Lightstone Value Plus REIT I, Inc. - Annual Report: 2005 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For
The Fiscal Year Ended December 31, 2005
or
o Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For
the
transition period from ____________ to ____________
Commission
file number 333-117367
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.
(Exact
Name of Registrant as Specified in Its Charter)
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Maryland
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20-1237795
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(State
or other jurisdiction
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(I.R.S.
Employer Identification No.)
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of
incorporation or organization)
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326
Third Street, Lakewood, NJ
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08701
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(Address
of principal executive offices)
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(Zip
code)
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Registrant's
telephone number, including area code: 732-367-0129
Securities
registered under Section 12(b) of the Exchange Act:
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Title of
Each Class
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Name
of Each Exchange on Which Registered
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None
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None
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Securities
registered under Section 12(g) of the Exchange Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. YesoNo x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. YesoNo x
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 x No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act). Large accelerated filer oAccelerated
filer o Non-accelerated
filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
As
of
June 30, 2005, the aggregate market value of the common shares held by
non-affiliates of the registrant was $0. While there is no established market
for the Registrant’s common shares, the Registrant is offering and has sold its
common shares pursuant to a Form S-11 Registration Statement under the
Securities Act of 1933 at a price of $10.00 per common share. As of
March 27, 2006, there were 462,616 shares of common stock held by
non-affiliates of the registrant.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.
Table
of Contents
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Page
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PART I
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Item 1.
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Business
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4
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Item
1A.
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Risk
Factors
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8
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Item
1B.
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Unresolved
Staff Comments
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27
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Item
2.
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Properties
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27
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Item
3.
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Legal
Proceedings
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27
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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27
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PART II
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Item 5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters, and Issuer
Purchases of Equity Securities
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28
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Item 6.
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Selected
Financial Data
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30
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Item 7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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30
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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38
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Item
8.
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Financial
Statements and Supplementary Data
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39
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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56
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Item
9A.
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Controls
and Procedures
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56
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Item
9B.
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Other
Information
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56
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PART
III
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Item 10.
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Directors
and Executive Officers of the Registrant
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57
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Item
11.
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Executive
Compensation
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60
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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60
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Item
13.
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Certain
Relationships and Related Transactions
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62
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Item
14.
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Principal
Accounting Fees and Services
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63
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PART
IV
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Item 15.
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Exhibits
and Financial Statement Schedules
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64
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Signatures
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65
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2
Special
Note Regarding Forward-Looking Statements
Certain
information included in this Annual Report on Form 10-K contains, and other
materials filed or to be filed by us with the Securities and Exchange
Commission, or the SEC, contain or will contain, forward-looking statements.
All
statements, other than statements of historical facts, including, among others,
statements regarding our possible or assumed future results of our business,
financial condition, liquidity, results of operations, plans and objectives,
are
forward-looking statements. Those statements include statements regarding the
intent, belief or current expectations of Lightstone Value Plus Real Estate
Investment Trust, Inc. and members of our management team, as well as the
assumptions on which such statements are based, and generally are identified
by
the use of words such as “may,” “will,” “seeks,” “anticipates,” “believes,”
“estimates,” “expects,” “plans,” “intends,” “should,” “would,” “could” or
similar expressions. Forward-looking statements are not guarantees of future
performance and involve risks and uncertainties that actual results may differ
materially from those contemplated by such forward-looking statements.
We
believe these forward-looking statements are reasonable; however, undue reliance
should not be placed on any forward-looking statements, which are based on
current expectations. All written and oral forward-looking statements
attributable to us, or persons acting on our behalf, are qualified in their
entirety by these cautionary statements. Further, forward-looking statements
speak only as of the date they are made, and 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 over
time unless required by law.
All
forward-looking statements should be read in light of the factors identified
herein at Part 1, Item 1A as well as in the “Risk Factors” section of the
Registration Statement on Form S-11 (File No. 333-117367) of Lightstone Value
Plus Real Estate Investment Trust, Inc. filed with the Securities and Exchange
Commission (the “SEC”), as the same may be amended and supplemented from time to
time.
3
PART I.
ITEM
1. BUSINESS:
General
Description of Business
Lightstone
Value Plus Real Estate Investment Trust, Inc. (the “Lightstone REIT”), a
Maryland corporation, was formed on June 8, 2004
primarily for the purpose of engaging in the business of investing in and owning
commercial and residential real estate properties located throughout the United
States and Puerto Rico. The Lightstone REIT intends to acquire
both portfolios and individual properties, with its commercial holdings expected
to consist primarily of multi-tenanted shopping centers, industrial and office
properties, and its residential properties expected to consist of “Class B”
multi-family complexes.
The
Lightstone
REIT
is
structured as an umbrella partnership real estate investment trust, or UPREIT,
and substantially all of the Lightstone
REIT’s
current and future business is and will be conducted through Lightstone
Value Plus REIT, L.P., a Delaware limited partnership formed on July
12,
2004 (the
“Operating Partnership”). We
refer
to the Lightstone
REIT
and the
Operating Partnership as the “Company” and the use of “we,” “our,” “us” or
similar pronouns in this annual report refers to the Lightstone
REIT,
the
Operating Partnership or the Company as required by the context in which such
pronoun is used.
Our
business is managed by Lightstone
Value Plus REIT, LLC (the “Advisor”),
an
affiliate of the Lightstone Group (our “Sponsor”), under the terms and
conditions of an advisory agreement. Our Sponsor and Advisor are owned and
controlled by David
Lichtenstein,
the
Chairman of our board of directors. Founded
in 1988 and headquartered in Lakewood, New Jersey, our Sponsor is ranked among
the 25 largest real estate companies in the industry with a diversified
portfolio of over 12,000 residential units as well as office, industrial and
retail properties totaling in excess of 29 million square feet of space in
26
states, the District of Columbia and Puerto Rico. Our
Sponsor has extensive experience in the areas of investment selection,
underwriting, due diligence, portfolio management, asset management, property
management, leasing, disposition, finance, accounting and investor
relations.
Operations
The
Lightstone REIT intends to sell a maximum of 30,000,000 common shares, at a
price of $10 per share (exclusive of 4,000,000 shares available pursuant to
our
dividend reinvestment plan, 600,000 shares that could be obtained through the
exercise of selling dealer warrants when and if issued and 75,000 shares that
are reserved for issuance under our stock option plan). The Lightstone REIT’s
Registration Statement on Form S-11 (the “Registration Statement”) was declared
effective under the Securities Act of 1933 on April 22, 2005, and
on
May
24,
2005,
we
began offering our common shares for sale to the public. Lightstone
Securities, LLC (the “Dealer Manager”) is serving as the dealer manager of our
public offering (the “Offering”).
The
Lightstone REIT sold 20,000 shares to our Advisor on July 6, 2004, for $10
per
share. We invested the proceeds from this sale in the Operating Partnership,
and
as a result, held a 99.01% limited partnership interest at December 31, 2005
and
2004, respectively. Our Advisor also contributed $2,000 to the Operating
Partnership in exchange for 200 limited partner units in the Operating
Partnership. The limited partner has the right to convert operating partnership
units into cash or, at the option of the Company, an equal number of common
shares of the Lightstone REIT, as allowed by the limited partnership agreement.
A
Post-Effective Amendment to the Lightstone REIT’s Registration Statement was
declared effective on October 17, 2005. The Post-Effective Amendment reduced
our
minimum offering from 1,000,000 shares of common stock to 200,000 shares of
common stock. As of December 31,
2005, we
had
reached our minimum offering by receiving subscriptions for 225,966
of
our
common shares, representing gross offering proceeds of $2,259,662.
On
February 1, 2006, cumulative gross offering proceeds of $2,731,535 were released
to us from escrow and the gross proceeds were invested in the Operating
Partnership.
As
of
March 27, 2006, cumulative gross offering proceeds of $4,826,158 have been
released to us and used for the purchase of a 99.96% limited partnership
interest in the Operating Partnership. We expect that our ownership percentage
in the Operating Partnership will remain significant as we plan to continue
to
invest all net proceeds from the Offering in the Operating Partnership.
4
PART
1, CONTINUED:
ITEM
1. BUSINESS, CONTINUED:
Lightstone
SLP, LLC, an affiliate of our Advisor, intends to purchase special general
partner units in the Operating Partnership at a cost of $100,000 per unit for
each $1,000,000 in offering subscriptions. Proceeds from the sale of the special
general partnership interests will be used to reimburse organizational and
offering costs paid by our Advisor on our behalf.
In
conjunction with our closing of escrow on February 1, 2006, the Lightstone
REIT
offset proceeds of $225,966 from the sale of special general partnership units
against amounts due to our Advisor. Such offset was in partial satisfaction
of
approximately $1.5 million of offering costs incurred by our Advisor on our
behalf. As of March 27, 2006, cumulative offering costs advanced by our Advisor
totaled approximately $1.7 million, representing 34.7% of gross offering
proceeds during the same period. Our Advisor did not allocate any organizational
costs to the Company as of December 31, 2005. Our Advisor is responsible for
offering and organizational costs exceeding 10% of the gross offering proceeds
without recourse to the Company.
As
of
March 27, 2006, the Company hasn’t purchased any properties, however we have
identified the Belz Factory Outlet World in St. Augustine, Florida as our first
potential acquisition. The $28 million transaction is expected to close by
April
2006, but there can be no assurance that this acquisition will be consummated.
Prime Retail Property Management, LLC, an affiliate of the Lightstone Value
Plus
REIT Management LLC, (the “Property Manager”), will serve as our property
manager.
The
Company’s Advisor, Property Manager and Dealer Manager are each related parties.
Each of these entities will receive compensation and fees for services related
to the offering and for the investment and management of our assets. These
entities will receive fees during the offering, acquisition, operational and
liquidation stages. The compensation levels during the offering, acquisition
and
operational stages are based on percentages of the offering proceeds sold,
the
cost of acquired properties and the annual revenue earned from such properties
and other such fees outlined in each of the respective agreements.
Primary
Investment Objectives
Our
primary investment objectives are:
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Capital
appreciation; and
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Income
without subjecting principal to undue
risk.
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Acquisition
and Investment Policies
We
intend
to acquire fee interests in multi-tenanted, community, power and lifestyle
shopping centers, and in malls located in highly trafficked retail corridors,
high-barrier to entry markets, and sub-markets with constraints on the amount
of
additional property supply. Additionally, we seek to acquire multi-tenanted
industrial properties located near major transportation arteries and
distribution corridors; multi-tenanted office properties located near major
transportation arteries; and market-rate, middle market multifamily properties
at a discount to replacement cost. We do not intend to invest in single family
residential properties; hotels or motels; leisure home sites; farms; ranches;
timberlands; unimproved properties not intended to be developed; or mining
properties.
Investments
in real estate will be made through the purchase of all or part of a fee simple
ownership, or all or part of a leasehold interest. We may also purchase limited
partnership interests, limited liability company interests and other equity
securities. We may also enter into joint ventures with affiliated entities
for
the acquisition, development or improvement of properties as well as general
partnerships, co-tenancies and other participations with real estate developers,
owners and others for the purpose of developing, owning and operating real
properties. We will not enter into a joint venture to make an investment that
we
would not be permitted to make on our own.
Not
more
than 10% of our total assets will be invested in unimproved real property.
For
purposes of this paragraph, “unimproved real properties” does not include
properties acquired for the purpose of producing rental or other operating
income, properties under construction and properties for which development
or
construction is planned within one year. Additionally, we will not invest in
contracts for the sale of real estate unless in recordable form and
appropriately recorded.
Although
we are not limited as to the geographic area where we may conduct our
operations, we intend to invest in properties located near the existing
operations of our sponsor, The Lightstone Group, in order to achieve economies
of scale
5
PART
1, CONTINUED:
ITEM
1. BUSINESS, CONTINUED:
where
possible. The Lightstone Group currently maintains operations in Alabama,
California, Connecticut, District of Columbia, Florida, Georgia, Illinois,
Indiana, Maryland, Massachusetts, Michigan, Mississippi, New Jersey, New York,
North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina,
Tennessee, Texas, Virginia, Washington, West Virginia, Wisconsin and Puerto
Rico.
Financing
Strategy and Policies
We
intend
to utilize leverage in acquiring our properties. The number of different
properties we will acquire will be affected by numerous factors, including,
the
amount of funds available to us. When interest rates on mortgage loans are
high
or financing is otherwise unavailable on terms that are satisfactory to us,
we
may purchase certain properties for cash with the intention of obtaining a
mortgage loan for a portion of the purchase price at a later time. We intend
to
limit our aggregate long-term permanent borrowings to 75% of the aggregate
fair
market value of all properties unless any excess borrowing is approved by a
majority of the independent directors and is disclosed to our stockholders.
We
may
finance our property acquisitions through a variety of means, including but
not
limited to individual non-recourse mortgages and through the exchange of an
interest in the property for limited partnership units of the Operating
Partnership.
The
Company currently has no debt and has not secured any financing sources.
Dividend
Objectives
Federal
income tax law requires that a REIT distribute annually at least 90% of its
REIT
taxable income (excluding any net capital gains). Distributions will be at
the
discretion of the board of directors and will depend upon our distributable
funds, current and projected cash requirements, tax considerations and other
factors. We
intend
to declare dividends to our shareholders as of daily record dates and aggregate
and pay such dividends quarterly.
On
January 26, 2006, our Board of Directors declared a dividend for the two-month
period ending March 31, 2006. The dividend will be calculated based on
shareholders of record each day during this two-month period at a rate of
$0.0019178 per day, and will equal a daily amount that, if paid each day for
a
365-day period, would equal a 7.0% annualized rate based on a share price of
$10.00. The dividend will be paid in cash in April 2006.
Tax
Status
We
intend
to qualify as a REIT and to elect to be taxed as a REIT for the taxable year
ending December 31, 2006, but as of the date of this Annual Report on Form
10-K,
we are not qualified as a REIT.
Once we
qualify for taxation as a REIT, we generally will not be subject to corporate
federal income tax to the extent we distribute our taxable income to our
shareholders. If we fail to qualify as a REIT in any taxable year, we will
be
subject to federal income tax at regular corporate rates.
Competition
The
retail, office, industrial and residential real estate markets are highly
competitive. We will compete in all of our markets with other owners and
operators of retail, office, industrial and residential real estate. The
continued development of new retail, office, industrial and residential
properties has intensified the competition among owners and operators of these
types of real estate in many market areas in which we intend to operate. We
will
compete based on a number of factors that include location, rental rates,
security, suitability of the property’s design to prospective tenants’ needs and
the manner in which the property is operated and marketed. The number of
competing properties in a particular market could have a material effect on
our
occupancy levels, rental rates and on the operating expenses of certain of
our
properties.
In
addition, we will compete with other entities engaged in real estate investment
activities to locate suitable properties to acquire and to locate tenants and
purchasers for our properties. These competitors will include other REITs,
specialty finance companies, savings and loan associations, banks, mortgage
bankers, insurance companies, mutual funds, institutional investors, investment
banking firms, lenders, governmental bodies and other entities. There are also
other REITs with asset acquisition objectives similar to ours and others may
be
organized in the future. Some of these competitors, including larger REITs,
have
substantially greater marketing and financial resources than we will have and
generally may be able to accept more risk than we can prudently manage,
including risks with respect to the creditworthiness of tenants. In addition,
these same entities seek financing through similar channels to our company.
Therefore, we will compete for institutional investors in a market where funds
for real estate investment may decrease.
6
PART
1, CONTINUED:
ITEM
1. BUSINESS, CONTINUED:
Competition
from these and other third party real estate investors may limit the number
of
suitable investment opportunities available to us. It may also result in higher
prices, lower yields and a narrower spread of yields over our borrowing costs,
making it more difficult for us to acquire new investments on attractive terms.
In addition, competition for desirable investments could delay the investment
of
proceeds from this offering in desirable assets, which may in turn reduce our
earnings per share and negatively affect our ability to commence or maintain
distributions to stockholders.
We
believe that our senior management’s experience, coupled with our financing,
professionalism, diversity of properties and reputation in the industry will
enable us to compete with the other real estate investment companies.
Because
we are organized as an UPREIT, we are well positioned within the industries
in
which we intend to operate to offer existing owners the opportunity to
contribute those properties to our company in tax-deferred transactions using
our operating partnership units as transactional currency. As a result, we
have
a competitive advantage over most of our competitors that are structured as
traditional REITs and non-REITs in pursuing acquisitions with tax-sensitive
sellers.
Environmental
As
an
owner of real estate, we will be subject to various environmental laws of
federal, state and local governments. Compliance with existing laws has not
had
a material adverse effect on our financial condition or results of operations,
and management does not believe it will have such an impact in the future.
However, we cannot predict the impact of unforeseen environmental contingencies
or new or changed laws or regulations on properties in which we hold an
interest, or on properties that may be acquired directly or indirectly in the
future.
Employees
We
do not
have employees. We entered into an advisory agreement with our Advisor on April
22, 2005, pursuant to which our Advisor supervises and manages our day-to-day
operations and selects our real estate and real estate related investments,
subject to oversight by our board of directors. We will pay our Advisor fees
for
services related to the investment and management of our assets, and we will
reimburse our Advisor for certain expenses incurred on our behalf.
