-K.

 

Item 2. Properties.

 

General

 

The following table presents certain additional information about our consolidated investments in real estate as of December 31, 2020:

 

Property Name  Location  Date Acquired  Number of Units
 or Beds
  Description  Encumbrances (dollars in thousands)   Ownership
Interest
   Occupancy
 as of the end
 of 2020
   Occupancy
 as of the end
 of 2019
   Effective
 Monthly
 Rent per
 Unit/Bed
 for 2020 (1)
   Effective
 Monthly
 Rent per
 Unit/Bed
 for 2019 (1)
 
River Club and the Townhomes at River Club(2)  Athens,
Georgia
  April 25,
2011
  1,134
beds
  Student housing  $30,359    85.0%   95%   96%  $489.79   $462.39 
Lakes of Margate  Margate,
Florida
  October 19,
2011
  280
units
  Multifamily  $35,700    92.5%   95%   95%  $1,393.29   $1,429.69 
Arbors Harbor Town  Memphis,
Tennessee
  December 20,
2011
  345
units
  Multifamily  $29,000    100.0%   96%   92%  $1,348.42   $1,300.62 
Parkside Apartments (“Parkside”)  Sugar Land,
Texas
  August 8,
2013
  240
units
  Multifamily  $17,289    90.0%   95%   93%  $1,169.59   $1,185.07 
Flats at Fishers  Fishers,
Indiana
  November 30,
2017
  306
units
  Multifamily  $28,800    100.0%   96%   92%  $1,182.01   $1,125.48 
Axis at Westmont  Westmont,
Illinois
  November 27,
2018
  400
units
  Multifamily  $37,600    100.0%   93%   94%  $1,177.56   $1,171.72 
Valley Ranch Apartments (3)  Ann Arbor,
Michigan
  February 14,
2019
  384
units
  Multifamily  $43,414    100.0%   94%   93%  $1,449.30   $1,415.84 
Autumn Breeze Apartments (4)  Noblesville,
Indiana
  March 17,
2020
  280
units
  Multifamily  $29,920    100.0%   95%   N/A   $1,057.28     N/A  

 

 

(1)Effective monthly rent is calculated using leases in place as of December 31 of the indicated year and takes into account any rent concessions.
(2)River Club and the Townhomes at River Club consist of two student housing complexes with a total of 1,134 beds.
(3)The Valley Ranch Apartments were acquired on February 14, 2019.
(4)The Autumn Breeze Apartments were acquired on March 17, 2020.

 

The following information generally applies to our consolidated investments in our real estate properties:

 

we believe our real estate property is adequately covered by insurance and suitable for its intended purpose;
our properties are located in markets where we are subject to competition in attracting new tenants and retaining current tenants; and
depreciation is provided on a straight-line basis over the estimated useful life of the applicable improvements.

 

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. Additionally, we have not recorded any loss contingencies related to legal proceedings in which the potential loss is deemed to be remote.

 

Item 4. Mine Safety Disclosure.

 

None

 

5

 

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Market Information

 

There currently is no established public trading market for our shares of common stock. Therefore, there is a risk that a stockholder may not be able to sell their shares of common stock at a time or price acceptable to them. Unless and until our shares of common stock are listed on a national securities exchange, it is not expected that a public market for them will develop.

 

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

 

On November 12, 2020, pursuant to the Policy for Estimation of Common Stock Value (the “Estimated Valuation Policy”), the board of directors of Lightstone Value Plus Real Estate Investment Trust V, Inc. (the “Company,” “we,” “us,” or “our”) determined and approved our estimated NAV of approximately $190.2 million and resulting estimated NAV per Share of $9.42 both as of September 30, 2020. Our estimated NAV and resulting NAV per Share are based upon the estimated fair values of our assets and liabilities as of September 30, 2020 and are effective as of November 12, 2020.

 

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 business is managed by LSG-BH II Advisor LLC and LSG Development Advisor LLC (collectively, the “Advisor”), which are affiliates of The Lightstone Group LLC (“Lightstone”) and we have no employees. 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 at least an annual basis unless and until our shares of common stock 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 both the assistance of our Advisor and Capright Property Advisors, LLC (“Capright”), an independent third-party valuation firm engaged to assist with the valuation of our assets and liabilities. Our Advisor recommended and our board of directors established the estimated NAV per Share based upon the analyses and reports provided by our Advisor and Capright. The process of estimating the value of our assets and liabilities is performed in accordance with our Estimated Valuation Policy and the provisions of the Investment Program Association Practice Guideline 2013-01, “Valuation of Publicly Registered Non-Listed REITs.” We believe our valuations were developed in a manner reasonably designed to ensure their reliability.

 

In arriving at an estimated NAV and resulting NAV per Share, our board of directors reviewed and considered the valuation analyses prepared by our Advisor and Capright. Our Advisor presented a report to the board of directors with an estimated NAV and resulting NAV per Share. Capright provided our board of directors an opinion that the resulting “as-is” market value for the Company’s properties, as calculated by our Advisor, and the other assets and liabilities as valued by our Advisor, along with the corresponding NAV valuation methodologies and assumptions used by our Advisor to arrive at a recommended NAV per Share of $9.42 as of September 30, 2020 were appropriate and reasonable. Our board of directors conferred with our Advisor and a representative from Capright regarding the methodologies and assumptions used to reach their respective conclusions. Our board of directors, which is responsible for determining our estimated per share value, considered all information provided in light of its own familiarity with our assets and liabilities and unanimously approved a NAV per Share of $9.42 as of September 30, 2020.

 

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The engagement of Capright 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. Capright has extensive experience in conducting asset valuations, including valuations of commercial real estate, debt, properties and real estate-related investments.

 

Capright’s opinion was subject to various limitations. In forming its opinion, Capright relied on certain information provided by our Advisor and third parties without independent verification. Our Advisor provided Capright with certain information regarding lease terms and the physical condition and capital expenditure requirements of each property. Capright did not perform engineering or structural studies or environmental studies of any of the properties, nor did they perform an independent appraisal of the other assets and liabilities included in our estimated NAV and resulting NAV per Share.

 

In forming their conclusion as to the “as-is” value of the real estate investments held by us as of September 30, 2020, Capright’s opinion was subject to various limitations. In connection with their engagement, Capright completed appraisals of seven of our eight consolidated properties. An appraisal was not deemed necessary for Autumn Breeze Apartments as it was recently acquired and its value was determined by our Advisor based on its contractual purchase price. With respect to the seven appraisals performed by Capright, the scope of their work included:

 

Review of all property level information provided by our Advisor;
Review of the historical performance of our real estate investments and business plans related to operations of the investments;
Review of the data models prepared by the Advisor supporting the valuation for each investment; and
Review of the applicable markets by means of publications and other resources to measure current market conditions, supply and demand factors, and growth patterns.

 

In addition to their appraisals of seven of our eight consolidated properties, Capright also evaluated the following information to arrive at their opinion of our other assets and liabilities:

 

Review of key market assumptions for our notes payable, which consist of mortgage loans on our properties, including but not limited to interest rates and collateral;
Review of our Advisor’s valuation of our note receivable, net;
Review of our Advisor calculations related to allocations of value to our noncontrolling interests based on applicable contractual terms and market assessments; and
Review of valuation methodology used by our Advisor for all our other assets and liabilities.

 

Capright has acted as a valuation advisor to us in connection with this assignment. The compensation paid to Capright in connection with this assignment was not contingent upon the successful completion of any transaction or conclusion reached by Capright. Capright may be engaged to provide financial advisory services to us, our Advisor, or other Lightstone-sponsored investment programs or their affiliates in the future.

 

The following is a summary of the valuation methodologies used for each type of asset:

 

Investments in real estate. We have generally focused on acquiring commercial real estate properties in various asset classes. Accordingly, Capright and our Advisor utilized a variety of valuation methodologies, each deemed appropriate for the asset type under consideration to assign an estimated value to each asset.

 

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The value of our investments in real estate were estimated utilizing multiple valuation methods, as appropriate for each asset, including an income approach using discounted cash flow analysis and a sales comparable analysis. The key assumptions used in the discounted cash flow approach were specific to each property type, market location, and quality of each property and were based on similar investors’ return expectations and market assessments. The key assumptions are reflected in the table included under “Allocation of Estimated NAV per Share” below. In calculating values for our assets, both balance sheet and estimates of cash flow as of September 30, 2020 were used.

 

In forming its opinion, Capright prepared appraisals on seven of our eight consolidated investment properties in connection with the valuation. An appraisal was not deemed necessary for one of our investment properties, Autumn Breeze Apartments, as it was recently acquired and its value was determined by our Advisor based on its contractual purchase price. The appraisals estimated values by using discounted cash flow, comparable sales, or a weighting of these approaches in determining each property’s value. The appraisals employed a range of terminal capitalization rates, discount rates, growth rates, and other variables that fell within ranges that Capright and our Advisor believed would be used by similar investors to value the properties we own. The assumptions used in developing these estimates were specific to each property (including holding periods) and were determined based upon a number of factors including the market in which the property is located, the specific location of the property within the market, property and market vacancy, tenant demand for space, and investor demand and return requirements.

 

While we and our Advisor believe that the approaches used by appraisers in valuing our real estate assets, including an income approach using discounted cash flow analysis and sales comparable analysis, is standard in the real estate industry, the estimated values for our investments in real estate may or may not represent current market values or fair values determined in accordance with generally accepted accounting principles in the United States (“GAAP”). Real estate is currently carried at its amortized cost basis in our financial statements, subject to any adjustments applicable under GAAP.

 

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

 

Marketable securities, available for sale. The estimated values of our marketable securities are based on Level 2 inputs. 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 cash. The estimated value of our restricted cash approximate their carrying value due to their short term maturities.

 

Note receivable, net. The estimated value of our note receivable, net approximates its carrying value as of September 30, 2020 based on current market rates for similar instruments.

 

Notes payable. We have notes payable, which consist of mortgage loans, 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 of our fixed-rate notes payable were estimated by the Advisor and reviewed by Capright 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 notes payable 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 3.7% to 4.2%.

 

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Other assets and liabilities, net. Our other assets and liabilities, net consist of prepaid expenses and other assets, accounts payable and accrued and other liabilities, payables to related parties, and accrued property tax. For a majority of our other assets and liabilities, the carrying values as of September 30, 2020 were considered equal to fair value by our Advisor due to their cost-based characteristics or 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 operating properties or financial instruments (i.e., notes payable).

 

Noncontrolling interests. In those situations where our consolidated operating properties are held in joint venture structures in which other equity holders have an ownership interest, our Advisor has valued those noncontrolling interests based on the terms of the respective joint venture agreement applied assuming a liquidation of the joint venture as of the date of valuation. The resulting allocation of value to noncontrolling interests is a deduction to the estimated NAV.

 

Common stock outstanding. In deriving an estimated NAV per Share, the total estimated NAV was divided by 20.2 million, the total number of common shares outstanding as of September 30, 2020, on a fully diluted basis, which includes financial instruments that can be converted into a known or determinable number of common shares. As of the valuation date, none of our financial instruments that could be converted into common shares are currently convertible into a known or determinable number of common shares. The determination of the number of common shares outstanding used in the estimated NAV per Share is the same as used in GAAP computations for per share amounts.

 

Our estimated NAV per Share was calculated by aggregating the value of our assets, subtracting the value of both our liabilities and noncontrolling interests, and dividing the net amount by the fully-diluted shares of common stock outstanding, all as of September 30, 2020.

 

Allocation of Estimated NAV per Share

 

The table below sets forth the calculation of our estimated NAV per Share as of September 30, 2020, as well as the calculation of our prior estimated NAV per Share as of September 30, 2019. The estimated NAV per Share of $9.42 as of September 30, 2020, reflects an increase of $0.32, or 3.5%, from the estimated NAV per Share of $9.10 as of September 30, 2019.

 

   Estimated NAV per Share 
   As of   As of 
   September 30,
2020
   September 30,
2019
 
Investments in real estate(1)  $19.99   $16.75 
Cash and cash equivalents   1.38    1.50 
Restricted cash   0.36    0.19 
Marketable securities   0.18    0.24 
Note receivable   0.61    0.39 
Notes payable   (12.45)   (9.34)
Other assets and liabilities, net   (0.23)   (0.23)
Noncontrolling interests   (0.42)   (0.40)
Estimated NAV per Share(2)  $9.42   $9.10 

  

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Notes:

(1)The following are the key assumptions (shown on a weighted average basis) used in the discounted cash flow models to estimate the value of the seven of the eight consolidated properties we currently own.

 

   Multifamily   Student Housing 
   (six properties)   (one property) 
Exit capitalization rate   6.20%   6.25%
Discount rate   7.25%   7.25%
Annual market rent growth   2.85%   2.90%
Average holding period (in years)   10.0    10.0 

 

The following are ranges of the key assumptions used in the discounted cash flow models to estimate the value of our seven multifamily properties. The discounted cash flow analysis for our student housing asset is for only one property, and therefore, a range of values is not applicable.

 

   Multifamily
   (six properties)
Exit capitalization rate  5.50% - 6.75%
Discount rate  6.50% - 7.50%

 

(2)As of September 30, 2020, we had 20,192,656 shares of common stock outstanding. The potential dilutive effect of our common stock equivalents does not affect our estimated NAV per Share as there were no potentially dilutive securities outstanding as of the valuation date.

 

The estimated values of our investments in real estate as of September 30, 2020 reflect an aggregate increase of 26.4% compared to their original contractual purchase price or an aggregate increase of 18.8% compared to their original contractual purchase price plus capital expenditures after acquisition.

 

While we believe that our assumptions utilized are reasonable, a change in these assumptions would affect the calculation of the value of our real estate assets. The table below presents the estimated increase or decrease to our estimated NAV per Share resulting from a 25 basis point increase and decrease in the discount rates and capitalization rates for seven of the eight consolidated properties we currently own. The table is presented to provide a hypothetical illustration of 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 
Capitalization rate  $(0.81)  $0.89 
Discount rate  $(0.33)  $0.34 

 

Historical Estimated NAV per Share

 

The historical reported estimated NAV per Share of our common stock as approved by our board of directors for the preceding year is set forth below:

 

$9.10   September 30, 2019   Current Report on Form 8-K filed November 7, 2019

 

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Limitations and Risks

 

As with any valuation methodology, the methodology used to determine our estimated NAV and resulting 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 represents 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. 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 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. Our Estimated Valuation Policy requires us to update our estimated NAV per Share value on 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.
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.

 

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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.
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.

 

Holders

  

As of March 15, 2021, we had 20.2 million shares of common stock outstanding held by 9,962 stockholders.

 

Distributions

 

We made an election to qualify as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2008. U.S. federal tax law requires a REIT distribute at least 90% of its annual REIT taxable income (which does not equal net income, as calculated in accordance with generally accepted accounting principles, or GAAP) determined without regard to the deduction for dividends paid and excluding any net capital gain. In order to continue to qualify for REIT status, we may be required to make distributions in excess of cash available. Distributions are authorized at the discretion of our board of directors based on their analysis of our performance over the previous periods and expectations of performance for future periods. Such analyses may include actual and anticipated operating cash flow, capital expenditure needs, general financial and market conditions, proceeds from asset sales and other factors that our board of directors deem relevant. Our board of directors’ decisions will be substantially influenced by their obligation to ensure that we maintain our federal tax status as a REIT. We cannot provide assurance that we will pay distributions at any particular level, or at all.

 

Prior to 2012, our board of directors declared distributions on a quarterly basis based on daily record dates, portions of which were paid on a monthly basis. During the first quarter of 2012, our board of directors determined to cease regular, monthly distributions in favor of payment of periodic special distributions.

 

During 2014 and 2015, our board of directors declared a total of $77.1 million, or $3.00 per share of common stock, in special cash distributions, all of which were paid to stockholders during 2014, 2015, and 2016. These special cash distributions were paid with a portion of proceeds from asset sales. No special cash distributions have been declared or paid since 2016.

 

Recent Sales of Unregistered Securities

 

During the year ended December 31, 2020, we did not sell any equity securities that were not registered under the Securities Act of 1933.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

None.

 

Tender Offers

 

2020 Tender Offer

 

We commenced a tender offer on June 16, 2020, pursuant to which we offered to acquire up to 300,000 shares of our common stock at a purchase price of $2.25 per share, or approximately $0.7 million in the aggregate (the “2020 Tender Offer”).

 

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The 2020 Tender Offer terminated on July 24, 2020, and a total of 26,637 shares were validly tendered and not withdrawn pursuant to the 2020 Tender Offer as of such date. In accordance with the terms of the 2020 Tender Offer, we subsequently repurchased all of the tendered shares for approximately $0.1 million in August 2020.

 

2019 Tender Offer

 

We commenced a tender offer on December 17, 2019, pursuant to which we offered to acquire up to 2.0 million shares of our common stock at a purchase price of $7.75 per share, or $15.5 million in the aggregate (the “2019 Tender Offer”).

 

The 2019 Tender Offer terminated on February 28, 2020, and a total of 2,183,888 shares were validly tendered and not withdrawn pursuant to the 2019 Tender Offer as of such date, an amount that exceeded the maximum number of shares we offered to purchase pursuant to the 2019 Tender Offer. In accordance with the terms of the 2019 Tender Offer, we subsequently repurchased a total of approximately 2.0 million shares for approximately $15.6 million in April 2020.

 

Because the amount of repurchase requests exceeded the maximum number of shares we had offered to repurchase, we repurchased shares on a pro-rata basis, subject to “odd lot” priority as described in the 2019 Tender Offer. Excluding the stockholders eligible for “odd lot” priority that were not be subject to proration, approximately 91.58% of the number of shares tendered by each remaining stockholder who participated in the 2019 Tender Offer were repurchased by us. 

 

Share Redemption Program and Redemption Price

 

Our board of directors has adopted a share redemption program (the “SRP”) that permits stockholders to sell their shares back to us, subject to the significant conditions and limitations of the SRP. Our board of directors can amend the provisions of our SRP at any time without the approval of our stockholders.

 

On August 9, 2017, our board of directors adopted a Fourth Amended and Restated Share Redemption Program (the “Fourth Amended SRP”) which became effective July 1, 2018. The material changes made to the SRP were as follows. We no longer process redemptions upon death, “qualifying disability,” or confinement to a long-term care facility on terms different than those on which we process all other redemptions. The price at which we redeem shares submitted for redemption will be a percentage of the estimated NAV per Share as of the Effective Date (as defined in the Fourth Amended SRP), as follows:

 

For Redemptions with an Effective Date Between

 
July 1, 2018 and June 30, 2019: 92.5% of the estimated NAV per Share
July 1, 2019 and June 30, 2020: 95.0% of the estimated NAV per Share
July 1, 2020 and June 30, 2021: 97.5% of the estimated NAV per Share
Thereafter: 100% of the estimated NAV per Share

 

Pursuant to the terms of the Fourth Amended SRP, any shares approved for redemption are redeemed on a periodic basis as determined from time to time by our board of directors, and no less frequently than annually.  We will not redeem, during any twelve-month period, more than 5% of the weighted average number of shares outstanding during the twelve-month period immediately prior to the date of redemption.  In addition, the cash available for redemptions is limited to no more than $10.0 million in any twelve-month period.  Any redemption requests are honored pro rata among all requests received based on funds available and are not honored on a first come, first served basis.

 

On December 28, 2018, our board of directors adopted a Fifth Amended and Restated Share Redemption Program (the “Fifth Amended SRP”) which became effective on January 31, 2019. The only material change to the SRP was to change the measurement period for the limitations on the number and dollar amount of shares that may be accepted for redemption from a rolling 12 month-period to a calendar year.

 

In accordance with our Fifth Amended SRP, the per share redemption price automatically adjusted to $9.18 effective November 12, 2020 as a result of the determination and approval by our board of directors of the updated estimated NAV per Share.

