Gyrodyne, LLC - Quarter Report: 2016 June (Form 10-Q)

---

---

		June 30,				December 31,
		2016				2015
		(Unaudited)
ASSETS:
Real estate held for sale		$	31,414,979			$	46,950,000
Cash and cash equivalents			4,322,590				5,875,596
Investment in marketable securities			4,694,399				5,001,722
Rent receivable			21,972				45,276
Other receivables			402,395				19,117
Total Assets		$	40,856,335			$	57,891,711
LIABILITIES:
Accounts payable		$	433,206			$	499,669
Accrued liabilities			241,170				408,898
Deferred rent liability			115,836				12,509
Tenant security deposits payable			362,158				483,556
Income taxes payable			-				11,162
Estimated liquidation and operating costs net of receipts			9,715,064				13,020,340
Total Liabilities			10,867,434				14,436,134
Net assets in liquidation		$	29,988,901			$	43,455,577

---

Net assets in liquidation, at December 31, 2015						$	43,455,577
Changes in assets and liabilities in liquidation:
Change in liquidation value of real estate		$	134,979
Change in market value of securities			115,068
Remeasurement of assets and liabilities			(1,933	)
Net increase in liquidation value							248,114
Liquidating distributions to shareholders							(13,714,790	)
Total changes in net assets in liquidation							(13,466,676	)
Net assets in liquidation, at June 30, 2016						$	29,988,901

---

1.     The Company:

 

On September 1, 2015, Gyrodyne, LLC (NASDAQ: GYRO), a New York limited liability company (“Gyrodyne”, the “Company” or the “Registrant”), announced the completion of the previously announced merger of Gyrodyne Company of America, Inc. (the “Corporation”) and Gyrodyne Special Distribution, LLC (“GSD”) with and into Gyrodyne (the “Merger”). Where applicable, references in this Report to the Company or the Registrant shall be deemed to be references to Gyrodyne as the successor to the Corporation.

The Merger was approved by the shareholders of the Corporation on August 20, 2015. Gyrodyne is the surviving company in the Merger, which terminated the existence of the Corporation and GSD. On September 1, 2015, trading of common shares of limited liability company interests of Gyrodyne commenced on the NASDAQ Stock Market under the symbol “GYRO”. The number of common shares outstanding in Gyrodyne following the Merger is 1,482,680. The common shares of Gyrodyne have a new CUSIP number of 403829104.

The Corporation had previously approved the Merger on behalf of GSD and Gyrodyne in its capacity as managing member of GSD and Gyrodyne, respectively.

 

The Merger resulted in holders of common stock of the Corporation receiving approximately 22.6% (335,086 shares) of the common shares of Gyrodyne in the aggregate (.0904 common share of Gyrodyne per share of Corporation common stock), holders of interests in non-transferable notes issued by the Corporation receiving approximately 30.0% (444,804 shares) of the common shares of Gyrodyne in the aggregate (.024798 common share of Gyrodyne per $1.00 principal amount of the dividend notes issued in January 2014 and the dividend notes issued in December 2014, together, in each case, with any interest thereon paid in kind in the form of additional notes), and holders of non-transferable interests in GSD receiving approximately 47.4% (702,790 shares) of the common shares of Gyrodyne in the aggregate (.473999 common interest of Gyrodyne per GSD interest).

 

The Merger completed the Corporation’s plan of tax liquidation under the Internal Revenue Code, even though the actual disposition of all of the properties had not yet occurred. The completion of the Corporation’s tax liquidation by means of the Merger removes the timing constraints associated with the tax liquidation and now provides Gyrodyne the opportunity to pursue without such constraints the opportunistic disposition of certain properties and the enhancement of the value of the Flowerfield, and Cortlandt Manor properties, by pursuing various development or zoning/entitlement opportunities, which the Gyrodyne Board believes will improve the chances of obtaining better values for such properties. The pursuit of the highest and best use of Flowerfield and Cortlandt Manor may involve the acquisition of properties, pursuit of joint venture relationships and other investments and or other strategies to maximize the returns for our shareholders. Gyrodyne expects that it will dissolve after it has completed the disposition of all of its real property assets, has applied the proceeds of such dispositions first to settle any claims, pending or otherwise, against Gyrodyne, and then has made liquidating distributions to holders of Gyrodyne common shares. We are unable to predict the precise nature, amount or timing of such distributions. The actual nature, amount and timing of all distributions will be determined by Gyrodyne’s Board in its sole discretion, and will depend in part upon the ability to convert our remaining assets into cash and pay and settle our remaining liabilities and obligations. Under Gyrodyne’s Amended and Restated Limited Liability Company Agreement, such dissolution may be effected upon the vote of holders of a majority of Gyrodyne common shares or, in the Board’s discretion and without any separate approval by the holders of the Gyrodyne common shares, at any time the value of Gyrodyne’s assets, as determined by the Board in good faith, is less than $1,000,000.

 

Prior to the Merger, the Corporation was a self-managed and self-administered real estate investment trust (“REIT”) formed under the laws of the State of New York. The Corporation managed its business as one operating segment. Prior to December 30, 2013, the Corporation’s primary business was the investment in and the acquisition, ownership and management of a geographically diverse portfolio of medical office, industrial properties and the development of industrial and residential properties located in the Northeast region of the United States. On December 30, 2013, the Corporation distributed to its shareholders, as the non-cash portion of the special dividend announced on September 12, 2013 (the “Special Dividend”), all of the equity interests of its subsidiary Gyrodyne Special Distribution LLC, which owned 100% of the interests (through GSD’s subsidiaries) in the Corporation’s four real estate properties, subject to related mortgage debt in favor of Flowerfield Mortgage Inc. (“FMI”), also a subsidiary of the Corporation, with Flowerfield Properties, Inc. (“FPI”) having the contractual right to manage the business and properties of GSD. Based on management provisions set forth in GSD’s limited liability company agreement which designated sole management authority to the Corporation, the Corporation concluded that GSD was a variable interest entity and that GSD’s financial statements should be consolidated with the Corporation’s. Accordingly, we may use references to "we" or "our" to refer to the Company, the Corporation, taxable REIT subsidiary (“TRS”), FPI and GSD, and "the Company's properties" or "GSD's properties", or “TRS’s properties”, or “FPI’s properties” (or derivations thereof) interchangeably in this report as they relate to periods preceding August 31, 2015.

 

 

 

Substantially all of the properties are subject to leases in which the tenant reimburses the Company (GSD prior to the Merger) for a portion, all of or substantially all of the costs and/ or cost increases for utilities, insurance, repairs and maintenance, and real estate taxes. Certain leases provide that the Company is responsible for certain operating expenses.

 

The Company owns a 10.12% limited partnership interest in Callery Judge Grove, L.P. (the “Grove”), a limited partnership which in 2013 sold its only asset, an undeveloped Florida property (the “Grove Property”). Following the Merger, the interest continues to be owned indirectly through FPI, its wholly-owned subsidiary. FPI is a “C” corporation; accordingly any income generated by FPI will be subject to a corporate level income tax. If the distributions are less than the Company’s basis in the Grove, the Company will carryback the loss and receive a Federal and state tax refund, respectively. For further information see Footnote 15.