Economic
Dependence
We
are
dependent upon the net proceeds to be received from the Offering to conduct
our
proposed activities. The capital required to purchase real estate and real
estate related investments will be obtained from the Offering and from any
indebtedness that we may incur in connection with the acquisition of any real
estate and real estate related investments thereafter.
Available
Information
Shareholders
may obtain copies of our filings with the Securities and Exchange Commission,
or
SEC, free of charge from the website maintained by the SEC at
http://www.sec.gov. Our office is located at 326 Third Avenue, Lakewood, NJ
08701. Our telephone number is 1-866-792-8700. Our web site is
www.LightstoneREIT.com.
7
PART
1, CONTINUED:
ITEM
1. BUSINESS, CONTINUED:
ITEM
1A. RISK FACTORS:
Set
forth below are the risk factors that we believe are material to our investors.
This section contains forward-looking statements. You should refer
to the explanation of the qualifications and limitations on forward-looking
statements on page 3. If any of the risk events described below actually occurs,
our business, financial condition or results of operations could be adversely
affected.
Risks
Related to the Common Stock
We
are a newly formed company with no operating history upon which to evaluate
our
likely performance. We
do not
have an operating history upon which to evaluate our likely performance. We
may
not be able to implement our business plan successfully.
Distributions
to stockholders may be reduced or not made at all. Distributions
will be based principally on cash available from our properties. The amount
of
cash available for distributions will be affected by many factors, such as
our
ability to buy properties as offering proceeds become available, the operating
performance of the properties we acquire and many other variables. We may not
be
able to pay or maintain distributions or increase distributions over time.
Therefore, we cannot determine what amount of cash will be available for
distributions. Some of the following factors, which we believe are the material
factors that can affect our ability to make distributions, are beyond our
control, and a change in any one factor could adversely affect our ability
to
pay future distributions:
| • |
Cash
available for distributions may be reduced if we are required to
make
capital improvements to properties.
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| • |
Cash
available to make distributions may decrease if the assets we acquire
have
lower cash flows than expected.
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| • |
Until
we invest our offering proceeds in real properties, we may invest
in lower
yielding short-term instruments, which could result in a lower yield
on
stockholders’ investment.
|
| • |
In
connection with future property acquisitions, we may issue additional
shares of common stock and/or operating partnership units or interests
in
the entities that own our properties. We cannot predict the number
of
shares of common stock, units or interests that we may issue, or
the
effect that these additional shares might have on cash available
for
distributions to stockholders. If we issue additional shares, that
issuance could reduce the cash available for distributions to
stockholders.
|
| • |
We
make distributions to our stockholders to comply with the distribution
requirements of the Internal Revenue Code and to eliminate, or at
least
minimize, exposure to federal income taxes and the nondeductible
REIT
excise tax. Differences in timing between the receipt of income and
the
payment of expenses, and the effect of required debt payments, could
require us to borrow funds on a short-term basis to meet the distribution
requirements that are necessary to achieve the tax benefits associated
with qualifying as a REIT.
|
Our
operations could be restricted if we become subject to the Investment Company
Act of 1940. We
intend
to conduct our operations so that we will not be subject to regulation under
the
Investment Company Act of 1940. We may therefore have to forego certain
investments that could produce a more favorable return. Should we fail to
qualify for an exemption from registration under the Investment Company Act
of
1940, we would be subject to numerous restrictions under this Act, which would
have a material adverse affect on our ability to deliver returns to our
stockholders.
We
do not
believe that we or our operating partnership will be considered an “investment
company” as defined in the Investment Company Act of 1940 because we do not
intend to engage in the types of business that characterize an investment
company under that law. Investments in real estate will represent the
substantial majority of our business, which would not subject us to investment
company status. While a company that owns investment securities having a value
exceeding 40 percent of its total assets could be considered an investment
company, we believe that if we make investments in joint ventures they will
be
structured so that they are not considered “investment securities” for purposes
of the law. However, if an examination of this type of our investments by the
SEC or a court deem them to be investment securities, we could be deemed to
be
an investment company and subject to additional restrictions.
8
PART
1, CONTINUED:
ITEM
1A. RISK FACTORS, CONTINUED:
Even
if
we or our operating partnership are deemed an investment company, we may qualify
for an exemption from the provisions of the Investment Company Act, such as
the
exemption that applies generally to companies that purchase or otherwise acquire
interests in real estate. Under Section 3(c)(5)(C), the Investment Company
Act
exempts entities that are primarily engaged in the business of purchasing or
otherwise acquiring “mortgages and other liens on and interests in real estate.”
The staff of the SEC has provided guidance on the availability of this
exemption. Specifically, the staff’s position generally requires us to maintain
at least 55% of our assets directly in qualifying real estate interests
(“qualifying assets”). To constitute a qualifying real estate interest under
this 55% requirement, a real estate interest must meet various criteria. We
intend to invest only in fee or leasehold interests in real estate. Fee
interests in real estate are considered “qualifying assets” for purposes of
Section 3(c)(5)(C) of the Investment Company Act and leasehold interests in
real
estate may be considered “qualifying assets” for purposes of
Section 3(c)(5)(C) of the Investment Company Act. We do not intend to
invest in mezzanine loans, subordinate interests in whole loans (B Notes),
distressed debt, preferred equity or multi-class (first loss) mortgage-back
securities. Investments in such assets may not be deemed “qualifying assets” for
purposes of Section 3(c)(5)(C) of the Investment Company Act and, as a result,
any such investments may have to be limited. There can be no assurance that
our
investments will continue to qualify for an exemption from investment company
status.
If
we
fail to maintain an exemption or exclusion from registration as an investment
company, we could, among other things, be required either (a) to substantially
change the manner in which we conduct our operations to avoid being required
to
register as an investment company, or (b) to register as an investment company,
either of which could have an adverse effect on us and the market price of
our
common stock. If we were required to register as an investment company under
the
Investment Company Act, we would become subject to substantial regulation with
respect to our capital structure (including our ability to use leverage),
management, operations, transactions with affiliated persons (as defined in
the
Investment Company Act), portfolio composition, including restrictions with
respect to diversification and industry concentration and other matters.
We
intend
to monitor our compliance with the exemptions under the Investment Company
Act
on an ongoing basis.
The
special general partner interests will entitle Lightstone SLP, LLC, which is
directly owned and controlled by our sponsor, to certain payments and
distributions that will significantly reduce the distributions available to
stockholders after a 7% return.
Lightstone SLP, LLC will receive returns on its special general partner
interests that are subordinated to stockholders’ 7% return on their net
investment. Distributions to stockholders will be reduced after they have
received this 7% return because of the payments and distributions to Lightstone
SLP, LLC in connection with its special general partner interests that will
be
issued as more proceeds are raised in our offering of common stock. In addition,
we may eventually repay Lightstone SLP, LLC up to $30,000,000 for its investment
in the special general partner interests, which will result in a smaller pool
of
assets available for distribution to stockholders.
Conflicts
of Interest
There
are conflicts of interest between our dealer manager, advisor, property manager
and their affiliates and us. David
Lichtenstein, our sponsor, founded both American Shelter Corporation and The
Lightstone Group, LLC in 1988. Mr. Lichtenstein wholly owns The Lightstone
Group
and does business in his individual capacity under that name. Through The
Lightstone Group, Mr. Lichtenstein controls and indirectly owns our advisor,
our
property manager, our operating partnership, our dealer manager and affiliates,
except for us, although he owned over 9% of our shares indirectly through our
advisor at the time we reached the minimum offering of $2,000,000. [This
percentage results from dividing 20,000 by the total of 220,000 issued and
outstanding shares at the time of the minimum.]
Mr.
Lichtenstein is one of our directors and The Lightstone Group or an affiliated
entity controlled by Mr. Lichtenstein employs Bruno de Vinck, our other
non-independent director, and each of our officers. As a result, our operation
and management may be influenced or affected by conflicts of interest arising
out of our relationship with our affiliates.
There
is competition for the time and services of the personnel of our advisor and
its
affiliates. Our
sponsor and its affiliates may compete with us for the time and services of
the
personnel of our advisor and its other affiliates in connection with our
operation and the management of our assets. Specifically, employees of our
sponsor, the advisor and the property manager will face conflicts of interest
relating to time management and the allocation of resources and investment
opportunities.
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We
do not have employees. Likewise,
our advisor will rely on the employees of the sponsor and its affiliates to
manage and operate our business. The sponsor is not restricted from acquiring,
developing, operating, managing, leasing or selling real estate through entities
other than us and will continue to be actively involved in operations and
activities other than our operations and activities. The sponsor currently
controls and/or operates other entities that own properties in many of the
markets in which we may seek to invest. The sponsor spends a material amount
of
time managing these properties and other assets unrelated to our business.
Our
business may suffer as a result because we lack the ability to manage it without
the time and attention of our sponsor’s employees.
Our
sponsor and its affiliates are general partners and sponsors of other real
estate programs having investment objectives and legal and financial obligations
similar to ours. Because the sponsor and its affiliates have interests in other
real estate programs and also engage in other business activities, they may
have
conflicts of interest in allocating their time and resources among our business
and these other activities. Our officers and directors, as well as those of
the
advisor, may own equity interests in entities affiliated with our sponsor from
which we may buy properties. These individuals may make substantial profits
in
connection with such transactions, which could result in conflicts of interest.
Likewise, such individuals could make substantial profits as the result of
investment opportunities allocated to entities affiliated with the sponsor
other
than us. As a result of these interests, they could pursue transactions that
may
not be in our best interest. Also, if our sponsor suffers financial or
operational problems as the result of any of its activities, whether or not
related to our business, the ability of our sponsor and its affiliates, our
advisor and property manager to operate our business could be adversely
impacted.
Certain
of our affiliates who provide services to us may be engaged in competitive
activities. Our
advisor, property manager and their respective affiliates may, in the future,
be
engaged in other activities that could result in potential conflicts of interest
with the services that they will provide to us. In addition, the sponsor may
compete with us for both the acquisition and/or refinancing of properties of
a
type suitable for our investment following the final closing of the offering
of
our common shares and after 75% of the total gross proceeds from such offering
of the shares have been invested or committed for investment in real properties.
If
we invest in joint ventures, the objectives of our partners may conflict with
our objectives. In
accordance with one of our acquisition strategies, we may make investments
in
joint ventures or other partnership arrangements between us and affiliates
of
our sponsor or with unaffiliated third parties. Investments in joint ventures
which own real properties may involve risks otherwise not present when we
purchase real properties directly. For example, our co-venturer may file for
bankruptcy protection, may have economic or business interests or goals which
are inconsistent with our interests or goals, or may take actions contrary
to
our instructions, requests, policies or objectives. Among other things, actions
by a co-venturer might subject real properties owned by the joint venture to
liabilities greater than those contemplated by the terms of the joint venture
or
other adverse consequences.
These
diverging interests could result in, among other things, exposing us to
liabilities of the joint venture in excess of our proportionate share of these
liabilities. The partition rights of each owner in a jointly owned property
could reduce the value of each portion of the divided property. Moreover, there
is an additional risk that the co-venturers may not be able to agree on matters
relating to the property they jointly own. In addition, the fiduciary obligation
that our sponsor or our board of directors may owe to our partner in an
affiliated transaction may make it more difficult for us to enforce our rights.
We
may purchase real properties from persons with whom affiliates of our advisor
have prior business relationships. If
we
purchase properties from third parties who have sold, or may sell, properties
to
our advisors or its affiliates, our advisor will experience a conflict between
our current interests and its interest in preserving any ongoing business
relationship with these sellers.
Property
management services are being provided by an affiliated party.
Our
property manager is owned by our sponsor, and is thus subject to an inherent
conflict of interest. In addition, our advisor may face a conflict of interest
when determining whether we should dispose of any property we own that is
managed by the property manager because the property manager may lose fees
associated with the management of the property. Specifically, because the
property manager will receive significant fees for managing our properties,
our
advisor may face a conflict of interest when determining whether we should
sell
properties under circumstances where the property manager would no longer manage
the property after the transaction. As a result of this conflict of interest,
we
may not dispose of properties when it would be in our best interests to do
so.
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Our
advisor and its affiliates receive commissions, fees and other compensation
based upon our investments. Some
compensation is payable to our advisor whether or not there is cash available
to
make distributions to our stockholders. To the extent this occurs, our advisor
and its affiliates benefit from us retaining ownership of our assets and
leveraging our assets, while our stockholders may be better served by sale
or
disposition or not leveraging the assets. In addition, the advisor’s ability to
receive fees and reimbursements depends on our continued investment in real
properties. Therefore, the interest of the advisor and its affiliates in
receiving fees may conflict with the interest of our stockholders in earning
income on their investment in our common stock. Because asset management fees
payable to our advisor are based on total assets under management, including
assets purchased using indebtedness, our advisor may have an incentive to incur
a high level of leverage in order to increase the total amount of assets under
management.
Our
sponsor may face conflicts of interest in connection with the management of
our
day-to-day operations and in the enforcement of agreements between our sponsor
and its affiliates.
The
property manager and the advisor will manage our day-to-day operations and
properties pursuant to a management agreement and an advisory agreement. These
agreements were not negotiated at arm’s length and certain fees payable by us
under such agreements are paid regardless of our performance. Our sponsor and
its affiliates may be in a conflict of interest position as to matters relating
to these agreements. Examples include the computation of fees and reimbursements
under such agreements, the enforcement and/or termination of the agreements
and
the priority of payments to third parties as opposed to amounts paid to our
sponsor’s affiliates. These fees may be higher than fees charged by third
parties in an arm’s-length transaction as a result of these conflicts.
We
may compete with other entities affiliated with our sponsor for
tenants.
The
sponsor and its affiliates are not prohibited from engaging, directly or
indirectly, in any other business or from possessing interests in any other
business venture or ventures, including businesses and ventures involved in
the
acquisition, development, ownership, management, leasing or sale of real estate
projects. The sponsor or its affiliates may own and/or manage properties in
most
if not all geographical areas in which we expect to acquire real estate assets.
Therefore, our properties may compete for tenants with other properties owned
and/or managed by the sponsor and its affiliates. The sponsor may face conflicts
of interest when evaluating tenant opportunities for our properties and other
properties owned and/or managed by the sponsor and its affiliates and these
conflicts of interest may have a negative impact on our ability to attract
and
retain tenants.
We
have the same legal counsel as our sponsor and its affiliates.
Proskauer
Rose LLP serves as our general legal counsel, as well as special counsel to
our
sponsor and various affiliates including, our advisor. The interests of our
sponsor and its affiliates, including our sponsor, may become adverse to ours
in
the future. Under legal ethics rules, Proskauer Rose LLP may be precluded from
representing us due to any conflict of interest between us and our sponsor
and
its affiliates, including our advisor.
Risks
Related to our Organization, Structure and Management
Limitations
on Changes in Control (Anti-Takeover Provisions).
Because
of the way we are organized, we would be a difficult takeover target. Certain
provisions in our charter, bylaws, operating partnership agreement, advisory
agreement and Maryland law may have the effect of discouraging a third party
from making an acquisition proposal and could thereby depress the price of
our
stock and inhibit a management change. Provisions which may have an
anti-takeover effect and inhibit a change in our management include:
There
are ownership limits and restrictions on transferability and ownership in our
charter. In
order
for us to qualify as a REIT, no more than 50% of the outstanding shares of
our
stock may be beneficially owned, directly or indirectly, by five or fewer
individuals at any time during the last half of each taxable year. To make
sure
that we will not fail to qualify as a REIT under this test, our charter provides
that, subject to some exceptions, no person may beneficially own (i) more than
9.8% in value of our aggregate outstanding stock or (ii) more than 9.8% in
terms of the number of outstanding shares or the value of our common stock.
Our
board of directors may exempt a person from the 9.8% ownership limit upon such
conditions as the board of directors may direct. However, our board of directors
may not grant an exemption from the 9.8% ownership limit to any proposed
transferee if it would result in the termination of our status as a REIT.
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This
restriction may:
| • |
have
the effect of delaying, deferring or preventing a change in control
of us,
including an extraordinary transaction (such as a merger, tender
offer or
sale of all or substantially all of our assets) that might provide
a
premium price for holders of our common stock; or
|
| • |
compel
a stockholder who had acquired more than 9.8% of our stock to dispose
of
the additional shares and, as a result, to forfeit the benefits of
owning
the additional shares.
|
Our
charter permits our board of directors to issue preferred stock with terms
that
may discourage a third party from acquiring us. Our charter authorizes us to
issue additional authorized but unissued shares of common stock or preferred
stock. In addition, our board of directors may classify or reclassify any
unissued shares of common stock or preferred stock and may set the preferences,
rights and other terms of the classified or reclassified shares. Our board
of
directors could establish a series of Preferred Stock that could delay or
prevent a transaction or a change in control that might involve a premium price
for the Common Stock or otherwise be in the best interest of our stockholders.