 

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On December 13, 2019, our board of directors approved the suspension of the SRP. Pursuant to the terms of the SRP, while the SRP is suspended, we will not accept any requests for redemption and any such requests and all pending requests will not be honored or retained, but will be returned to the requestor.

 

Our board of directors will continue to consider the liquidity available to stockholders going forward, balanced with our other long-term interests and other long-term interests of the stockholders. It is possible that in the future additional liquidity will be made available by through the SRP, issuer tender offers or other methods, though we can make no assurances as to whether that will happen, or the timing or terms of any such liquidity.

 

During the year ended December 31, 2019, we redeemed 1.2 million shares of our common stock at an average price per share of $7.94.

 

Effective March 25, 2021, the Company’s Board of Directors reopened the SRP solely for redemptions submitted in connection with a stockholder’s death and set the price for all such purchases to $9.42, 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.

 

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.

 

Our board of directors will continue to consider the liquidity available to stockholders going forward, balanced with other long-term interests of the stockholders and us. It is possible that in the future additional liquidity will be made available by us through the SRP, issuer tender offers or other methods, though we can make no assurances as to whether that will happen, or the timing or terms of any such liquidity.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and the notes thereto.

 

Executive Overview

 

We were formed primarily to acquire and operate commercial real estate and real estate-related assets on an opportunistic and value-add basis.  In particular, we have focused generally on acquiring commercial properties with significant possibilities for capital appreciation, such as those requiring development, redevelopment or repositioning, those located in markets and submarkets with high growth potential, and those available from sellers who were distressed or faced time-sensitive deadlines.  In addition, our opportunistic and value-add investment strategy has included investments in real estate-related assets that present opportunities for higher current income. Since inception, we have acquired a wide variety of commercial properties, including office, industrial, retail, hospitality, and multifamily. We have purchased existing, income-producing properties and newly constructed properties. We have also invested in mortgage and mezzanine loans. We have made our investments in or in respect of real estate assets located in the United States and other countries based on our view of existing market conditions. As of December 31, 2020, our investments included multifamily and student housing communities and a note receivable. All of our current investments are located in the United States. We currently intend to hold our various real properties until such time as our board of directors determines that a sale or other disposition appears to be advantageous to achieve our investment objectives or until it appears that the objectives will not be met.

 

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.

 

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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. 

 

Our consolidated portfolio of properties currently consists of seven multi-family apartment complexes and one student housing complex. Despite past and current restrictions and mitigation strategies, our multi-family properties still have not yet seen any significant impact from the COVID-19 pandemic. Our student housing complex, which consists of the River Club Apartments and the Townhomes at River Club, are located in Athens, Georgia and principally serve as “off-campus” lodging for students attending the University of Georgia (“UGA”). Leases for the River Club Apartments and Townhomes at River Club generally have a term of one year running from August through July. UGA previously transitioned to online instruction during its Spring 2020 semester and for its other course offerings throughout the summer. However, UGA returned to “on-campus” classes beginning with its Fall 2020 semester and has continued “on-campus” classes into the current Spring 2021 semester. Our student housing complex is located “off-campus” and therefore, its tenants are not required to vacate even if UGA does not conduct “on-campus” classes. However, if UGA decides to return to online instruction for its students in lieu of “on-campus” classes in future semesters, it could adversely impact leasing demand, occupancy levels and the operating results of our student housing complex in future periods. Additionally, our note receivable relates to a condominium development project located in New Yok City (the “Condominium Project”), which is subject to similar restrictions and risks. To date, our note receivable has not been significantly impacted by the COVID-19 pandemic.

 

While our business has not yet seen any material impact from the ongoing COVID-19 pandemic, the extent to which we may be affected in future periods will largely depend on both current and future developments, all of which are highly uncertain and cannot be reasonably predicted. 

 

If our properties and real estate-related investments are negatively impacted in future periods for an extended period because (i) tenants are unable to pay their rent, (ii) demand for its student housing complex declines, and (iii) its borrower is unable to pay scheduled debt service on the outstanding note receivable; our business and financial results could be materially and adversely impacted.

 

Liquidity and Capital Resources

 

We had cash and cash equivalents of $27.1 million and marketable securities, available for sale of $3.7 million as of December 31, 2020. Our principal demands for funds going forward will be for the payment of (a) operating expenses and (b) scheduled interest and principal payments on our outstanding indebtedness. We also may, at our discretion use funds for (a) tender offers and/or redemptions of shares of our common stock, (b) distributions, if any, to our shareholders, and (c) selective acquisitions and/or real estate-related investments. Generally, we expect to meet our cash needs with our cash on hand and cash flow from operations. However, to the extent that our cash on hand and cash flow from operations are not sufficient to cover our cash needs, we may use proceeds from additional borrowings and/or selective asset sales to fund such needs.

 

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We have borrowed money to acquire properties and make other investments.  Under our charter, the maximum amount of our indebtedness is limited to 300% of our “net assets” (as defined by our charter) as of the date of any borrowing; however, we may exceed that limit if approved by a majority of our independent directors.  In addition to our charter limitation, our board of directors has adopted a policy to generally limit our aggregate borrowings to approximately 75% of the aggregate value of our assets unless substantial justification exists that borrowing a greater amount is in our best interests.  Our policy limitation, however, does not apply to individual real estate assets.

 

Acquisitions and Investments Activity

 

Autumn Breeze Apartments

 

On March 17, 2020, we acquired a 280-unit multifamily property located in Noblesville, Indiana (the “Autumn Breeze Apartments”) from an unrelated third party for a contractual purchase price of $43.0 million. In connection with the acquisition, we subsequently entered into a 10-year $29.9 million non-recourse mortgage loan (the “Autumn Breeze Apartments Loan”) scheduled to mature on April 1, 2030. The Autumn Breeze Apartments Loan bears interest at 3.39% and requires monthly interest-only payments through June 30, 2023 and monthly principal and interest payments of approximately $0.1 million thereafter, through its stated maturity. The Autumn Breeze Apartments Loan is collateralized by the Autumn Breeze Apartments.

 

Valley Ranch Apartments

 

On February 14, 2019, we completed the acquisition of a 384-unit multifamily property located in Ann Arbor, Michigan (the “Valley Ranch Apartments”) from an unrelated third party, for an aggregate purchase price of approximately $70.3 million, excluding closing and other related transaction costs.

 

In connection with the acquisition of the Valley Ranch Apartments, we simultaneously entered into a seven-year $43.4 million non-recourse mortgage loan (the “Valley Ranch Mortgage”) scheduled to mature on March 1, 2026. The Valley Ranch Mortgage bears interest at 4.16% and requires monthly interest-only payments through its stated maturity. The Valley Ranch Mortgage is collateralized by the Valley Ranch Apartments.

 

500 West 22nd Street Mezzanine Loan

 

On February 28, 2019, we, as the lender, and an unrelated third party (the “500 West 22nd Street Mezzanine Loan Borrower), as the borrower, entered into a promissory note (the “500 West 22nd Street Mezzanine Loan”) pursuant to which we would fund up to $12.0 million of mezzanine financing. The 500 West 22nd Street Mezzanine Loan is classified in Note Receivable on our consolidated balance sheet as of December 31, 2020 and 2019. See Note 7 – “Note Receivable” of the Notes to Consolidated Financial Statements for additional information.

 

Disposition Activity and Properties Held for Sale

 

Gardens Medical Pavilion

 

On January 15, 2020, we and the noncontrolling member completed the disposition of the Gardens Medical Pavilion for an aggregate contractual sales price of $24.3 million. In connection with the disposition of the Gardens Medical Pavilion, we recognized a gain on the sale of investment property of approximately $5.5 million during the year ended December 31, 2020. Approximately $12.6 million of the proceeds were used towards the repayment in full of a mortgage loan (the “Gardens Medical Mortgage”) secured by the Gardens Medical Pavilion . Additionally, approximately $1.8 million of the remaining proceeds were distributed to the noncontrolling member. As of December 31, 2019, the Gardens Medical Pavilion met the criteria to be classified as held for sale and therefore, its associated assets and liabilities are classified as held for sale in the consolidated balance sheet as of December 31, 2019.

 

Lakes of Margate

 

Beginning with the fourth quarter of 2019, Lakes of Margate met the criteria to be classified as held for sale and therefore, its associated assets and liabilities, which were expected to be sold within 12 months, were previously classified as held for sale in the consolidated balance sheets as of both March 31, 2020 and December 31, 2019.

 

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However, because of the COVID-19 pandemic we subsequently decided during the second quarter of 2020 to discontinue our marketing efforts and to retain the property for the foreseeable future. Additionally, on June 26, 2020 we obtained a new 10-year mortgage financing (the “Lakes of Margate Loan”) on the property, which previously was unencumbered. As a result, we determined the property should no longer be classified as held for sale effective as of June 30, 2020 because a sale was no longer considered probable within the next 12 months.  Since the fair value of the property was in excess of our carrying value, we recorded catch-up depreciation for the period the property was previously classified as held for sale. In addition, we no longer have classified the long-lived asset as held for sale on the consolidated balance sheet as of December 31, 2019.

 

Despite us discontinuing marketing efforts and deciding to retain the property for the foreseeable future, we were approached by an unrelated third-party during the third quarter of 2020 and ultimately entered into a purchase and sale agreement (the “Lakes of Margate Agreement”) with Lakes at Margate Apartments FL LLC (the “Lakes of Margate Buyer”). Pursuant to the terms of the Lakes of Margate Agreement, the Lakes at Margate would be sold to the Lakes of Margate Buyer for aggregate consideration of $51.0 million, including the assumption of the existing Lakes of Margate Loan, which was subject to the Lakes of Margate Buyer obtaining the lender’s consent. Because the proposed transaction was contingent on the Lakes of Margate Buyer obtaining lender approval for the assumption of the existing Lakes of Margate Loan, which was outside of our control, a sale of the property within the next 12 months was not deemed probable as of September 30, 2020 and we continued to classify Lakes of Margate as held for use on our consolidated balance sheet as of that date.

 

During the fourth quarter of 2020, the Lakes of Margate Buyer successfully obtained the lender’s approval to assume the existing Lakes of Margate Loan in connection with the proposed transaction and, as a result, the Lakes of Margate now met the criteria to be classified as held for sale and therefore, its associated assets and liabilities are classified as held for sale in the consolidated balance sheet as of December 31, 2020.

 

On March 17, 2021, the disposition of the Lakes of Margate was completed pursuant to the terms of the Lakes of Margate Agreement. At closing, the Buyer paid $15.3 million and assumed the existing Lakes of Margate Loan with an outstanding principal balance of $35.7 million.

 

Additionally, see Note 9 of the Notes to Consolidated Financial Statements for further information related to subsequent events during the period from January 1, 2021 through the date of this filing.

 

Debt Financings

 

From time to time, we have obtained mortgage, bridge, or mezzanine loans for acquisitions and investments, as well as property development.  In the future, we may obtain financing for property development or to refinance our existing real estate assets, depending on multiple factors.

 

Excluding the Lakes of Margate Loan (which was included in liabilities held for sale on the consolidated balance sheet as of December 31, 2020 and subsequently assumed by the Buyer of Lakes of Margate on March 17, 2021), our aggregate notes payable balance was $213.0 million, net of deferred financing fees of $3.4 million, and had a weighted average interest rate of 3.71% as of December 31, 2020. Excluding the Gardens Medical Mortgage Loan (which was included in liabilities held for sale on the consolidated balance sheet and subsequently paid off in full in connection with the sale of the Gardens Medical Pavilion on January 15, 2020), our aggregate notes payable balance was $183.8 million, net of deferred financing fees of $3.0 million, and had a weighted average interest rate of 4.14% as of December 31, 2019.

 

Debt Transactions

 

On February 14, 2019, we entered into the Valley Ranch Mortgage scheduled to mature on March 1, 2026. The Valley Ranch Mortgage bears interest at 4.16% and requires monthly interest-only payments through its stated maturity. The Valley Ranch Mortgage is collateralized by the Valley Ranch Apartments.

 

On June 13, 2019, we entered into a seven-year $28.8 million non-recourse mortgage loan (the "Flats at Fishers Mortgage") scheduled to mature on July 1, 2026. The Flats at Fishers Mortgage bears interest at 3.78% and requires monthly interest-only payments through the first two years of the term and thereafter, monthly payments of principal and interest based upon a 30-year amortization. The Flats at Fishers Mortgage is collateralized by the Flats at Fishers.

 

On December 31, 2019, we repaid in full a $13.4 million non-recourse mortgage loan (the “Lakes of Margate Mortgage”) which was collateralized by the Lakes of Margate.

 

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On March 17, 2020, we entered into the Autumn Breeze Apartments Loan scheduled to mature on April 1, 2030. The Autumn Breeze Apartments Loan bears interest at 3.39% and requires monthly interest-only payments through June 30, 2023 and monthly principal and interest payments of approximately $0.1 million thereafter, through its stated maturity. The Autumn Breeze Apartments Loan is collateralized by the Autumn Breeze Apartments.

 

On June 26, 2020, we and the noncontrolling member entered into a 10-year, $35.7 million non-recourse mortgage loan (the "Lakes of Margate Loan") scheduled to mature on July 1, 2030. The Lakes of Margate Loan bears interest at LIBOR + 2.98% and requires monthly interest-only payments through the first four years of the term and thereafter, monthly payments of principal and interest based upon a 30-year amortization. The Lakes of Margate Loan is collateralized by the Lakes of Margate. In connection with the Lakes of Margate Loan, we paid the Advisor an aggregate of approximately $0.4 million in financing fees. Additionally, approximately $1.4 million of the financing proceeds were distributed to the noncontrolling member. On March 15, 2021, the Lakes of Margate Loan was assumed by the Lakes of Margate Buyer in connection with the disposition of the property (see Note 9 of the Notes to Consolidated Financial Statements).

 

Contractual Obligations

 

One of our principal short-term and long-term liquidity requirements includes the repayment of maturing debt. The following table provides information with respect to the contractual maturities and scheduled principal repayments of our indebtedness as of December 31, 2020, excluding the Lakes of Margate Loan, which was included in liabilities held for sale on the consolidated balance sheet as of that date and subsequently assumed by the Lakes of Margate Buyer on March 15, 2021 (dollars in thousands):

 

Contractual Obligations  2021   2022   2023   2024   2025   Thereafter   Total 
Mortgage Payable  $1,023   $1,468   $2,498   $3,181   $46,590   $161,622   $216,382 
Interest Payments(1)   8,325    8,268    8,198    8,118    7,311    5,545    45,765 
Total Contractual Obligations  $9,348   $9,736   $10,696   $11,299   $53,901   $167,167   $262,147 

 

(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.

 

Results of Operations

 

As of December 31, 2020, we had eight real estate investments, (five wholly owned properties and three properties consolidated through investments in joint ventures) and one real estate-related investment (mezzanine loan).

 

On March 17, 2020, we acquired the Autumn Breeze Apartments (the “2020 Acquisition”) and on February 14, 2019, we acquired the Valley Ranch Apartments (the “2019 Acquisition” and collectively, the “Acquisitions”).

 

On February 28, 2019, we entered into a mezzanine loan (500 West 22nd Street Mezzanine Loan) and in January 2019, we received proceeds of approximately $10.9 million related to our equity method investment in Prospect Park representing the minimum amount payable for our participation in the residual interests of our equity method investment in Prospect Park. Any additional amounts received will be recognized upon receipt.

 

On January 15, 2020, we disposed of the Gardens Medical Pavilion (the “Disposition”) and the disposition of this property did not qualify to be reported as discontinued operations since it did not represent a strategic shift that had a major effect on our operations and financial results. Accordingly, the operating results of this property are reflected in our results from continuing operations for all periods presented through its date of disposition.

 

Year ended December 31, 2020 as compared to the year ended December 31, 2019

 

Our results of operations for the year ended December 31, 2020 compared to the same period in 2019 reflect our acquisition and disposition activities during such periods. Properties which were owned by us during the entire periods presented are referred to as our “Same Store” properties.

 

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The following table provides summary information about our results of operations for the years ended December 31, 2020 and 2019 (dollars in thousands):

 

   Year Ended December 31,   Increase/   Percentage   Change
due to
   Change
due to
   Change due to 
   2020   2019   (Decrease)   Change   Acquisitions(1)   Dispositions(2)   Same Store(3) 
Rental revenues  $39,978   $37,173   $2,805    8.0%  $3,791   $(2,203)  $1,217 
Property operating expenses   13,049    12,721    328    3.0%   1,273    (689)   (256)
Real estate taxes   5,454    5,181    273    5.0%   738    (307)   (158)
General and administrative   6,493    6,283    210    3.0%   47    (42)   205 
Depreciation and amortization   12,227    13,196    (969)   (7.0)%   755    (1,093)   (631)
Interest expense, net   9,644    9,221    423    5.0%   1,056    (703)   70 
Gain on sale of investment property   5,474    -    5,474    -    -    5,474    - 

 

 

(1)Represents the effect on our operating results for the periods indicated resulting from our 2019 acquisition of the Valley Ranch Apartments and our 2020 acquisition of the Autumn Breeze Apartments.
(2)Represents the effect on our results for the periods indicated resulting from our 2020 disposition of the Gardens Medical Pavilion.
(3)Represents the change for the year ended December 31, 2020 compared to the same period in 2019 for real estate and real estate-related investments owned by us during the entire periods presented (“Same Store”). Same Store properties for the periods ended December 31, 2020 and 2019 include River Club and the Townhomes at River Club, Lakes of Margate, Arbors Harbor Town, Parkside, Axis at Westmont and Flats at Fishers.

 

The following table reflects total rental revenues and total property operating expenses for the years ended December 31, 2020 and 2019 for our (i) Same Store properties, (ii) acquisitions and (iii) dispositions (dollars in thousands):

  

   Year Ended December 31,     
Description  2020   2019   Change 
Rental Revenues:               
Same Store  $30,525   $29,308   $1,217 
Acquisitions   9,350    5,559    3,791 
Disposition   103    2,306    (2,203)
Total rental revenues  $39,978   $37,173   $2,805 
                
Property operating expenses:               
Same Store  $10,350   $10,606   $(256)
Acquisitions   2,684    1,411    1,273 
Disposition   15    704    (689)
Total property operating expenses  $13,049   $12,721   $328 

 

The tables below reflect occupancy and effective monthly rental rates for our Same Store properties:

 

   Occupancy   Effective Monthly Rent per Unit/Bed(1)    
   As of December 31,   Year Ended December 31,    
Property  2020   2019   2020   2019    
River Club and the Townhomes at River Club   95%   96%  $489.79   $462.39   per bed
Lakes of Margate   95%   95%  $1,393.29   $1,429.69   per unit
Arbors Harbor Town   96%   92%  $1,348.42   $1,300.62   per unit
Parkside   95%   93%  $1,169.59   $1,185.07   per unit
Flats at Fishers   96%   92%  $1,182.01   $1,125.48   per unit
Axis at Westmont   93%   94%  $1,177.56   $1,171.72   per unit

 

 

(1)Effective monthly rent is calculated as in-place contracted monthly rental revenue, including any premiums due for short-term or month-to-month leases, less any concessions or discounts.

 

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Revenues.   Rental revenues for the year ended December 31, 2020 were $40.0 million, an increase of $2.8 million, compared to $37.2 million for the same period 2019. Excluding the effect of our acquisition and disposition activities, our rental revenues increased by $1.2 million for our Same Store properties primarily as a result of higher occupancy and/or rental rates at most of our Same Store properties during the 2020 period.

 

Property Operating Expenses.   Property operating expenses for the year ended December 31, 2020 were $13.0 million, an increase of $0.3 million, compared to $12.7 million for the same period in 2019. Excluding the effect of our acquisition and disposition activities, our property operating expenses decreased by $0.3 million for our Same Store properties.