 

After giving effect to the Company’s dispositions of real property through August 10, 2016 (see Footnote 8), the Company controls one remaining medical office park and five of fourteen buildings in a second medical office park, together comprising approximately 53,000 rentable square feet and a multitenant industrial park comprising approximately 130,000 rentable square feet. The Company also owns approximately 68 acres of property in St. James, New York, which includes the aforementioned industrial park which sits on ten of those acres. The remaining medical office park in Cortlandt Manor, the group of five buildings in the Port Jefferson Professional Park and the Flowerfield Industrial Park including the undeveloped property are individually owned in single asset LLCs wholly owned by the Company.

 

Prior to the Merger, the Corporation operated as a REIT under Section 856(c) (1) of the Internal Revenue Code of 1986 as amended (the “Code”). As a REIT, the Corporation generally was not subject to federal and state income tax, provided that distributions were made to its shareholders equal of at least 90% of its REIT taxable income as defined under the Code. The Corporation was permitted to participate in certain activities from which it was previously precluded in order to maintain its qualifications as a REIT. However, these activities were required to be conducted in an entity that elected to be treated as a TRS under the Code. The Corporation had one TRS, FPI, which was subject to federal and state income tax on the income from these activities. FPI continues as a wholly-owned subsidiary of Gyrodyne LLC, and any income generated by FPI is subject to corporate level taxes.

 

Pursuant to the Merger, all of the assets and liabilities of the Corporation and GSD became assets and liabilities of Gyrodyne, LLC by operation of law. In addition, the notes issued by the Corporation along with the accrued interest expense on the notes through the date of the merger, were redeemed with equity interests in Gyrodyne.

 

2.     Strategic Process:

 

Seeking Shareholder Approval for the Merger

 

On October 21, 2013, the Corporation filed a preliminary proxy statement with the Securities and Exchange Commission (“SEC”) which contained, among other matters, the board of director’s recommendation that the shareholders vote in favor of a plan of merger in which the Corporation and GSD would merge with and into Gyrodyne. The Corporation received comments from the SEC on November 18, 2013. The Corporation proceeded with holding its 2013 annual meeting without seeking authorization for the merger transaction at that time because of NASDAQ rules requiring listed companies to hold an annual meeting not later than twelve months following the fiscal year end. On May 8, 2014, the Corporation responded to such comments and filed a revised preliminary proxy statement with the SEC. The Corporation received comments from the SEC on May 29, 2014 and responded to such comments and filed a revised proxy statement (Amendment No. 2) with the SEC on June 17, 2014. The Corporation received comments from the SEC on June 24, 2014 and responded to such comments and filed a revised proxy statement (Amendment No. 3) with the SEC on June 26, 2014. The Corporation received comments from the SEC on June 26, 2014 and responded to such comments and filed a definitive proxy statement (Amendment No. 4) with the SEC on July 1, 2014.

 

On June 5, 2014, the Corporation announced that a special meeting of shareholders of the Corporation would be on August 14, 2014. At the special meeting, the Corporation would be asking the shareholders as of the record date of June 30, 2014 to authorize the plan of merger and the transactions contemplated thereby, including the merger of the Corporation and GSD with and into Gyrodyne, a subsidiary of the Corporation. Shareholders of record at the close of business on June 30, 2014, were entitled to vote at the special meeting or its adjournment or postponement, if any, provided such meeting took place by August 30, 2014. The special meeting was postponed until August 27, 2014 and then on August 25, 2014, the Corporation announced the postponement of the special meeting to December 5, 2014 to allow additional time for shareholders to vote on the Merger and changed the shareholder record date to October 31, 2014. The Corporation had been advised by its proxy solicitor, MacKenzie Partners, that with approximately 45% of the outstanding shares voted by delivery of proxy cards, approximately 97% of such shares had voted in favor of the Merger.  Despite the overwhelming percentage of received votes in favor of the merger not enough shares were voted to reach the two-thirds of the outstanding share majority needed under New York law.  Accordingly, on November 4, 2014, the Corporation announced a further postponement of the special meeting until the middle of 2015.

 

 

 

Rights Offering

 

Given the small size of holdings of many of the shareholders of the Corporation and the nature of various holders, the Corporation believed many holders may not have paid enough attention to the Merger to exercise their right to vote during attempts in 2014. The Corporation and its advisors continued to analyze potential options in the best interests of the Corporation and its shareholders, which included enhancements designed to facilitate the ability to complete the merger transaction. On March 6, 2015, the Corporation filed a registration statement on Form S-1 with the SEC for a rights offering to its existing shareholders to facilitate the vote of two-thirds of the outstanding shares needed under New York law to approve the Merger, as well as raise equity capital in a timely and cost-effective manner while providing all of its shareholders the opportunity to participate in an offering of the Corporation’s shares on a pro rata basis without diluting their ownership interest in the Corporation. The board of directors believed that shareholders who exercised their subscription rights in the rights offering would be more likely to vote their shares on the Merger proposal.

 

On April 10, 2015 and May 15, 2015, the Corporation filed amendments to the registration statement to replace the financial statements and related financial information in the original filing of the Registration Statement with the updated financial statements as of and for the year ended December 31, 2014 and as of and for the quarter ended March 31, 2015, respectively, and other updated financial information related thereto.

 

On April 27, 2015, the Corporation announced that it had set May 6, 2015 as the record date for its previously announced rights offering, and that the subscription price for the rights offering was $2.75 per share. In the rights offering, the Corporation distributed, at no charge, to shareholders as of the record date non-transferable subscription rights to purchase, on a three-for-two basis, up to an aggregate of 2,224,020 shares of its common stock.

 

On May 18, 2015, the SEC declared the registration statement effective, and on May 19, 2015, the Corporation announced the commencement of the rights offering. The Corporation effected the rights offering through the distribution of non-transferable subscription rights to purchase shares of its common stock at $2.75 per share subject to certain aggregate ownership limitations. In the rights offering, shareholders received three subscription rights for each two shares of common stock held of record on May 6, 2015, with each subscription right giving a shareholder the right to purchase one share of common stock. The rights offering also included an over-subscription privilege, which entitled each rights holder that exercised its basic subscription privilege in full, the right to purchase additional shares of common stock that remained unsubscribed at the expiration of the rights offering, subject to the availability and pro rata allocation of shares among persons exercising this over-subscription right. The rights offering did not contain an overallotment option.

 

On June 17, 2015, the Corporation closed the rights offering and on June 22, 2015, the Corporation announced that it received subscriptions for approximately 7,044,894 shares, greatly exceeding the maximum shares offered of 2,224,020. Shareholders were allocated 100% of their basic subscriptions. Based on the maximum 2,224,020 shares that were issuable in the rights offering, 1,214,644 shares were allocated to shareholders who properly exercised their oversubscription privilege, pro rata in proportion to the aggregate number of shares subscribed for under the over-subscription privilege, or 20.12499% of each over-subscriber’s requested shares. The rights offering resulted in 2,224,020 common shares issued on June 26, 2015 and net proceeds received (after expenses) of $5,606,190 (gross proceeds of $6,116,055 less direct expenses of the rights offering of $509,865).