The
operating partnership agreement contains provisions that may discourage a third
party from acquiring us. A
limited
partner in Lightstone Value Plus REIT LP, a Delaware limited partnership and
our
operating partnership, has the option to exchange his or her limited partnership
units for cash or, at our option, shares of our common stock. Those exchange
rights are generally not exercisable until the limited partner has held those
limited partnership units for more than one year. However, if we or the
operating partnership propose to engage in any merger, consolidation or other
combination with or into another person or a sale of all or substantially all
of
our assets, or a liquidation, or any reclassification, recapitalization or
change of common and preferred stock into which a limited partnership common
unit may be exchanged, each holder of a limited partnership unit will have
the
right to exchange the partnership unit into cash or, at our option, shares
of
common
stock,
prior to the stockholder vote on the transaction. As a result, limited
partnership unit holders who timely exchange their units prior to the record
date for the stockholder vote on any transaction will be entitled to vote their
shares of common stock with respect to the transaction. The additional shares
that might be outstanding as a result of these exchanges of limited partnership
units may deter an acquisition proposal.
Maryland
law may discourage a third party from acquiring us. Maryland
law restricts mergers and other business combinations and provides that control
shares of a Maryland corporation acquired in a control share acquisition have
limited voting rights. These provisions of Maryland law are more fully described
below under the heading “Provisions of Maryland Law and of our Charter and
Bylaws.” The business combination statute could have the effect of discouraging
offers from third parties to acquire us and increasing the difficulty of
successfully completing this type of offer. The control share statute may
discourage others from trying to acquire control of us and increase the
difficulty of consummating any offer. Our bylaws contain a provision exempting
from the control share acquisition statute any and all acquisitions by the
sponsor and its affiliates of shares of our stock, however, this provision
may
be amended or eliminated at any time in the future.
Management
and Policy Changes
We
may not be reimbursed by our advisor for certain operational stage expenses.
Our
advisor may be required to reimburse us for certain operational stage expenses.
In the event our advisor’s net worth or cash flow is not sufficient to cover
these expenses, we will not be reimbursed. This may adversely affect our
financial condition and our ability to pay distributions.
Our
rights and the rights of our stockholders to take action against the directors
and the advisor are limited. Maryland
law provides that a director has no liability in that capacity if he or she
performs his duties in good faith, in a manner he or she reasonably believes
to
be in the best interests of the corporation and with the care that an ordinarily
prudent person in a like position would use under similar circumstances. Subject
to the restrictions discussed below, our charter, in the case of our directors,
officers, employees and agents, and the advisory agreement, in the case of
the
advisor, require us to indemnify our directors, officers, employees and agents
and the advisor for actions taken on our behalf, in good faith and in our best
interest and without negligence or misconduct or, in the case of independent
directors, without gross negligence or
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willful
misconduct. As a result, we and the stockholders may have more limited rights
against our directors, officers, employees and agents, and the advisor than
might otherwise exist under common law. In addition, we may be obligated to
fund
the defense costs incurred by our directors, officers, employees and agents
or
the advisor in some cases.
Stockholders
have limited control over changes in our policies. Our
board
of directors determines our major policies, including our investment objectives,
financing, growth, debt capitalization, REIT qualification and distributions.
Subject to the investment objections and limitations set forth in our charter,
our board of directors may amend or revise these and other policies. Although
stockholders will have limited control over changes in our policies, our charter
requires the concurrence of a majority of our outstanding stock in order for
the
board of directors to amend our charter (except for amendments that do not
adversely affect stockholders’ rights, preferences and privileges), sell all or
substantially all of our assets other than in the ordinary course of business
or
in connection with our liquidation or dissolution, cause our merger or other
reorganization, or dissolve or liquidate us, other than before our initial
investment in property.
Certain
of our affiliates will receive substantial fees prior to the payment of
dividends to our stockholders. We
will
pay or cause to be paid substantial compensation to our dealer manager, advisor,
property manager, management and affiliates and their employees. We will pay
various types of compensation to affiliates of The Lightstone Group and such
affiliates’ employees, including salaries, other cash compensation and options.
In addition, our affiliates, Lightstone Securities and Lightstone Value Plus
REIT, LLC, will receive compensation for acting, respectively, as our dealer
manager and advisor (although we will pay dealer manager fees and selling
commissions with the proceeds from the sale of the special general partner
interests in our operating partnership to the sponsor or an affiliate). In
general, this compensation will not be dependent on our success or
profitability. These payments are payable before the payment of dividends to
the
stockholders and none of these payments are subordinated to a specified return
to the stockholders. Also, Lightstone Value Plus REIT Management LLC, our
property manager and an affiliate of The Lightstone Group, will receive
compensation under the Management Agreement though, in general, this
compensation would be dependent on our gross revenues. In addition, other
affiliates may from time to time provide services to us if and as approved
by
the disinterested directors. It is possible that we could obtain such goods
and
services from unrelated persons at a lesser price. We do not currently own
properties or other investments, we have not obtained any financing and we
do
not currently conduct any operations.
Limitations
on Liability and Indemnification
The
liability of directors and officers is limited.
Our
directors and officers will not be liable for monetary damages unless the
director or officer actually received an improper benefit or profit in money,
property or services, or is adjudged to be liable to us or our stockholders
based on a finding that his or her action, or failure to act, was the result
of
active and deliberate dishonesty and was material to the cause of action
adjudicated in the proceeding.
Our
directors are also required to act in good faith in a manner believed by them
to
be in our best interests and with the care that an ordinarily prudent person
in
a like position would use under similar circumstances. A director who performs
his or her duties in accordance with the foregoing standards should not be
liable to us or any other person for failure to discharge his obligations as
a
director. We are permitted to purchase and maintain insurance or provide similar
protection on behalf of any directors, officers, employees and agents, including
our advisor and its affiliates, against any liability asserted which was
incurred in any such capacity with us or arising out of such status, except
as
limited by our charter. This may result in us having to expend significant
funds, which will reduce the available cash for distribution to our
stockholders.
Our
charter prohibits us from indemnifying or holding harmless, for any loss or
liability that we suffer, any director, officer, employee, agent or the advisor
or its affiliates.
We
may indemnify our directors, officers and agents against
loss.
Under
our charter, we will, under specified conditions, indemnify and pay or reimburse
reasonable expenses to our directors, officers, employees and other agents,
including our advisor and its affiliates, against all liabilities incurred
in
connection with their serving in such capacities, subject to the limitations
set
forth in our charter. We may also enter into any contract for indemnity and
advancement of expenses in this regard. This may result in us having to expend
significant funds, which will reduce the available cash for distribution to
our
stockholders.
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Risks
Associated with our Properties and the Market
Real
Estate Investment Risks
Operating
risks.
Failure
to generate revenue may reduce distributions to
stockholders.
The cash
flow from equity investments in commercial and residential properties depends
on
the amount of revenue generated and expenses incurred in operating the
properties. If the properties we invest in fail to generate revenue that is
sufficient to meet operating expenses, debt service, and capital expenditures,
our income and ability to make distributions to stockholders will be adversely
affected.
Economic
conditions may adversely affect our income.
A
commercial or residential property’s income and value may be adversely affected
by national and regional economic conditions, local real estate conditions
such
as an oversupply of properties or a reduction in demand for properties,
availability of “for sale” properties, competition from other similar
properties, our ability to provide adequate maintenance, insurance and
management services, increased operating costs (including real estate taxes),
the attractiveness and location of the property and changes in market rental
rates. Our income will be adversely affected if the properties we invest in
cannot be rented on favorable terms or if a significant number of tenants in
such properties are unable to pay rent. Our performance is linked to economic
conditions in the regions where the properties we invest in will be located
and
in the market for residential, office, retail and industrial space generally.
Therefore, to the extent that there are adverse economic conditions in those
regions, and in these markets generally, that impact the applicable market
rents, such conditions could result in a reduction of our income and cash
available for distributions and thus affect the amount of distributions we
can
make to stockholders.
The
profitability of attempted acquisitions is uncertain. We
intend
to acquire properties selectively. Acquisition of properties entails risks
that
investments will fail to perform in accordance with expectations. In undertaking
these acquisitions, we will incur certain risks, including the expenditure
of
funds on, and the devotion of management’s time to, transactions that may not
come to fruition. Additional risks inherent in acquisitions include risks that
the properties will not achieve anticipated occupancy levels and that estimates
of the costs of improvements to bring an acquired property up to standards
established for the market position intended for that property may prove
inaccurate.
Real
estate investments are illiquid. Because
real estate investments are relatively illiquid, our ability to vary our
portfolio promptly in response to economic or other conditions will be limited.
In addition, certain significant expenditures, such as debt service, real estate
taxes, and operating and maintenance costs generally are not reduced in
circumstances resulting in a reduction in income from the investment. The
foregoing and any other factor or event that would impede our ability to respond
to adverse changes in the performance of our investments could have an adverse
effect on our financial condition and results of operations.
Rising
expenses could reduce cash flow and funds available for future acquisitions.
Properties
we invest in will be subject to increases in tax rates, utility costs, operating
expenses, insurance costs, repairs and maintenance, administrative and other
expenses. While some of our properties may be leased on a triple-net basis
or
require the tenants to pay a portion of the expenses, renewals of leases or
future leases may not be negotiated on that basis, in which event we will have
to pay those costs. If we are unable to lease properties on a triple-net basis
or on a basis requiring the tenants to pay all or some of the expenses, we
would
be required to pay those costs, which could adversely affect funds available
for
future acquisitions or cash available for distributions.
We
will depend on tenants who lease from us on a triple-net basis to pay the
appropriate portion of expenses.
If the
tenants lease on a triple-net basis fail to pay required tax, utility and other
impositions, we could be required to pay those costs for properties we invest
in, which would adversely affect funds available for future acquisitions or
cash
available for distributions. If we lease properties on a triple-net basis,
we
run the risk of tenant default or downgrade in the tenant’s credit, which could
lead to default, and foreclosure on the underlying property.
If
we purchase assets at a time when the commercial and residential real estate
market is experiencing substantial influxes of capital investment and
competition for properties, the real estate we purchase may not appreciate
or
may decrease in value.
The
commercial and residential real estate markets are currently experiencing a
substantial influx of capital from investors. This substantial flow of capital,
combined with significant competition for real estate, may result in
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inflated
purchase prices for such assets. To the extent we purchase real estate in such
an environment, we are subject to the risk that if the real estate market ceases
to attract the same level of capital investment in the future as it is currently
attracting, or if the number of companies seeking to acquire such assets
decreases, our returns will be lower and the value of our assets may not
appreciate or may decrease significantly below the amount we paid for such
assets.
The
bankruptcy or insolvency of a major commercial tenant would adversely impact
us.
Any
or
all of the commercial tenants in a property we invest in, or a guarantor of
a
commercial tenant’s lease obligations, could be subject to a bankruptcy
proceeding. The bankruptcy or insolvency of a significant commercial tenant
or a
number of smaller commercial tenants would have an adverse impact on our income
and our ability to pay dividends because a tenant or lease guarantor bankruptcy
could delay efforts to collect past due balances under the relevant leases,
and
could ultimately preclude full collection of these sums. Such an event could
cause a decrease or cessation of rental payments that would mean a reduction
in
our cash flow and the amount available for distributions to stockholders.
Generally,
under bankruptcy law, a tenant has the option of continuing or terminating
any
unexpired lease. In the event of a bankruptcy, there is no assurance that the
tenant or its trustee will continue our lease. If a given lease, or guaranty
of
a lease, is not assumed, our cash flow and the amounts available for
distributions to stockholders may be adversely affected. If the tenant continues
its current lease, the tenant must cure all defaults under the lease and provide
adequate assurance of its future performance under the lease. If the tenant
terminates the lease, we will lose future rent under the lease and our claim
for
past due amounts owing under the lease will be treated as a general unsecured
claim and may be subject to certain limitations. General unsecured claims are
the last claims paid in a bankruptcy and therefore this claim could be paid
only
in the event funds were available, and then only in the same percentage as
that
realized on other unsecured claims. While the bankruptcy of any tenant and
the
rejection of its lease may provide us with an opportunity to lease the vacant
space to another more desirable tenant on better terms, there can be no
assurance that we would be able to do so.
The
terms of new leases may adversely impact our income. Even
if
the tenants of the properties we invest in do renew their leases, or we relet
the units to new tenants, the terms of renewal or reletting may be less
favorable than current lease terms. If the lease rates upon renewal or reletting
are significantly lower than expected rates, then our results of operations
and
financial condition will be adversely affected. As noted above, certain
significant expenditures associated with each equity investment in real estate
(such as mortgage payments, real estate taxes and maintenance costs) are
generally not reduced when circumstances result in a reduction in rental income.
We
may depend on commercial tenants for our revenue and therefore our revenue
may
depend on the success and economic viability of our commercial tenants. Our
reliance on single or significant commercial tenants in certain buildings may
decrease our ability to lease vacated space.
Our
financial results will depend in part on leasing space in the properties we
acquire to tenants on economically favorable terms. A default by a commercial
tenant, the failure of a guarantor to fulfill its obligations or other premature
termination of a lease, or a commercial tenant’s election not to extend a lease
upon its expiration could have an adverse effect on our income, general
financial condition and ability to pay distributions. Therefore, our financial
success is indirectly dependent on the success of the businesses operated by
the
commercial tenants of our properties.
Lease
payment defaults by commercial tenants would most likely cause us to reduce
the
amount of distributions to stockholders. In the event of a tenant default,
we
may experience delays in enforcing our rights as landlord and may incur
substantial costs in protecting our investment and re-letting our property.
A
default by a significant commercial tenant or a substantial number of commercial
tenants at any one time on lease payments to us would cause us to lose the
revenue associated with such lease(s) and cause us to have to find an
alternative source of revenue to meet mortgage payments and prevent a
foreclosure if the property is subject to a mortgage. Therefore, lease payment
defaults by tenants could cause us to reduce the amount of distributions to
stockholders.
Commercial
tenants may have the right to terminate their leases upon the occurrence of
certain customary events of default and, in other circumstances, may not renew
their leases or, because of market conditions, may be able to renew their leases
on terms that are less favorable to us than the terms of the current leases.
If
a lease is terminated, there is no assurance that we will be able to lease
the
property for the rent previously received or sell the property without incurring
a loss. Therefore, the weakening of the financial condition of a significant
commercial tenant or a number of smaller commercial tenants and vacancies caused
by defaults of tenants or the expiration of leases may adversely affect our
operations.
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1A. RISK FACTORS, CONTINUED:
A
property that incurs a vacancy could be difficult to re-lease.
A
property may incur a vacancy either by the continued default of a tenant under
its lease or the expiration of one of our leases. If we terminate any lease
following a default by a lessee, we will have to re-lease the affected property
in order to maintain our qualification as a REIT. If a tenant vacates a
property, we may be unable either to re-lease the property for the rent due
under the prior lease or to re-lease the property without incurring additional
expenditures relating to the property. In addition, we could experience delays
in enforcing our rights against, and collecting rents (and, in some cases,
real
estate taxes and insurance costs) due from a defaulting tenant. Any delay we
experience in re-leasing a property or difficulty in re-leasing at acceptable
rates may reduce cash available to make distributions to our stockholders.
In
many
cases, tenant leases contain provisions giving the tenant the exclusive right
to
sell particular types of merchandise or provide specific types of services
within the particular retail center, or limit the ability of other tenants
to
sell such merchandise or provide such services. When re-leasing space after
a
vacancy is necessary, these provisions may limit the number and types of
prospective tenants for the vacant space.
We
also
may have to incur substantial expenditures in connection with any re-leasing.
A
number of the properties we invest in may be specifically suited to the
particular needs of our tenants. Therefore, we may have difficulty obtaining
a
new tenant for any vacant space we have in our properties, particularly if
the
floor plan of the vacant space limits the types of businesses that can use
the
space without major renovation. If the vacancy continues for a long period
of
time, we may suffer reduced revenues resulting in less cash dividends to be
distributed to stockholders. As noted above, certain significant expenditures
associated with each equity investment (such as mortgage payments, real estate
taxes and maintenance costs) are generally not reduced when circumstances cause
a reduction in income from the investment. The failure to re-lease or to
re-lease on satisfactory terms could result in a reduction of our income, funds
from operations and cash available for distributions and thus affect the amount
of distributions to stockholders. In addition, the resale value of the property
could be diminished because the market value of a particular property will
depend principally upon the value of the leases of such property.
We
may be unable to sell a property if or when we decide to do
so.
We may
give some commercial tenants the right, but not the obligation, to purchase
their properties from us beginning a specified number of years after the date
of
the lease. Some of our leases also generally provide the tenant with a right
of
first refusal on any proposed sale provisions. These policies may lessen the
ability of the advisor and our board of directors to freely control the sale
of
the property.
Although
we may grant a lessee a right of first offer or option to purchase a property,
there is no assurance that the lessee will exercise that right or that the
price
offered by the lessee in the case of a right of first offer will be adequate.
In
connection with the acquisition of a property, we may agree on restrictions
that
prohibit the sale of that property for a period of time or impose other
restrictions, such as a limitation on the amount of debt that can be placed
or
repaid on that property. Even absent such restrictions, the real estate market
is affected by many factors, such as general economic conditions, availability
of financing, interest rates and other factors, including supply and demand,
that are beyond our control. We may not be able to sell any property for the
price or on the terms set by us, and prices or other terms offered by a
prospective purchaser may not be acceptable to us. We cannot predict the length
of time needed to find a willing purchaser and to close the sale of a property.