 

Real Estate Taxes.  Real estate taxes for the year ended December 31, 2020 were $5.5 million, an increase of $0.3 million, compared to $5.2 million for the same period in 2019. Excluding the effect of our acquisition and disposition activities, our real estate taxes decreased by $0.2 million for our Same Store properties.

 

General and Administrative Expenses.   General and administrative expenses for the years ended December 31, 2020 and 2019 were $6.5 million and $6.3 million, respectively.  The increase is principally attributable to higher asset management fees during the 2020 period resulting from our acquisition and investment activities. General and administrative expenses primarily consist of audit fees, legal fees, board of directors’ fees, and other administrative expenses, including certain costs paid to our advisor.

 

Depreciation and Amortization.   Depreciation and amortization for the years ended December 31, 2020 and 2019 were $12.2 million and $13.2 million, respectively.  Excluding the effect of our acquisition and disposition activities, depreciation and amortization decreased by $0.6 million for our Same Store Properties primarily as a result of decreased amortization expense resulting from in-place lease intangibles becoming fully amortized during the first quarter of 2020.

 

Interest Expense, Net.   Interest expense, net for the year ended December 31, 2020 was $9.6 million, an increase of $0.4 million, compared to $9.2 million for the same period in 2019. Excluding the effect of our acquisition and disposition activities, interest expense increased slightly by $0.1 million for our Same Store properties.

 

Interest income.   Interest income for the year ended December 31, 2020 was $1.9 million, an increase of $0.2 million, compared to $1.7 million for the same period in 2019. The increase was principally attributable to the increase in the interest earned on our note receivable which was entered into on February 28, 2019.

 

Gain on Sale of Investment Property. During the first quarter of 2020, we recognized a gain on the sale of the Gardens Medical Pavilion of approximately $5.5 million. 

 

Summary of Cash Flows

 

Operating activities

 

The net cash provided by operating activities of $5.3 million for the year ended December 31, 2020 consisted primarily of our net income of $1.2 million plus depreciation and amortization and amortization of deferred financing costs aggregating $12.8 million partially offset by a gain on the sale of investment property related to the sale of the Gardens Medical Pavilion of $5.5 million, non-cash interest income of $1.7 million and the net change in operating assets and liabilities of $1.4 million.

 

Investing activities

 

The net cash used in investing activities of $25.3 million for the year ended December 31, 2020 consists primarily of the following:

  

  the acquisition of the Autumn Breeze Apartments for $43.8 million;
  capital expenditures of $6.4 million;
  funding of note receivable of $0.6 million;
  proceeds from the sale of the Gardens Medical Pavilion of $23.7 million; and
  net proceeds of $1.9 million from the sale and purchase of marketable securities;

 

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Financing activities

 

The net cash provided by financing activities of $31.4 million for the year ended December 31, 2020 consists primarily of the following:

 

net proceeds from notes payable of $64.0 million;

aggregate payments of $15.7 million to repurchase approximately 2.0 million shares of common stock through tender offers;

aggregate advances from advisor of $25.0 million fully offset by aggregate repayments of advances from advisor of $25.0 million;

debt principal payments of $12.9 million (including $12.6 million for the repayment in full of the Gardens Medical Mortgage in connection with the sale of the property on January 15, 2020); and
distributions paid to noncontrolling interests of $4.0 million.

         

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.

 

 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.

 

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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.

 

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Our calculations of FFO and MFFO are presented below (dollars and shares in thousands, except per share amounts):

 

   For the Year Ended
December 31,
 
Description  2020   2019 
Net income/(loss)  $1,183   $(7,201)
FFO adjustments:          
Depreciation and amortization of real estate assets   12,227    13,196 
Gain on sale of investment property   (5,474)   - 
FFO   7,936    5,995 
MFFO adjustments:          
Other adjustments:          
Acquisition and other transaction related costs expensed(1)   -    10 
Noncash adjustments:          
Amortization of above or below market leases and liabilities(2)   -    (79)
Mark-to-market adjustments(3)   2    - 
Non-recurring (loss)/gain from extinguishment/sale of debt, derivatives or securities holdings(4)   (63)   49 
MFFO before straight-line rent   7,875    5,975 
Straight-line rent(5)   (32)   (9)
MFFO - IPA recommended format  $7,843   $5,966 
           
Net income/(loss)  $1,183   $(7,201)
Less: (income)/loss attributable to noncontrolling interests   (1,298)   92 
Net loss applicable to Company's common shares  $(115)  $(7,109)
Net loss per common share, basic and diluted  $(0.01)  $(0.31)
           
FFO  $7,936   $5,995 
Less: FFO attributable to noncontrolling interests   (526)   (531)
FFO attributable to Company's common shares  $7,410   $5,464 
FFO per common share, basic and diluted  $0.36   $0.24 
           
MFFO - IPA recommended format  $7,843   $5,966 
Less: MFFO attributable to noncontrolling interests   (520)   (515)
MFFO attributable to Company's common shares  $7,323   $5,451 
           
Weighted average number of common shares outstanding, basic and diluted   20,741    22,887 

 

 

(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.
(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.

 

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(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. Mark-to-market adjustments are made for items such as ineffective derivative instruments, certain marketable equity securities and any other items that GAAP requires we make a mark-to-market adjustment for. 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.

 

Distributions

 

We made an election to qualify as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2008. U.S. federal tax law requires a REIT to distribute at least 90% of its annual REIT taxable income (which does not equal net income, as calculated in accordance with generally accepted accounting principles, or GAAP) determined without regard to the deduction for dividends paid and excluding any net capital gain. In order to continue to qualify for REIT status, we may be required to make distributions in excess of cash available. Distributions, if any, are authorized at the discretion of our board of directors based on their analysis of our performance over the previous periods and expectations of performance for future periods. Such analyses may include actual and anticipated operating cash flow, capital expenditure needs, general financial and market conditions, proceeds from asset sales and other factors that our board of directors deems relevant. Our board of directors’ decisions will be substantially influenced by their obligation to ensure that we maintain our federal tax status as a REIT. We cannot provide assurance that we will pay distributions at any particular level, or at all.

 

Prior to 2012, our board of directors declared distributions on a quarterly basis based on daily record dates, portions of which were paid on a monthly basis. During the first quarter of 2012, our board of directors determined to cease regular, monthly distributions in favor of payment of periodic special distributions.

 

During 2014 and 2015, our board of directors declared a total of $77.1 million, or $3.00 per share of common stock, in special cash distributions, all of which were paid to stockholders during 2014, 2015, and 2016. These special cash distributions were paid with a portion of proceeds from asset sales. No special cash distributions have been declared or paid since 2016.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

 

Critical Accounting Policies and 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 contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  These estimates include such items as purchase price allocation for real estate acquisitions, impairment of long-lived assets, depreciation and amortization, and allowance for doubtful accounts.  Actual results could differ from those estimates.

 

Below is a discussion of the accounting policies that we consider to be critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain.

 

Principles of Consolidation and Basis of Presentation

 

Our consolidated financial statements include our accounts and the accounts of other subsidiaries over which we have control. All inter-company transactions, balances, and profits have been eliminated in consolidation. In addition, interests in entities acquired are evaluated based on applicable GAAP, and deemed to be variable interest entities (“VIE”) in which we are the primary beneficiary are also consolidated. If the interest in the entity is determined not to be a VIE, then the entity is evaluated for consolidation based on legal form, economic substance, and the extent to which we have control, substantive participating rights or both under the respective ownership agreement. For entities in which we have less than a controlling interest or entities which we are not deemed to be the primary beneficiary, we account for the investment using the equity method of accounting.

 

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There are judgments and estimates involved in determining if an entity in which we have made an investment is a VIE and, if so, whether we are the primary beneficiary.  The entity is evaluated to determine if it is a VIE by, among other things, calculating the percentage of equity being risked compared to the total equity of the entity.  Determining expected future losses involves assumptions of various possibilities of the results of future operations of the entity, assigning a probability to each possibility and using a discount rate to determine the net present value of those future losses.  A change in the judgments, assumptions, and estimates outlined above could result in consolidating an entity that should not be consolidated or accounting for an investment using the equity method that should in fact be consolidated, the effects of which could be material to our financial statements.

 

Accounting for Acquisitions of Investment Property

 

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.

 

Upon the acquisition of real estate properties that qualify as a business, we recognize the assets acquired, the liabilities assumed, and any noncontrolling interest as of the acquisition date, measured at their fair values. The acquisition date is the date on which we obtain control of the real estate property. The assets acquired and liabilities assumed may consist of land, inclusive of associated rights, buildings, assumed debt, identified intangible assets and liabilities, and asset retirement obligations. Identified intangible assets generally consist of above-market leases, in-place leases, in-place tenant improvements, in-place leasing commissions, and tenant relationships. Identified intangible liabilities generally consist of below-market leases. Goodwill is recognized as of the acquisition date and measured as the aggregate fair value of consideration transferred and any noncontrolling interests in the acquiree over the fair value of the identifiable net assets acquired. Likewise, a bargain purchase gain is recognized in current earnings when the aggregate fair value of consideration transferred and any noncontrolling interests in the acquiree is less than the fair value of the identifiable net assets acquired. Acquisition-related costs are expensed in the period incurred. Initial valuations are subject to change until our information is finalized, which is no later than twelve months from the acquisition date.

 

The fair value of the tangible assets acquired, consisting of land and buildings, is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land and buildings. Land values are derived from appraisals, and building values are calculated as replacement cost less depreciation or management’s estimates of the fair value of these assets using discounted cash flow analyses or similar methods believed to be used by market participants. The value of hotels and all other buildings is depreciated over the estimated useful lives of 39 years and 25 years, respectively, using the straight-line method.

 

We determine the fair value of assumed debt by calculating the net present value of the scheduled mortgage payments using interest rates for debt with similar terms and remaining maturities that management believes we could obtain at the date of the debt assumption. Any difference between the fair value and stated value of the assumed debt is recorded as a discount or premium and amortized over the remaining life of the loan using the effective interest method.

 

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.

 

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Investment Impairment

 

For all of our real estate and real estate-related investments, we monitor events and changes in circumstances indicating that the carrying amounts of the real estate assets may not be recoverable.  Examples of the types of events and circumstances that would cause management to assess our assets for potential impairment include, but are not limited to:  a significant decrease in the market price of an asset; a significant adverse change in the manner in which the asset is being used; an accumulation of costs in excess of the acquisition basis plus construction of the property; major vacancies and the resulting loss of revenues; natural disasters; a change in the projected holding period; legitimate purchase offers; and changes in the global and local markets or economic conditions.  To the extent that our portfolio is concentrated in limited geographic locations, downturns specifically related to such regions may result in tenants defaulting on their lease obligations at those properties within a short time period, which may result in asset impairments.  When such events or changes in circumstances are present, we assess potential impairment by comparing estimated future undiscounted operating cash flows expected to be generated over the life of the asset and from its eventual disposition to the carrying amount of the asset.  These projected cash flows are prepared internally by the Advisor and reflect in-place and projected leasing activity, market revenue and expense growth rates, market capitalization rates, discount rates, and changes in economic and other relevant conditions. Our management reviews these projected cash flows to assure that the valuation is prepared using reasonable inputs and assumptions that are consistent with market data or with assumptions that would be used by a third-party market participant and assume the highest and best use of the investment. We consider trends, strategic decisions regarding future development plans, and other factors in our assessment of whether impairment conditions exist.  In the event that the carrying amount exceeds the estimated future undiscounted operating cash flows, we recognize an impairment loss to adjust the carrying amount of the asset to estimated fair value.  While we believe our estimates of future cash flows are reasonable, different assumptions regarding factors such as market rents, economic conditions, and occupancy rates could significantly affect these estimates.

 

In evaluating our investments for impairment, management may use appraisals and make estimates and assumptions, including, but not limited to, the projected date of disposition of the properties, the estimated future cash flows of the properties during our ownership, and the projected sales price of each of the properties.  A future change in these estimates and assumptions could result in understating or overstating the carrying value of our investments, which could be material to our financial statements. In addition, we may incur impairment charges on assets classified as held for sale in the future if the carrying amount of the asset upon classification as held for sale exceeds the estimated fair value, less costs to sell.

 

New Accounting Pronouncements

 

See Note 3 of the Notes to Consolidated Financial Statements for further information.

 

Subsequent Events

 

See Note 9 of the Notes to Consolidated Financial Statements for further information related to subsequent events during the period from January 1, 2021 through the date of this filing.

 

Item 8. Financial Statements and Supplementary Data.

 

The information required by this Item 8 is included in our Consolidated Financial Statements beginning on page F-1 of this Annual Report on Form 10-K.

 

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

 

None.

 

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Item 9A. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

As required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act, our management, including our principal executive officer and principal financial officer, evaluated, As of December 31, 2020, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective, as of December 31, 2020, to provide reasonable assurance that information required to be disclosed by us in this report is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

 

We believe, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a Company has been detected.

 

Management’s Annual Report on Internal Control over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Our management, including our principal executive officer and principal financial officer, evaluated, As of December 31, 2020, the effectiveness of our internal control over financial reporting using the criteria established in Internal Control—New Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our principal executive officer and principal financial officer concluded that our internal controls over financial reporting, as of December 31, 2020, were effective.

 

Changes in Internal Control over Financial Reporting

 

There has been no change in internal control over financial reporting that occurred during the quarter ended December 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information.

 

None.

 

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PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

 

Directors

 

Because our directors take a critical role in guiding our strategic direction and overseeing our management, they must demonstrate broad-based business and professional skills and experiences, concern for the long-term interests of our stockholders, and personal integrity and judgment. In addition, our directors must have time available to devote to board activities and to enhance their knowledge of our industry. As described further below, we believe our directors have the appropriate mix of experiences, qualifications, attributes, and skills required of our board members in the context of the current needs of our company.

 

Andreas K. Bremer, 64, has served as one of our independent directors since November 2007 and as Lead Director since June 2017 Mr. Bremer currently serves as President and Chief Executive Officer of International Capital, LLC, a position he has held since 2018. Mr. Bremer joined International Capital as its Chief Financial Officer in October 2002 and became its Executive Vice President in 2005. International Capital specializes in acquisition, disposition, management and administration of commercial investment properties, and Mr. Bremer is responsible for all financial aspects of the company’s operations. Before joining International Capital, Mr. Bremer was the Chief Financial Officer of ATLASwerks®, a leading communication software company in Dallas. He acted as a corporate finance consultant for two years at McKinsey & Co. in both the Dallas and New York offices and served as Vice President of Finance and Treasurer at Paging Network, Inc. Mr. Bremer started his career at COMMERZBANK AG in Germany and spent seven of his 13-year tenure at the company’s New York and Atlanta offices. Mr. Bremer has over 25 years of financial and general management experience with extensive knowledge of corporate finance and commercial lending both in the United States and other countries, particularly Germany and holds a degree as CCIM. Mr. Bremer has served as Chairman of the German International School in Dallas since 2009. He was the Director of the Texas Warburg Chapter of the American Council on Germany in Dallas and, as Knight of Justice, is a member of the Order of St. John. . In 2018, Mr. Bremer was appointed Honorary Counsel of the Federal Republic of Germany in Dallas 2018 and continues to serve in that capacity. Mr. Bremer received a law degree from the Johannes-Gutenberg University in Mainz, Germany.

 

Our board of directors has concluded that Mr. Bremer is qualified to serve as one of our directors for reasons including his more than 25 years of financial and general management experience, including international corporate finance and commercial lending. Mr. Bremer has served in various financial management positions and has significant experience in acquisition, disposition, management, and administration of commercial real estate investments. In addition, Mr. Bremer’s international background brings a unique perspective to our board.

 

Diane S. Detering-Paddison, 61, has served as one of our independent directors since June 2009. Ms. Detering-Paddison serves as President of 4word, www.4wordwomen.org, a not-for-profit organization she founded that connects, leads and supports professional Christian women and enables them to reach their potential. From February 2010 until June 2014, Ms. Detering-Paddison served as Chief Strategy Officer of Cassidy Turley, one of the nation’s largest commercial real estate service providers. Prior to joining Cassidy Turley, Ms. Detering-Paddison served as the Chief Operating Officer of ProLogis, an owner, manager, and developer of distribution facilities, from June 2008 until January 2009. Prior to that, Ms. Detering-Paddison was with CB Richard Ellis and Trammell Crow Company for over 20 years. During her time there, she served as Senior Vice President, Corporate and Investor Client Accounts from April 2001 until December 2004, Chief Operating Officer, Global Services from January 2005 until December 2006, and President, Global Corporate Services - Client Accounts from December 2006 until May 2008. Ms. Detering-Paddison was part of a ten member executive team that managed the merger between Trammell Crow Company and CB Richard Ellis in December 2006. Ms. Detering-Paddison serves on the Salvation Army’s National Advisory Board. Ms. Detering-Paddison is the author of “Work, Love, Pray.” Ms. Detering-Paddison holds a Master of Business Administration degree from the Harvard Graduate School of Business and a Bachelor of Science degree from Oregon State University where she graduated as Valedictorian.

 

Our board of directors has concluded that Ms. Detering-Paddison is qualified to serve as one of our directors for reasons including her more than 30 years of management experience with large commercial real estate companies, including Trammell Crow Company, CB Richard Ellis, ProLogis, and Cassidy Turley. With her background, Ms. Detering-Paddison brings substantial insight and experience with respect to the commercial real estate industry.

 

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Jeffrey F. Joseph, 79, has served as one of our independent directors since September 2017. Mr. Joseph served as President, Chief Executive Officer and director of Presidential Realty Corporation, a publicly held company focused on the development and ownership of multifamily residential properties, from 1991 until his retirement in 2011. From 1979 to 1991, Mr. Joseph served as a principal of Ivy Properties Ltd. and as General Counsel of Presidential Realty Corporation from 1973 to 1979. Mr. Joseph is Chairman of the Board of Takoda Service Dogs Inc., a charitable organization that provides service dogs to Veterans suffering from PTSD. Mr. Joseph began his career 1967 as an associate with Hughes Hubbard Blair & Reed. Mr. Joseph holds a Bachelor of Arts degree from Cornell University with a major in Economics and a Juris Doctorate degree from Cornell Law School, where he graduated Summa Cum Laude.

 

Our board of directors has concluded that Mr. Joseph is qualified to serve as one of our directors for reasons including his more than 40 years of real estate industry experience.

 

David Lichtenstein, 59, has served as one of our directors and Chairman of the Board of Directors since September 2017. Mr. Lichtenstein is Chairman and Chief Executive Officer of our Advisor. Mr. Lichtenstein founded both American Shelter Corporation and Lightstone. From 1988 to the present, Mr. Lichtenstein has served as Chairman of the Board of Directors and Chief Executive Officer of Lightstone, directing all aspects of the acquisition, financing and management of a diverse portfolio of multifamily, lodging, retail and industrial properties located in 20 states and Puerto Rico. From June 2004 to the present, Mr. Lichtenstein has served as the Chairman of the Board of Directors and Chief Executive Officer of Lightstone Value Plus Real Estate Investment Trust, Inc. (“Lightstone I”) and Chief Executive Officer of Lightstone Value Plus REIT LLC, its advisor. From April 2008 to the present, Mr. Lichtenstein has served as the Chairman of the Board of Directors and Chief Executive Offer of Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone II”) and Lightstone Value Plus REIT II LLC, its advisor. From September 2014 to the present, Mr. Lichtenstein has served as Chairman of the Board of Directors and Chief Executive Officer of Lightstone Value Plus Real Estate Investment Trust III, Inc. (“Lightstone III”), and as Chief Executive Officer of Lightstone Value Plus REIT III LLC, its advisor.  From September 2014 to the present, Mr. Lichtenstein has served as Chairman of the Board of Directors and Chief Executive Officer of Lightstone Real Estate Income Trust Inc., (“Lightstone IV”), and as Chief Executive Officer of Lightstone Real Estate Income LLC, its advisor. From October 2014 to the present, Mr. Lichtenstein has served as Chairman of the Board of Directors and Chief Executive Officer of Lightstone Enterprises Limited (“Lightstone Enterprises”). From July 2015 to the present, Mr. Lichtenstein has served as a member of the Board of Directors of the New York City Economic Development Corporation, New York City’s primary economic development vehicle. Mr. Lichtenstein is on the Board of Governors of the Real Estate Board of New York, a Trustee of the Citizens Budget Commission, and is a Member of The Economic Club of New York and the Real Estate Roundtable, and Co-Chair of the Real Estate Capital Policy Advisory Committee. He is also a member of the Brookings Institution’s Economic Studies Council and a trustee of The Touro College and University System and sits on the Board Supervisory Committee for The New York Medical College. Mr. Lichtenstein is a founder of the Friendship House, an organization that provides housing for families of sick children and adults in the Greater New York City area. Mr. Lichtenstein is also a member of the International Council of Shopping Centers and the National Association of Real Estate Investment Trusts, Inc., or NAREIT, an industry trade group, as well as a member of the Board of Directors of Touro College and New York Medical College.