 

Merger Allocation Adjustment

 

The Plan of Merger originally provided for an allocation of Gyrodyne, LLC interests to be issued in the Merger of 15.2% to shareholders of the Corporation, 29.2% to the holders of the Notes and 55.6% to the holders of common interests of GSD (collectively, the “Initial Allocations”). The Plan of Merger as revised by the December 2013 amendment provided that each of the Initial Allocations set forth therein of Gyrodyne LLC interests to be issued in the Merger in exchange for common shares of the Corporation, GSD Interests and interests in the Dividend Note was subject to adjustment in the discretion of the Corporation’s board of directors. The Plan of Merger provided that any changes made to the Initial Allocations would be announced at least ten days prior to the meeting of shareholders at which shareholders of the Corporation would be asked to consider and vote upon the Plan of Merger.

 

 

 

At a board of directors meeting held on April 24, 2015, the Corporation’s directors determined to adjust the allocation of common shares of Gyrodyne, LLC to be issued pursuant to the Merger to account for certain developments since the Initial Allocations were set in December 2013. As adjusted, the common shares of Gyrodyne, LLC to be issued in the Merger would be allocated as follows:

 

●

Approximately 22.6% in the aggregate to shareholders of the Corporation;

 

●

Approximately 30.0% in the aggregate to holders of interests in the notes issued by the Corporation in the aggregate principal amount of $17,937,000 (the “Notes”); and

 

●

Approximately 47.4% in the aggregate to holders of common interests of GSD.

 

The Corporation’s board of directors determined the foregoing allocation adjustments based on the increase in the adjusted net book value of its shares due to the rights offering and the respective anticipated net proceeds to the Corporation of $5,606,000 (actual net proceeds were $5,606,190), assuming all 2,224,020 shares were sold. In addition, the allocations reflect adjusted net book value, face value and “fair value” (based on appraised values of underlying properties owned by GSD, less liabilities) of the Corporation, the Notes and GSD, respectively, in each case as of December 31, 2014. This methodology was consistent with the valuation metrics used to determine the Initial Allocations in December, 2013.

 

Special Meeting and Consummation of Merger

 

Following the completion of the rights offering on June 17, 2015, the Corporation’s board of directors established June 29, 2015 as the record date for determining shareholders entitled to receive notice of and vote at the special meeting, and that the special meeting would take place on August 20, 2015. On July 1, 2015 the Corporation filed a supplement to the proxy statement/prospectus dated July 1, 2014 to provide supplemental information to the proxy statement prospectus and to be read in conjunction with the proxy statement/prospectus. On August 17, 2015, the Corporation filed supplement number 2 to the proxy statement/prospectus dated July 1, 2014 to provide supplemental information regarding the terms of a settlement in the class action lawsuit against the Corporation and members of its board of directors, and against GSD and Gyrodyne. See Part II, Item 1, “Legal Proceedings”. On August 20, 2015 the shareholders of the Corporation voted to authorize the Merger with more than 99% of votes cast at the special meeting voting in favor, representing more than 76% of all outstanding shares. The Merger closed on August 31, 2015 and common shares of Gyrodyne, LLC began trading on NASDAQ on September 1, 2015. The Merger completed the tax plan of liquidation for purposes of the Internal Revenue Code, and resulted in holders of common stock of the Corporation receiving approximately 22.6% (335,086 shares) of the common shares of Gyrodyne, LLC in the aggregate (.0904 common share of Gyrodyne, LLC per share of the Corporation’s common stock), holders of non-transferable Notes receiving approximately 30.0% (444,804 shares) of the common shares of Gyrodyne, LLC in the aggregate (.024798 common share of Gyrodyne, LLC per $1.00 principal amount of the Dividend Notes issued in January 2014 and the Dividend Notes issued in December 2014, together, in each case, with any interest thereon paid in kind in the form of additional Notes), and holders of non-transferable interests in GSD receiving approximately 47.4% (702,790 shares) of the common shares of Gyrodyne, LLC in the aggregate (.473999 common share of Gyrodyne, LLC per GSD interest).

 

3.	Significant accounting policies:

 

The condensed consolidated financial statements for periods prior to September 1, 2015 were prepared on the going concern basis of accounting, which contemplates realization of assets and satisfaction of liabilities in the normal course of business. The completion of the Corporation’s tax liquidation by means of the Merger removes the timing constraints associated with the tax liquidation and now provides Gyrodyne the opportunity to pursue without such constraints the opportunistic disposition of certain properties and the enhancement of the value of the Flowerfield, and Cortlandt Manor properties, by pursuing various development or zoning/entitlement opportunities, which the Gyrodyne Board believes will improve the chances of obtaining better values for such properties. The pursuit of the highest and best use of the Flowerfield and Cortlandt Manor properties may involve the acquisition of properties, pursuit of joint venture relationships and other investments and or other strategies to maximize the returns for our shareholders. Gyrodyne expects that it will dissolve after it has completed the disposition of all of its real property assets, has applied the proceeds of such dispositions first to settle any claims, pending or otherwise, against Gyrodyne, and then has made liquidating distributions to holders of Gyrodyne common shares. Therefore Gyrodyne adopted the liquidation basis of accounting. This basis of accounting is considered appropriate when, among other things, liquidation of the entity is imminent, as defined in ASC 205-30, Presentation of Financial Statements Liquidation Basis of Accounting. Under Gyrodyne’s Amended and Restated Limited Liability Company Agreement the Board has the ability to sell all of the Company’s assets without further approval. As a result, liquidation is “imminent” in accordance with the guidance provided in ASC 205-30.

 

 

 

A.  Liquidation Basis of Accounting – Under the liquidation basis of accounting the consolidated balance sheet, consolidated statement of operations, statement of equity and the consolidated statement of cash flows are no longer presented (except for periods prior to the adoption of the liquidation basis of accounting). The consolidated statement of net assets in liquidation and the consolidated statement of changes in net assets in liquidation are the principal financial statements presented under the liquidation basis of accounting.

  

Under the liquidation basis of accounting, all of the Company’s assets have been stated at their estimated net realizable value which are based on current contracts, estimates and other indications of sales value.  All liabilities of the Company, including those estimated costs associated with implementing the Plan of Liquidation, have been stated at their estimated settlement amounts.  These amounts are presented in the accompanying statement of net assets in liquidation.  These estimates will be periodically reviewed and adjusted as appropriate.  There can be no assurance that these estimated values will be realized.  Such amounts should not be taken as an indication of the timing or amount of future distributions or our actual dissolution.  The valuation of assets at their net realizable value and liabilities at their anticipated settlement amount represent estimates, based on present facts and circumstances, of the net realizable value of the assets and the costs associated with carrying out the Plan of Liquidation.  The actual values and costs associated with carrying out the Plan of Liquidation are expected to differ from amounts reflected in the accompanying financial statements because of the plan’s inherent uncertainty.  These differences may be material.  In particular, the estimates of our costs will vary with the length of time necessary to complete the Plan of Liquidation, which is currently anticipated to be completed during 2018.  Accordingly, it is not possible to predict with certainty the timing or aggregate amount which may ultimately be distributed to common interest holders and no assurance can be given that the distributions will equal or exceed the estimate presented in the accompanying statement of net assets in liquidation.