We may be required to expend funds to correct defects or to make improvements
before a property can be sold. We may not have funds available to correct such
defects or to make such improvements.
We
may not make a profit if we sell a property. The
prices that we can obtain when we determine to sell a property will depend
on
many factors that are presently unknown, including the operating history, tax
treatment of real estate investments, demographic trends in the area and
available financing. There is a risk that we will not realize any significant
appreciation on our investment in a property. Accordingly, stockholders’ ability
to recover all or any portion of stockholders’ investment under such
circumstances will depend on the amount of funds so realized and claims to
be
satisfied therefrom.
Our
properties may not be diversified. Because
this offering will be made on a best efforts basis, our potential profitability
and our ability to diversify our investments, both geographically and by type
of
properties purchased, will be limited by the amount of funds we raise. We will
be able to purchase additional properties only as additional funds are raised.
Even if we sell 30,000,000 shares of common stock for $300,000,000, our
properties may not be well diversified and their economic performance could
be
affected by changes in local economic conditions.
16
PART
1, CONTINUED:
ITEM
1A. RISK FACTORS, CONTINUED:
Our
current strategy is to acquire interests primarily in industrial facilities,
retail space (primarily multi-tenanted shopping centers), office buildings,
residential apartment communities and other income-producing real estate. As
a
result, we are subject to the risks inherent in investing in these industries.
A
downturn in the office, industrial, retail or residential industry may have
more
pronounced effects on the amount of cash available to us for distribution or
on
the value of our assets than if we had diversified our investments.
Our
performance is therefore linked to economic conditions in the regions in which
we will acquire properties and in the market for real estate properties
generally. Therefore, to the extent that there are adverse economic conditions
in the regions in which our properties are located and in the market for real
estate properties, such conditions could result in a reduction of our income
and
cash to return capital and thus affect the amount of distributions we can make
to stockholders.
We
may incur liabilities in connection with properties we acquire.
Our
anticipated acquisition activities are subject to many risks. We may acquire
properties or entities that are subject to liabilities or that have problems
relating to environmental condition, state of title, physical condition or
compliance with zoning laws, building codes, or other legal requirements. In
each case, our acquisition may be without any recourse, or with only limited
recourse, with respect to unknown liabilities or conditions. As a result, if
any
liability were asserted against us relating to those properties or entities,
or
if any adverse condition existed with respect to the properties or entities,
we
might have to pay substantial sums to settle or cure it, which could adversely
affect our cash flow and operating results. However, some of these liabilities
may be covered by insurance. In addition, we intend to perform customary due
diligence regarding each property or entity we acquire. We also will attempt
to
obtain appropriate representations and indemnities from the sellers of the
properties or entities we acquire, although it is possible that the sellers
may
not have the resources to satisfy their indemnification obligations if a
liability arises. Unknown liabilities to third parties with respect to
properties or entities acquired might include:
| • |
liabilities
for clean-up of undisclosed environmental contamination;
|
| • |
claims
by tenants, vendors or other persons dealing with the former owners
of the
properties;
|
| • |
liabilities
incurred in the ordinary course of business; and
|
| • |
claims
for indemnification by general partners, directors, officers and
others
indemnified by the former owners of the properties.
|
Competition
with third parties in acquiring and operating properties may reduce our
profitability and the return on stockholders’
investment.
We
compete with many other entities engaged in real estate investment activities,
many of which have greater resources than we do. Specifically, there are
numerous commercial developers, real estate companies, real estate investment
trusts and U.S. institutional and foreign investors that operate in the markets
in which we may operate, that will compete with us in acquiring residential,
office, retail, industrial and other properties that will be seeking investments
and tenants for these properties. Many of these entities have significant
financial and other resources, including operating experience, allowing them
to
compete effectively with us.
Competitors
with substantially greater financial resources than us may generally be able
to
accept more risk than we can prudently manage, including risks with respect
to
the creditworthiness of entities in which investments may be made or risks
attendant to a geographic concentration of investments. In addition, those
competitors that are not REITs may be at an advantage to the extent they can
utilize working capital to finance projects, while we (and our competitors
that
are REITs) will be required by the annual distribution provisions under the
Internal Revenue Code to distribute significant amounts of cash from operations
to our stockholders.
17
PART
1, CONTINUED:
ITEM
1A. RISK FACTORS, CONTINUED:
Demand
from third parties for properties that meet our investment objectives could
result in an increase of the price of such properties. If we pay higher prices
for properties, our profitability may be reduced and stockholders may experience
a lower return on stockholders’ investment. In addition, our properties may be
located in close proximity to other properties that will compete against our
properties for tenants. Many of these competing properties may be better located
and/or appointed than the properties that we will acquire, giving these
properties a competitive advantage over our properties, and we may, in the
future, face additional competition from properties not yet constructed or
even
planned. This competition could adversely affect our business. The number of
competitive properties could have a material effect on our ability to rent
space
at our properties and the amount of rents charged.
We
could
be adversely affected if additional competitive properties are built in
locations competitive with our properties, causing increased competition for
residential renters, retail customer traffic and creditworthy commercial
tenants. In addition, our ability to charge premium rental rates to tenants
may
be negatively impacted. This increased competition may increase our costs of
acquisitions or lower the occupancies and the rent we may charge tenants. This
could result in decreased cash flow from tenants and may require us to make
capital improvements to properties which we would not have otherwise made,
thus
affecting cash available for distributions to stockholders.
We
may not have control over costs arising from rehabilitation of properties.
We
may
elect to acquire properties which may require rehabilitation. In particular,
we
may acquire affordable properties that we will rehabilitate and convert to
market rate properties. Consequently, we intend to retain independent general
contractors to perform the actual physical rehabilitation work and will be
subject to risks in connection with a contractor’s ability to control
rehabilitation costs, the timing of completion of rehabilitation, and a
contractor’s ability to build in conformity with plans and specifications.
We
may incur losses as result of defaults by the purchasers of properties we sell
in certain circumstances. If
we
decide to sell any of our properties, we will use our best efforts to sell
them
for cash. However, we may sell our properties by providing financing to
purchasers. When we provide financing to purchasers, we will bear the risk
of
default by the purchaser and will be subject to remedies provided by law. There
are no limitations or restrictions on our ability to take purchase money
obligations. We may incur losses as a result of such defaults, which may
adversely affect our available cash and our ability to make distributions to
stockholders.
We
may experience energy shortages and allocations. There
may
be shortages or increased costs of fuel, natural gas, water, electric power
or
allocations thereof by suppliers or governmental regulatory bodies in the areas
where we purchase properties, in which event the operation of our properties
may
be adversely affected.
We
may acquire properties with lockout provisions which may prohibit us from
selling a property, or may require us to maintain specified debt levels for
a
period of years on some properties.
We may
acquire properties in exchange for operating partnership units and agree to
restrictions on sales or refinancing, called “lock-out” provisions that are
intended to preserve favorable tax treatment for the owners of such properties
who sell them to us. Lockout provisions may restrict sales or refinancings
for a
certain period in order to comply with the applicable government regulations.
Lockout provisions could materially restrict us from selling or otherwise
disposing of or refinancing properties. This would affect our ability to turn
our investments into cash and thus affect cash available to return capital
to
stockholders. Lockout provisions could impair our ability to take actions during
the lockout period that would otherwise be in the best interests of our
stockholders and, therefore, might have an adverse impact on the value of the
shares, relative to the value that would result if the lockout provisions did
not exist. In particular, lockout provisions could preclude us from
participating in major transactions that could result in a disposition of our
assets or a change in control even though that disposition or change in control
might be in the best interests of our stockholders.
Changes
in applicable laws may adversely affect the income and value of our properties.
The
income and value of a property may be affected by such factors as environmental,
rent control and other laws and regulations, changes in applicable general
and
real estate tax laws (including the possibility of changes in the federal income
tax laws or the lengthening of the depreciation period for real estate) and
interest rates, the availability of financing, acts of nature (such as
hurricanes and floods) and other factors beyond our control.
18
PART
1, CONTINUED:
ITEM
1A. RISK FACTORS, CONTINUED:
Retail
industry risks.
Some
of
the properties that we intend to own and operate may consist of retail
properties (primarily multi-tenanted shopping centers). Our retail properties
will be subject to the various risks discussed above. In addition, they will
be
subject to the risks discussed below.
Retail
conditions may adversely affect our income.
A retail
property’s revenues and value may be adversely affected by a number of factors,
many of which apply to real estate investment generally, but which also include
trends in the retail industry and perceptions by retailers or shoppers of the
safety, convenience and attractiveness of the retail property. In addition,
to
the extent that the investing public has a negative perception of the retail
sector, the value of our common stock may be negatively impacted.
Some
of
our leases may provide for base rent plus contractual base rent increases.
A
number of our retail leases may also include a percentage rent clause for
additional rent above the base amount based upon a specified percentage of
the
sales our tenants generate. Under those leases that contain percentage rent
clauses, our revenue from tenants may increase as the sales of our tenants
increase. Generally, retailers face declining revenues during downturns in
the
economy. As a result, the portion of our revenue which we may derive from
percentage rent leases could decline upon a general economic downturn. We do
not
currently own properties or other investments, we have not obtained any
financing and we do not currently conduct any operations.
Our
revenue will be impacted by the success and economic viability of our anchor
retail tenants. Our reliance on single or significant tenants in certain
buildings may decrease our ability to lease vacated
space.
In the
retail sector, any tenant occupying a large portion of the gross leasable area
of a retail center, a tenant of any of the triple-net single-user retail
properties outside the primary geographical area of investment, commonly
referred to as an anchor tenant, or a tenant that is our anchor tenant at more
than one retail center, may become insolvent, may suffer a downturn in business,
or may decide not to renew its lease. Any of these events would result in a
reduction or cessation in rental payments to us and would adversely affect
our
financial condition.
A
lease
termination by an anchor tenant could result in lease terminations or reductions
in rent by other tenants whose leases permit cancellation or rent reduction
if
another tenant’s lease is terminated. We may own properties where the tenants
may have rights to terminate their leases if certain other tenants are no longer
open for business. These “co-tenancy” provisions may also exist in some leases
where we own a portion of a retail property and one or more of the anchor
tenants leases space in that portion of the center not owned or controlled
by
us. If such tenants were to vacate their space, tenants with co-tenancy
provisions would have the right to terminate their leases with us or seek a
rent
reduction from us. In such event, we may be unable to re-lease the vacated
space.
Similarly,
the leases of some anchor tenants may permit the anchor tenant to transfer
its
lease to another retailer. The transfer to a new anchor tenant could cause
customer traffic in the retail center to decrease and thereby reduce the income
generated by that retail center. A lease transfer to a new anchor tenant could
also allow other tenants to make reduced rental payments or to terminate their
leases at the retail center. In the event that we are unable to re-lease the
vacated space to a new anchor tenant, we may incur additional expenses in order
to re-model the space to be able to re-lease the space to more than one tenant.
Competition
with other retail channels may reduce our profitability and the return on
stockholders’ investment. Retail
tenants will face potentially changing consumer preferences and increasing
competition from other forms of retailing, such as discount shopping centers,
outlet centers, upscale neighborhood strip centers, catalogues, discount
shopping clubs, internet and telemarketing. Other retail centers within the
market area of properties we invest in will compete with our properties for
customers, affecting their tenants’ cash flows and thus affecting their ability
to pay rent. In addition, tenants’ rent payments may be based on the amount of
sales revenue that they generate. If these tenants experience competition,
the
amount of their rent may decrease and our cash flow will decrease.
19
PART
1, CONTINUED:
ITEM
1A. RISK FACTORS, CONTINUED:
Residential
industry risks.
Although
we do not currently own properties or other investments, we have not obtained
any financing and we do not currently conduct any operations, some of the
properties that we intend to own and operate may consist of residential
properties. Our residential properties will be subject to the various risks
discussed above. In addition, they will be subject to the risks discussed below.
The
short-term nature of our residential leases may adversely impact our income.
If
residents of properties we invest in decide not to renew their leases upon
expiration, we may not be able to relet their units. Because substantially
all
of our residential leases will be for apartments, they will generally be for
terms of no more than one or two years. If we are unable to promptly renew
the
leases or relet the units then our results of operations and financial condition
will be adversely affected. Certain significant expenditures associated with
each equity investment in real estate (such as mortgage payments, real estate
taxes and maintenance costs) are generally not reduced when circumstances result
in a reduction in rental income.
An
economic downturn could adversely affect the residential industry and may affect
operations for the residential properties that we
acquire.
As a
result of the effects of an economic downturn, including increased unemployment
rates, the residential industry may experience a significant decline in business
caused by a reduction in overall renters. Moreover, low residential mortgage
interest rates could accompany an economic downturn and encourage potential
renters to purchase residences rather than lease them. The residential
properties we acquire may experience declines in occupancy rate due to any
such
decline in residential mortgage interest rates.
Real
Estate Financing Risks
General
Financing Risks
We
plan to incur mortgage indebtedness and other borrowings, which may increase
our
business risks. We
intend
to acquire properties subject to existing financing or by borrowing new funds.
In addition, we intend to incur or increase our mortgage debt by obtaining
loans
secured by selected or all of the real properties to obtain funds to acquire
additional real properties. We may also borrow funds if necessary to satisfy
the
requirement that we distribute to stockholders as dividends at least 90% of
our
annual REIT taxable income, or otherwise as is necessary or advisable to assure
that we maintain our qualification as a REIT for federal income tax purposes.
We
intend
to incur mortgage debt on a particular real property if we believe the
property’s projected cash flow is sufficient to service the mortgage debt.
However, if there is a shortfall in cash flow, requiring us to use cash from
other sources to make the mortgage payments on the property, then the amount
available for distributions to stockholders may be affected. In addition,
incurring mortgage debt increases the risk of loss since defaults on
indebtedness secured by properties may result in foreclosure actions initiated
by lenders and our loss of the property securing the loan which is in default.
For
tax
purposes, a foreclosure of any of our properties would be treated as a sale
of
the property for a purchase price equal to the outstanding balance of the debt
secured by the mortgage. If the outstanding balance of the debt secured by
the
mortgage exceeds our tax basis in the property, we would recognize taxable
income on foreclosure, but would not receive any cash proceeds. We may, in
some
circumstances, give a guaranty on behalf of an entity that owns one of our
properties. In these cases, we will be responsible to the lender for
satisfaction of the debt if it is not paid by such entity. If any mortgages
contain cross-collateralization or cross-default provisions, there is a risk
that more than one real property may be affected by a default.
Any
mortgage debt which we place on properties may contain clauses providing for
prepayment penalties. If a lender invokes these penalties upon the sale of
a
property or the prepayment of a mortgage on a property, the cost to us to sell
the property could increase substantially, and may even be prohibitive. This
could lead to a reduction in our income, which would reduce cash available
for
distribution to stockholders and may prevent us from borrowing more money.
Moreover, if we enter into financing arrangements involving balloon payment
obligations, such financing arrangements will involve greater risks than
financing arrangements whose principal amount is amortized over the term of
the
loan. At the time the balloon payment is due, we may or may not be able to
refinance the balloon payment on terms as favorable as the original loan or
sell
the property at a price sufficient to make the balloon payment.
20
PART
1, CONTINUED:
ITEM
1A. RISK FACTORS, CONTINUED:
If
we have insufficient working capital reserves, we will have to obtain financing
from other sources. We
have
established working capital reserves that we believe are adequate to cover
our
cash needs. However, if these reserves are insufficient to meet our cash needs,
we may have to obtain financing to fund our cash requirements. Sufficient
financing may not be available or, if available, may not be available on
economically feasible terms or on terms acceptable to us. If mortgage debt
is
unavailable at reasonable rates, we will not be able to place financing on
the
properties, which could reduce the number of properties we can acquire and
the
amount of distributions per share.
If
we
place mortgage debt on the properties, we run the risk of being unable to
refinance the properties when the loans come due, or of being unable to
refinance on favorable terms. If interest rates are higher when the properties
are refinanced, our income could be reduced, which would reduce cash available
for distribution to stockholders and may prevent us from borrowing more money.
Additional borrowing for working capital purposes will increase our interest
expense, and therefore our financial condition and our ability to pay
distributions may be adversely affected.
We
may not have funding or capital resources for future improvements.
When
a
commercial tenant at a property we invest in does not renew its lease or
otherwise vacates its space in such properties, it is likely that, in order
to
attract one or more new tenants, we will be required to expend substantial
funds
for leasing costs, tenant improvements and tenant refurbishments to the vacated
space. We will incur certain fixed operating costs during the time the space
is
vacant as well as leasing commissions and related costs to re-lease the vacated
space. We may also have similar future capital needs in order to renovate or
refurbish any of our properties for other reasons.