 

Our board of directors has concluded that Mr. Lichtenstein is qualified to serve as one of our directors for reasons including his more than 25 years of financial and general management experience, including significant experience in acquisition, disposition, management, and administration of commercial real estate investments.

 

Jeffrey P. Mayer, 64, has served as one of our independent directors since November 2007 and is chairman of our audit committee. Mr. Mayer previously served as a consultant serving the real estate industry and is the owner of Mayer Financial Consulting, LLC and is the firm’s sole employee. This firm was started in 2011 to provide consulting services to individuals and businesses primarily dealing with financial investments and real estate. From 2000 until 2007, Mr. Mayer was the Chief Financial Officer of ClubCorp, Inc., a holding company that owns and operates premier golf and business clubs and destination golf resorts. He previously served as Chief Financial Officer of Bristol Hotels & Resorts in Dallas, a position he held from 1996 until the company’s acquisition by Bass PLC in early 2000. Prior to joining Bristol, he was Corporate Controller at Host Marriott Corporation (formerly Marriott Corporation) and, prior to that, held various senior financial positions at Marriott Corporation. He also serves as treasurer and board member of the Georgia Chapter of The American Foundation for Suicide Prevention. In addition, he serves or has previously served as the Audit Committee chairman for three other organizations including both profit and not-for-profit entities. He was a board member of the Dallas Children’s Advocacy Center and chairman of its audit committee. A graduate of the College of William & Mary, he began his career as an accountant with Arthur Andersen LLP.

 

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 Our board of directors has concluded that Mr. Mayer is qualified to serve as one of our directors and as Chairman of our Audit Committee for reasons including his more than 30 years of accounting and finance experience in the commercial real estate industry. In particular, Mr. Mayer has served as Chief Financial Officer for two commercial real estate companies and has significant management experience relating to preparing and reviewing financial statements and coordinating with external auditors. Mr. Mayer continues to provide consulting services to the commercial real estate industry and is in tune with current industry trends and issues.

 

Cynthia Pharr Lee, 72, has served as one of our independent directors since November 2007. Ms. Lee serves as Chairman of Dala Communications and she was CEO of its predecessor firm, C. Pharr & Company, which provides strategic brand, marketing and public relations services to many real estate, construction, design and other B2B clients. Ms. Pharr Lee also serves as an independent board member of AAA Auto Club of Southern California. From 2016 through 2020, Ms. Pharr Lee served as a member of the board of directors of Darling Ingredients Inc. (DAR-NYSE) and its audit and compensation committees. From 1994 through February 2014, Ms. Pharr Lee served as a member of the board of directors of CEC Entertainment, Inc. (CEC-NYSE) and its audit and compensation committees. A co-founder of Texas Women Ventures Fund, Ms. Pharr Lee serves on the Fund’s Investment Advisory Committee. Ms. Pharr Lee is a former president of Executive Women of Dallas and former national chairman of the Counselor’s Academy of the Public Relations Society of America. From May 1989 through February 1993, Ms. Lee was President and Chief Executive Officer of Tracy Locke/Pharr Public Relations, a division of Omnicom (NYSE). Ms. Lee has earned designation as a Board Leadership Fellow of the National Association of Corporate Directors (NACD) and has also earned the CERT Certificate in Cybersecurity Oversight through a program sponsored by NACD and Carnegie Mellon University. She received her Bachelor of Science degree in English (summa cum laude) and her Master of Arts degree in English from Mississippi State University.

 

Our board of directors has concluded that Ms. Lee is qualified to serve as one of our directors for reasons including her more than 30 years of management experience in the public relations and marketing communications industry, with significant experience working with commercial real estate and construction firms. Ms. Lee has also served on the boards of directors and audit committees of New York Stock Exchange listed companies, which allows her to provide valuable knowledge and insight into management issues. In addition, Ms. Lee’s background complements that of our other board members and brings a unique perspective to our board.

 

Steven Spinola, 72, has served as one of our independent directors since September 2017. Mr. Spinola served as President of the Real Estate Board of New York (“REBNY”) from 1986 and since July 2015 as its President Emeritus. Mr. Spinola is a recipient of the Harry B. Helmsley Distinguished New Yorker Award for a lifetime of achievement in the profession. Before becoming REBNY’s President, Mr. Spinola served as President of the New York City Public Development Corporation (now known as the New York City Economic Development Corporation) from 1983 to 1986. Mr. Spinola currently serves as an independent director on the Board of Directors of Lightstone IV. Mr. Spinola holds a Bachelor of Arts degree from the City College of New York with a concentration in political science and government. He attended the Harvard Business School/Kennedy School of Government Summer Program for Senior Managers in Government.

 

Our board of directors has concluded that Mr. Spinola is qualified to serve as one of our directors for reasons including his extensive experience in the real estate industry.

 

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Executive Officers

 

In addition, the following individuals serve as our executive officers:

 

Mitchell Hochberg, 68, was appointed our Chief Executive Officer on September 28, 2017. Mr. Hochberg also serves as President and Chief Operating Officer of Lightstone I, Lightstone II, Lightstone III and Lightstone IV and their respective advisors. From October 2014 to the present, Mr. Hochberg has served as President of Lightstone Enterprises. Mr. Hochberg was appointed Chief Executive Officer of Behringer Harvard Opportunity REIT I, Inc. (“BH OPP I”) effective as of September 28, 2017. Prior to joining The Lightstone Group in August 2012, Mr. Hochberg served as principal of Madden Real Estate Ventures from 2007 to August 2012 when it combined with our sponsor. Mr. Hochberg held the position of President and Chief Operating Officer of Ian Schrager Company, a developer and manager of innovative luxury hotels and residential projects in the United States from early 2006 to early 2007 and prior to that Mr. Hochberg founded Spectrum Communities, a developer of luxury neighborhoods in the northeast of the United States, in 1985 where for 20 years he served as its President and Chief Executive Officer. Mr. Hochberg served on the board of directors of Belmond Ltd from 2009 to April 2019. Additionally, through October 2014 Mr. Hochberg served on the board of directors and as Chairman of the board of directors of Orleans Homebuilders, Inc Mr. Hochberg received his law degree as a Harlan Fiske Stone Scholar from Columbia University School of Law and graduated magna cum laude from New York University College of Business and Public Administration with a Bachelor of Science degree in accounting and finance.

 

Seth Molod, 57, was appointed our Chief Financial Officer and Treasurer August 27, 2018. Mr. Molod also serves as Chief Financial Officer and Treasurer of Lightstone I, Lightstone II, Lightstone III and Lightstone IV. Mr. Molod also serves as the Executive Vice President and Chief Financial Officer of our Sponsor and as the Chief Financial Officer of our Advisor and the advisors of Lightstone I, Lightstone II, Lightstone III and Lightstone IV. Prior to joining The Lightstone Group in August of 2018, Mr. Molod served as an Audit Partner, Chair of Real Estate Services and on the Executive Committee of Berdon LLP, a full service accounting, tax, financial and management advisory firm (“Berdon”). Mr. Molod joined Berdon in 1989. He has extensive experience advising some of the nation’s most prominent real estate owners, developers, managers, and investors in both commercial and residential projects. Mr. Molod has worked with many privately held real estate companies as well as institutional investors, REITs, and other public companies. Mr. Molod is a licensed certified public accountant in New Jersey and New York and a member of the American Institute of Certified Public Accountants. Mr. Molod holds a Bachelor of Business Administration degree in Accounting from Muhlenberg College.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires each director, officer, and individual beneficially owning more than 10% of a registered security of the Company to file with the SEC, within specified time frames, initial statements of beneficial ownership (Form 3) and statements of changes in beneficial ownership (Forms 4 and 5) of common stock of the Company. These specified time frames require the reporting of changes in ownership within two business days of the transaction giving rise to the reporting obligation. Reporting persons are required to furnish us with copies of all Section 16(a) forms filed with the SEC. Based solely on a review of the copies of such forms furnished to the Company during and with respect to the fiscal year ended December 31, 2019 or written representations that no additional forms were required, to the best of our knowledge, all required Section 16(a) filings were timely and correctly made by reporting persons during 2018.

 

Code of Ethics

 

Our board of directors has adopted a Code of Business Conduct Policy that is applicable to all members of our board of directors, our executive officers and employees of our Advisor and its affiliates. We have posted the policy on the website maintained for us at www.lightstonecapitalmarkets.com. If, in the future, we amend, modify or waive a provision in the Code of Business Conduct Policy, we may, rather than filing a Current Report on Form 8-K, satisfy the disclosure requirement by promptly posting such information on the website maintained for us as necessary.

 

Audit Committee Financial Expert

 

The Audit Committee consists of independent directors Jeffrey P. Mayer, the chairman, Andreas K. Bremer, Diane S. Detering-Paddison, Jeffrey F. Joseph, Steven Spinola and Cynthia Pharr Lee. Our board of directors has determined that Mr. Mayer is an “audit committee financial expert,” as defined by the rules of the SEC. The biography of Mr. Mayer, including his relevant qualifications, is previously described in this Item 10.

 

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Item 11. Executive Compensation.

 

Executive Compensation

 

We do not directly compensate our named executive officers, nor do we reimburse the Advisor for compensation paid to our named executive officers, for services rendered to us. We pay certain management fees to the Advisor to compensate the Advisor for the services it provides in our day-to-day management. In addition, we reimburse certain expenses of the Advisor, including reimbursement for the costs of salaries and benefits of certain of their employees.

 

Reimbursement for the costs of salaries and benefits of the Advisor’s employees relate to compensation paid to the Advisor’s employees that provide services to us such as accounting, administrative or legal, for which the Advisor or its affiliates are not entitled to compensation in the form of a separate fee. A description of the fees that we pay to the Advisor and other affiliates is found in Item 13 below. Therefore, we do not have, nor has our board of directors or compensation committee considered, a compensation policy or program for our executive officers, and thus we have not included a Compensation Discussion and Analysis in this Annual Report on Form 10-K.

 

Directors’ Compensation

 

We pay each of our directors who are Independent Directors as defined in our charter an annual retainer of $60,000. In addition, we pay the chairperson of the audit committee and our lead independent director an annual retainer of $10,000 and the chairpersons of our nominating and compensation committees annual retainers of $5,000 each. These retainers are payable quarterly in arrears. In addition, we pay each of our directors who are Independent Directors as defined in our charter (a) $1,500 for each board of directors or permanent committee meeting attended in person or by telephone, (c) $1,000 for each special committee meeting attended by phone or in person, and (c) $500 for each written consent considered by the director.  

 

All directors receive reimbursement of reasonable out-of-pocket expenses incurred in connection with attendance at meetings of our board of directors. If a director is also an affiliate director, we do not pay compensation for services rendered as a director.

 

Director Compensation Table

 

The following table sets forth certain information with respect to our director compensation during the fiscal year ended December 31, 2020:

 

Name

  Fees
Earned(1)
 
David Lichtenstein
  $- 
Andreas K. Bremer  $100,250 
Diane S. Detering-Paddison  $81,000 
Jeffrey F. Joseph
  $81,000 
Steven Spinola
  $81,000 
Jeffrey P. Mayer  $91,000 
Cynthia Pharr Lee  $86,000 

 

 

(1)Includes fees earned for services rendered in 2020, regardless of when paid.

 

Compensation Committee Interlocks and Insider Participation

 

No member of our compensation committee served as an officer or employee of the Company or any of our subsidiaries during the fiscal year ended December 31, 2020 or formerly served as an officer of the Company or any of our subsidiaries. In addition, during the fiscal year ended December 31, 2020, none of our executive officers served as a director or member of a compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of any entity that has one or more executive officers or directors serving as a member of our board of directors or compensation committee.

 

32

 

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

Security Ownership of Certain Beneficial Owners

 

The following table sets forth information as of March 15, 2021 regarding the beneficial ownership of our common stock by each person known by us to own 5% or more of the outstanding shares of common stock, each of our directors, each of our executive officers, and our directors and executive officers as a group:

 

 

Name of Beneficial Owner(2)

   

Amount and Nature

of Beneficial

Ownership(1)

    

Percentage

of Class

 
David Lichtenstein        
Andreas K. Bremer        
Diane S. Detering-Paddison        
Jeffrey P. Mayer        
Cynthia Pharr Lee        
Steven Spinola
        
Jeffrey F. Joseph        
Mitchell Hochberg        
Seth Molod        
All directors and executive officers as a group (nine persons)        

 

 

(1)Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities and shares issuable pursuant to options, warrants and similar rights held by the respective person or group that may be exercised within 60 days following March 15, 2021. Except as otherwise indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.
(2)The address of our directors and officers is c/o Lightstone Value Plus Real Estate Investment Trust V, Inc., 1985 Cedar Bridge Avenue, Suite 1, Lakewood, New Jersey 08701.

 

Item 13. Certain Relationships and Related Transactions and Director Independence.

 

Policies and Procedures for Transactions with Related Persons

 

We do not currently have written formal policies and procedures for the review, approval or ratification of transactions with related persons, as defined by Item 404 of Regulation S-K of the Exchange Act. Under that definition, transactions with related persons are transactions in which we were or are a participant and the amount involved exceeds $120,000 and in which any related person had or will have a direct or indirect material interest. Related parties include any executive officers, directors, director nominees, beneficial owners of more than 5% of our voting securities, immediate family members of any of the foregoing persons, and any firm, corporation or other entity in which any of the foregoing persons is employed and in which such person has 10% or greater beneficial ownership interest.

 

However, in order to reduce or eliminate certain potential conflicts of interest, our charter contains a number of restrictions relating to (1) transactions we enter into with our Advisor and its affiliates, (2) certain future offerings, and (3) allocation of investment opportunities among affiliated entities. As a general rule, any related party transactions must be approved by a majority of the directors (including a majority of independent directors) not otherwise interested in the transaction. In determining whether to approve or authorize a particular related party transaction, these persons will consider whether the transaction between us and the related party is fair and reasonable to us.

 

Related Party Transactions

 

Advisor and Property Manager

 

Effective February 10, 2017, we engaged affiliates of The Lightstone Group, LLC (“Lightstone”), LSG-BH II Advisor LLC and LSG Development Advisor LLC (collectively, the “Advisor”), to provide advisory services to us. Lightstone is majority owned by the chairman of our board of directors, David Lichtenstein. Pursuant to the terms of an advisory agreement and subject to the oversight of our board of directors, the Advisor is responsible for managing our day-to-day affairs and for services related to our acquisition, financing and disposition activities.

 

We have agreements with the Advisor and its affiliates to pay certain fees in exchange for services performed by these entities and other related parties. Our ability to secure financing and subsequent real estate operations are dependent upon the Advisor and the Advisor’s affiliates to perform such services as provided in these agreements. Additionally, we engaged an affiliate of Lightstone pursuant to a property management and leasing agreement. The following discussion describes the fees and expenses payable to the Advisor and affiliated property manager and their respective affiliates under various agreements.

 

33

 

  

Fees   Amount
Acquisition -  

We pay the Advisor acquisition and advisory fees of 1.5% of the amount paid in respect of the purchase, development, construction, or improvement of each asset we acquire, including any debt attributable to those assets.

 

In addition, we pay acquisition and advisory fees of 1.5% of the funds advanced in respect of a loan investment.

 

We pay the Advisor an acquisition expense reimbursement in the amount of (i) 0.25% of the funds paid for purchasing an asset, including any debt attributable to the asset, plus 0.25% of the funds budgeted for development, construction, or improvement in the case of assets that we acquire and intend to develop, construct, or improve or (ii) 0.25% of the funds advanced in respect of a loan investment.

 

We pay third parties, or reimburses the Advisor or its affiliates, for any investment-related expenses due to third parties in the case of a completed investment, including, but not limited to, legal fees and expenses, travel and communication expenses, costs of appraisals, accounting fees and expenses, third-party brokerage or finder’s fees, title insurance, premium expenses, and other closing costs.

 

The Advisor and its affiliates are also responsible for paying all of the investment-related expenses that we pay or the Advisor or its affiliates incur that are due to third parties or related to the additional services provided by the Advisor as described above with respect to investments we do not make, other than certain non-refundable payments made in connection with any acquisition.

     

Debt Financing -

 

 

  We pay the Advisor a debt financing fee of 1.0% of the amount available under any loan or line of credit made available to us and pay directly all third-party costs associated with obtaining the debt financing. Generally, these fees are capitalized as a direct reduction to the applicable financing and amortized over its term.
     

Property Management -

 

 

  We pay our property manager and affiliate of the Advisor, fees for the management, leasing, and construction supervision of our properties which is 4.0% of gross revenues of the properties managed by our property manager. We pay our property manager an oversight fee equal to 0.5% of the gross revenues of the property managed for any property for which we contract directly with a third-party property manager.  In no event will our property manager or its affiliates receive both a property management fee and an oversight fee with respect to any particular property.  In the event we own a property through a joint venture that does not pay our property manager directly for its services, we will pay our property manager a management fee or oversight fee, as applicable, based only on our economic interest in the property.  
     
Construction Management -  

We pay our property manager a construction management fee in an amount not to exceed 5% of all hard construction costs incurred in connection with, but not limited to capital repairs and improvements, major building reconstruction and tenant improvements, if such affiliate supervises construction performed by or on behalf of us or our affiliates. We incurred no construction management fees for the years ended December 31, 2020 and 2019.

 

34

 

 

Asset Management -  

We pay the Advisor a monthly asset management fee of one-twelfth of 0.7% of the value of each asset. The value of our assets will be the value as determined in connection with the establishment and publication of an estimated net asset value (“NAV”) per share unless the asset was acquired after our publication of a NAV per share (in which case the value of the asset will be the contractual purchase price of the asset).

     
Administrative Services Reimbursement  

The Advisor is responsible for paying all of the expenses it incurs associated with persons employed by the Advisor to the extent that they provide services to us for which the Advisor receives an acquisition, asset management, or debt financing fee, including wages and benefits of the applicable personnel. Instead of reimbursing the Advisor for specific expenses paid or incurred in connection with providing services to us, we pay the Advisor an administrative services fee, which is an allocation of a portion of the actual costs that the Advisor paid or incurred providing these services to us (the “Administrative Services Reimbursement”). The Administrative Services Reimbursement is intended to reimburse the Advisor for all its costs associated with providing services to us.