 

The Company is conducting market research and associated concept analysis to determine the value associated with the highest and best use for the Flowerfield Property as well as the property associated with the Cortlandt Medical Center. The pursuit of the highest and best use of Flowerfield and Cortlandt Manor may involve the acquisition of properties adjacent to its existing properties (acquisitions if any will be limited to those that the Company believes will be a catalyst to increasing the value of its existing properties), pursuit of joint venture relationships and other investments and or other strategies to maximize the returns for our shareholders. The actual costs of such research and the associated values may differ materially from the assumptions and estimates utilized and accordingly, could have a significant impact on the value of net assets in liquidation.

 

The Company’s assumptions and estimates (including the sales proceeds of all its real estate holdings, selling costs, retention bonus payments, rental revenues, rental expenses, land development costs, general and administrative fees, litigation settlement, director and officer liability and reimbursement post liquidation insurance tail coverage policy and final liquidation costs) are based on completing the liquidation during 2018. However, the Company may pursue avenues to achieve the highest and best use of certain of its properties that may result in the liquidation being extended beyond December 31, 2018. As previously stated, on an ongoing basis, Gyrodyne evaluates the estimates and assumptions that can have a significant impact on the reported net assets in liquidation and will update accordingly for any costs and value associated with a change in the duration of the liquidation.

 

This report should be read in conjunction with the audited financial statements and footnotes therein included in the Annual Report on Form 10-K for the year ended December 31, 2015 and with the definitive proxy statement/prospectus filed with the SEC on July 1, 2014, the supplement, dated July 1, 2015, and the supplement no. 2, dated August 17, 2015 to the proxy statement/prospectus dated July 1, 2014 and the S-1/A filed with the SEC on May 15, 2015.

 

B.  Estimated Distributions per Share – Under the liquidation basis of accounting, the Company reports estimated distributions per share data by dividing net assets in liquidation by the number of shares outstanding.  

 

C.  Management Estimates – In preparing the consolidated financial statements in conformity with GAAP and the liquidation basis of accounting, management is required to make estimates and assumptions that affect the reported amounts of assets, including net assets in liquidation, and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of income and expense for the reporting period.  Actual results could differ from those estimates.

 

4.	Basis of Quarterly Presentations:

 

The accompanying quarterly financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). The financial statements of the Company included herein have been prepared by the Company pursuant to the rules and regulations of the SEC and, in the opinion of management, reflect all adjustments which are necessary to present fairly the results for the six-month period ended June 30, 2016.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations; however, management believes that the disclosures are adequate to make the information presented not misleading.

 

Certain 2015 amounts and descriptions have been reclassified to conform to the 2016 financial statement presentation. These reclassifications have no effect on previously reported changes in net assets.

 

---

5.     Principles of Consolidation:

 

The accompanying condensed consolidated financial statements include the accounts of Gyrodyne LLC, and all majority owned subsidiaries. The Company consolidates its wholly owned subsidiaries, partnerships and joint ventures which it controls (i) through voting rights or similar rights or (ii) by means other than voting rights if the Company is the primary beneficiary of a variable interest entity ("VIE"). If an investment is determined to be a VIE, the Company performs an analysis to determine if the Company is the primary beneficiary of the VIE. GAAP requires a VIE to be consolidated by its primary beneficiary. The primary beneficiary is the party that has a controlling financial interest in an entity. In order for a party to have a controlling financial interest in an entity, it must have (1) the power to direct the activities of a VIE that most significantly impact the entity's economic performance and (2) the obligation to absorb losses or the right to receive benefits of an entity that could potentially be significant to the VIE. Prior to the Merger, GSD was the only VIE and was included in the consolidated financial statements. As a result of the Merger, GSD merged with and into Gyrodyne, LLC, accordingly, effective with such merger, there is no longer a VIE.

 

6.     Statement of Net Assets in Liquidation:

 

Following the Merger, effective September 1, 2015, the Company reports its financial results on the statement of net assets in liquidation and the statement of changes in net assets in liquidation, both of which track the Company’s estimated remaining liquidating distributions. Net assets in liquidation at June 30, 2016 would result in liquidating distributions of approximately $20.23 per common share.

 

The cash balance at the end of the liquidation period (currently estimated to be December 31, 2018), excluding any interim distributions, is estimated based on the June 30, 2016 combined cash balance and marketable securities of $9.0 million plus adjustments for the following items which are estimated through December 31, 2018:

 

1.

Adjustments for the estimated cash receipts from the operation of the properties net of rental property related expenditures as well as costs expected to be incurred to maintain the fair value of the property at its estimated gross sales proceeds.

2.

Proceeds from the sale of all its real estate holdings.

3.

The net cash used to settle the working capital accounts.

4.

The general and administrative expenses and or liabilities associated with the Merger, operations and the liquidation of the Company have been included, including severance, director and officer liability and reimbursement insurance policy inclusive of post liquidation tail policy coverage, and financial and legal fees to complete the liquidation.

5.

In addition, the Company is incurring land development costs to determine the highest and best use for the Flowerfield and Cortlandt Manor properties. The pursuit of the highest and best use of Flowerfield and Cortlandt Manor may involve the acquisition of adjacent properties, pursuit of joint venture relationships and other investments and or other strategies to maximize the returns for our shareholders.

 

In the initial adoption of the liquidation basis of accounting which was effective with the Merger, the consolidated statement of changes in net assets in liquidation contains fair value adjustments to the August 31, 2015 going concern equity to arrive at the liquidating value.

 

The Company estimates the fair value of its real estate assets by using income and market valuation techniques. The Company may estimate fair values using market information such as broker opinions of value, appraisals, and recent sales data for similar assets or discounted cash flow models, which primarily rely on Level 3 inputs. The cash flow models include estimated cash inflows and outflows over a specified holding period. These cash flows may include contractual rental revenues, projected future rental revenues and expenses and forecasted tenant improvements and lease commissions based upon market conditions determined through discussion with local real estate professionals, experience the Company has with its other owned properties in such markets and expectations for growth. Capitalization rates and discount rates utilized in these models are estimated by management based upon rates that management believes to be within a reasonable range of current market rates for the respective properties based upon an analysis of factors such as property and tenant quality, geographical location and local supply and demand observations. To the extent the Company under estimates forecasted cash outflows (tenant improvements, lease commissions and operating costs) or over estimates forecasted cash inflows (rental revenue rates), the estimated fair value of its real estate assets could be overstated. 