Also,
in
the event we need to secure funding sources in the future but are unable to
secure such sources or are unable to secure funding on terms we feel are
acceptable, we may be required to defer capital improvements or refurbishment
to
a property. This may cause such property to suffer from a greater risk of
obsolescence or a decline in value and/or produce decreased cash flow as the
result of our inability to attract tenants to the property. If this happens,
we
may not be able to maintain projected rental rates for affected properties,
and
our results of operations may be negatively impacted. Or, we may be required
to
secure funding on unfavorable terms.
We
may be adversely affected by limitations in our charter on the aggregate amount
we may borrow. Our
charter limits the aggregate amount we may borrow, absent approval by our
independent directors and justification for such excess. That limitation could
have adverse business consequences such as:
|
•
|
limiting
our ability to purchase additional properties;
|
| • |
causing
us to lose our REIT status if additional borrowing was necessary
to pay
the required minimum amount of cash distributions to our stockholders
to
maintain our status as a REIT;
|
| • |
causing
operational problems if there are cash flow shortfalls for working
capital
purposes; and
|
| • |
resulting
in the loss of a property if, for example, financing was necessary
to
repay a default on a mortgage.
|
Any
excess borrowing over the 300% level will be disclosed to stockholders in our
next quarterly report, along with justification for such excess.
Lenders
may require us to enter into restrictive covenants relating to our operations.
In
connection with obtaining financing, a bank or other lender could impose
restrictions on us affecting our ability to incur additional debt and our
distribution and operating policies. Loan documents we enter into may contain
negative covenants limiting our ability to, among other things, further mortgage
our properties, discontinue insurance coverage or replace Lightstone Value
Plus
REIT, LLC as our advisor. In addition, prepayment penalties imposed by banks
or
other lenders could affect our ability to sell properties when we want.
21
PART
1, CONTINUED:
ITEM
1A. RISK FACTORS, CONTINUED:
Financing
Risks on the Property Level
Some
of our mortgage loans may have “due on sale” provisions.
In
purchasing properties subject to financing, we may obtain financing with
“due-on-sale” and/or “due-on-encumbrance” clauses. Due-on-sale clauses in
mortgages allow a mortgage lender to demand full repayment of the mortgage
loan
if the borrower sells the mortgaged property. Similarly, due-on-encumbrance
clauses allow a mortgage lender to demand full repayment if the borrower uses
the real estate securing the mortgage loan as security for another loan.
These
clauses may cause the maturity date of such mortgage loans to be accelerated
and
such financing to become due. In such event, we may be required to sell our
properties on an all-cash basis, to acquire new financing in connection with
the
sale, or to provide seller financing. It is not our intent to provide seller
financing, although it may be necessary or advisable for us to do so in order
to
facilitate the sale of a property. It is unknown whether the holders of
mortgages encumbering our properties will require such acceleration or whether
other mortgage financing will be available. Such factors will depend on the
mortgage market and on financial and economic conditions existing at the time
of
such sale or refinancing.
Lenders
may be able to recover against our other properties under our mortgage loans.
We
will
seek secured loans (which are nonrecourse) to acquire properties. However,
only
recourse financing may be available, in which event, in addition to the property
securing the loan, the lender may look to our other assets for satisfaction
of
the debt. Thus, should we be unable to repay a recourse loan with the proceeds
from the sale or other disposition of the property securing the loan, the lender
could look to one or more of our other properties for repayment. Also, in order
to facilitate the sale of a property, we may allow the buyer to purchase the
property subject to an existing loan whereby we remain responsible for the
debt.
Our
mortgage loans may charge variable interest. Some
of
our mortgage loans will be subject to fluctuating interest rates based on
certain index rates, such as the prime rate. Future increases in the index
rates
would result in increases in debt service on variable rate loans and thus reduce
funds available for acquisitions of properties and dividends to the
stockholders. We do not currently own properties or other investments, we have
not obtained any financing and we do not currently conduct any operations.
Insurance
Risks.
We
may suffer losses that are not covered by insurance. If
we
suffer losses that are not covered by insurance or that are in excess of
insurance coverage, we could lose invested capital and anticipated profits.
We
intend to cause comprehensive insurance to be obtained for our properties,
including casualty, liability, fire, extended coverage and rental loss
customarily obtained for similar properties in amounts which our advisor
determines are sufficient to cover reasonably foreseeable losses, with policy
specifications and insured limits that we believe are adequate and appropriate
under the circumstances.
Material
losses may occur in excess of insurance proceeds with respect to any property
as
insurance proceeds may not provide sufficient resources to fund the losses.
However, there are types of losses, generally of a catastrophic nature, such
as
losses due to wars, earthquakes, floods, hurricanes, pollution, environmental
matters, mold or, in the future, terrorism which are either uninsurable or
not
economically insurable, or may be insured subject to limitations, such as large
deductibles or co-payments.
Insurance
companies have recently begun to exclude acts of terrorism from standard
coverage. Terrorism insurance is currently available at an increased premium,
and it is possible that the premium will increase in the future or that
terrorism coverage will become unavailable. However, mortgage lenders in some
cases have begun to insist that specific coverage against terrorism be purchased
by commercial owners as a condition for providing loans. We intend to obtain
terrorism insurance if required by our lenders, but the terrorism insurance
that
we obtain may not be sufficient to cover loss for damages to our properties
as a
result of terrorist attacks. In addition, we may not be able to obtain insurance
against the risk of terrorism because it may not be available or may not be
available on terms that are economically feasible. In such instances, we may
be
required to provide other financial support, either through financial assurances
or self-insurance, to cover potential losses.
There
is
no assurance that we will have adequate coverage for such losses. If such an
event occurred to, or caused the destruction of, one or more of our properties,
we could lose both our invested capital and anticipated profits from such
property. In addition, certain losses resulting from these types of events
are
uninsurable and others may not be covered by our terrorism insurance. Terrorism
insurance may not be available at a reasonable price or at all.
22
PART
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ITEM
1A. RISK FACTORS, CONTINUED:
However,
on December 22, 2005, President Bush signed into law the Terrorism Risk
Insurance Extension Act of 2005 (“TRIEA”). TRIEA extends the federal terrorism
insurance backstop through 2007. The Terrorism Risk Insurance Act of 2002
(“TRIA”), which expired on December 31, 2005, was adopted to ensure affordable
terrorism insurance to commercial insureds, including real estate investment
trusts. Its extension should increase availability of terrorism insurance
coverage on our properties through 2007, and thus mitigate the risks described
above.
In
addition, many insurance carriers are excluding asbestos-related claims from
standard policies, pricing asbestos endorsements at prohibitively high rates
or
adding significant restrictions to this coverage. Because of our inability
to
obtain specialized coverage at rates that correspond to the perceived level
of
risk, we may not obtain insurance for acts of terrorism or asbestos-related
claims. We will continue to evaluate the availability and cost of additional
insurance coverage from the insurance market. If we decide in the future to
purchase insurance for terrorism or asbestos, the cost could have a negative
impact on our results of operations. If an uninsured loss or a loss in excess
of
insured limits occurs on a property, we could lose our capital invested in
the
property, as well as the anticipated future revenues from the property and,
in
the case of debt that is recourse to us, would remain obligated for any mortgage
debt or other financial obligations related to the property. Any loss of this
nature would adversely affect us. Although we intend to adequately insure our
properties, there is no assurance that we will successfully do so.
Compliance
with Laws.
The
costs of compliance with environmental laws and regulations may adversely affect
our income and the cash available for any
distributions.
All real
property and the operations conducted on real property are subject to federal,
state and local laws and regulations relating to environmental protection and
human health and safety. These laws and regulations generally govern wastewater
discharges, air emissions, the operation and removal of underground and
aboveground storage tanks, the use, storage, treatment, transportation and
disposal of solid and hazardous materials, and the remediation of contamination
associated with disposals. Some of these laws and regulations may impose joint
and several liability on tenants, owners or operators for the costs of
investigation or remediation of contaminated properties, regardless of fault
or
the legality of the original disposal.
Under
various federal, state and local laws, ordinances and regulations, a current
or
previous owner, developer or operator of real estate may be liable for the
costs
of removal or remediation of hazardous or toxic substances at, on, under or
in
its property. The costs of removal or remediation could be substantial. In
addition, the presence of these substances, or the failure to properly remediate
these substances, may adversely affect our ability to sell or rent such property
or to use the property as collateral for future borrowing.
Environmental
laws often impose liability without regard to whether the owner or operator
knew
of, or was responsible for, the presence of hazardous or toxic materials. Even
if more than one person may have been responsible for the contamination, each
person covered by the environmental laws may be held responsible for all of
the
clean-up costs incurred. In addition, third parties may sue the owner or
operator of a site for damages and costs resulting from environmental
contamination arising from that site. The presence of hazardous or toxic
materials, or the failure to address conditions relating to their presence
properly, may adversely affect the ability to rent or sell the property or
to
borrow using the property as collateral.
Persons
who dispose of or arrange for the disposal or treatment of hazardous or toxic
materials may also be liable for the costs of removal or remediation of such
materials, or for related natural resource damages, at or from an off-site
disposal or treatment facility, whether or not the facility is or ever was
owned
or operated by those persons. In addition, environmental laws today can impose
liability on a previous owner or operator of a property that owned or operated
the property at a time when hazardous or toxic substances were disposed on,
or
released from, the property. A conveyance of the property, therefore, does
not
relieve the owner or operator from liability.
There
may
be potential liability associated with lead-based paint arising from lawsuits
alleging personal injury and related claims. Typically, the existence of lead
paint is more of a concern in residential units than in commercial properties.
Although a structure built prior to 1978 may contain lead-based paint and may
present a potential for exposure to lead, structures built after 1978 are not
likely to contain lead-based paint.
Properties’
values may also be affected by their proximity to electric transmission lines.
Electric transmission lines are one of many sources of electro-magnetic fields
(“EMFs”) to which people may be exposed. Research completed regarding
23
PART
1, CONTINUED:
ITEM
1A. RISK FACTORS, CONTINUED:
potential
health concerns associated with exposure to EMFs has produced inconclusive
results. Notwithstanding the lack of conclusive scientific evidence, some states
now regulate the strength of electric and magnetic fields emanating from
electric transmission lines, and other states have required transmission
facilities to measure for levels of EMFs.
On
occasion, lawsuits have been filed (primarily against electric utilities) that
allege personal injuries from exposure to transmission lines and EMFs, as well
as from fear of adverse health effects due to such exposure. This fear of
adverse health effects from transmission lines has been considered both when
property values have been determined to obtain financing and in condemnation
proceedings. We may not, in certain circumstances, search for electric
transmission lines near our properties, but are aware of the potential exposure
to damage claims by persons exposed to EMFs.
Recently,
indoor air quality issues, including mold, have been highlighted in the media
and the industry is seeing mold claims from lessees rising. To date, we have
not
incurred any material costs or liabilities relating to claims of mold exposure
or abating mold conditions. However, due to the recent increase in mold claims
and given that the law relating to mold is unsettled and subject to change,
we
could incur losses from claims relating to the presence of, or exposure to,
mold
or other microbial organisms, particularly if we are unable to maintain adequate
insurance to cover such losses. We may also incur unexpected expenses relating
to the abatement of mold on properties that we may acquire.
Limited
quantities of asbestos-containing materials are present in various building
materials such as floor coverings, ceiling texture material, acoustical tiles
and decorative treatment. Environmental laws govern the presence, maintenance
and removal of asbestos. These laws could be used to impose liability for
release of, and exposure to, hazardous substances, including asbestos-containing
materials, into the air. Such laws require that owners or operators of buildings
containing asbestos (1) properly manage and maintain the asbestos, (2) notify
and train those who may come into contact with asbestos and (3) undertake
special precautions, including removal or other abatement, if asbestos would
be
disturbed during renovation or demolition of a building. Such laws may impose
fines and penalties on building owners or operators who fail to comply with
these requirements. These laws may allow third parties to seek recovery from
owners or operators of real properties for personal injury associated with
exposure to asbestos fibers. As the owner of our properties, we may be
potentially liable for any such costs.
There
is
no assurance that properties which we acquire in the future will not have any
material environmental conditions, liabilities or compliance concerns.
Accordingly, we have no way of determining at this time the magnitude of any
potential liability to which we may be subject arising out of environmental
conditions or violations with respect to the properties we own.
The
costs of compliance with laws and regulations relating to our residential
properties may adversely affect our income and the cash available for any
distributions.
Various
laws, ordinances, and regulations affect multi-family residential properties,
including regulations relating to recreational facilities, such as activity
centers and other common areas. We intend for our properties to have all
material permits and approvals to operate. In addition, rent control laws may
also be applicable to any of the properties.
Some
of
these laws and regulations have been amended so as to require compliance with
new or more stringent standards as of future dates. Compliance with new or
more
stringent laws or regulations, stricter interpretation of existing laws or
the
future discovery of environmental contamination may require material
expenditures by us. Future laws, ordinances or regulations may impose material
environmental liabilities, and the current environmental condition of our
properties might be affected by the operations of the tenants, by the existing
condition of the land, by operations in the vicinity of the properties, such
as
the presence of underground storage tanks, or by the activities of unrelated
third parties.
These
laws typically allow liens to be placed on the affected property. In addition,
there are various local, state and federal fire, health, life-safety and similar
regulations which we may be required to comply with, and which may subject
us to
liability in the form of fines or damages for noncompliance.
Any
newly
acquired or developed multi-family residential properties must comply with
Title
II of the Americans with Disabilities Act (the “ADA”) to the extent that such
properties are “public accommodations” and/or “commercial facilities” as defined
by the ADA. Compliance with the ADA requires removal of structural barriers
to
handicapped access in certain public areas of the properties where such removal
is “readily achievable.” We intend for our properties to comply in all material
respects with all present requirements under the ADA and applicable state laws.
24
PART
1, CONTINUED:
ITEM
1A. RISK FACTORS, CONTINUED:
We
will
attempt to acquire properties which comply with the ADA or place the burden
on
the seller to ensure compliance with the ADA. We may not be able to acquire
properties or allocate responsibilities in this manner. Noncompliance with
the
ADA could result in the imposition of injunctive relief, monetary penalties
or,
in some cases, an award of damages to private litigants. The cost of defending
against any claims of liability under the ADA or the payment of any fines or
damages could adversely affect our financial condition and affect cash available
to return capital and the amount of distributions to stockholders.
The
Fair
Housing Act (the FHA) requires, as part of the Fair Housing Amendments Act
of
1988, apartment communities first occupied after March 13, 1990 to be accessible
to the handicapped. Noncompliance with the FHA could result in the imposition
of
fines or an award of damages to private litigants. We intend for any of our
properties that are subject to the FHA to be in compliance with such law. The
cost of defending against any claims of liability under the FHA or the payment
of any fines or damages could adversely affect our financial condition.
Risks
Related to General Economic Conditions and Terrorism
Adverse
economic conditions may negatively affect our returns and profitability.
The
timing, length and severity of any economic slowdown that the nation may
experience cannot be predicted with certainty. Since we may liquidate within
seven to ten years after the proceeds from the offering are fully invested,
there is a risk that depressed economic conditions at that time could cause
cash
flow and appreciation upon the sale of our properties, if any, to be
insufficient to allow sufficient cash remaining after payment of our expenses
for a significant return on stockholders’ investment.
The
terrorist attacks of September 11, 2001 on the United States negatively impacted
the U.S. economy and the U.S. financial markets. Any future terrorist attacks
and the anticipation of any such attacks, or the consequences of the military
or
other response by the U.S. and its allies, may have further adverse impacts
on
the U.S. financial markets and the economy and may adversely affect our
operations and our profitability. It is not possible to predict the severity
of
the effect that any of these future events would have on the U.S. financial
markets and economy.
It
is
possible that the economic impact of the terrorist attacks may have an adverse
effect on the ability of the tenants of our properties to pay rent. In addition,
insurance on our real estate may become more costly and coverage may be more
limited due to these events. The instability of the U.S. economy may also reduce
the number of suitable investment opportunities available to us and may slow
the
pace at which those investments are made. In addition, armed hostilities and
further acts of terrorism may directly impact our properties. These developments
may subject us to increased risks and, depending on their magnitude, could
have
a material adverse effect on our business and stockholders’ investment.
Tax
Risks
Stockholders’
investment has various federal income tax risks. Although
the provisions of the Internal Revenue Code relevant to stockholders’ investment
are generally described in the section of the prospectus titled “Federal Income
Tax Considerations,” stockholders should consult their own tax advisors
concerning the effects of federal, state and local income tax law on an
investment and on stockholders’ individual tax situation.
If
we
fail to qualify as a REIT or to maintain our REIT status, our dividends will
not
be deductible to us, and our income will be subject to taxation. We intend
to
qualify as a REIT under the Internal Revenue Code which will afford us
significant tax advantages. The requirements for this qualification, however,
are complex. If we fail to meet these requirements, our dividends will not
be
deductible to us and we will have to pay a corporate level tax on our income.
This would substantially reduce our cash available to pay distributions and
stockholders’ yield on stockholders’ investment. In addition, tax liability
might cause us to borrow funds, liquidate some of our investments or take other
steps which could negatively affect our operating results.