 

For the period January 1, 2019 through June 10, 2019, the Administrative Services Reimbursement was up to $1.29 million annually, pro-rated for the period. On June 10, 2019, the advisory management agreements were extended an additional year through June 10, 2020. For the period June 11, 2019 through June 10, 2020, the Administrative Services Reimbursement was up to $1.312 million. On June 10, 2020, the advisory management agreements were extended an additional year through June 10, 2021. For the period June 11, 2020 through June 10, 2021, the Administrative Services Reimbursement is limited to the lesser of the actual costs incurred or $1.33 million. The Administrative Services Reimbursement is payable in four equal quarterly installments within 45 days of the end of each calendar quarter. In addition, under the various advisory management agreements, the Company is to reimburse the Advisor for certain due diligence services provided in connection with asset acquisitions and dispositions and debt financings separately from the Administrative Services Reimbursement.

 

Notwithstanding the fees and cost reimbursements payable to the Advisor pursuant to our advisory management agreement, under our charter we may not reimburse the Advisor for any amount by which our operating expenses (including the asset management fee) at the end of the four preceding fiscal quarters exceeds the greater of: (i) 2% of our average invested assets, or (ii) 25% of our net income determined without reduction for any additions to reserves for depreciation, bad debts, or other similar non-cash reserves and excluding any gain from the sale of our assets for that period unless a majority of our independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. For the four fiscal quarters ended December 31, 2020 and December 31, 2019, our total operating expenses (including the asset management fee) exceeded the limit on total operating expenses; however, our independent directors determined the excess expenses were justified.

 

35

 

 

The following table represents the fees incurred associated with the payments to our Advisor for the periods indicated (amounts in thousands):

 

   For the Years Ended
December 31,
 
   2020   2019 
Acquisition fees and acquisition expense reimbursement (1)  $764   $1,428 
Debt financing fees (2)   656    722 
Property management fees (property operating expenses)   468    467 
Administrative services reimbursement (general and administrative costs)   1,321    1,300 
Asset management fees (general and administrative costs)   2,721    2,446 
Total  $5,930   $6,363 

 

 

(1)Capitalized to the corresponding asset and amortized over its estimated useful life.
(2)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.

 

As of December 31, 2020, we had no amounts payable to the Advisor and its affiliates. As of December 31, 2019, we had a payable to the Advisor and its affiliates of approximately $6,000.

 

We are dependent on the Advisor and our property manager for certain services that are essential to us, including asset disposition decisions, property management and leasing services, and other general administrative responsibilities. In the event that these companies were unable to provide us with their respective services, we would be required to obtain such services from other sources.

 

Advance from Advisor

 

On March 16, 2020, the Advisor provided an advance of $25.0 million to us that bore interest at a fixed-rate of 5.00%. On March 31, 2020, we repaid $15.0 million of the advance and on June 29, 2020, we repaid the remaining $10.0 million of the advance and aggregate accrued interest of $0.2 million. Approximately $0.2 million of interest expense was incurred on the advance during the year ended December 31. 2020.

 

 Independence

 

Although our shares are not listed for trading on any national securities exchange and therefore our board of directors is not subject to the independence requirements of the NYSE or any other national securities exchange, our board has evaluated whether our directors are “independent” as defined by the NYSE. The NYSE standards provide that to qualify as an independent director, in addition to satisfying certain bright-line criteria, the board of directors must affirmatively determine that a director has no material relationship with us (either directly or as a partner, stockholder or officer of an organization that has a relationship with us).

 

Consistent with these considerations, after review of all relevant transactions or relationships between each director, or any of his or her family members, and the Company, our senior management and our independent registered public accounting firm, the board has determined that the majority of the members of our board, and each member of our audit committee, compensation committee and nominating committee, is “independent” as defined by the NYSE.

 

Item 14. Principal Accounting Fees and Services.

 

Independent Registered Public Accounting Firm

 

EisnerAmper LLP has served as our independent registered public accounting firm since April 2017. Our management believes that they are knowledgeable about our operations and accounting practices and well qualified to act as our independent registered public accounting firm.

 

36

 

 

Audit and Non-Audit Fees

 

The following table presents the aggregate fees billed to the Company for the years indicated by the Company’s principal accounting firm (amounts in thousands):

 

   For the Year Ended
December 31,
 
   2020   2019 
Audit Fees (a)  $354   $358 
Tax Fees (b)   57    66 
Total Fees  $411   $424 

 

a) Fees for audit services consisted of the audit of the Company’s annual consolidated financial statements, interim reviews of the Company’s quarterly consolidated financial statements and services normally provided in connection with statutory and regulatory filings.

b)Fees for tax services.

 

Our audit committee considers the provision of these services to be compatible with maintaining the independence of our independent registered accounting firms.

 

Audit Committee’s Pre-Approval Policies and Procedures

 

Our audit committee must approve any fee for services to be performed by the Company’s independent registered public accounting firm in advance of the service being performed. For proposed projects using the services of the Company’s independent registered public accounting firm that are expected to cost under $100,000, our audit committee will be provided information to review and must approve each project prior to commencement of any work. For proposed projects using the services of the Company’s independent registered public accounting firm that are expected to cost $100,000 and over, our audit committee will be provided with a detailed explanation of what is being included, and asked to approve a maximum amount for specifically identified services in each of the following categories: (1) audit fees; (2) audit-related fees; (3) tax fees; and (4) all other fees for any services allowed to be performed by the independent registered public accounting firm. If additional amounts are needed, our audit committee must approve the increased amounts prior to the previously approved maximum being reached and before the work may continue. Approval by our audit committee may be made at its regularly scheduled meetings or otherwise, including by telephonic or other electronic communications. The Company will report the status of the various types of approved services and fees, and cumulative amounts paid and owed, to our audit committee on a regular basis. Our audit committee has considered the independent registered public accounting firm’s non-audit services provided to the Company and has determined that such services are compatible with maintaining its independence.

 

Our audit committee approved all of the services provided by, and fees paid to, EisnerAmper LLP during the years ended December 31, 2020 and 2019.

 

37

 

 

PART IV

 

Item 15. Exhibits, Financial Statement Schedules.

 

(a)List of Documents Filed.

 

1.Financial Statements

 

The list of the financial statements filed as part of this Annual Report on Form 10-K is set forth on page F-1 herein.

 

2.Financial Statement Schedules

 

None.

 

3.Exhibits

 

The list of exhibits filed as part of this Annual Report on Form 10-K is submitted in the Exhibit Index following the financial statements in response to Item 601 of Regulation S-K.

 

(b)Exhibits.

 

The exhibits filed in response to Item 601 of Regulation S-K are listed in the Exhibit Index attached hereto.

 

(c)Financial Statement Schedules.

 

All financial statement schedules have been omitted because the required information of such schedules is not present, is not present in amounts sufficient to require a schedule, is not required or is included in the financial statements and related notes.

 

Item 16. Form 10-K Summary

 

None.

 

38

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  Lightstone Value Plus Real Estate Investment Trust V, Inc.
   
Dated: March 25, 2021 By: /s/ MITCHELL HOCHBERG
   

Mitchell Hochberg

President

Principal Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

March 25, 2021

/s/ MITCHELL HOCHBERG
 

Mitchell Hochberg

President

Principal Executive Officer

   
March 25, 2021 /s/ DAVID LICHTENSTEIN
 

David Lichtenstein

Chairman of the Board of Directors

   
March 25, 2021

 /s/ SETH MOLOD

 

Seth Molod

Chief Financial Officer

Principal Financial Officer 

   
March 25, 2021

 /s/ JEFFREY F. JOSEPH

 

Jeffrey F. Joseph

Director

   
March 25, 2021

 /s/ ANDREAS K. BREMER

 

Andreas K. Bremer

Director

   
March 25, 2021 /s/ STEVEN SPINOLA
 

Steven Spinola

Director

   
March 25, 2021 /s/ JEFFREY P. MAYER
  Jeffrey P. Mayer  
Director
   
March 25, 2021 /s/ CYNTHIA PHARR LEE
 

Cynthia Pharr Lee

Director

   
March 25, 2021

 /s/ DIANE S. DETERING-PADDISON

 

Diane S. Detering-Paddison

Director

 

39

 

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

  Page
Financial Statements  
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of December 31, 2020 and 2019 F-4
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2020 and 2019 F-5
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2020 and 2019 F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019 F-7
Notes to Consolidated Financial Statements F-8

 

F-1

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Lightstone Value Plus Real Estate Investment Trust V, Inc. (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations and comprehensive loss, 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.

  

F-2

 

 

Critical Audit Matter

 

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

 

Investment Property – Indicators of Impairment

 

As of December 31, 2020, the Company had investment property, net of accumulated depreciation, of approximately $267.7 million. As more fully described in Note 2 to the financial statements, the Company monitors events and changes in circumstances representing triggering events that could indicate that the carrying amounts of the investment property may not be recoverable. Examples of the types of events and circumstances that would cause management to assess the Company’s investment property for potential impairment include, but are not limited to: a significant decrease in the market price of an asset; a significant adverse change in the manner in which the asset is being used; an accumulation of costs in excess of the acquisition basis plus construction of the property; major vacancies and the resulting loss of revenues; natural disasters; a change in the projected holding period; legitimate purchase offers; and changes in the global and local markets or economic conditions. When such events or changes in circumstances are present, the Company assesses potential impairment by comparing estimated future undiscounted operating cash flows expected to be generated over the life of the asset and from its eventual disposition to the carrying amount of the asset. These projected cash flows reflect in-place and projected leasing activity, market revenue and expense growth rates, market capitalization rates, discount rates, and changes in economic and other relevant conditions. In evaluating the Company’s investment property for impairment, management may use appraisals and make estimates and assumptions, including, but not limited to: the projected date of disposition of the properties, the estimated future cash flows of the properties during the Company’s ownership, and the projected sales price of each of the properties.

 

We identified the evaluation of indicators of impairment as a critical audit matter due to significant judgment by management in identifying indicators of impairment. This in turn led to a high degree of auditor judgment, subjectivity, and audit effort in performing procedures to evaluate the reasonableness of management's significant estimates and assumptions related to impairment evaluation including identifying events and circumstances that exist that would indicate the carrying amount of investment property may not be recoverable.

 

Addressing the matter involved performing procedures and evaluating audit evidence, in connection with forming our overall opinion on the 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 and identifying the existence of any triggering events, including comparing budget to actual operating income, comparing actual operating income to projected future operating income, and comparing actual, budgeted and projected occupancy percentages, and considering if the determination was reasonable considering the past and current performance of the property and if consistent with evidence obtained in other areas of the audit. We tested the completeness and accuracy of the underlying data used by management in its evaluation. We held discussions with management about the current status of certain properties to understand how management’s significant estimates and assumptions are developed considering potential future market conditions. 

 

/s/ EisnerAmper LLP

 

We have served as the Company’s auditor since 2017.

 

EISNERAMPER LLP 

Iselin, New Jersey 

March 25, 2021

 

F-3

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Consolidated Balance Sheets

(dollars in thousands, except per share amounts)

 

   December 31,
2020
   December 31,
2019
 
Assets          
Investment property:          
Land and improvements  $63,873   $65,767 
Building and improvements   248,079    227,938 
Furniture, fixtures and equipment   6,552    7,231 
Gross investment property   318,504    300,936 
Less accumulated depreciation   (50,823)   (49,693)
Net investment property   267,681    251,243 
           
Cash and cash equivalents   27,078    15,802 
Marketable securities, available for sale   3,654    5,496 
Restricted cash   4,373    4,148 
Note receivable, net   12,794    10,423 
Prepaid expenses and other assets   1,604    1,318 
Assets held for sale   24,140    18,192 
Total Assets  $341,324   $306,622 
           
Liabilities and Stockholders’ Equity          
Notes payable, net  $212,989   $183,788 
Accounts payable and accrued and other liabilities   6,530    6,043 
Payables to related parties   -    6 
Liabilities held for sale   37,165    13,686 
Total liabilities   256,684    203,523 
           
Commitments and Contingencies          
           
Stockholders’ Equity:          
           
Company’s stockholders’ equity:          
Preferred stock, $.0001 par value per share; 50.0 million shares authorized, none issued and outstanding   -    - 
Convertible stock, $.0001 par value per share; 1,000 shares authorized, issued and outstanding   -    - 
Common stock, $.0001 par value per share; 350.0 million shares authorized, 20.2 million and 22.2 million shares issued and outstanding, respectively   2    2 
Additional paid-in-capital   189,216    204,912 
Accumulated other comprehensive income   140    111 
Accumulated deficit   (102,519)   (102,404)
Total Company’s stockholders’ equity   86,839    102,621 
           
Noncontrolling interests   (2,199)   478 
           
Total Stockholders’ Equity   84,640    103,099 
           
Total Liabilities and Stockholders’ Equity  $341,324   $306,622 

 

See Notes to Consolidated Financial Statements.

 

F-4

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Consolidated Statements of Operations and Comprehensive Loss

(dollars and shares in thousands, except per share amounts)

 

   For the Years Ended
December 31,
 
   2020   2019 
         
Rental revenues  $39,978   $37,173 
           
Expenses          
Property operating expenses   13,049    12,721 
Real estate taxes   5,454    5,181 
General and administrative   6,493    6,283 
Depreciation and amortization   12,227    13,196 
Total operating expenses   37,223    37,381 
           
Operating income/(loss)   2,755    (208)
           
Interest expense, net   (9,644)   (9,221)
Interest income   1,877    1,682 
Gain on sale of investment property   5,474    - 
Other income, net   721    546 
Net income/(loss)   1,183    (7,201)
Net (income)/loss attributable to noncontrolling interests   (1,298)   92 
Net loss attributable to the Company’s shares  $(115)  $(7,109)
Weighted average shares outstanding:          
Basic and diluted   20,741    22,887 
Basic and diluted loss per share  $(0.01)  $(0.31)
Comprehensive loss:          
Net income/(loss)  $1,183   $(7,201)
Other comprehensive income:          
Holding gain on marketable securities, available for sale   92    251 
Reclassification adjustment for (gain)/loss on sale of marketable securities included in net income/(loss)   (63)   49 
Foreign currency translation gain   -    28 
Total other comprehensive income   29    328 
Comprehensive income/(loss)   1,212    (6,873)
Comprehensive (income)/loss attributable to noncontrolling interest   (1,298)   92 
Comprehensive loss attributable to the Company’s shares  $(86)  $(6,781)

 

 See Notes to Consolidated Financial Statements.

 

F-5

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Consolidated Statements of Stockholders’ Equity 

For the Years Ended December 31, 2020 and 2019 

(dollars and shares in thousands)

 

                   Additional       Accumulated Other         
   Convertible Stock   Common Stock   Paid-In   Accumulated   Comprehensive   Noncontrolling   Total 
   Shares   Amount   Shares   Amount   Capital   Deficit   Income   Interests   Equity 
                                     
BALANCE, December 31, 2018   1   $-    23,432   $2   $214,537   $(95,295)  $(217)  $794   $119,821 
                                              
Net loss   -    -    -    -    -    (7,109)   -    (92)   (7,201)
Distributions paid to noncontrolling interests   -    -    -    -    -    -    -    (254)   (254)
Redemption, cancellation and tender of shares   -    -    (1,209)   -    (9,625)   -    -    -    (9,625)
Contributions received from noncontrolling interests   -    -    -    -    -    -    -    30    30 
Other comprehensive income:                                             
Holding gain on marketable securities, available for sale   -    -    -    -    -    -    251    -    251 
Foreign currency translation gain   -    -    -    -    -    -    28    -    28 
Reclassification adjustment for loss on sale of marketable securities included in net loss   -    -    -    -    -    -    49    -    49 
                                              
BALANCE, December 31, 2019   1   $-    22,223   $2   $204,912   $(102,404)  $111   $478   $103,099 
                                              
Net income   -    -    -    -    -    (115)   -    1,298    1,183 
Distributions paid to noncontrolling interests   -    -    -    -    -    -    -    (3,975)   (3,975)
Tender of common stock   -    -    (2,030)   -    (15,696)   -    -    -    (15,696)
Other comprehensive income:                                             
Holding gain on marketable securities, available for sale   -    -    -    -    -    -    92    -    92 
Reclassification adjustment for gain on sale of marketable securities included in net income   -    -    -    -    -    -    (63)   -    (63)
                                              
BALANCE, December 31, 2020   1  $-    20,193   $2   $189,216   $(102,519)  $140   $(2,199)  $84,640 

 

See Notes to Consolidated Financial Statements.

 

F-6

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc. 

Consolidated Statements of Cash Flows 

For the Years Ended December 31, 2020 and 2019 

(dollars in thousands)

 

   For the Year Ended
December 31,
 
   2020   2019 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income/(loss)  $1,183   $(7,201)
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:          
Depreciation and amortization   12,227    13,196 
Amortization of deferred financing costs   600    643 
(Gain)/loss on sale of marketable securities   (63)   49 
Gain on sale of investment property   (5,474)   - 
Non-cash interest income   (1,746)   (1,092)
Other non-cash adjustments, net   -    12 
Changes in operating assets and liabilities:          
Decrease (increase) in prepaid expenses and other assets   (2,795)   2,635 
Increase in accounts payable and accrued and other liabilities   1,407    1,945 
Decrease  in payables to related parties   (6)   (310)
Net cash provided by operating activities   5,333    9,877 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of investment property   (50,240)   (80,084)
Purchase of marketable securities   (1,456)   (2,985)
Proceeds from sale of marketable securities   3,390    12,127 
Funding of note receivable, net   (625)   (9,132)
Acquisition fee paid on note receivable   -    (199)
Proceeds from sale of investment property, net of closing costs   23,673    - 
Proceeds from disposition of investment in unconsolidated joint venture   -    10,944 
Net cash used in investing activities   (25,258)   (69,329)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from notes payable   65,620    72,214 
Payments on notes payable   (12,939)   (14,215)
Proceeds from advance from advisor   25,000    - 
Payments on advance from advisor   (25,000)   - 
Payment of loan fees and expenses   (1,584)   (1,428)
Tender of common stock   (15,696)   - 
Redemption and cancellation of common stock   -    (9,625)
Contributions received from noncontrolling interests   -    30 
Distributions paid to noncontrolling interests   (3,975)   (254)
Net cash provided by financing activities   31,426    46,722 
           
Effect of exchange rate changes on cash, cash equivalents, and restricted cash   -    28 
Net change in cash, cash equivalents and restricted cash   11,501    (12,702)
Cash, cash equivalents and restricted cash, beginning of year   19,950    32,652 
Cash, cash equivalents and restricted cash, end of year  $31,451   $19,950 
           
Supplemental cash flow information for the years indicated is as follows:          
           
Cash paid for interest, net of amounts capitalized  $8,997   $8,347 
Holding loss/gain on marketable securities, available for sale  $29   $300 
Capital expenditures for real estate in accrued liabilities and accounts payable  $42   $201 

 

See Notes to Consolidated Financial Statements.

 

F-7

 

 

Lightstone Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements

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

 

1. Business and Organization

 

Business

 

Lightstone Value Plus Real Estate Investment Trust V, Inc. which was previously named Behringer Harvard Opportunity REIT II, Inc., prior to July 20, 2017 (which may be referred to as the “Company,” “we,” “us,” or “our”), was organized as a Maryland corporation on January 9, 2007 and has elected to be taxed, and currently qualifies, as a real estate investment trust (“REIT”) for federal income tax purposes.

 

The Company was formed primarily to acquire and operate commercial real estate and real estate-related assets on an opportunistic and value-add basis. In particular, the Company has focused generally on acquiring commercial properties with significant possibilities for capital appreciation, such as those requiring development, redevelopment, or repositioning, those located in markets and submarkets with high growth potential, and those available from sellers who are distressed or face time-sensitive deadlines.  The Company has acquired a wide variety of commercial properties, including office, industrial, retail, hospitality, and multifamily.  The Company has purchased existing, income-producing properties, and newly-constructed properties. The Company has also invested in other real estate-related investments such as mortgage and mezzanine loans. The Company intends to hold the various real properties in which it has invested until such time as its board of directors determines that a sale or other disposition appears to be advantageous to achieve the Company’s investment objectives or until it appears that the objectives will not be met. The Company currently has one operating segment. As of December 31, 2020, the Company had eight real estate investments (five wholly owned properties and three properties consolidated through investments in joint ventures) and one real estate-related investment (mezzanine loan).