 

The Company is pursuing various options to maximize total distributions to our shareholders during the liquidation process. The Company estimates that it will have incurred approximately $3.15 million (included in the statement of net assets as part of the estimated liquidation and operating costs net of receipts, see Footnote 7) in charges over calendar years 2016 and 2017, inclusively, to obtain entitlements, inclusive of zone changes and special permits that it believes will result in an internal rate of return through the improvement of values in the Flowerfield and Cortlandt Manor properties. During the six months ended June 30, 2016, the Company incurred approximately $600,000 of the $3.15 million in land development costs inclusive of a land purchase (inclusive of closing costs) for approximately $210,000. The Company estimates the remaining balance of $2.55 million ($3,150,000-$600,000) will occur from July 2016 through the end of liquidation. The Company does not intend to develop the properties but rather to commit resources to position the properties for sale in a timely manner with all entitlements necessary to achieve maximum pre-construction values. During the process of pursuing such entitlements, the Company may entertain offers from potential buyers who may be willing to pay premiums for the properties that the Company finds more acceptable from a timing or value perspective than completing the entitlement processes itself. In addition, the Company may entertain joint ventures or other types of relationships for the properties which might provide funds for earlier distributions to shareholders while simultaneously providing enhancements to the underlying values of the properties. 

 

 

The net assets in liquidation at June 30, 2016 ($29,988,901) would result in estimated liquidating distributions of approximately $20.23 per common share (1,482,680 shares outstanding), based on current contracts, estimates and other indications of sales value but excluding any actual additional sales proceeds which may result directly or indirectly from the $3.15 million in land development costs. The Company believes there will be an internal rate of return resulting from the land development costs that will enhance estimated distributions per share through the improved values from the sales of the Flowerfield and Cortlandt Manor properties. This estimate of liquidating distributions includes projections of costs and expenses to be incurred during the period required to complete the plan of liquidation. There is inherent uncertainty with these projections, and they could change materially based on the timing of the sales, improved values of the Cortlandt Manor and/or Flowerfield properties resulting from the land development efforts, favorable or unfavorable changes in the land development costs, the performance of the underlying assets, the market for commercial real estate properties generally and any changes in the underlying assumptions of the projected cash flows.

 

7.     Liability for Estimated Costs in Excess of Receipts during Liquidation:

 

The liquidation basis of accounting requires the Company to estimate net cash flows from operations and to accrue all costs associated with implementing and completing the plan of liquidation. The Company currently estimates that it will incur costs in excess of estimated receipts during the liquidation period, excluding the net proceeds from the real estate sales. These amounts can vary significantly due to, among other things, land development costs, the timing and estimates for executing and renewing leases, capital expenditures to maintain the real estate at its current fair value and estimates of tenant improvement costs, the timing of property sales and any direct/indirect costs incurred that are related to the sales (costs to address buy side due diligence inclusive of administrative fees, legal fees and property costs to address items arising from such due diligence and not previously known ), the timing and amounts associated with discharging known and contingent liabilities and the costs associated with the winding up of operations. These costs are estimated and are anticipated to be paid through-out the liquidation period.

 

As of December 31, 2015, the Company accrued the following revenues and expenses expected to be earned or incurred during liquidation which is expected to be completed during 2018:

  

 

⁽¹⁾Includes all general and administrative fees, litigation settlement, director and officer liability and reimbursement post liquidation insurance tail coverage policy and final liquidation costs.

 

 

 

The change in the liability for estimated costs in excess of estimated receipts during liquidation from January 1, 2016 through June 30, 2016 is as follows:

  

 

8.     Disposition Activities:

 

Port Jefferson Professional Park. During 2016, the Company sold four buildings (approximately 4,000 square feet each) in the Port Jefferson Professional Park as follows:

 

 

The Company has five remaining buildings within the same medical park, one of which is the subject of a purchase and sale agreement and four of which are currently being actively marketed for sale. 

 

The Company also entered into a purchase and sale agreement dated as of July 18, 2016 to sell the building at 2 Medical Drive in the medical park for $800,000, subject to an evaluation period that will expire on September 16, 2016 during which time the purchaser shall have the unilateral right to terminate the agreement by written notice to GSD Port Jefferson after which the purchaser will have the right to receive a refund of its $40,000 deposit. Unless so terminated, the agreement provides for a closing on or before October 16, 2016.     

 

 

Fairfax Medical Center.

 

On February 4, 2016 the Company’s wholly-owned subsidiary Virginia Healthcare Center, LLC, a Virginia limited liability company (“VHC”) entered into a Purchase and Sale Agreement (the “Agreement”) to sell the Fairfax Medical Center, subsequently amended, for a sales price of $14,315,000 to JAG Associates, L.L.C., a Virginia limited liability company (“JAG”). The material terms of the Agreement provided for: (i) an initial earnest money deposit in the amount of $250,000 payable by JAG to the escrow agent within five business days following the Effective Date that were applied to the purchase price at closing; (ii) an evaluation period that expired on April 11, 2016, during which time JAG had the right to terminate the Agreement by written notice to the Company, for any reason or no reason, prior to the expiration of the evaluation period, in which case JAG had the right to receive a refund of its initial $250,000 earnest money deposit; (iii) if the Agreement was not terminated on or prior to April 11, 2016, JAG was obligated to deliver an additional earnest money deposit to the escrow agent in the amount of $250,000, which together with the initial earnest money deposit were applied toward the purchase price at closing; (iv) unless JAG terminated the Agreement on or prior to April 11, 2016, the closing would occur on or before May 4, 2016. The Agreement also contained a master lease (2 year term for approximately 4,700 square feet) to VHC for approximately $210,000, payments due quarterly if certain vacancies were not re-tenanted. Prior to the sale, the Company marketed, and following the sale, JAG continues to actively market the space, the success of which will directly reduce the master lease obligation. The Agreement also contained additional customary covenants, conditions, representations and warranties. On April 25, 2016, in response to the purchaser’s due diligence results, VHC and JAG amended the Agreement as follows:

a.

Reduced the purchase price from $14,315,000 to $14,015,000 to address certain property conditions to JAG’s satisfaction.

b.

Amended the master lease obligation which among other things effectively reduced VHC’s obligation on rentable square feet from 4,700 square feet to 3,852 square feet which translates to a reduction in VHC’s liability from approximately $210,000 to approximately $155,000. Consistent with the original master lease, VHC will continue to get credit toward the master lease obligation for leases to new tenants and expansions of existing tenants. If the financial obligation under the master lease becomes satisfied through leases to one or more third party tenants, the master lease will terminate and VHC will have no further obligation to pay rent thereunder. JAG has a continuing obligation during the lease term to make commercially reasonable efforts to lease all or a portion of the leased premises at then-current market rates, as a priority over leasing occupied space in the property. In connection with the execution of the master lease, Gyrodyne agreed to guarantee full performance of the master lease by VHC, including the payment of all rentals but limited to two years of base rent.

 

On May 4th, 2016, VHC closed on the sale of the Fairfax Medical Center. Based on the aforementioned terms, VHC has a master lease obligation (guaranteed by the Company) on approximately 3,852 square feet for approximately $155,000 over the next two years with payments due quarterly less any new leases or expansions signed by the buyer, which obligations will terminate if the financial obligation is satisfied through leases to one or more third party tenants. Based on the leasing activity since the closing date, the Company estimates the obligation on the master lease has been reduced to $71,000.

 

The Comparison of the Gross sales proceeds to the fair value reported prior to entering the Purchase and Sale Agreement:

 

 

 

9.     Investment in Marketable Securities:

 

The Company determines the appropriate classification of securities at the time of purchase and reassesses the appropriateness of such classification at each reporting date. All marketable securities held by the Company have been classified as available-for-sale and, as a result, are stated at fair value, based on a pricing model that incorporates coupon type, prepayment speeds and the type of collateral backing the securities. The unrealized gains or loss for the period in the securities and the fair value of the securities at the end of the period are reflected in the Condensed Consolidated Statement of Changes in Net Assets in Liquidation and Statements of Net Assets in Liquidation, accordingly.