Moreover,
if our REIT status is terminated because of our failure to meet a technical
REIT
test or if we voluntarily revoke our election, we would be disqualified from
electing treatment as a REIT for the four taxable years following the year
in
which REIT status is lost. This could materially and negatively affect
stockholders’ investment by causing a loss of common stock value.
25
PART
1, CONTINUED:
ITEM
1A. RISK FACTORS, CONTINUED:
Stockholders
may have tax liability on distributions that they elect to reinvest in common
stock. If
stockholders participate in our distribution reinvestment program, such
stockholders will be deemed to have received, and for income tax purposes will
be taxed on, the amount reinvested in common stock. As a result, unless a
stockholder is a tax-exempt entity, its may have to use funds from other sources
to pay its tax liability on the value of the common stock received.
The
opinion of Proskauer Rose LLP regarding our status as a REIT does not guarantee
our ability to remain a REIT. Our
legal
counsel, Proskauer Rose LLP, has rendered its opinion that we will qualify
as a
REIT, based upon our representations as to the manner in which we are and will
be owned, invest in assets and operate, among other things. Our qualification
as
a REIT depends upon our ability to meet, through investments, actual operating
results, distributions and satisfaction of specific stockholder rules, the
various tests imposed by the Internal Revenue Code. Proskauer Rose LLP will
not
review these operating results or compliance with the qualification standards.
We may not satisfy the REIT requirements in the future. Also, this opinion
represents Proskauer Rose LLP’s legal judgment based on the law in effect as of
the date of this prospectus and is not binding on the Internal Revenue Service
or the courts, and could be subject to modification or withdrawal based on
future legislative, judicial or administrative changes to the federal income
tax
laws, any of which could be applied retroactively.
Failure
to qualify as a REIT or to maintain such qualification could materially and
negatively impact stockholders’ investment and its yield to stockholders by
causing a loss of common share value and by substantially reducing our cash
available to pay distributions.
If
the operating partnership fails to maintain its status as a partnership, its
income may be subject to taxation. We
intend
to maintain the status of the operating partnership as a partnership for federal
income tax purposes. However, if the Internal Revenue Service were to
successfully challenge the status of the operating partnership as a partnership,
it would be taxable as a corporation. In such event, this would reduce the
amount of distributions that the operating partnership could make to us. This
would also result in our losing REIT status, and becoming subject to a corporate
level tax on our own income. This would substantially reduce our cash available
to pay distributions and the yield on stockholders’ investment. In addition, if
any of the partnerships or limited liability companies through which the
operating partnership owns its properties, in whole or in part, loses its
characterization as a partnership for federal income tax purposes, it would
be
subject to taxation as a corporation, thereby reducing distributions to the
operating partnership. Such a recharacterization of an underlying property
owner
could also threaten our ability to maintain REIT status.
Even
REITS are subject to federal and state income taxes. Even
if
we qualify and maintain our status as a REIT, we may become subject to federal
income taxes and related state taxes. For example, if we have net income from
a
“prohibited transaction,” such income will be subject to a 100% tax. We may not
be able to make sufficient distributions to avoid excise taxes applicable to
REITs. We may also decide to retain income we earn from the sale or other
disposition of our property and pay income tax directly on such income. This
will result in our stockholders being treated for tax purposes as though they
had received their proportionate shares of such retained income.
However,
to the extent we have already paid income taxes directly on such income, our
stockholders will also be credited with their proportionate share of such taxes
already paid by us. Stockholders that are tax-exempt, such as charities or
qualified pension plans, would have no benefit from their deemed payment of
such
tax liability. We may also be subject to state and local taxes on our income
or
property, either directly or at the level of the operating partnership or at
the
level of the other companies through which we indirectly own our assets.
We
may
not be able to continue to satisfy the REIT requirements, and it may cease
to be
in our best interests to continue to do so in the future.
Future
changes in the income tax laws could adversely affect our profitability.
Future
events, such as court decisions, administrative rulings and interpretations
and
changes in the tax laws or regulations, including the REIT rules, that change
or
modify these provisions could result in treatment under the federal income
tax
laws for us and/or our stockholders that differs materially and adversely from
that described in this prospectus; both for taxable years arising before and
after such event. Future legislation, administrative interpretations or court
decisions may be retroactive in effect.
In
recent
years, numerous legislative, judicial and administrative changes have been
made
to the federal income tax laws applicable to investments in REITs and similar
entities. Additional changes to tax laws are likely to continue to occur in
the
future, and may adversely affect the taxation of our stockholders.
26
PART
1, CONTINUED:
ITEM
1A. RISK FACTORS, CONTINUED:
In
view
of the complexity of the tax aspects of the offering, particularly in light
of
the fact that some of the tax aspects of the offering will not be the same
for
all investors, prospective investors are strongly advised to consult their
tax
advisors with specific reference to their own tax situation prior to an
investment in shares of our common stock.
Employee
Benefit Plan Risks
An
investment in our common stock may not satisfy the requirements of ERISA or
other applicable laws. When
considering an investment in our common stock, an individual with investment
discretion over assets of any pension plan, profit-sharing plan, retirement
plan, IRA or other employee benefit plan covered by ERISA or other applicable
laws should consider whether the investment satisfies the requirements of
Section 404 of ERISA or other applicable laws. In particular, attention should
be paid to the diversification requirements of Section 404(a)(1)(C ) of ERISA
in
light of all the facts and circumstances, including the portion of the plan’s
portfolio of which the investment will be a part. All plan investors should
also
consider whether the investment is prudent and meets plan liquidity requirements
as there may be only a limited market in which to sell or otherwise dispose
of
our common stock, and whether the investment is permissible under the plan’s
governing instrument. We have not, and will not, evaluate whether an investment
in our common stock is suitable for any particular plan. Rather, we will accept
entities as stockholders if an entity otherwise meets the suitability standards.
The
annual statement of value that we will be sending to stockholders subject to
ERISA and stockholders is only an estimate and may not reflect the actual value
of our shares. The annual statement of value will report the value of each
common share as of the close of our fiscal year. The value will be based upon
an
estimated amount we determine would be received if our properties and other
assets were sold as of the close of our fiscal year and if such proceeds,
together with our other funds, were distributed pursuant to a liquidation.
However, the net asset value of each share of common stock will be deemed to
be
$10 until the end of the first year following the completion of this offering.
Thereafter, our advisor or its affiliates will determine the net asset value
of
each share of common stock. Because this is only an estimate, we may
subsequently revise any annual valuation that is provided. It is possible that:
| • |
a
value included in the annual statement may not actually be realized
by us
or by our stockholders upon liquidation;
|
| • |
stockholders
may not realize that value if they were to attempt to sell their
common
stock; or
|
|
•
|
an
annual statement of value might not comply with any reporting and
disclosure or annual valuation requirements under ERISA or other
applicable law. We will stop providing annual statements of value
if the
common stock becomes listed for trading on a national stock exchange
or
included for quotation on a national market system.
|
ITEM
1B. UNRESOLVED STAFF COMMENTS:
None
applicable.
ITEM
2. PROPERTIES:
The
Company currently has no properties or investments in real estate assets,
however we have identified the Belz Factory Outlet World in St. Augustine,
Florida as our first potential acquisition. This $28 million purchase
transaction is expected to close by April 2006, but there can be no assurance
that this acquisition will be consummated.
ITEM
3. 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, we are not a
party
to any material pending legal proceedings.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None.
27
PART II.
ITEM
5. MARKETS FOR COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS:
As
of
March 27, 2006, we had approximately 482,616 common shares
outstanding, held by a total of approximately 157 shareholders. The number
of shareholders is based on the records of Trust Company of America, which
serves as our registrar and transfer agent.
There
currently is no public market for our common shares and we do not expect one
to
develop. We currently have no plans to list our shares on a national securities
exchange or over-the-counter market, or to include our shares for quotation
on
any national securities market. Consequently, there is the risk that a
shareholder may not be able to sell our common shares promptly or at all.
Our
share
repurchase program may provide eligible stockholders with limited, interim
liquidity by enabling them to sell shares back to us after the end of the
offering period, subject to restrictions and applicable law. A selling
stockholder must be unaffiliated with our Advisor, and must have beneficially
held the shares for at least one year prior to offering them for sale to us
through the share repurchase program. Subject to the limitations described
in
the Registration Statement, we will also redeem shares upon the request of
the
estate, heir or beneficiary of a deceased stockholder.
The
prices at which shares may be sold back to us are as follows:
|
·
|
$9.00
per share during the 24 months following the end of the offering
period;
|
|
·
|
$9.50
per share during the next 12 months; and
|
|
·
|
$10
per share thereafter.
|
Redemption
of shares, when requested, will be made quarterly on a pro rata basis. Subject
to funds being available, we will limit the number of shares repurchased during
any calendar year to one half of one percent (0.5%) of the weighted average
number of shares outstanding during the prior calendar year. Funding for the
share repurchase program will come exclusively from proceeds we receive from
the
sale of shares under our distribution reinvestment plan and other operating
funds, if any, as the board of directors, at its sole discretion, may reserve
for this purpose.
Our
board
of directors, at its sole discretion, may choose to terminate the share
repurchase program after the end of the offering period, or reduce the number
of
shares purchased under the program, if it determines that the funds allocated
to
the share repurchase program are needed for other purposes, such as the
acquisition, maintenance or repair of properties, or for use in making a
declared distribution. A determination by our board of directors to eliminate
or
reduce the share repurchase program will require the unanimous affirmative
vote
of the independent directors.
In
order
for NASD members and their associated persons to have participated in the
offering and sale of our common shares or to participate in any future offering
of our common shares, we are required pursuant to NASD Rule 2710(c)(6) to
disclose in each annual report distributed to our shareholders a per share
estimated value of the common shares, the method by which it was developed
and
the date of the data used to develop the estimated value. In addition, our
Advisor must prepare annual statements of estimated share values to assist
fiduciaries of retirement plans subject to the annual reporting requirements
of
ERISA in the preparation of their reports relating to an investment in our
common shares. For these purposes, the estimated value of the shares shall
be
deemed to be $10.00 per share as of December 31, 2005. The basis for
this valuation is the fact that we are currently conducting a public offering
of
our common shares at the price of $10.00 per share.
Dividends
Federal
income tax law requires that a REIT distribute annually at least 90% of its
REIT
taxable income (excluding any net capital gains). Distributions will be at
the
discretion of our board of directors and will depend upon our distributable
funds, current and projected cash requirements, tax considerations and other
factors. We
intend
to declare dividends to our shareholders as of daily record dates and aggregate
and pay such dividends quarterly.
No
dividends were declared or paid by the Company during 2005. On January 26,
2006,
our Board of Directors declared a dividend for the two-month period ending
March
31, 2006. The dividend will be calculated based on shareholders of record each
day during this two-month period at a rate of $0.0019178 per day, and will
equal
a daily amount that, if paid each day for a 365-day period, would equal a 7.0%
annualized rate based on a share price of $10.00. The dividend will be paid
in
cash in April 2006.
28
PART II,
CONTINUED:
ITEM
5. MARKETS FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS,
CONTINUED:
Recent
Sales of Unregistered Securities
During
the period covered by this Annual Report on Form 10-K, we did not sell any
equity securities that were not registered under the Securities Act of 1933,
and
we did not repurchase any of our securities.
Use
of Initial Public Offering Proceeds
On
April
22, 2005, the Lightstone REIT’s Registration Statement on Form S-11 (File No.
333-117367), covering a public offering of up to 30,000,000 common shares for
$10 per share (exclusive of 4,000,000 shares available pursuant to the our
dividend reinvestment plan, 600,000 shares that could be obtained through the
exercise of selling dealer warrants when and if issued, and 75,000 shares that
are reserved for issuance under our stock option plan) was declared effective
under the Securities Act of 1933. The
offering commenced on May
24,
2005
and is
ongoing. The Dealer Manager is managing this offering for us.
On
October 17, 2005, the Company’s filing of a Post-Effective Amendment to its
Registration Statement was declared effective. The Post-Effective Amendment
reduced the minimum offering from 1,000,000 shares of common stock to 200,000
shares of common stock. The information below reflects such
reduction.
As
of
December 31,
2005, we
had
reached our minimum offering by receiving subscriptions for 225,966
of
our
common shares, representing gross offering proceeds of $2,259,662.
On
February 1, 2006, cumulative gross offering proceeds of $2,731,535 were released
to us from escrow and the gross proceeds were invested in the Operating
Partnership. As of March 27, 2006, cumulative gross offering proceeds of
$4,826,158 have been released to us and used for the purchase of a 99.96%
limited partnership interest in the Operating Partnership.
Lightstone
SLP, LLC intends to purchase special general partner units in the Operating
Partnership at a cost of $100,000 per unit for each $1,000,000 in offering
subscriptions. Proceeds from the sale of the special general partnership
interests will be used to reimburse organizational and offering costs paid
by
the Advisor on our behalf. If organizational and offering expenses, including
the selling commissions and dealer manager fee discussed above, exceed 10%
of
the gross proceeds raised in this offering, the excess will be paid by our
Advisor without recourse to us and will not be exchangeable into special general
partner interests of our operating partnership.
In
conjunction with our closing of escrow on February 1, 2006, the Lightstone
REIT
offset proceeds of $225,966 from the sale of special general partnership units
against amounts due to our Advisor. Such offset was in partial satisfaction
of
approximately $1.5 million of offering costs incurred by our Advisor on our
behalf. As of March 27, 2006, cumulative offering costs advanced by our Advisor
totaled approximately $1.7 million, representing 34.7% of gross offering
proceeds during the same period. Our Advisor did not allocate any organizational
costs to the Company as of December 31, 2005. Our Advisor is responsible for
offering and organizational costs exceeding 10% of the gross offering proceeds
without recourse to the Company.
As
of
March 27, 2006, the Company hasn’t purchased any properties, however we have
identified the Belz Factory Outlet World in St. Augustine, Florida as our first
potential acquisition. The $28 million transaction is expected to close by
April
2006, but there can be no assurance that this acquisition will be consummated.
Prime Retail Property Management, LLC, an affiliate of the Lightstone Value
Plus
REIT Management LLC, (the “Property Manager”), will serve as our property
manager.
29
PART II.
CONTINUED:
ITEM
6. SELECTED FINANCIAL DATA:
The
following selected consolidated and combined financial data are qualified by
reference to and should be read in conjunction with our Consolidated Financial
Statements and Notes thereto and “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations” below.
|
|
|
|
|||||
|
|
2005
|
2004(1)
|
|||||
|
|
|
|
|||||
|
Operating
Data:
|
|||||||
|
Revenues
|
$
|
—
|
$
|
—
|
|||
|
|
|||||||
|
Net
loss before loss allocated to minority interests
|
$
|
(117,571
|
)
|
$
|
—
|
||
|
Loss
allocated to minority interests
|
$
|
1,164
|
$
|
—
|
|||
|
Net
loss
|
$
|
(116,407
|
)
|
$
|
—
|
||
|
Basic
and diluted loss per common share
|
$
|
(5.82
|
)
|
$
|
—
|
||
|
Dividends
declared per common share(2)
|
$
|
—
|
$
|
—
|
|||
|
Weighted
average common shares outstanding-basic and diluted
|
20,000
|
20,000
|
|||||
|
Balance
Sheet Data:
|
|||||||
|
Total
assets
|
$
|
430,996
|
$
|
205,489
|
|||
|
Long-term
obligations
|
$
|
—
|
$
|
—
|
|||
|
(1)
|
For
the period from June 8, 2004 (date of inception) through December 31,
2004 for operating data, and as of December 31, 2004 for balance
sheet data.
|
|
|
|
|
(2)
|
The
Company declared its first dividend in January 2006 to shareholders
of record as of March 31, 2006.
|
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
You
should read the following discussion and analysis together with our consolidated
financial statements and notes thereto included in this Annual Report on
Form 10-K. The following information contains forward-looking statements,
which are subject to risks and uncertainties. Should one or more of these risks
or uncertainties materialize, actual results may differ materially from those
expressed or implied by the forward-looking statements. Please see “Special
Note Regarding Forward-Looking Statements” above for a description of these
risks and uncertainties.
Overview
Lightstone
Value Plus Real Estate Investment Trust, Inc. was formed primarily
for the purpose of engaging in the business of investing in and owning
commercial and residential real estate properties located throughout the United
States and Puerto Rico. The Lightstone REIT intends to acquire
both portfolios and individual properties, with our commercial holdings expected
to consist primarily of multi-tenanted shopping centers, industrial and office
properties, and our residential properties expected to consist of “Class B”
multi-family complexes.
We
had no
real estate investments at December 31, 2005.
Capital
required for the purchase of real estate and real estate related investments
will be obtained from the public offering of up to 30,000,000 common shares
for
$10 per share, and from any indebtedness that we may incur in connection with
the acquisition of any real estate and real estate related investments
thereafter. A Registration Statement on Form S-11 covering our public offering
was declared effective under
the
Securities Act of 1933 on
April
22, 2005. The
offering commenced on May
24,
2005
and is
ongoing. We
are
dependent upon the net proceeds from the offering to conduct our proposed
activities.
The
Company intends to make direct or indirect real estate investments that will
satisfy our primary investment objectives of preserving capital, paying regular
cash dividends and achieving appreciation of our assets over the long term.