 

Substantially all of the Company’s business is conducted through Lightstone REIT V OP LP, a limited partnership organized in Delaware (the “Operating Partnership”).  As of December 31, 2020, the Company’s wholly-owned subsidiary, BHO II, Inc., a Delaware corporation, owned a 0.1% partnership interest in the Operating Partnership as its sole general partner.  As of December 31, 2020, the Company’s wholly-owned subsidiary, BHO Business Trust II, a Maryland business trust, was the sole limited partner of the Operating Partnership and owned the remaining 99.9% interest in the Operating Partnership.

 

The Company’s business is managed by an external advisor and the Company has no employees. Effective February 10, 2017, the Company engaged affiliates of The Lightstone Group (“Lightstone”), LSG-BH II Advisor LLC and LSG Development Advisor LLC (collectively, the “Advisor”), to provide advisory services to the Company. Lightstone is majority owned by the chairman of the Company’s board of directors, David Lichtenstein. Pursuant to the terms of an advisory agreement and subject to the oversight of the Company’s board of directors, the Advisor is responsible for managing the Company’s day-to-day affairs and for services related to the management of the Company’s assets.

 

Organization

 

In connection with the Company’s initial capitalization, the Company issued 22,500 shares of its common stock and 1,000 shares of its convertible stock to the Company’s previous advisor on January 19, 2007.  The 1,000 shares of convertible stock were transferred to an affiliate of Lightstone on February 10, 2017 and remain outstanding. As of December 31, 2020, the Company had 20.2 million shares of common stock outstanding. 

 

The Company’s common stock is not currently listed on a national securities exchange. The timing of a liquidity event for the Company’s stockholders will depend upon then prevailing market conditions. The Company’s board of directors previously targeted June 30, 2023 as the commencement of a liquidity event, however, on January 9, 2020, the Company’s board of directors elected to extend the targeted timeline until June 30, 2028 based on their assessment of the Company’s investment objectives and liquidity options for the Company’s stockholders. The Company can provide no assurances as to the actual timing of the commencement of a liquidity event for its stockholders or the ultimate liquidation of the Company. The Company will seek stockholder approval prior to liquidating its entire portfolio.

 

F-8

 

 

Lightstone Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements

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

 

2. Summary of Significant Accounting Policies

 

Use of Estimates in the Preparation of Financial Statements

 

The preparation of financial statements in conformity with generally accepted accounting principles in the U.S. (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant assumptions and estimates relate to the valuation of real estate including impairment and depreciable lives. Application of these assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates.

 

Principles of Consolidation and Basis of Presentation

 

The Company’s consolidated financial statements include the Company’s accounts and the accounts of other subsidiaries over which it has control. All inter-company transactions, balances, and profits have been eliminated in consolidation. In addition, interests in entities acquired are evaluated based on applicable GAAP, and entities deemed to be variable interest entities (“VIE”) in which the Company is the primary beneficiary are also consolidated. If the interest in the entity is determined not to be a VIE, then the entity is evaluated for consolidation based on legal form, economic substance, and the extent to which the Company has control, substantive participating rights or both under the respective ownership agreement. For entities in which the Company has less than a controlling interest but have significant influence, it accounts for the investment using the equity method of accounting.

 

There are judgments and estimates involved in determining if an entity in which the Company has made an investment is a VIE and, if so, whether it is the primary beneficiary.  The entity is evaluated to determine if it is a VIE by, among other things, calculating the percentage of equity being risked compared to the total equity of the entity.  Determining expected future losses involves assumptions of various possibilities of the results of future operations of the entity, assigning a probability to each possibility, and using a discount rate to determine the net present value of those future losses.  A change in the judgments, assumptions, and estimates outlined above could result in consolidating an entity that should not be consolidated or accounting for an investment using the equity method that should in fact be consolidated, the effects of which could be material to the Company’s consolidated financial statements.

 

Accounting for Acquisitions of Investment Property

 

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.

 

Upon the acquisition of real estate property that meets the definition of a business, the Company recognizes the assets acquired, the liabilities assumed and any noncontrolling interest as of the acquisition date, measured at their fair values. The acquisition date is the date on which the Company obtains control of the real estate property. The assets acquired and liabilities assumed may consist of land, inclusive of associated rights, buildings, assumed debt, identified intangible assets and liabilities, and asset retirement obligations. Identified intangible assets generally consist of above-market leases, in-place leases, in-place tenant improvements, in-place leasing commissions, and tenant relationships. Identified intangible liabilities generally consist of below-market leases. Goodwill is recognized as of the acquisition date and measured as the aggregate fair value of the consideration transferred and any noncontrolling interests in the acquiree over the fair value of the identifiable net assets acquired. Likewise, a bargain purchase gain is recognized in current earnings when the aggregate fair value of the consideration transferred and any noncontrolling interests in the acquiree is less than the fair value of the identifiable net assets acquired. Acquisition-related costs are expensed in the period incurred. Initial valuations are subject to change until the Company’s information is finalized, which is no later than 12 months from the acquisition date.

 

The fair value of the tangible assets acquired, consisting of land and buildings, is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land and buildings. Land values are derived from appraisals, and building values are calculated as replacement cost less depreciation or management’s estimates of the fair value of these assets using discounted cash flow analyses or similar methods believed to be used by market participants. The value of hotels and all other buildings is depreciated over the estimated useful lives of 39 years and 25 years, respectively, using the straight-line method.

 

F-9

 

 

Lightstone Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements

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

 

The Company determines the fair value of assumed debt by calculating the net present value of the scheduled mortgage payments using interest rates for debt with similar terms and remaining maturities that management believes the Company could obtain at the date of the debt assumption. Any difference between the fair value and stated value of the assumed debt is recorded as a discount or premium and amortized over the remaining life of the loan using the effective interest method.

 

Cash and Cash Equivalents

 

The Company considers investments in highly liquid money market funds or investments with original maturities of three months or less to be cash equivalents. The carrying amount of cash and cash equivalents reported on the consolidated balance sheet approximates fair value.

 

Restricted Cash

 

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 the Company’s 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.

 

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

 

   December 31, 
   2020   2019 
Cash and cash equivalents  $27,078   $15,802 
Restricted cash   4,373    4,148 
Total cash, cash equivalents and restricted cash  $31,451   $19,950 

 

Marketable Securities

 

Marketable securities currently consist of debt securities that are designated as available-for-sale and are recorded at fair value. Unrealized holding gains or losses for debt securities are reported as a component of accumulated other comprehensive income/(loss). Realized gains or losses resulting from the sale of these securities are determined based on the specific identification of the securities sold.

 

An impairment charge is recognized when the decline in the fair value of a security below the amortized cost basis is determined to be other-than-temporary. 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 the Company’s amortized cost basis, any adverse changes in the financial condition of the issuers’ and its intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. As of December 31, 2020 and 2019, the Company did not recognize any impairment charges.

 

F-10

 

 

Lightstone Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements

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

 

Investment Impairment

 

For all of the Company’s real estate and real estate related investments, the Company monitors events and changes in circumstances indicating that the carrying amounts of the real estate assets may not be recoverable.  Examples of the types of events and circumstances that would cause management to assess the Company’s assets for potential impairment include, but are not limited to: a significant decrease in the market price of an asset; a significant adverse change in the manner in which the asset is being used; an accumulation of costs in excess of the acquisition basis plus construction of the property; major vacancies and the resulting loss of revenues; natural disasters; a change in the projected holding period; legitimate purchase offers; and changes in the global and local markets or economic conditions.  To the extent that the Company’s portfolio is concentrated in limited geographic locations, downturns specifically related to such regions may result in tenants defaulting on their lease obligations at those properties within a short time period, which may result in asset impairments.  When such events or changes in circumstances are present, the Company assesses potential impairment by comparing estimated future undiscounted operating cash flows expected to be generated over the life of the asset and from its eventual disposition to the carrying amount of the asset.  These projected cash flows are prepared internally by the Advisor and reflect in-place and projected leasing activity, market revenue and expense growth rates, market capitalization rates, discount rates, and changes in economic and other relevant conditions. The Company’s management reviews these projected cash flows to assure that the valuation is prepared using reasonable inputs and assumptions that are consistent with market data or with assumptions that would be used by a third-party market participant and assume the highest and best use of the investment. The Company considers trends, strategic decisions regarding future development plans, and other factors in its assessment of whether impairment conditions exist.  In the event that the carrying amount exceeds the estimated future undiscounted operating cash flows, the Company recognizes an impairment loss to adjust the carrying amount of the asset to estimated fair value.  While the Company believes its estimates of future cash flows are reasonable, different assumptions regarding factors such as market rents, economic conditions, and occupancy rates could significantly affect these estimates.

 

In evaluating the Company’s investments for impairment, management may use appraisals and make estimates and assumptions, including, but not limited to, the projected date of disposition of the properties, the estimated future cash flows of the properties during the Company’s ownership, and the projected sales price of each of the properties.  A future change in these estimates and assumptions could result in understating or overstating the carrying value of the Company’s investments, which could be material to its financial statements. In addition, the Company may incur impairment charges on assets classified as held for sale in the future if the carrying amount of the asset upon classification as held for sale exceeds the estimated fair value, less costs to sell.

 

During the years ended December 31, 2020 and 2019, the Company did not record any impairment charges.

 

Investment in Unconsolidated Joint Venture

 

The Company has and may continue to provide funding to third-party developers for the acquisition, development, and construction of real estate (“ADC Arrangement”). Under an ADC Arrangement, the Company may participate in the residual profits of the project through the sale or refinancing of the property. The Company evaluates such arrangements to determine if they have characteristics similar to a loan or if the characteristics are more similar to a joint venture or partnership such as participating in the risks and rewards of the project as an owner or an investment partner. When the Company determines that the characteristics are more similar to a jointly-owned investment or partnership, it accounts for the arrangement as an investment in an unconsolidated joint venture under the equity method of accounting or a direct investment (consolidated basis of accounting) instead of applying loan accounting. ADC Arrangements are reassessed at each reporting period. See Note 8 of the Notes to the Consolidated Financial Statements for additional information.

 

Revenue Recognition

 

The Company recognizes rental income generated from leases of its operating properties on a straight-line basis over the terms of the respective leases, including the effect of rent holidays, if any. Leases associated with the Company’s multifamily and student housing are generally short-term in nature, and thus have no straight-line rent.

 

Other Assets

 

Other assets primarily consist of deposits, receivables and intangible assets related to the Company’s consolidated properties.

 

F-11

 

 

Lightstone Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements

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

 

Deferred Financing Costs

 

Deferred financing costs are recorded at cost and consist of loan fees and other costs incurred in issuing debt. Amortization of deferred financing costs is computed using a method that approximates the effective interest method over the term of the related debt and is included in interest expense in the consolidated statements of operations. Unamortized deferred financing costs are included as a direct deduction from the related debt in the consolidated balance sheets.

 

Income Taxes

 

The Company has elected to be taxed as a REIT commencing with the taxable year ended December 31, 2008. 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.

 

Concentration of Credit Risk

 

At December 31, 2020 and 2019, the Company had cash and cash equivalents deposited in certain financial institutions in excess of federally insured levels.  The Company has diversified its cash and cash equivalents among several banking institutions in an attempt to minimize exposure to any one of these entities.  The Company regularly monitors the financial stability of these financial institutions and believes that it is not exposed to any significant credit risk in cash and cash equivalents or restricted cash.

 

Noncontrolling Interest

 

Noncontrolling interest represents the noncontrolling member’s share of the equity in certain of the Company’s consolidated real estate investments.  Income and losses are allocated to noncontrolling interest holders based generally on their ownership percentage.  In certain instances, the Company’s joint venture agreements provide for liquidating distributions based on achieving certain return metrics (“promoted interest”) and if a property reaches a defined return threshold, then it will result in distributions to the noncontrolling member which differs from the standard pro-rata allocation percentage.

 

Earnings per Share

 

The Company had no potentially dilutive securities outstanding during the periods presented. Accordingly, net (loss) income per share is calculated by dividing net (loss) income by the weighted-average number of shares of common stock outstanding during the applicable period.

 

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.

 

F-12

 

 

Lightstone Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements

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

 

The Company’s consolidated portfolio of properties currently consists of seven multi-family apartment complexes and one student housing complex. Despite past and current restrictions and mitigation strategies, the Company’s multi-family properties still have not yet seen any significant impact from the COVID-19 pandemic. The Company’s student housing complex, which consists of the River Club Apartments and the Townhomes at River Club, are located in Athens, Georgia and principally serve as “off-campus” lodging for students attending the University of Georgia (“UGA”). Leases for the River Club Apartments and Townhomes at River Club generally have a term of one year running from August through July. UGA previously transitioned to online instruction during its Spring 2020 semester and for its other course offerings throughout the summer. However, UGA returned to “on-campus” classes beginning with its Fall 2020 semester and has continued “on-campus” classes into the current Spring 2021 semester. The Company’s student housing complex is located “off-campus” and therefore, its tenants are not required to vacate even if UGA does not conduct “on-campus” classes. However, if UGA decides to return to online instruction for its students in lieu of “on-campus” classes in future semesters, it could adversely impact leasing demand, occupancy levels and the operating results of the Company’s student housing complex in future periods. Additionally, the Company’s note receivable relates to a condominium development project located in New Yok City (the “Condominium Project”), which is subject to similar restrictions and risks. To date, the Company’s note receivable has not been significantly impacted by the COVID-19 pandemic.

 

While the Company’s business has not yet seen any material impact from the ongoing COVID-19 pandemic, the extent to which it may be affected in future periods will largely depend on current and future developments, all of which are highly uncertain and cannot be reasonably predicted.

 

If the Company’s properties and real estate-related investments are negatively impacted in future periods for an extended period because (i) tenants are unable to pay their rent, (ii) demand for its student housing complex declines, and (iii) its borrower is unable to pay scheduled debt service on the outstanding note receivable; the Company’s business and financial results could be materially and adversely impacted.

 

Reclassifications 

 

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

 

3. New Accounting Pronouncements

 

In June 2016, the FASB issued new guidance 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.

 

F-13

 

 

Lightstone Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements

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

 

4. Marketable Securities and Fair Value Measurements

 

Marketable Securities

 

The following is a summary of the Company’s available for sale securities: 

 

   As of December 31, 2020 
   Adjusted Cost   Gross Unrealized Gains   Gross Unrealized Losses   Fair Value 
Debt securities:                    
Corporate and Government Bonds  $3,515   $140   $(1)  $3,654 

 

   As of December 31, 2019 
   Adjusted Cost   Gross Unrealized Gains   Gross Unrealized Losses   Fair Value 
Debt securities:                
Corporate and Government Bonds  $5,385   $113   $(2)  $5,496 

 

Fair Value Measurements

 

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

 

The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:

 

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

  

The fair values of the Company’s investments in debt securities are measured using quoted prices for these investments; however, the markets for these assets are not active. As of December 31, 2020 and 2019, all of the Company’s debt securities were classified as Level 2 assets and there were no transfers between the level classifications during the year ended December 31, 2020.

 

The following table summarizes the estimated fair value of the Company’s investments in marketable debt securities with stated contractual maturity dates, accounted for as available-for-sale securities and classified by the contractual maturity date of the securities:

 

   As of December 31,
2020
 
Due in 1 year  $519 
Due in 1 year through 5 years   3,135 
Due in 5 years through 10 years   - 
Due after 10 years   - 
Total  $3,654 

 

F-14

 

 

Lightstone Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements

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

 

5. Financial Instruments not Reported at Fair Value

 

The Company determined the following disclosure of estimated fair values using available market information and appropriate valuation methodologies. However, considerable judgment is necessary to interpret market data and develop the related estimates of fair value. The use of different market assumptions or only estimation methodologies may have a material effect on the estimated fair value amounts.

 

As of December 31, 2020 and 2019, management estimated that the carrying value of cash and cash equivalents, restricted cash, note receivable, prepaid expenses and other assets, accounts payable and accrued and other liabilities, and accrued property tax were at amounts that reasonably approximated their fair value based on their highly-liquid nature and/or short-term maturities.

 

The fair value of the notes payable is categorized as a Level 2 in the fair value hierarchy. The fair value was estimated using a discounted cash flow analysis valuation on the estimated borrowing rates currently available for loans with similar terms and maturities. The fair value of the notes payable was determined by discounting the future contractual interest and principal payments by a market rate. Disclosure about fair value of financial instruments is based on pertinent information available to management as of December 31, 2020 and 2019.

 

Carrying amounts of the Company’s notes payable and the related estimated fair value as follows:

 

   As of December 31, 2020   As of December 31, 2019 
   Carrying Amount   Estimated Fair Value   Carrying Amount   Estimated Fair Value 
Notes payable  $216,382   $219,625   $186,761   $187,304 

 

6. Real Estate and Real Estate-Related Investments

 

The following table presents certain information about the Company’s consolidated investments as of December 31, 2020:

 

Property Name  Description  Location  Date Acquired 

Ownership 

Interest

 
River Club and the Townhomes at River Club  Student housing  Athens, Georgia  April 25, 2011   85%
Lakes of Margate(1)  Multifamily  Margate, Florida  October 19, 2011   92.5%
Arbors Harbor Town  Multifamily  Memphis, Tennessee  December 20, 2011   100%
Parkside Apartments (“Parkside”)  Multifamily  Sugar Land, Texas  August 8, 2013   90%
Flats at Fishers Fishers  Multifamily  Fishers, Indiana  November 30, 2017   100%
Axis at Westmont Fishers  Multifamily  Westmont, Illinois  November 27, 2018   100%
Valley Ranch Apartments  Multifamily  Ann Arbor, Michigan  February 14, 2019   100%
Autumn Breeze Apartments  Multifamily  Noblesville, Indiana  March 17, 2020   100%

 

Note:

(1)On March 17, 2021, the disposition of the Lakes of Margate was completed pursuant to the terms of the Lakes of Margate Agreement. See Note 9 for additional information.

 

Real Estate Asset Acquisitions

 

Autumn Breeze Apartments

 

On March 17, 2020, the Company completed the acquisition of a 280-unit multifamily property located in Noblesville, Indiana (the “Autumn Breeze Apartments”) from an unrelated third party, for an aggregate purchase price of approximately $43.0 million, excluding closing and other related transaction costs. In connection with the acquisition, the Company paid the Advisor an aggregate of approximately $0.8 million in acquisition fees and acquisition expense reimbursements.

 

F-15

 

 

Lightstone Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements

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

 

The Company determined this acquisition was an asset acquisition and allocated the total purchase price, including acquisition fees and expenses, to the assets acquired based on their relative fair value. Approximately $7.2 million was allocated to land and improvements, $36.0 million was allocated to building and improvements, and $0.6 million was allocated to in-place lease intangibles.

 

The capitalization rate for the acquisition of the Autumn Breeze Apartments was approximately 4.86%. The Company calculates the capitalization rate for a real property by dividing the net operating income (“NOI”) of the property by the purchase price of the property, excluding costs. For purposes of this calculation, NOI was based upon the twelve months ended February 29, 2020. Additionally, NOI is all gross revenues from the property less all operating expenses, including property taxes and management fees but excluding depreciation.

 

Valley Ranch Apartments

 

On February 14, 2019, the Company completed the acquisition of a 384-unit multifamily property located in Ann Arbor, Michigan (the “Valley Ranch Apartments”) from an unrelated third party, for an aggregate purchase price of approximately $70.3 million, excluding closing and other related transaction costs. In connection with the acquisition, the Advisor received an aggregate of approximately $1.2 million in acquisition fees and acquisition expense reimbursements. 