 

The Company reviews its investments on a regular basis and adjusts the balance to fair value in the Condensed Consolidated Statement of Changes in Net Assets in Liquidation and Statements of Net Assets in Liquidation, accordingly.

 

The historical cost and estimated fair value of investments in marketable securities available for sale as of June 30, 2016 and December 31, 2015 are as follows:

 

 

* $413,150 in principal repayments was received during the six months ended June 30, 2016

 

The Company’s investment is in conforming agency fixed rate mortgage pass through securities (“mortgage-backed securities”), each of which contained either AA or AAA ratings, the principal of which is fully guaranteed by agencies of the U.S. Government. At June 30, 2016 and December 31, 2015, marketable securities based on amortized cost, reflect a yield of approximately 2%, have contractual maturities of 15 or 30 years and an adjusted duration of less than four years. The fair value of mortgage-backed securities was estimated based on a Level 2 methodology, additional details of which are discussed further in Footnote 15 – Fair Value of Financial Instruments. As of September 1, 2015, all securities are reported at fair value and the changes are reported in the statement of net assets in liquidation and the statement of changes in net assets in liquidation, accordingly.

 

---

10.	Income Taxes:

 

Gyrodyne LLC is not subject to an entity level income tax but rather is treated as a pass through entity with the taxable income or loss reported annually on a Form K-1 to its shareholders pro rata. FPI is a wholly-owned subsidiary of the Company. FPI is a “C” corporation and therefore any income generated by FPI is subject to a corporate level tax.

 

11.	Incentive Compensation Plan:

 

The Corporation had an Incentive Compensation Plan (the “ICP”), the remaining benefits of which were vested and not contingent on any future performance. Payment of the limited remaining benefit under the ICP was triggered upon the December 30, 2013 non-cash dividend distribution of $20.70/share which was comprised of the distribution of interests in Gyrodyne Special Distribution LLC. At that time, the Corporation’s board decided that the Corporation should defer the cash payment triggered under the ICP by such dividend, until such time as the Company made cash distributions so as to ensure plan participants were not paid ICP benefits prior to the time the shareholders received cash on the non-cash portion of the dividend (i.e. the GSD shares). Under such deferral and pursuant to the ICP limitation, the cumulative total future payments that were to be made was $233,200. As a result, based on 1,482,680 shares outstanding, for every penny per share dividend declared and paid, an ICP payment of $14,827 were to be paid until such future cumulative ICP payments reaches $233,200. On June 15^th, the Company paid a dividend of $9.25 per share to shareholders of record on June 6, 2016. As a result, the Company made its final payment of $233,200 to the ICP participants.

 

Neither Frederick C. Braun III (the Company’s Chief Executive Officer), who joined the Company in February 2013, nor Gary Fitlin (the Company’s Chief Financial Officer), who joined the Company in 2009, was a participant in the ICP.

 

The final remaining ICP benefits were paid during the six months ended June 30, 2016. The allocation to ICP participants are below:

 

 

¹ $17,490 of the $131,758 was paid to a former Director who resigned in September 2013.

²Approximately $25,652 of the $26,818 was paid to former employees.

 

12.	Concentration of Credit Risk:
	Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents and securities issued with the guarantee of U.S. Government Agencies. The Company places its temporary cash investments with high credit quality financial institutions and generally limits the amount of credit exposure in any one financial institution. The Company maintains bank account balances, which exceed insured limits. The Company has not experienced any losses in such accounts and believes that it is not exposed to any significant credit risk on cash. Management does not believe significant credit risk existed at June 30, 2016 and December 31, 2015.

 

---

13.	Commitments and Contingencies:

 

Lease revenue commitment

 

Excluding the rental revenue for the period after property sales through August 10, 2016, the approximate future minimum revenues from rental property under the terms of all noncancellable tenant leases, assuming no new or renegotiated leases are executed for such premises, are as follows:

 

 

Other commitments and contingencies

 

As of June 30, 2016, other commitments and contingencies are summarized in the below table:

 

 

On May 4th, 2016, the Company’s wholly owned subsidiary Virginia Healthcare Center, LLC (“VHC”) closed on the sale of the Fairfax Medical Center. The purchase and sale agreement contains a master lease obligation by VHC (guaranteed by the Company) on approximately 3,852 square feet for an initial approximate $155,000 over a period of two years with payments made quarterly less any new leases or expansions signed by the buyer, which obligations will terminate if the financial obligation is satisfied through leases to one or more third party tenants. Under the master lease, VHC receives a credit for any new leases (other than renewals) and expansions from existing tenants. Based on such activity, the Company estimates the total obligation under the master lease will be reduced to approximately $71,000, the amount of which will be paid in quarterly installments over the period from August 3^rd 2016 to May 4, 2018. For further discussion see Footnote 8.

 

Employment agreements and Compensation Arrangements

 

The Company has employment agreements with its Chief Executive Officer and Chief Financial Officer, each executed during the quarter ended June 30, 2013. Each of these agreements contains a bonus of $125,000 payable upon a change of control as defined in the agreements. In addition, each agreement provides for severance equivalent to the payment of the aforementioned bonus under the change in control provision, if not previously paid, plus 6 months of base salary.

 

The Company also has an employment agreement with its Chief Operating Officer executed on May 8, 2014 which provides for severance equivalent to 6 months of base salary.

 

The aggregate severance commitment contingency to other employees under the Company’s severance policy is approximately $77,100.

 

As of June 30, 2016, the Company’s aggregate commitment related to severance is approximately $677,100.

 

In May 2014, the board of directors approved a Retention Bonus Plan. The estimated aggregate bonus amount payable under this plan and included in the estimated liquidation and operating costs in excess of operating receipts in the statement of net assets in liquidation and the statement of changes in net assets in liquidation (excluding amounts paid through June 20, 2016) is approximately $1.0 million, of which approximately $0.6 million and $0.4 million is payable to directors and employees, respectively. This amount is an estimate based on anticipated sales prices at appraisal values. See “Retention Bonus Plan” below for a description on calculating the bonus amounts.

 

Retention Bonus Plan

 

In May 2014, the board of directors approved a Retention Bonus Plan designed to recognize the nature and scope of the responsibilities related to the Company’s business plan, to reward and incent performance in connection therewith, to align the interests of directors, executives and employees with our shareholders and to retain such persons during the term of such plan. The Retention Bonus Plan provides for bonuses to directors and to officers and employees determined by the gross sales proceeds from the sale of each property and the date of sale.

 

The Retention Bonus Plan provides for a bonus pool funded with an amount equal to 5% of the specified appraised value of such properties (set forth in the Plan), so long as the gross selling price of a property is equal to or greater than 100% of its appraised value (based on appraisals utilized to support the value of the real estate included in the non-cash dividend distributed on December 30, 2013). Additional funding of the bonus pool will occur on a property-by-property basis when the gross sales price of a property exceeds its appraised value as follows: 10% on the first 10% of appreciation, 15% on the next 10% of appreciation and 20% on appreciation greater than 20%. Furthermore, if a specified property is sold on or before a designated date specified in the Retention Bonus Plan, an additional amount equal to 2% of the gross selling price of such property also is funded into the bonus pool.