The
ability of our Advisor to identify and execute investment opportunities at
a
pace consistent with the capital raised through our offering will directly
impact the financial performance of the Company.
30
PART II.
CONTINUED:
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,
CONTINUED:
Recent
Developments and Subsequent Events
On
April
22, 2005, the Company’s Registration Statement on Form S-11 (File No.
333-117367), covering a public offering of up to 30,000,000 common shares for
$10 per share (exclusive of 4,000,000 shares available pursuant to our dividend
reinvestment plan, 600,000 shares that could be obtained through the exercise
of
selling dealer warrants when and if issued, and 75,000 shares that are reserved
for issuance under our stock option plan) was declared effective under the
Securities Act of 1933. The
offering commenced on May
24,
2005
and is
ongoing.
On
October 17, 2005, the Company’s filing of a Post-Effective Amendment to its
Registration Statement was declared effective. The Post-Effective Amendment
reduced the minimum offering from 1,000,000 shares of common stock to 200,000
shares of common stock. As of December 31,
2005, we
had
reached our minimum offering by receiving subscriptions for 225,966
of
our
common shares, representing gross offering proceeds of $2,259,662.
On
January 26, 2006, our board of directors declared a dividend for the two-month
period ending March 31, 2006. The dividend will be calculated based on
shareholders of record each day during this period at a rate of $0.0019178
per
day, and will equal a daily amount that, if paid each day for a 365-day period,
would equal a 7.0 percent annualized rate based on a share price of $10.00.
The
dividend will be paid in cash in April 2006. The amount of dividends to be
distributed to our stockholders in the future will be determined by our Board
of
Directors and are dependent on a number of factors, including funds available
for payment of dividends, our financial condition, capital expenditure
requirements and annual distribution requirements needed to maintain our status
as a REIT under the Internal Revenue Code.
On
February 1, 2006, we announced the commencement of our real estate operations
upon the release of cumulative gross offering proceeds of $2,731,535 from
escrow. The gross proceeds were invested in the Operating Partnership. As of
March 27, 2006, cumulative gross offering proceeds of $4,826,158 have been
released to us and used for the purchase of a 99.96% limited partnership
interest in the Operating Partnership.
Also
on
February 1, 2006, we announced our first potential property acquisition,
the Belz Factory Outlet World in St. Augustine, Florida. Once acquired, the
retail property will be operated by an affiliate of our Sponsor. We expect
to
close on this $28 million acquisition by April 2006. Although we believe that
the acquisition of this property is probable, there can be no assurance that
this acquisition will be consummated.
Critical
Accounting Policies
General.
The
consolidated financial statements of the Company included in this annual report
include the accounts of Lightstone REIT and the Operating Partnership (over
which Lightstone REIT exercises financial and operating control) and the related
amount of minority interest. All inter-company balances and transactions have
been eliminated in consolidation.
The
discussion and analysis of our financial condition and results of operations
is
based upon our consolidated financial statements, which have been prepared
in
accordance with accounting principles generally accepted in the United States
of
America. The preparation of our financial statements requires us to make
estimates and judgments about the effects of matters or future events that
are
inherently uncertain. These estimates and judgments may affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure
of
contingent assets and liabilities.
On
an
ongoing basis, we evaluate our estimates, including contingencies and
litigation. We base these estimates on historical experience and on various
other assumptions that we believe to be reasonable in the circumstances. These
estimates form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.
To
assist
in understanding our results of operations and financial position, we have
identified our critical accounting policies and discussed them below. These
accounting policies are most important to the portrayal of our results and
financial position, either because of the significance of the financial
statement items to which they relate or because they require our management's
most difficult, subjective or complex judgments.
31
PART II.
CONTINUED:
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,
CONTINUED:
Revenue
Recognition and Valuation of Related Receivables.
Our
revenue, which will be comprised largely of rental income, will include rents
that tenants pay in accordance with the terms of their respective leases
reported on a straight-line basis over the initial term of the lease. Since
our
leases may provide for rental increases at specified intervals, straight-line
basis accounting will require us to record as an asset, and include in revenue,
unbilled rent that we will only receive if the tenant makes all rent payments
required through the expiration of the initial term of the lease. Accordingly,
we must determine, in our judgment, to what extent the unbilled rent receivable
applicable to each specific tenant is collectible. We will review unbilled
rent
receivables on a quarterly basis and take into consideration the tenant’s
payment history, the financial condition of the tenant, business conditions
in
the industry in which the tenant operates and economic conditions in the area
in
which the property is located. In the event that the collection of unbilled
rent
with respect to any given tenant is in doubt, we would be required to record
an
increase in our allowance for doubtful accounts or record a direct write-off
of
the specific rent receivable, which would have an adverse effect on our net
income for the year in which the allowance is increased or the direct write-off
is recorded and would decrease our total assets and stockholders’ equity.
Investments
in Real Estate. We
will
record investments in real estate at cost and will capitalize improvements
and
replacements when they extend the useful life or improve the efficiency of
the
asset. We will expense costs of repairs and maintenance as incurred. We will
compute depreciation using the straight-line method over the estimated useful
lives of our real estate assets, which we expect will be approximately 40 years
for buildings and improvements, three to seven years for equipment and fixtures
and the shorter of the useful life or the remaining lease term for tenant
improvements and leasehold interests.
We
will
be required to make subjective assessments as to the useful lives of our
properties for purposes of determining the amount of depreciation to record
on
an annual basis with respect to our investments in real estate. These
assessments will have a direct impact on our net income because, if we were
to
shorten the expected useful lives of our investments in real estate, we would
depreciate these investments over fewer years, resulting in more depreciation
expense and lower net income on an annual basis.
We
have
adopted Statement of Financial Accounting Standard No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets,” which we refer to as SFAS 144, and
which establishes a single accounting model for the impairment or disposal
of
long-lived assets including discontinued operations. SFAS 144 requires that
the
operations related to properties that have been sold or that we intend to sell
be presented as discontinued operations in the statement of income for all
periods presented, and properties we intend to sell be designated as “held for
sale” on our balance sheet.
When
circumstances such as adverse market conditions indicate a possible impairment
of the value of a property, we will review the recoverability of the property’s
carrying value. The review of recoverability will be based on our estimate
of
the future undiscounted cash flows, excluding interest charges, expected to
result from the property’s use and eventual disposition. Our forecast of these
cash flows will consider factors such as expected future operating income,
market and other applicable trends and residual value, as well as the effects
of
leasing demand, competition and other factors. If impairment exists due to
the
inability to recover the carrying value of a property, an impairment loss will
be recorded to the extent that the carrying value exceeds the estimated fair
value of the property.
We
will
be required to make subjective assessments as to whether there are impairments
in the values of our investments in real estate. We will evaluate our ability
to
collect both interest and principal related to any real estate related
investments in which we may invest. If circumstances indicate that such
investment is impaired, we will reduce the carrying value of the investment
to
its net realizable value. Such reduction in value will be reflected as a charge
to operations in the period in which the determination is made.
Real
Estate Purchase Price Allocation. We
will
allocate the purchase price of an acquired property to tangible assets (which
includes land, buildings and tenant improvements) based on the estimated fair
values of those tangible assets assuming the building was vacant. We will record
above-market and below-market in-place lease values for acquired properties
based on the present value (using an interest rate which reflects the risks
associated with the leases acquired) of the difference between (1) the
contractual amounts to be paid pursuant to the in-place leases and (2)
management’s estimate of fair market lease rates for the corresponding in-place
leases, measured over a period equal to the remaining non-cancelable term of
the
lease. We will amortize any capitalized above-market lease values as a reduction
of rental income over the remaining non-cancelable terms of the respective
leases. We will amortize any capitalized below-market lease values as an
increase to rental income over the initial term and any fixed-rate renewal
periods in the respective leases.
32
PART II.
CONTINUED:
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,
CONTINUED:
We
will
measure the aggregate value of other intangible assets acquired based on the
difference between (1) the property valued with existing in-place leases
adjusted to market rental rates and (2) the property valued as if vacant. Our
estimates of value are expected to be made using methods similar to those used
by independent appraisers (e.g.,
discounted cash flow analysis). Factors we may consider in our analysis include
an estimate of carrying costs during hypothetical expected lease-up periods
considering current market conditions and costs to execute similar leases.
We
will also consider information obtained about each property as a result of
our
pre-acquisition due diligence, marketing and leasing activities in estimating
the fair value of the tangible and intangible assets acquired. In estimating
carrying costs, we will also include real estate taxes, insurance and other
operating expenses and estimates of lost rentals at market rates during the
expected lease-up periods. We will also estimate costs to execute similar leases
including leasing commissions, legal and other related expenses to the extent
that such costs are not already incurred in connection with a new lease
origination as part of the transaction.
The
total
amount of other intangible assets acquired will be further allocated to in-place
lease values and customer relationship intangible values based on our evaluation
of the specific characteristics of each tenant’s lease and our overall
relationship with that respective tenant. Characteristics we will consider
in
allocating these values include the nature and extent of our existing business
relationships with the tenant, growth prospects for developing new business
with
the tenant, the tenant’s credit quality and expectations of lease renewals
(including those existing under the terms of the lease agreement), among other
factors.
We
will
amortize the value of in-place leases to expense over the initial term of the
respective leases, which we would not expect to exceed 20 years. The value
of
customer relationship intangibles will be amortized to expense over the initial
term and any renewal periods in the respective leases, but in no event will
the
amortization period for intangible assets exceed the remaining depreciable
life
of the building. Should a tenant terminate its lease, the unamortized portion
of
the in-place lease value and customer relationship intangibles would be charged
to expense.
Joint
Venture Investments.
We
will
evaluate our joint venture investments in accordance with Financial Accounting
Standards Board, Interpretation No. 46 (revised December 2003), Consolidation
of
Variable Interest Entities, which we refer to as FIN 46R. If we determine that
the joint venture is a “variable interest entity,” or a “VIE,” and that we are
the “primary beneficiary” as defined in FIN 46R, we would account for such
investment as if it were a consolidated subsidiary. For a joint venture
investment which is not a VIE or in which we are not the primary beneficiary,
we
will consider Accounting Principle Board Opinion 18—The Equity Method of
Accounting for Investments in Common Stock, Statement of Opinion 78-9—Accounting
for Investments in Real Estate Ventures, and Emerging Issues Task Force Issue
96-16—Investors Accounting for an Investee When the Investor has the Majority of
the Voting Interest but the Minority Partners have Certain Approval or Veto
Rights, to determine the method of accounting for each of our partially-owned
entities.
In
accordance with the above pronouncements, we will account for our investments
in
partially-owned entities under the equity method when we do not exercise direct
or indirect control of the entity and our ownership interest is more than 3%
but
less than 50%, in the case of a partially-owned limited partnership, or more
than 20% but less than 50%, in the case of all other partially-owned entities.
Factors that we will consider in determining whether or not we exercise control
include substantive participating rights of partners on significant business
decisions, including dispositions and acquisitions of assets, financing and
operating and capital budgets, board and management representatives and
authority and other contractual rights of our partners. To the extent that
we
are deemed to control these entities, these entities would be consolidated.
On
a
periodic basis we will evaluate whether there are any indicators that the value
of our investments in partially owned entities are impaired. An investment
is
impaired if our estimate of the value of the investment is less than the
carrying amount. The ultimate realization of our investment in partially owned
entities is dependent on a number of factors including the performance of that
entity and market conditions. If we determine that a decline in the value of
a
partially owned entity is other than temporary, then we would record an
impairment charge.
Accounting
for Derivative Financial Investments and Hedging Activities .
We
will
account for our derivative and hedging activities, if any, using SFAS 133,
“Accounting for Derivative Instruments and Hedging Activities,” as amended by
SFAS 137, “Accounting for Derivative Instruments and Hedging Activities—Deferral
of the Effective Date of FASB Statement No. 133,” and SFAS 149, “Amendment of
Statement 133 on Derivative Instruments and Hedging Activities,” which require
all derivative instruments to be carried at fair value on the balance sheet.
33
PART II.
CONTINUED:
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,
CONTINUED:
Derivative
instruments designated in a hedge relationship to mitigate exposure to
variability in expected future cash flows, or other types of forecasted
transactions, will be considered cash flow hedges. We will formally document
all
relationships between hedging instruments and hedged items, as well as our
risk-
management objective and strategy for undertaking each hedge transaction. We
will periodically review the effectiveness of each hedging transaction, which
involves estimating future cash flows. Cash flow hedges will be accounted for
by
recording the fair value of the derivative instrument on the balance sheet
as
either an asset or liability, with a corresponding amount recorded in other
comprehensive income within shareholders’ equity. Amounts will be reclassified
from other comprehensive income to the income statement in the period or periods
the hedged forecasted transaction affects earnings. Derivative instruments
designated in a hedge relationship to mitigate exposure to changes in the fair
value of an asset, liability, or firm commitment attributable to a particular
risk, such as interest rate risk, will be considered fair value hedges under
SFAS 133. We are not currently a party to any derivatives
contracts.
Impact
of Recent Accounting Principles
In
December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement no. 153 ("SFAS 153"), "Exchanges of Non-monetary Assets," an amendment
of APB Opinion No. 29. SFAS 153 is effective for non-monetary transactions
occurring in fiscal periods beginning after June 15, 2005. SFAS 153
generally will no longer allow non-monetary exchanges to be recorded at book
value with no gain being recognized. Non-monetary exchanges will be
accounted for at fair value, recognizing any gain or loss, if the transactions
meet a commercial substance criterion and fair value is determinable. To
prevent gain recognition on exchanges of real estate when the risks and rewards
of ownership are not fully transferred, SFAS 153 precludes a gain from being
recognized if the entity has significant continuing involvement with the real
estate given up in the exchange. Adoption is not expected to affect
us.
In
December 2004, the FASB issued SFAS No. 123R (revised 2004), “Share-Based
Payment”, which is a revision of SFAS No. 123, “Accounting for Stock-Based
Compensation”. SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting
for Stock Issued to Employees” and amends SFAS No. 95, “Statement of Cash
Flows”. Generally, the approach in SFAS No. 123(R) is similar to the
approach described in SFAS No. 123. However, SFAS No. 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based on their fair values. Pro
forma disclosure is no longer an alternative. Adoption is not
expected to affect us as no options have been grated under our current
plan.
In
March
2005, the FASB issued Interpretation No. 47 ("FIN 47"), "Accounting for
Conditional Asset Retirement Obligations, an interpretation of FASB Statement
No. 143." FIN 47 refers to a legal obligation to perform an asset
retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of
the
entity. An entity is required to recognize a liability for the fair value
of a conditional asset retirement obligation if the fair value of the liability
can be reasonable estimated. The fair value of a liability for the
conditional asset retirement obligation should be recognized when incurred,
generally upon acquisition, construction, or development and through the normal
operation of the asset. This interpretation is effective no later than the
end of fiscal years ending after December 31, 2005. Adoption is not
expected to have a material effect on us.
In
May
2005, the FASB issued Statement No. 154 ("SFAS 154") "Accounting Changes and
Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement
No.
3." SFAS 154 changes the requirements for the accounting for and reporting
of a change in accounting principle. APB Opinion 20 previously required
that most voluntary changes in accounting principle be recognized by including
in net income of the period of the change the cumulative effect of changing
to
the new accounting principle. SFAS 154 requires retrospective application
to prior periods' financial statements of changes in accounting principle,
unless it is impracticable to determine either the period-specific effects
of
the cumulative effect of the change. In the event of such impracticality,
SFAS 154 provides for other means of application. In the event the Company
changes accounting principles, it will evaluate the impact of SFAS
154.
In
June
2005, the FASB ratified the EITF's consensus on Issue No. 04-5 "Determining
Whether a General Partner, or the General Partners as a Group, Controls a
Limited Partnership or Similar Entity When the Limited Partners Have Certain
Rights."
This consensus establishes the presumption that general partners in a
limited partnership control that limited partnership regardless of the extent
of
the general partners' ownership interest in the limited partnership. The
consensus further establishes that the rights of the limited partners can
overcome the presumption of control by the general partners, if
34
PART II.
CONTINUED:
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,
CONTINUED:
the
limited partners have either (a) the substantive ability to dissolve (liquidate)
the limited partnership or otherwise remove the general partners without cause
or (b) substantive participating rights. Whether the presumption of
control is overcome is a matter of judgment based on the facts and
circumstances, for which the consensus provides additional guidance. This
consensus is currently applicable to the Company for new or modified
partnerships, and will otherwise be applicable to existing partnerships in
2006.
This consensus applies to limited partnerships or similar entities, such
as limited liability companies that have governing provisions that are the
functional equivalent of a limited partnership. Adoption is not expected
to have a material effect on us.
Inflation
Our
long-term leases are expected to contain provisions to mitigate the adverse
impact of inflation on our operating results. Such provisions will include
clauses entitling us to receive scheduled base rent increases and base rent
increases based upon the consumer price index. In addition, our leases are
expected to require tenants to pay a negotiated share of operating expenses,
including maintenance, real estate taxes, insurance and utilities, thereby
reducing our exposure to increases in cost and operating expenses resulting
from
inflation.