 

In connection with the acquisition of the Valley Ranch Apartments, the Company simultaneously entered into a seven-year $43.4 million non-recourse mortgage loan (the “Valley Ranch Mortgage”) scheduled to mature on March 1, 2026. The Valley Ranch Mortgage bears interest at 4.16% and requires monthly interest-only payments through its stated maturity. The Valley Ranch Mortgage is collateralized by the Valley Ranch Apartments. See Note 11 for additional information.

 

The Company determined this acquisition was an asset acquisition and allocated the total purchase price, including acquisition fees and expenses of $1.2 million, to the assets acquired based on their relative fair value. Approximately $24.1 million was allocated to land and improvements, $46.3 million was allocated to building and improvements, and $1.1 million was allocated to in-place lease intangibles.

 

Real Estate Asset Dispositions - Continuing Operations

 

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

 

Gardens Medical Pavilion

 

 On December 23, 2019, the Company and CPI/AHP Garden Medical Pavilion Mob Owner, L.L.C. (the “Gardens Medical Pavilion Buyer”), an unaffiliated third party, entered into a purchase and sale agreement (the “Gardens Medical Pavilion Agreement”) pursuant to which the Company would dispose of the Gardens Medical Pavilion to the Gardens Medical Pavilion Buyer for an aggregate contractual sales price of $24.3 million. 

 

As of December 31, 2019, the Gardens Medical Pavilion met the criteria to be classified as held for sale and therefore, its associated assets and liabilities are classified as held for sale in the consolidated balance sheet as of December 31, 2019.

 

On January 15, 2020, the Company completed the disposition of the Gardens Medical Pavilion to the Gardens Medical Pavilion Buyer for an aggregate contractual sales price of $24.3 million. In connection with the disposition of the Gardens Medical Pavilion, the Company recognized a gain on the sale of investment property of approximately $5.5 million during the first quarter of 2020. Approximately $12.6 million of the proceeds were used towards the repayment the Gardens Medical Mortgage. Additionally, approximately $1.8 million of the remaining proceeds were distributed to the noncontrolling member. See Notes 9 and 10 for additional information.

 

F-16

 

 

Lightstone Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements

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

 

7. Note Receivable

 

500 West 22nd Street Mezzanine Loan

 

On February 28, 2019, the Company, as the lender, and an unrelated third party (the “500 West 22nd Street Mezzanine Loan Borrower”), as the borrower, entered into a loan promissory note (the “500 West 22nd Street Mezzanine Loan”) pursuant to which the Company would fund up to $12.0 million of mezzanine financing. On the same date, the Company initially funded $8.0 million of the 500 West 22nd Street Mezzanine Loan. Subsequently, through the first quarter of 2020, the Company funded an additional $4.0 million and as a result, the 500 West 22nd Street Mezzanine Loan has been fully funded.

 

The 500 West 22nd Street Mezzanine Loan is recorded in note receivable, net on the consolidated balance sheet. In connection with the fundings made for the 500 West 22nd Street Mezzanine Loan, the Advisor has received an aggregate of approximately $0.2 million in acquisition fees from the Company. The acquisition fees are accounted for as an addition to the carrying value of the 500 West 22nd Street Mezzanine Loan and are being amortized as a reduction to interest income over the initial term of the 500 West 22nd Street Mezzanine Loan using a straight-line method that approximates the effective interest method.

 

The 500 West 22nd Street Mezzanine Loan is due August 31, 2021 and is collateralized by the ownership interests of the 500 West 22nd Street Mezzanine Loan Borrower. The 500 West 22nd Street Mezzanine Loan Borrower owns a parcel of land located at 500 West 22nd Street, New York, New York on which it is developing and constructing the Condominium Project. Although New York City previously restricted certain non-essential construction activities because of the COVD-19 pandemic, which led to a temporarily suspension of construction of the Condominium Project, construction activities for the Condominium Project resumed in early May 2020 and its anticipated construction timeline has not been significantly impacted to date.

 

The 500 West 22nd Street Mezzanine Loan bears interest at a rate of LIBOR + 11.0% per annum with a floor of 13.493% (13.493% as of December 31, 2020). The Company received an origination fee of 1.0% of the loan balance, or approximately $0.1 million, which is presented in the consolidated balance sheets as a direct deduction from the carrying value of the 500 West 22nd Street Mezzanine Loan and is being amortized to interest income, using a straight-line method that approximates the effective interest method, over the initial term of the 500 West 22nd Street Mezzanine Loan. The 500 West 22nd Street Mezzanine Loan may be extended two additional six-month periods by the 500 West 22nd Street Mezzanine Loan Borrower provided certain conditions are met, including the establishment of an additional reserve for interest and the payment of an extension fee equal to 0.25% of the outstanding loan balance.

 

In connection with the initial funding under the 500 West 22nd Street Mezzanine Loan, the Company retained approximately $2.1 million of the proceeds to establish a reserve for interest and other items, which is presented in the consolidated balance sheets as a direct deduction from the carrying value of the 500 West 22nd Street Mezzanine Loan and are being applied against the first 8.0% of monthly interest due during the initial term of the 500 West 22nd Street Mezzanine Loan. Through December 31, 2020, approximately $1.7 million of the reserve has been recognized as interest income and the remaining balance of the reserve was approximately $0.4 million as of December 31, 2020. The additional monthly interest due above the 8.0% threshold is added to the balance of the 500 West 22nd Street Mezzanine Loan and payable at maturity. As of December 31, 2020, approximately $1.2 million of additional interest due is included in the balance of the 500 West 22nd Street Mezzanine Loan.

 

During the years ended December 31, 2020 and 2019, the Company recorded approximately $1.7 million and $1.1 million, respectively, of interest income related to the note receivable. As of December 31, 2020, the outstanding principal balance of the 500 West 22nd Street Mezzanine Loan was approximately $12.8 million.

 

F-17

 

 

Lightstone Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements

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

 

8. Investment in Unconsolidated Joint Venture

 

The Company provided mezzanine financing totaling $15.3 million to an unaffiliated third-party entity (the “Borrower”) that owned an apartment complex in Denver, Colorado (the “Prospect Park”). The Borrower also had a senior construction loan with a third-party construction lender (the “Senior Lender”) in an aggregate original principal amount of $40.0 million. The senior construction loan was guaranteed by the owners of the developer. The Company also had a personal guaranty from the owners of the developer guaranteeing completion of Prospect Park and payment of any cost overruns. The Company’s mezzanine loan was secured by all of the membership interests of the Borrower and was subordinate to the senior construction loan. The Company’s advances of $15.3 million initially had annual stated interest rates ranging from 10% to 18%. 

 

Pursuant to the terms of the mezzanine loan, the Company participated in the residual interests of Prospect Park attributable to a sale or refinancing even though it had no actual ownership interest. The Company previously evaluated this arrangement and determined that its characteristics were similar to a jointly-owned investment or partnership. Accordingly, the Company’s investment, which was a variable interest entity (“VIE”) was accounted for as an unconsolidated joint venture under the equity method of accounting instead of loan accounting. 

 

On December 15, 2017, the Borrower sold Prospect Park to an unrelated third-party for a contractual sales price of approximately $100.5 million. In connection with the sale, the Borrower repaid the Senior Construction Loan in full and the Company received aggregate proceeds of approximately $21.6 million representing the repayment in full of the outstanding principal and accrued interest due on the Company’s mezzanine loan. Additionally, the Borrower placed approximately $15.1 million of the net proceeds from the sale into an escrow account to be used for settlement of the amount due to the Company for its participation in the residual interests of Prospect Park. The carrying value of the Company’s unconsolidated investment in Prospect Park, which represented the minimum amount payable to the Company for its participation in the residual interests of Prospect Park, was $10.9 million as of December 31, 2018. 

 

On January 4, 2019, the Company and the Borrower received payments of $10.9 million and $1.9 million, respectively, from the escrow account, which has a remaining balance of $2.3 million. As a result, the carrying value of the Company’s unconsolidated investment in Prospect Park has been reduced to zero. Additional amounts, if any, received by the Company from the remaining escrow account will be recognized upon receipt.

 

9. Held for Sale

 

Lakes of Margate

 

Beginning with the fourth quarter of 2019, Lakes of Margate met the criteria to be classified as held for sale and therefore, its associated assets and liabilities, which were expected to be sold within 12 months, were previously classified as held for sale in the consolidated balance sheets as of both March 31, 2020 and December 31, 2019.

 

However, because of the COVID-19 pandemic the Company subsequently decided during the second quarter of 2020 to discontinue its marketing efforts and to retain the property for the foreseeable future. Additionally, on June 26, 2020 the Company obtained a new 10-year mortgage financing (the “Lakes of Margate Loan”) on the property, which previously was unencumbered (see Note 10 for additional information). As a result, the Company determined the property should no longer be classified as held for sale effective as of June 30, 2020 because a sale was no longer considered probable within the next 12 months. Since the fair value of the property was in excess of the Company’s carrying value, it recorded catch-up depreciation for the period the property was previously classified as held for sale. In addition, the Company no longer has classified the long-lived asset as held for sale on the consolidated balance sheet as of December 31, 2019.

 

Despite the Company discontinuing marketing efforts and deciding to retain the property for the foreseeable future, it was approached by an unrelated third-party during the third quarter of 2020 and ultimately entered into a purchase and sale agreement (the “Lakes of Margate Agreement”) with Lakes at Margate Apartments FL LLC (the “Lakes of Margate Buyer”). Pursuant to the terms of the Lakes of Margate Agreement, the Lakes at Margate would be sold to the Lakes of Margate Buyer for aggregate consideration of $51.0 million, including the assumption of the existing Lakes of Margate Loan, which was subject to the Lakes of Margate Buyer obtaining the lender’s consent. Because the proposed transaction was contingent on the Lakes of Margate Buyer obtaining lender approval for the assumption of the existing Lakes of Margate Loan, which was outside of the Company’s control, a sale of the property within the next 12 months was not deemed probable as of September 30, 2020 and the Company continued to classify Lakes of Margate as held for use on its consolidated balance sheet as of that date.

 

F-18

 

 

Lightstone Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements

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

 

During the fourth quarter of 2020, the Lakes of Margate Buyer successfully obtained the lender’s approval to assume the existing Lakes of Margate Loan in connection with the proposed transaction and, as a result, the Lakes of Margate now met the criteria to be classified as held for sale and therefore, its associated assets and liabilities are classified as held for sale in the consolidated balance sheet as of December 31, 2020.

 

On March 17, 2021, the disposition of the Lakes of Margate was completed pursuant to the terms of the Lakes of Margate Agreement. At closing, the Lakes of Margate Buyer paid $15.3 million and assumed the existing Lakes of Margate Loan with an outstanding principal balance of $35.7 million.

 

The following summary presents the major components of the Lakes of Margate’s assets and liabilities held for sale, of as December 31, 2020.

 

   As of 
   December 31,
2020
 
Net investment property  $21,308 
Other assets   2,832 
Total assets held for sale  $24,140 
Note payable, net  $35,136 
Accounts payable and accrued expenses   2,029 
Total liabilities held for sale  $37,165 

  

Gardens Medical Pavilion

 

On December 23, 2019, the Company and the Gardens Medical Pavilion Buyer entered into the Gardens Medical Pavilion Agreement pursuant to which the Company would dispose of the Gardens Medical Pavilion to the Gardens Medical Pavilion Buyer for an aggregate contractual sales price of $24.3 million.

 

As of December 31, 2019, the Gardens Medical Pavilion met the criteria to be classified as held for sale and therefore, its associated assets and liabilities are classified as held for sale in the consolidated balance sheet as of December 31, 2019.

 

The following summary presents the major components of the Gardens Medical Pavilion’s assets and liabilities held for sale as of December 31, 2019:

 

   As of 
   December 31,
2019
 
Net investment property  $17,448 
Other assets   744 
Total assets held for sale  $18,192 
Note payable, net  $12,441 
Accounts payable and accrued expenses   1,245 
Total liabilities held for sale  $13,686 

 

On January 15, 2020, the Company completed the disposition of the Gardens Medical Pavilion to the Gardens Medical Pavilion Buyer for an aggregate contractual sales price of $24.3 million. In connection with the disposition of the Gardens Medical Pavilion, the Company recognized a gain on the sale of investment property of approximately $5.5 million during the first quarter of 2020. Approximately $12.6 million of the proceeds were used towards the repayment the Gardens Medical Mortgage. Additionally, approximately $1.8 million of the remaining proceeds were distributed to the noncontrolling member. See Notes 6 and 10 for additional information.

 

F-19

 

 

Lightstone Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements

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

 

10. Notes Payable

 

The following table sets forth information as of the date indicated for the Company’s notes payable, excluding certain mortgage debt associated with properties that were classified as held for sale (see below and Note 9 for additional information):

 

Property  Interest Rate   Weighted Average Interest Rate as of December 31,
2020
   Maturity Date  Amount Due at Maturity   As of
December 31,
2020
   As of
December 31,
2019
 
                        
River Club and the Townhomes at River Club   LIBOR + 1.78%    1.92%   May 1, 2025  $28,419   $30,359   $30,359 
                             
Arbors Harbor Town   4.53%    4.53%  December 28, 2025   29,000    29,000    29,000 
                             
Parkside   4.45%    4.45%   June 1, 2025   15,782    17,289    17,588 
                             
Axis at Westmont   4.39%    4.39%   February 1, 2026   34,343    37,600    37,600 
                             
Valley Ranch Apartments   4.16%    4.16%   March 1, 2026   43,414    43,414    43,414 
                             
Flats at Fishers   3.78%    3.78%   July 1, 2026   26,090    28,800    28,800 
                             
Autumn Breeze Apartments   3.39%    3.39%   April 1, 2030   25,518    29,920    - 
                             
Total notes payable        3.71%     $202,566    216,382    186,761 
                             
Less: Deferred financing costs                     (3,393)   (2,973)
                             
Total notes payable, net                    $212,989   $183,788 

 

On March 31, 2020, the Company entered into a 10-year $29.9 million non-recourse mortgage loan (the “Autumn Breeze Apartments Loan”) scheduled to mature on April 1, 2030. The Autumn Breeze Apartments Loan bears interest at 3.39% and requires monthly interest-only payments through June 30, 2023 and monthly principal and interest payments of approximately $0.1 million thereafter, through its stated maturity. The Autumn Breeze Apartments Loan is collateralized by the Autumn Breeze Apartments. In connection with the Autumn Breeze Apartments Loan, the Company paid the Advisor an aggregate of approximately $0.3 million in financing fees.

 

On February 14, 2019, the Company entered into the Valley Ranch Mortgage scheduled to mature on March 1, 2026. The Valley Ranch Mortgage bears interest at 4.16% and requires monthly interest-only payments through its stated maturity. The Valley Ranch Mortgage is collateralized by the Valley Ranch Apartments.

 

On June 13, 2019, the Company entered into a seven-year $28.8 million non-recourse mortgage loan (the “Flats at Fishers Mortgage”) scheduled to mature on July 1, 2026. The Flats at Fishers Mortgage bears interest at 3.78% and requires monthly interest-only payments through the first two years of the term and thereafter, monthly payments of principal and interest based upon a 30-year amortization. The Flats at Fishers Mortgage is collateralized by the Flats at Fishers.

 

On December 31, 2019, the Company repaid in full its Lakes of Margate Mortgage collateralized by the Lakes of Margate.

 

On May 1, 2018, the Company entered into a seven-year non-recourse mortgage loan (the “River Club Mortgage”) in the amount of $30.4 million. The River Club Mortgage bears interest at Libor plus 1.78% and requires monthly interest-only payments during the first five years and interest and principal payments pursuant to a 30-year amortization schedule for the remaining two years through its stated maturity with the entire unpaid balance due upon maturity. The River Club Mortgage is cross-collateralized by the River Club and the Townhomes at River Club. At closing, approximately $23.4 million of the proceeds from the River Club Mortgage were used to repay in full the existing non-recourse mortgage loan.

 

F-20

 

 

Lightstone Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements

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

 

On June 1, 2018, the Company entered into a seven-year non-recourse mortgage loan (the “Parkside Mortgage”) in the amount of $18.0 million. The Parkside Mortgage bears interest at 4.45% and requires monthly interest and principal payments pursuant to a 30-year amortization schedule through its stated maturity with the entire unpaid balance due upon maturity. The Parkside Mortgage is collateralized by Parkside. At closing, approximately $9.6 million of the proceeds from the Parkside Mortgage were used to repay in full the existing non-recourse mortgage loan.

 

On November 27, 2018, the Company assumed an existing non-recourse mortgage loan (the “Axis at Westmont Mortgage”) in the amount of $37.6 million. The Axis at Westmont Mortgage is collateralized by the Axis at Westmont, bears interest at a fixed annual rate of 4.39% and requires monthly interest only payments until March 1, 2021, at which time monthly principal and interest payments of $0.2 million are required. Any unpaid principal and interest is due on the maturity date, February 1, 2026. The Company has the right to prepay the entire outstanding amount of the loan provided that if prepayment is made prior to November 1, 2025, a prepayment premium is required.

 

On December 28, 2018, the Company entered into a seven-year non-recourse mortgage loan (the “Arbors Harbor Town Mortgage”) in the amount of $29.0 million. The Arbors Harbor Town Mortgage bears interest at 4.53% and requires monthly interest payments through its stated maturity with the entire unpaid balance due upon maturity. The Arbors Harbor Town Mortgage is collateralized by the Arbors Harbor Town. At closing, approximately $23.7 million of the proceeds from the Arbors Harbor Town Mortgage were used to repay in full the existing non-recourse mortgage loan and an additional $1.9 million of the proceeds were used to acquire the 6.0% membership interest in the property held by a minority owner, and as a result, the Company now owns 100.0% of this property.

 

The following table provides information with respect to the contractual maturities and scheduled principal repayments of the Company’s indebtedness as of December 31, 2020.

 

   2021   2022   2023   2024   2025   Thereafter   Total 
Principal maturities (1)  $1,023   $1,468   $2,498   $3,181   $46,590   $161,622   $216,382 
Less: deferred financing costs                                 (3,393)
Total notes payable, net                                $212,989 

 

Note:

(1)– Excludes the Lakes of Margate Mortgage which is included in liabilities held for sale as of December 31, 2020. The Lakes of Margate Mortgage was assumed by the Lakes of Margate Buyer in connection with the disposition of the Lakes of Margate on March 17, 2021. See below and Note 9 for additional information.

 

Notes Payable included in Liabilities Held for Sale

 

Lakes of Margate Loan

 

On June 26, 2020, the Company and its noncontrolling member entered into a 10-year, $35.7 million non-recourse mortgage loan (the “Lakes of Margate Loan”) scheduled to mature on July 1, 2030. The Lakes of Margate Loan bears interest at LIBOR + 2.98% and requires monthly interest-only payments through the first four years of the term and thereafter, monthly payments of principal and interest based upon a 30-year amortization schedule. The Lakes of Margate Loan is collateralized by the Lakes of Margate. In connection with the Lakes of Margate Loan, the Company paid the Advisor an aggregate of approximately $0.4 million in financing fees. Additionally, approximately $1.4 million of the financing proceeds were distributed to the noncontrolling member.

 

As of December 31, 2020, the Lakes of Margate met the criteria to be classified as held for sale and therefore, its associated assets and liabilities, which include the Lakes of Margate Loan, are classified as held for sale in the consolidated balance sheet as of December 31, 2020.

 

On March 17, 2021, the disposition of the Lakes of Margate was completed pursuant to the terms of the Lakes of Margate Agreement. At closing, the Lakes of Margate Buyer paid $15.3 million and assumed the existing Lakes of Margate Loan with an outstanding principal balance of $35.7 million. See Note 9.