 

 

 

The bonus pool is distributable in the following proportions to the named participants in the bonus plan for so long as they are directors or employees of the Company: 15% for the Chairman, 50% for the directors other than the Chairman (10% for each of the other five directors) and 35% (the “Employee Pool”) for the Company’s executives and employees. Such share of the bonus pool is earned only upon the completion of the sale of a property at a gross selling price equal to or greater than its appraised value and is paid to the named beneficiaries of the Retention Bonus Plan or their designees within 60 days of the completion of such sale or, if later, within 60 days of receipt of any subsequent post-completion installment payment related to such sale. All allocations to individual beneficiaries of the Employee Pool shall be determined by the board of directors of the Company or its successor in consultation with its President.

 

On May 24, 2016, the Company amended its Retention Bonus Plan to provide that land development costs incurred on a property since the date of appraisal will be added to the appraised value of the property in calculating appreciation (gross sales price minus appraised value) for the purpose of determining the bonus pool. The foregoing change was approved in order to better align the interests of the participants in the Retention Bonus Plan with those of the shareholders. The amendment also provides that each of the ten buildings in the Port Jefferson Professional Park will be treated as a “property”, so that a participant’s right to bonus payment on the sale of a Port Jefferson building will vest on, and payments to the bonus pool may be made shortly following, the closing of the sale of that building. As originally adopted, all ten buildings in the Port Jefferson Professional Park were treated as one property, so that a participant departing prior to the sale of all ten buildings would forfeit bonus on all ten buildings. The reason for this original designation was that, at the time of adoption, the board of directors believed that Gyrodyne’s entire Port Jefferson property would be sold as one block, not as individual buildings. Subsequent to adoption, the Gyrodyne board came to believe that the sale of individual buildings would generate the greatest aggregate values and thus would be in the best interests of the Company and its shareholders.

 

14.	Recent Accounting Pronouncements:

 

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810) - Amendments to the Consolidation Analysis.” The amendments in this update provide guidance on evaluating whether a company should consolidate certain legal entities. In accordance with the guidance, all legal entities are subject to reevaluation under the revised consolidation model. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is allowed. The adoption of this pronouncement did not have a material effect on the Company’s net assets and changes in net assets.

 

In May 2015, the FASB issued ASU No. 2015-07, “Fair Value Measurement (Topic 820) Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (“ASU No. 2015-07”).” The amendments in this Update remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The adoption of this pronouncement did not have a material effect on the Company’s net assets and changes in net assets.

 

In May 2015, the FASB issued ASU No. 2015-08, “Business Combinations (Topic 805) (“ASU No. 2015-08”).” This update amends various SEC paragraphs pursuant to the issuance of Staff Accounting Bulletin No. 115. The adoption did not have a material effect on the Company’s net assets and changes in net assets.

 

In June 2015, the FASB issued ASU No. 2015-10, “Technical Corrections and Improvements (“ASU No. 2015-10”).” The amendments in this update cover a wide range of Topics in the Codification. The amendments in this update represent changes to make minor corrections or minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. This update is the final version of Proposed Accounting Standards Update 2014-240—Technical Corrections and Improvements, which has been deleted. The adoption did not have a material effect on the Company’s net assets and changes in net assets.

 

In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606).” The amendments in this Update defer the effective date of Update 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The adoption of this pronouncement is not expected to have a material effect on the Company’s net assets and changes in net assets.

 

 

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. This update provides revised guidance related to the accounting and reporting of leases. ASU 2016-02 requires lessees to recognize most leases on the balance sheet. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or operating lease. ASU 2016-02 requires a modified retrospective transition, with a number of practical expedients that entities may elect to apply. ASU 2016-02 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted. The adoption of this pronouncement is not expected to have a material effect on Company’s net assets and changes in net assets.

 

15.	Fair Value of Financial Instruments:

 

Assets and Liabilities Measured at Fair-Value – The Company follows authoritative guidance on fair value measurements, which defines fair-value, establishes a framework for measuring fair-value, and expands disclosures about fair-value measurements. The guidance applies to reported balances that are required or permitted to be measured at fair-value under existing accounting pronouncements.

 

The Company follows authoritative guidance on the fair value option for financial assets, which permits companies to choose to measure certain financial instruments and other items at fair-value in order to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently. Effective with the Merger, the Company adopted the liquidation basis of accounting and reports all assets and liabilities at fair value, accordingly.

 

The guidance emphasizes that fair-value is a market-based measurement, not an entity-specific measurement. Therefore, a fair-value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair-value measurements, the guidance establishes a fair-value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). In instances where the determination of the fair-value measurement is based on inputs from different levels of the fair-value hierarchy, the level in the fair-value hierarchy within which the entire fair-value measurement falls is based on the lowest level input that is significant to the fair-value measurement in its entirety. Our assessment of the significance of a particular input to the fair-value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

 

The following table represents the carrying value and fair value on a recurring basis of the Company’s financial assets and liabilities as of June 30, 2016 and December 31, 2015, respectively.

 

 

* $413,150 in principal repayments was received during the first six-months of 2016.

 

The Company has investments in mortgage backed securities with either AA or AAA ratings fully guaranteed by US government agencies (the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation). The fair values of mortgage backed securities originated by US government agencies are based on a pricing model that incorporates coupon type, prepayment speeds and the type of collateral backing the securities. A discount rate is applied to the cash flows in the model to arrive at the fair value. Market quotes, current yields, and their spreads to benchmark indices are obtained for each type of security. With this data, a yield curve is derived for each category of mortgage backed securities. Each security is priced by discounting the cash flow stream by the appropriate yield found on the yield curve. As the significant inputs used to derive the value of the mortgage-backed securities are observable market inputs, the fair value of these securities are included in the Level 2 fair value hierarchy.

 

The Company estimates that fair value approximates carrying value for cash equivalents, rents receivable, prepaid and other assets, and accounts payable due to the relatively short maturity of the instruments.

 

 

 

Fair Value Measurements:

 

The following table presents the Company's assets and liabilities measured at fair value on a non-recurring basis as of June 30, 2016, aggregated by the level in the fair value hierarchy within which those measurements fall:

 

 

The Company estimates the fair value of its real estate assets by using income and market valuation techniques including market information such as broker opinions of value, appraisals, and recent sales data for similar assets or discounted cash flow models, which primarily rely on Level 3 inputs. The cash flow models include estimated cash inflows and outflows over a specified holding period. These cash flows may include contractual rental revenues, projected future rental revenues and expenses and forecasted tenant improvements and lease commissions based upon market conditions determined through discussion with local real estate professionals, experience the Company has with its other owned properties in such markets and expectations for growth. Capitalization rates and discount rates utilized in these models are estimated by management based upon rates that management believes to be within a reasonable range of current market rates for the respective properties based upon an analysis of factors such as property and tenant quality, geographical location and local supply and demand observations. To the extent the Company under estimates forecasted cash outflows (tenant improvements, lease commissions and operating costs) or over estimates forecasted cash inflows (rental revenue rates), the estimated fair value of its real estate assets could be overstated. The following table represents the change in the fair value of the Company’s real estate assets during the six-months ended June 30, 2016:

 

 

(a) The net increase in value of $134,979 is attributable to an increase in value from entering into purchase and sale agreement on each of two buildings in the Port Jefferson Professional Park at $206,000 in excess of the estimated value at December 31, 2015. This increase was partially offset by the remaining master lease obligation at the Fairfax Medical Center of $71,021. The combined net increase of $134,979 represents the net increase in value of the real estate compared to that which was reported in the Statement of Net Assets at December 31, 2015.