 

F-21

 

 

Lightstone Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements

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

 

Gardens Medical Mortgage

 

On June 28, 2018, the Company entered into a three-year non-recourse mortgage loan (the “Gardens Medical Mortgage”) in the amount of $13.0 million. The Gardens Medical Mortgage bore interest at Libor plus 1.90% and required monthly interest and principal payments through its stated maturity with the entire unpaid balance due upon maturity. The Gardens Medical Mortgage was collateralized by the Gardens Medical Pavilion.

 

As of December 31, 2019, the Garden Medical Pavilion met the criteria to be classified as held for sale and therefore, its associated assets and liabilities, which include the Garden Medical Mortgage, are classified as held for sale in the consolidated balance sheet as of December 31, 2019.

 

On January 15, 2020, the Company completed the disposition of the Gardens Medical Pavilion for an aggregate contractual sales price of $24.3 million. Approximately $12.6 million of the proceeds were used towards the repayment in full of the Gardens Medical Mortgage. See Notes 6 and 9.

 

11. Commitments and Contingencies

 

Legal Proceedings 

 

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

 

As of the date hereof, the Company is 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 its results of operations or financial condition, which would require accrual or disclosure of the contingency and possible range of loss. Additionally, the Company has not recorded any loss contingencies related to legal proceedings in which the potential loss is deemed to be remote.

 

12. Stockholders’ Equity

 

Capitalization

 

As of December 31, 2020, the Company’s authorized capital was 350,000,000 shares of common stock, 50,000,000 shares of preferred stock, and 1,000 shares of convertible stock. All shares of such stock have a par value of $.0001 per share.

 

As of December 31, 2020, the Company had issued 20.2 million shares of its common stock, including 2.2 million shares previously issued through its distribution reinvestment plan, which was terminated on April 3, 2012. From the Company’s inception through December 31, 2020, it redeemed an aggregate 4.5 million shares of its common stock. As of December 31, 2020, the Company had 1,000 shares of convertible stock held by an affiliate of Lightstone.

 

The shares of convertible stock will be converted into shares of common stock automatically if (1) the Company has made total distributions on then outstanding shares of its common stock equal to the issue price of those shares plus a 10% cumulative, non-compounded, annual return on the issue price of those outstanding shares, or (2) the Company lists its common stock for trading on a national securities exchange if the sum of the prior distributions on then outstanding shares of the common stock plus the aggregate market value of the common stock (based on the 30-day average closing price) meets the same 10% performance threshold. In general, the convertible stock will convert into shares of common stock with a value equal to the lesser of (A) 20% of the excess of the Company’s enterprise value plus the aggregate value of distributions paid to date on then outstanding shares of its common stock over the aggregate issue price of those outstanding shares plus a 10% cumulative, non-compounded, annual return on the issue price of those outstanding shares, or (B) 15% of the excess of the Company’s enterprise value plus the aggregate value of distributions paid to date on then outstanding shares of the common stock over the aggregate issue price of those outstanding shares plus a 6% cumulative, non-compounded, annual return on the issue price of those outstanding shares. At the date of issuance of the shares of convertible stock, management determined the fair value under GAAP was less than the nominal value paid for the shares; therefore, the difference is not material.

 

F-22

 

 

Lightstone Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements

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

 

The timing of the conversion of any or all of the convertible stock may be deferred by the Company’s board of directors if it determines that full conversion may jeopardize its qualification as a REIT. Any such deferral will in no event otherwise alter the terms of the convertible stock, and such stock shall be converted at the earliest date after the Company’s board of directors determines that such conversion will not jeopardize its qualification as a REIT. The Company’s board of directors is authorized to amend the Company’s charter, without the approval of the stockholders, to increase the aggregate number of authorized shares of capital stock or the number of shares of any class or series that the Company has the authority to issue.

 

Tender Offers

 

2020 Tender Offer

 

The Company commenced a tender offer on June 16, 2020, pursuant to which it offered to acquire up to 300,000 shares of the Company’s common stock at a purchase price of $2.25 per share, or approximately $0.7 million in the aggregate (the “2020 Tender Offer”).

 

The 2020 Tender Offer terminated on July 24, 2020, and a total of 26,637 shares were validly tendered and not withdrawn pursuant to the 2020 Tender Offer as of such date. In accordance with the terms of the 2020 Tender Offer, the Company subsequently repurchased all of the tendered shares for approximately $0.1 million in August 2020.

 

2019 Tender Offer

 

The Company commenced a tender offer on December 17, 2019, pursuant to which it offered to acquire up to 2.0 million shares of the Company’s common stock at a purchase price of $7.75 per share, or $15.5 million in the aggregate (the “2019 Tender Offer”).

 

The 2019 Tender Offer terminated on February 28, 2020, and a total of 2,183,888 shares were validly tendered and not withdrawn pursuant to the 2019 Tender Offer as of such date, an amount that exceeded the maximum number of shares the Company offered to purchase pursuant to the 2019 Tender Offer. In accordance with the terms of the 2019 Tender Offer, the Company subsequently repurchased a total of approximately 2.0 million shares for approximately $15.6 million in April 2020.

 

Because the amount of repurchase requests exceeded the maximum number of shares the Company had offered to repurchase, the Company repurchased shares on a pro-rata basis, subject to “odd lot” priority as described in the 2019 Tender Offer. Excluding the stockholders eligible for “odd lot” priority that were not be subject to proration, approximately 91.58% of the number of shares tendered by each remaining stockholder who participated in the 2019 Tender Offer were repurchased by the Company. 

 

Share Redemption Program and Redemption Price

 

The Company’s board of directors has adopted a share redemption program (the “SRP”) that permits stockholders to sell their shares back to the Company, subject to the significant conditions and limitations of the program.  The Company’s board of directors can amend the provisions of the SRP at any time without the approval of its stockholders.

 

During the year ended December 31, 2019, the Company redeemed 1.2 million shares of its common stock at average prices per share of $7.94.

 

On August 9, 2017, the Company’s board of directors adopted a Fourth Amended and Restated Share Redemption Program (the “Fourth Amended SRP”) which became effective July 1, 2018. The material changes made to the program were as follows. The Company no longer process redemptions upon death, “qualifying disability,” or confinement to a long-term care facility on terms different than those on which it processes all other redemptions. The price at which the Company redeems shares submitted for redemption will be a percentage of the estimated NAV per Share as of the Effective Date (as defined in the Fourth Amended SRP), as follows:

 

For Redemptions with an Effective Date Between  
July 1, 2018 and June 30, 2019: 92.5% of the estimated NAV per Share
July 1, 2019 and June 30, 2020: 95.0% of the estimated NAV per Share
July 1, 2020 and June 30, 2021: 97.5% of the estimated NAV per Share
Thereafter: 100% of the estimated NAV per Share

 

F-23

 

 

Lightstone Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements

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

 

Pursuant to the terms of the Fourth Amended SRP, any shares approved for redemption are redeemed on a periodic basis as determined from time to time by the Company’s board of directors, and no less frequently than annually.  The Company will not redeem, during any twelve-month period, more than 5% of the weighted average number of shares outstanding during the twelve-month period immediately prior to the date of redemption.  In addition, the cash available for redemptions is limited to no more than $10.0 million in any twelve-month period.  Any redemption requests are honored pro rata among all requests received based on funds available and are not honored on a first come, first served basis.

 

On December 28, 2018, the Company’s board of directors adopted a Fifth Amended and Restated Share Redemption Program (the “Fifth Amended SRP”) which became effective on January 31, 2019. The only material change to the program was to change the measurement period for the limitations on the number and dollar amount of shares that may be accepted for redemption from a rolling 12 month-period to a calendar year.

 

In accordance with the Fifth Amended SRP, the per share redemption price automatically adjusted to $9.18 effective November 12, 2020 as a result of the determination and approval by the Company’s board of directors of the updated estimated NAV per Share.

 

On December 13, 2019, the Company’s board of directors approved the suspension of the SRP. Pursuant to the terms of the SRP, while the SRP is suspended, the Company will not accept any requests for redemption and any such requests and all pending requests will not be honored or retained, but will be returned to the requestor.

 

Effective March 25, 2021, the Company’s Board of Directors reopened the SRP solely for redemptions submitted in connection with a stockholder’s death and set the price for all such purchases to $9.42, 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 the Company within one year of the stockholder’s date of death for consideration.

 

On an annual basis, the Company 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.

 

The Company’s board of directors will continue to consider the liquidity available to stockholders going forward, balanced with other long-term interests of the stockholders and the Company. It is possible that in the future additional liquidity will be made available by the Company through the SRP, issuer tender offers or other methods, though it can make no assurances as to whether that will happen, or the timing or terms of any such liquidity.

 

Distributions

 

The Company made an election to qualify as a REIT for federal income tax purposes commencing with its taxable year ended December 31, 2008. U.S. federal tax law requires a REIT distribute at least 90% of its annual REIT taxable income (which does not equal net income, as calculated in accordance with generally accepted accounting principles, or GAAP) determined without regard to the deduction for dividends paid and excluding any net capital gain. In order to continue to qualify for REIT status, the Company may be required to make distributions in excess of cash available. Distributions are authorized at the discretion of the Company’s board of directors based on their analysis of the Company’s performance over the previous periods and expectations of performance for future periods.  Such analyses may include actual and anticipated operating cash flow, changes in market capitalization rates for investments suitable for the Company’s portfolio, capital expenditure needs, general financial and market conditions, proceeds from asset sales, and other factors that the Company’s board of directors deems relevant.  The Company’s board of directors’ decision will be substantially influenced by their obligation to ensure that the Company maintains its federal tax status as a REIT.  The Company cannot provide assurance that it will pay distributions at any particular level, or at all.

 

The Company did not make any distributions to its stockholders during the years ended December 31, 2020 and 2019.

 

F-24

 

 

Lightstone Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements

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

 

13. Related Party Transactions

 

Advisor and Property Manager

 

The Company has agreements with the Advisor and its affiliates to pay certain fees in exchange for services performed by these entities and other related parties. The Company’s ability to secure financing and subsequent real estate operations are dependent upon the Advisor and the Advisor’s affiliates to perform such services as provided in these agreements. Additionally, the Company engaged an affiliate of Lightstone pursuant to a property management and leasing agreement. The following discussion describes the fees and expenses payable to the Advisor and affiliated property manager and their respective affiliates under various agreements.

 

Fees   Amount

Acquisition -

 

 

 

The Company pays the Advisor acquisition and advisory fees of 1.5% of the amount paid in respect of the purchase, development, construction, or improvement of each asset the Company acquires, including any debt attributable to those assets.

 

In addition, the Company pays acquisition and advisory fees of 1.5% of the funds advanced in respect of a loan investment.

 

The Company pays the Advisor an acquisition expense reimbursement in the amount of (i) 0.25% of the funds paid for purchasing an asset, including any debt attributable to the asset, plus 0.25% of the funds budgeted for development, construction, or improvement in the case of assets that the Company acquires and intends to develop, construct, or improve or (ii) 0.25% of the funds advanced in respect of a loan investment.

 

The Company pays third parties, or reimburses the Advisor or its affiliates, for any investment-related expenses due to third parties in the case of a completed investment, including, but not limited to, legal fees and expenses, travel and communication expenses, costs of appraisals, accounting fees and expenses, third-party brokerage or finder’s fees, title insurance, premium expenses, and other closing costs.

 

The Advisor and its affiliates are also responsible for paying all of the investment-related expenses that the Company pays or the Advisor or its affiliates incur that are due to third parties or related to the additional services provided by the Advisor as described above with respect to investments the Company pays does not make, other than certain non-refundable payments made in connection with any acquisition.

     

Debt Financing -

  The Company pays the Advisor a debt financing fee of 1.0% of the amount available under any loan or line of credit made available to us and pay directly all third-party costs associated with obtaining the debt financing. Generally, these fees are capitalized as a direct reduction to the applicable financing and amortized over its term.

 

F-25

 

 

Lightstone Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements

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

 

Property Management -

  The Company pays its property manager, an affiliate of the Advisor, fees for the management, leasing, and construction supervision of the Company’s properties which is 4.0% of gross revenues of the properties managed by the Company’s property manager. The Company pays its property manager an oversight fee equal to 0.5% of the gross revenues of the property managed for any property for which the Company contracts directly with a third-party property manager.  In no event will the Company’s property manager or its affiliates receive both a property management fee and an oversight fee with respect to any particular property.  In the event the Company owns a property through a joint venture that does not pay the Company’s property manager directly for its services, the Company will pay its property manager a management fee or oversight fee, as applicable, based only on the Company’s economic interest in the property.  
     
Construction Management -  

The Company pays its property manager a construction management fee in an amount not to exceed 5% of all hard construction costs incurred in connection with, but not limited to capital repairs and improvements, major building reconstruction and tenant improvements, if such affiliate supervises construction performed by or on behalf of the Company or its affiliates. The Company incurred no construction management fees for the years ended December 31, 2020 and 2019.

     
Asset Management -  

The Company pays the Advisor a monthly asset management fee of one-twelfth of 0.7% of the value of each asset. The value of the Company’s assets will be the value as determined in connection with the establishment and publication of an estimated net asset value (“NAV”) per share unless the asset was acquired after the Company’s publication of a NAV per share (in which case the value of the asset will be the contractual purchase price of the asset).

     
Administrative Services Reimbursement -  

The Advisor is responsible for paying all of the expenses it incurs associated with persons employed by the Advisor to the extent that they provide services to the Company for which the Advisor receives an acquisition, asset management, or debt financing fee, including wages and benefits of the applicable personnel. Instead of reimbursing the Advisor for specific expenses paid or incurred in connection with providing services to the Company, the Company pays the Advisor an administrative services fee, which is an allocation of a portion of the actual costs that the Advisor paid or incurred providing these services to the Company (the “Administrative Services Reimbursement”). The Administrative Services Reimbursement is intended to reimburse the Advisor for all its costs associated with providing services to the Company.

 

For the period January 1, 2019 through June 10, 2019, the Administrative Services Reimbursement was up to $1.29 million annually, pro-rated for the period. On June 10, 2019, the advisory management agreements were extended an additional year through June 10, 2020. For the period June 11, 2019 through June 10, 2020, the Administrative Services Reimbursement was up to $1.312 million. On June 10, 2020, the advisory management agreements were extended an additional year through June 10, 2021. For the period June 11, 2020 through June 10, 2021, the Administrative Services Reimbursement is limited to the lesser of the actual costs incurred or $1.33 million. The Administrative Services Reimbursement is payable in four equal quarterly installments within 45 days of the end of each calendar quarter. In addition, under the various advisory management agreements, the Company is to reimburse the Advisor for certain due diligence services provided in connection with asset acquisitions and dispositions and debt financings separately from the Administrative Services Reimbursement.

 

Notwithstanding the fees and cost reimbursements payable to the Advisor pursuant to the Company’s advisory management agreement, under the Company’s charter the Company may not reimburse the Advisor for any amount by which the Company’s operating expenses (including the asset management fee) at the end of the four preceding fiscal quarters exceeds the greater of: (i) 2% of the Company’s average invested assets, or (ii) 25% of the Company’s net income determined without reduction for any additions to reserves for depreciation, bad debts, or other similar non-cash reserves and excluding any gain from the sale of the Company’s assets for that period unless a majority of the Company’s independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. For the four fiscal quarters ended December 31, 2020 and 2019, the Company’s total operating expenses (including the asset management fee) exceeded the limit on total operating expenses; however, the Company’s independent directors determined the excess expenses were justified.

 

F-26

 

 

Lightstone Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements

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

 

The following table represents the fees incurred associated with the payments to the Advisor for the periods indicated: 

 

   For the Years Ended
December 31,
 
   2020   2019 
Acquisition fees and acquisition expense reimbursement (1)  $764   $1,428 
Debt financing fees (2)   656    722 
Property management fees (property operating expenses)   468    467 
Administrative services reimbursement (general and administrative costs)   1,321    1,300 
Asset management fees (general and administrative costs)   2,721    2,446 
Total  $5,930   $6,363 

 

(1)Capitalized to the corresponding asset and amortized over its estimated useful life.

(2)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.

 

As of December 31, 2020, the Company had no amounts payable to the Advisor and its affiliates. As of December 31, 2019, the Company had a payable to the Advisor and its affiliates of approximately $6.

 

The Company is dependent on the Advisor and property manager for certain services that are essential to it, including asset disposition decisions, property management and leasing services, and other general administrative responsibilities. In the event that these companies were unable to provide the Company with their respective services, the Company would be required to obtain such services from other sources.

 

Advance from Advisor

 

On March 16, 2020, the Advisor provided an advance of $25.0 million to the Company that bore interest at a fixed-rate of 5.00%. On March 31, 2020, the Company repaid $15.0 million of the advance and on June 29, 2020, the Company repaid the remaining $10.0 million of the advance and aggregate accrued interest of $0.2 million. Approximately $0.2 million of interest expense was incurred on the advance during the year ended December 31. 2020.

 

****

 

F-27

 

 

EXHIBIT INDEX

 

Exhibit No.   Description
3.1   Third Articles of Amendment and Restatement (incorporated by reference to Exhibit 3.1 to Form 10-Q on November 14, 2012)
3.2   Second Amended and Restated Bylaws, as amended by Amendment No. 1 (incorporated by reference to Exhibit 3.2 to Form 10-Q filed on November 13, 2013)
4.1   Statement regarding restrictions on transferability of shares of common stock (to appear on stock certificate or to be sent upon request and without charge to stockholders issued shares without certificates)  (incorporated by reference to Exhibit 4.1 to Form 10-K filed on March 28, 2013)
4.2*   Description of Registrant’s Securities
10.1   Termination of Advisory Management Agreement among Behringer Harvard Opportunity REIT II, Inc., Behringer Harvard Opportunity Advisors II, LLC, and Stratera Services, LLC effective as of February 10, 2017. (incorporated by reference to Exhibit 10.6 to Form 10-K filed on March 16, 2017)
10.2   Termination of Property Management and Leasing Agreement among Behringer Harvard Opportunity REIT II, Inc., Behringer Harvard Opportunity OP II, LP and several affiliated special purpose entities, Behringer Harvard Opportunity Management Services, LLC, and Behringer Harvard Real Estate Services, LLC, and Stratera Services, LLC effective as of February 10, 2017. (incorporated by reference to Exhibit 10.7 to Form 10-K filed on March 16, 2017)
10.3   Advisory Management Agreement among Behringer Harvard Opportunity REIT II, Inc., Behringer Harvard Opportunity OP II, LP and LSG-BH II Advisor LLC (“LSG-BH II Advisor”) effective as of February 10, 2017. (incorporated by reference to Exhibit 10.8 to Form 10-K filed on March 16, 2017)
10.4   Advisory Agreement among Behringer Harvard Opportunity REIT II, Inc., Behringer Harvard Opportunity OP II, LP and LSG Development Advisor LLC (“LSG-BH II Advisor”) effective as of February 10, 2017. (incorporated by reference to Exhibit 10.9 to Form 10-K filed on March 16, 2017)
10.5   Property Management and Leasing Agreement among Behringer Harvard Opportunity REIT II, Inc., Behringer Harvard Opportunity OP II, LP and several affiliated special purpose entities, and LSG-BH II Property Manager LLC effective as of February 10, 2017. (incorporated by reference to Exhibit 10.10 to Form 10-K filed on March 16, 2017)
21.1*   List of Subsidiaries
31.1*   Rule 13a-14(a)/15d-14(a) Certification
31.2*   Rule 13a-14(a)/15d-14(a) Certification
32.1*   Section 1350 Certification**
32.2*   Section 1350 Certification**
101*   The following financial statements from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2020, filed on March 25, 2021, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) Consolidated Statements of Equity, (iv) Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements.

 

 

*Filed or furnished herewith.

 

**In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

 

40