 

The Company owns a 10.12% limited partnership interest in Callery Judge Grove, L.P. (the “Grove”), a limited partnership which in 2013 sold its only assets, an undeveloped Florida property located in Palm Beach County, Florida (the “Grove Property”), which is the subject of a plan for mixed-use development.

 

On March 18, 2011, the Grove’s lender, Prudential Industrial Properties, LLC ("Prudential"), commenced a foreclosure action against the Grove. On September 19, 2013, the Grove Property was sold, the foreclosure lawsuit was dismissed and the Grove’s debt to Prudential was repaid. At December 31, 2014 and 2013, the Company’s interest in the Grove was held in a taxable REIT subsidiary of the Company with $0 value. The purchaser of the Grove Property, Minto Group, formally refers to the development project as Westlake.

 

As of December 31, 2013, the Company had a $1,315,000 deferred tax liability related to the Grove, which represented taxable losses not yet recorded pursuant to the equity method of accounting. Following certain taxable gains received in 2014 but not yet recorded, the Company reversed the deferred tax liability in total in 2014 and recorded a current tax liability of approximately $618,000 (which was paid in the second quarter of 2015) and a tax benefit of $697,000.

 

While the Company did not receive any distribution in connection with the sale of the Grove Property in 2013, the purchase and sale agreement provides that the Grove has the right to receive certain payments on the sale of single family residential units constructed on the property or on the sale of the property itself. Gyrodyne has been informed by the Grove’s managing partner that the purchaser of the Grove Property, Minto Group, transferred the property to an affiliate which triggered an appraisal process that resulted in the payment of a fee by Minto to the Grove of $1,968,750, which was paid to the Grove accordingly. The Grove’s managing partner also informed Gyrodyne that the fee along with some of its existing cash will be utilized to pay back in full certain debt obligations owed to certain limited partners in the amount of $2.7 million. In light of the foregoing, Gyrodyne believes that the Grove may not receive any additional payments from Minto beyond the aforementioned $1,968,750. Accordingly, inasmuch as the Grove’s obligations to certain limited partners exceed the payment it received from Minto, it is unclear what amount, if any, Gyrodyne could expect to receive in any final liquidating distribution from the Grove, which may not occur until late 2016 at the earliest. The amount of distributions, if any, ultimately received by Gyrodyne will depend on the Grove’s assets, liabilities and expenses that must be settled prior to any distributions to the Grove’s limited partners.  

 

 

The Grove does not have an audit, review or compilation of its financial statements, therefore, the Company is challenged to determine the collectability of any income generated by the Grove. As a result, the Company will not recognize income from the Grove and will not include in the statement of net assets any potential distributions from the Grove until the earlier of when cash distributions are received or upon receiving financial data that substantiates its results of operations.

 

The Grove investment is a distressed asset operating in a distressed environment where an orderly transaction is not available. The facts and circumstances of the Grove make it unreasonable to present a fair value utilizing a Level 3 methodology, the lowest methodology which allows for broad assumptions. Therefore, in accordance with the exception rules for distressed assets that are thinly traded/lack of marketability, the Company is not presenting a fair value for its investment in the Grove or assuming the fair value is zero. Prior to the Merger, the Company accounted for the investment under the equity method. As of June 30, 2016 and December 31, 2015, the carrying value of the Company’s investment was $0.

 

16. Related Party Transactions:

 

Paul Lamb, the Chairman of the Board of Gyrodyne LLC was previously the Chairman of the Board of Directors of a not-for-profit corporation under New York law in which he does not earn any compensation or receive any other financial benefit. In late 2015, the Company entered into certain leasing relationships with an entity related to the not-for-profit company under New York Law with which the chairman also does not have any financial relationship. The leasing terms comprise 1,905 square feet and an annual and total lease commitment of $20,955 and $62,865, respectively. The Company provided certain rent abatements and tenant incentives which the Company believes were at arm’s length market rates. The independent members of the Board of the Company approved the transaction. During April 2016, Paul Lamb resigned as the Chairman of the Board of Directors of the aforementioned not-for-profit corporation, and therefore any post March 31, 2016 revenues, transactions, actions and or costs will not be disclosed under related party transactions.

 

Mr. Lamb is also a partner in Lamb & Barnosky, LLP which provided pro bono legal representation to the aforementioned not-for-profit corporation on the lease.

 

During the three months ended March 31, 2016, the Company received rental revenue of $5,715. 

 

In April 2016, Mr. Lamb founded and became the Executive Chairman of the Board of Directors of another not-for-profit corporation under New York law in which he does not earn any compensation or receive any other financial benefit. In May 2016, the Company entered into certain leasing relationships with such entity. The leasing term of 30 months comprise 1,971 square feet and an annual and total lease commitment of $21,078 and $51,816, respectively excluding abatements. The Company believes the lease is at market value.

 

The independent members of the Board of the Company approved the transaction.

 

17.	Reclassifications:

 

Certain amounts in the prior period have been reclassified to conform to the classification used in the current period. Prepaid expenses and other assets have been netted against estimated liquidation and operating costs net of receipts on the statement of net assets.

 

18.	Subsequent Events:

 

Port Jefferson Professional Park. GSD Port Jefferson, LLC, a wholly-owned subsidiary of the Company entered into a Purchase and Sale Agreement dated as of May 9, 2016 to sell the real property known as 3 Medical Drive, Port Jefferson Station, New York for $885,000 to Tameshasyl Realty LLC, subject to an evaluation period that expired on July 8, 2016, during which time the purchaser had the right to terminate the agreement by written notice to GSD Port Jefferson, for any reason or no reason, in which case the purchaser would have had the right to receive a refund of its $88,500 deposit. GSD Port Jefferson closed on the sale on August 5, 2016 at a price of $876,000. The Company agreed to an adjustment at closing to satisfy certain property conditions to the purchaser’s satisfaction.

 

 

 

GSD Port Jefferson also entered into a Purchase and Sale Agreement dated as of July 18, 2016 to sell the real property known as 2 Medical Drive, Port Jefferson Station, New York for $800,000 subject to an evaluation period that will expire on September 16, 2016, during which time the purchaser shall have the right to terminate the agreement by written notice to GSD Port Jefferson, for any reason or no reason, in which case the purchaser will have the right to receive a refund of its $40,000 deposit. Unless so terminated, the agreement provides for a closing on or before October 16, 2016.

 

---

---

---

---

---

---