Treatment
of Management Compensation, Expense Reimbursements and Operating Partnership
Participation Interest
Management
of our operations is outsourced to our Advisor and certain other affiliates
of
our Sponsor. Fees related to each of these services are accounted for based
on
the nature of such service and the relevant accounting literature. Fees for
services performed that represent period costs of the Company are expensed
as
incurred. Such fees include acquisition fees and asset management fees paid
to
our Advisor and property management fees paid to our Property Manager.
Our
Property Manager may also perform fee-based construction management services
for
both our re-development activities and tenant construction projects. These
fees
are considered incremental to the construction effort and will be capitalized
to
the associated real estate project as incurred in accordance with SFAS 67,
Accounting
for Costs and Initial Rental Operations of Real Estate
Projects.
Costs
incurred for tenant construction will be depreciated over the shorter of their
useful life or the term of the related lease. Costs related to redevelopment
activities will be depreciated over the estimated useful life of the associated
project.
Leasing
activity at our properties has also been outsourced to our Property Manager.
Any
corresponding leasing fees we pay will be capitalized and amortized over the
life of the related lease in accordance with the provisions of SFAS 91,
Accounting
for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases.
Expense
reimbursements made to both our Advisor and Property Manager will be expensed
as
they become payable.
Lightstone
SLP, LLC, an affiliate of our Sponsor, intends to purchase special general
partner units in the Operating Partnership. These special general partner units,
the purchase price of which will be repaid only after stockholders receive
a
stated preferred return and their net investment, will entitle
Lightstone SLP,
LLC to
a
portion of any regular distributions made by the Operating Partnership. Such
distributions will always be subordinated until stockholders receive a stated
preferred return.
We
have
recorded a liability representing our obligation to reimburse organizational
and
offering costs incurred by our Advisor on our behalf. Organizational costs,
representing salaries and other internally generated expenses of our Advisor,
are expensed as incurred. At December 31, 2005, the Company had not incurred
any
organizational costs through its Advisor. Third-party offering expenses such
as
registration fees, due diligence fees, marketing costs, and professional fees,
along with selling commissions and dealer manager fees paid to our Dealer
Manager, have been accounted for as deferred offering expenses on our balance
sheet at December 31, 2005.
35
PART II.
CONTINUED:
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,
CONTINUED:
Income
Taxes
We
will
elect to be taxed as a REIT under Sections 856 through 860 of the Internal
Revenue Code in conjunction with the filing of our 2006 federal tax return.
In
order to qualify as a REIT, an entity must meet certain organizational and
operational requirements, including a requirement to distribute at least 90%
of
its annual ordinary taxable income to shareholders. REITs are generally not
subject to federal income tax on taxable income that they distribute to their
shareholders. It is our intention to adhere to these requirements and maintain
our REIT status.
As
such,
no provision for federal income taxes has been included in the accompanying
consolidated financial statements. As a REIT, we still may be subject to certain
state, local and foreign taxes on our income and property and to federal income
and excise taxes on our undistributed taxable income.
Results
of Operations
Our
results of operations are not indicative of those expected in future periods
as
we had not commenced our real estate operations as of December 31, 2005. We
commenced our public offering in May 2005; however, we did not receive and
accept the minimum offering proceeds of $2,000,000 until February 1, 2006.
On
that date, we received the initial proceeds from our offering, acquired an
interest in the Operating Partnership and commenced operations.
During
the period from inception (June 8, 2004) to December 31, 2004, we had been
formed but had not yet commenced real estate operations, as we had not yet
begun
our public offering. As a result, we had no material results of operations
for
that period.
We
had a
net loss of approximately $116,407 for the year ended December 31, 2005 due
primarily to general and administrative costs ($117,571) incurred subsequent
to
the commencement of our offering.
Approximately
$1,493,488 of offering costs (including commission and dealer manager fee
payments totaling $180,773) were incurred by our Advisor on our behalf during
2004 and 2005. Based on gross proceeds of $2,259,662 from our public offering
as
of December 31, 2005, our responsibility for the reimbursement of commissions
and dealer manager fees was limited to $180,773 (or 8% of our gross offering
proceeds), and our obligation for the reimbursement of organization and
third-party offering costs was limited to $45,193 (or 2% of the gross offering
proceeds). Accordingly, we have accrued these costs with an offset of $225,966
recorded as deferred offering costs at December 31, 2005.
General
and administrative expenses for the year ended December 31, 2005 totaled
$117,571. We expect these expenses to increase in the future based on a full
year of operations as well as increased activity as we make additional real
estate investments in future periods. No fees of any kind were paid to the
Advisor for the year ended December 31, 2005.
The
loss
allocated to minority interests of approximately $1,164 for the year ended
December 31, 2005 relates to the interests in the Operating Partnership
held by our Sponsor.
Financial
Condition, Liquidity and Capital Resources
As
of
December 31, 2005, our sole source of funds was $200,000 from the sale of 20,000
shares to the Advisor on July 6, 2004, and our Advisor’s contribution of $2,000
to the Operating Partnership, for a total of $202,000 in cash.
We
are
dependent upon the net proceeds to be received from our public offering to
conduct our proposed activities. The capital required to purchase real estate
investments will be obtained from our offering and from any indebtedness that
we
may incur in connection with the acquisition and operations of any real estate
investments thereafter.
We
intend
to utilize leverage in acquiring our properties. The number of different
properties we will acquire will be affected by numerous factors, including,
the
amount of funds available to us. When interest rates on mortgage loans are
high
or financing is otherwise unavailable on terms that are satisfactory to us,
we
may purchase certain properties for cash with the intention of obtaining a
mortgage loan for a portion of the purchase price at a later
time.
36
PART II.
CONTINUED:
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,
CONTINUED:
Our
sources of funds in the future will primarily be the net proceeds of our
offering, operating cash flows and borrowings. We believe that these cash
resources will be sufficient to satisfy our cash requirements for the
foreseeable future, and we do not anticipate a need to raise funds from other
than these sources within the next twelve months.
We
currently have no outstanding debt under any financing facilities and have
not
identified any sources of debt financing.
We
intend to limit our aggregate long-term permanent borrowings to 75% of the
aggregate fair market value of all properties unless any excess borrowing is
approved by a majority of the independent directors and is disclosed to our
stockholders. We may also incur short-term indebtedness, having a maturity
of
two years or less.
Our
charter provides that the aggregate amount of borrowing, both secured and
unsecured, may not exceed 300% of net assets in the absence of a satisfactory
showing that a higher level is appropriate, the approval of our board of
directors and disclosure to stockholders. Net assets means our total assets,
other than intangibles, at cost before deducting depreciation or other non-cash
reserves less our total liabilities, calculated at least quarterly on a basis
consistently applied. Any excess in borrowing over such 300% of net assets
level
must be approved by a majority of our independent directors and disclosed to
our
stockholders in our next quarterly report to stockholders, along with
justification for such excess.
Borrowings
may consist of single-property mortgages as well as mortgages
cross-collateralized by a pool of properties. Such mortgages may be put in
place
either at the time we acquire a property or subsequent to our purchasing a
property for cash. In addition, we may acquire properties that are subject
to
existing indebtedness where we choose to assume the existing mortgages.
Generally, though not exclusively, we intend to seek to encumber our properties
with debt which will be on a non-recourse basis. This means that a lender’s
rights on default will generally be limited to foreclosing on the property.
However, we may, at our discretion, secure recourse financing or provide a
guarantee to lenders if we believe this may result in more favorable terms.
When
we give a guaranty for a property owning entity, we will be responsible to
the
lender for the satisfaction of the indebtedness if it is not paid by the
property owning entity.
We
intend
to obtain level payment financing, meaning that the amount of debt service
payable would be substantially the same each year. Accordingly, we expect that
some of the mortgages on our property will provide for fixed interest rates.
However, we expect that most of the mortgages on our properties will provide
for
a so-called “balloon” payment and that certain of our mortgages will provide for
variable interest rates. Any mortgages secured by a property will comply with
the restrictions set forth by the Commissioner of Corporations of the State
of
California.
We
may
also obtain lines of credit to be used to acquire properties. These lines of
credit will be at prevailing market terms and will be repaid from offering
proceeds, proceeds from the sale or refinancing of properties, working capital
or permanent financing. Our Sponsor or its affiliates may guarantee the lines
of
credit although they will not be obligated to do so. We may draw upon the lines
of credit to acquire properties pending our receipt of proceeds from our initial
public offering. We expect that such properties may be purchased by our
Sponsor’s affiliates on our behalf, in our name, in order to avoid the
imposition of a transfer tax upon a transfer of such properties to us.
In
addition to making investments in accordance with our investment objectives,
we
expect to use our capital resources to make certain payments to our Advisor,
our
Dealer Manager, and our Property Manager during the various phases of our
organization and operation. During the organizational and offering stage, these
payments will include payments to our Dealer Manager for selling commissions
and
the dealer manager fee, and payments to our Advisor for the reimbursement of
organization and offering costs. During the acquisition and development stage,
these payments will include asset acquisition fees and asset management fees,
and the reimbursement of acquisition related expenses to our Advisor. During
the
operational stage, we will pay our Property Manager a property management fee
and our Advisor an asset management fee. We will also reimburse our Advisor
and
its affiliates for actual expenses it incurs for administrative and other
services provided to us. Additionally, the Operating Partnership may be required
to make distributions to Lightstone SLP, LLC, an affiliate of the Advisor,
No
asset
management or acquisition fees were paid or owed to the Advisor for the year
ended December 31, 2005. As of December 31, 2005, approximately
$309,000 was payable to our Advisor for reimbursement of commissions and dealer
manager fees ($181,000), offering expenses ($45,000), expenses incurred in
connection with our administration and ongoing operations ($80,000), and
advances of working capital for use by the Company ($3,000).
37
PART II.
CONTINUED:
ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
Market
risk includes risks that arise from changes in interest rates, foreign currency
exchange rates, commodity prices, equity prices and other market changes that
affect market sensitive instruments. In pursuing our business plan, we expect
that the primary market risk to which we will be exposed is interest rate risk.
We
may be
exposed to the effects of interest rate changes primarily as a result of
long-term debt used to maintain liquidity and fund expansion of our real estate
investment portfolio and operations. Our interest rate risk management
objectives will be to monitor and manage the impact of interest rate changes
on
earnings and cash flows by considering certain derivative financial instruments
such as interest rate swaps and caps in order to mitigate our interest rate
risk
on variable rate debt. We will not enter into derivative or interest rate
transactions for speculative purposes.
In
addition to changes in interest rates, the value of our real estate is subject
to fluctuations based on changes in the real estate capital markets, market
rental rates for office space, local, regional and national economic conditions
and changes in the creditworthiness of tenants. All of these factors may also
affect our ability to refinance our debt if necessary.
38
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Lightstone
Value Plus Real Estate Investment Trust, Inc.
(a
Maryland corporation)
|
Index
|
|
|
|
Page
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm on Consolidated
Financial
Statements
|
40
|
|
|
|
|
Financial
Statements:
|
|
|
|
|
|
Consolidated
Balance Sheets December 31, 2005 and 2004
|
42
|
|
|
|
|
Consolidated
Statements of Operations for the year ended December 31, 2005 and
the
period June 8, 2004 (date of inceptions) to December 31,
2004
|
43
|
|
|
|
|
Consolidated
Statements of Stockholder’s Equity for the year ended December 31, 2005
and the period from June 8, 2004 (date of inception) to December
31,
2004
|
44
|
|
|
|
|
Consolidated
Statements of Cash Flows for the year ended December 31, 2005 and
the
period from June 8, 2004 (date of inception) to December 31,
2004
|
45
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
46
|
Schedules
not filed:
All
schedules have been omitted as the required information is not applicable or
the
information is presented in the financial statements or related
notes.
39
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Stockholders
Lightstone
Value Plus Real Estate Investment Trust, Inc.
We
have
audited the accompanying consolidated balance sheet of Lightstone Value Plus
Real Estate Investment Trust, Inc. and Subsidiary as of December 31, 2005,
and
the related consolidated statements of operations, stockholder’s equity and cash
flows for the year ended December 31, 2005. These financial statements are
the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures
that
are appropriate in the circumstances, 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 opinion. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for
our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Lightstone
Value Plus Real Estate Investment Trust, Inc. and Subsidiary as of December
31,
2005 and the results of their operations and their cash flows for the year
ended
December 31, 2005, in conformity with accounting principles generally accepted
in the United States of America.
| Amper, Politziner & Mattia, P.C. |
March
17,
2006
Edison,
New Jersey
40
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
Report
of Independent Registered Public Accounting Firm
The
Stockholder
Lightstone
Value Plus Real Estate Investment Trust, Inc.:
We
have
audited the accompanying balance sheet of Lightstone Value Plus Real Estate
Investment Trust, Inc. (the Company) as of December 31, 2004, and the related
statements of operations, stockholder’s equity and cash flows for the period
from June 8, 2004 (Date of Inception) to December 31, 2004. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based
on
our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Lightstone Value Plus Real Estate
Investment Trust, Inc. as of December 31, 2004 and the results of its operations
and its cash flows for the period from June 8, 2004 (Date of Inception) to
December 31, 2004, in conformity with accounting principles generally accepted
in the United States of America.
| Kamler, Lewis & Norman LLP |
Great
Neck, New York
February
14, 2005
41
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.
CONSOLIDATED
BALANCE SHEETS
As
of December 31, 2005 and 2004
|
December
31, 2005
|
December 31, 2004
|
||||||
|
Assets
|
|||||||
|
Cash
|
$
|
205,030
|
$
|
205,489
|
|||
|
Deferred
offering costs
|
225,966
|
-
|
|||||
|
430,996
|
205,489
|
||||||
|
Liabilities
and Stockholder's Equity
|
|||||||
|
Accounts
payable and accrued expenses
|
$
|
37,511
|
$
|
-
|
|||
|
Due
to affiliate
|
309,056
|
3,489
|
|||||
|
346,567
|
3,489
|
||||||
|
Minority
interest
|
836
|
2,000
|
|||||
|
Stockholder’s
equity:
|
|||||||
|
Preferred
shares, 10,000,000 shares authorized, none outstanding
|
-
|
-
|
|||||
|
Common
stock, $.01 par value; 60,000,000 shares authorized, 20,000 shares
issued
and outstanding
|
200
|
200
|
|||||
|
Additional
paid-in-capital
|
199,800
|
199,800
|
|||||
|
Accumulated
deficit
|
(116,407
|
)
|
-
|
||||
|
Total
stockholder’s equity
|
83,593
|
200,000
|
|||||
|
Total
Liabilities and Stockholder’s Equity
|
$
|
430,996
|
$
|
205,489
|
|||
The
accompanying notes are an integral part of these consolidated financial
statements.
42
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
For
the Year ended December 31, 2005 and
for
the Period from June 8, 2004 (date of inception) to December 31,
2004
|
Year
Ended December 31, 2005
|
Period
from June 8, 2004 (date of inception) to December 31,
2004
|
||||||
|
Revenues
|
$
|
-
|
$
|
-
|
|||
|
Expenses:
|
|||||||
|
General
and administrative costs
|
117,571
|
-
|
|||||
|
Operating
loss
|
(117,571
|
)
|
-
|
||||
|
Loss
allocated to minority interest
|
1,164
|
-
|
|||||
|
Net
loss
|
$
|
(116,407
|
)
|
$
|
-
|
||
|
Loss
per common share, basic and diluted
|
$
|
(5.82
|
)
|
$
|
-
|
||
|
Weighted
average number of common shares outstanding
|
20,000
|
20,000
|
|||||
The
accompanying notes are an integral part of these consolidated financial
statements.
43
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDER’S EQUITY
For
the Year ended December 31, 2005 and
for
the Period from June 8, 2004 (date of inception) to December 31,
2004
|
Preferred
Shares
|
Common
Shares
|
|||||||||||||||||||||
|
Additional
|
Total
|
|||||||||||||||||||||
|
Preferred
|
Common
|
Paid-In
|
Accumulated
|
Shareholder's
|
||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Equity
|
||||||||||||||||
|
BALANCE,
June 8, 2004 (date of inception)
|
-
|
$
|
-
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||
|
Issuance
of common shares
|
-
|
-
|
20,000
|
200
|
199,800
|
-
|
200,000
|
|||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
BALANCE,
December 31, 2004
|
-
|
-
|
20,000
|
200
|
199,800
|
-
|
200,000
|
|||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(116,407
|
)
|
(116,407
|
)
|
|||||||||||||
|
BALANCE,
December 31, 2005
|
-
|
$
|
-
|
20,000
|
$
|
200
|
$
|
199,800
|
$
|
(116,407
|
)
|
$
|
83,593
|
|||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
44
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the Year ended December 31, 2005 and
for
the Period from June 8, 2004 (date of inception) to December 31,
2004
|
Year
Ended December 31, 2005
|
Period
from June 8, 2004 (date of inception) to December 31,
2004
|
||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|||||||
|
Net
loss
|
$
|
(116,407
|
)
|
$
|
-
|
||
|
Loss
allocated to minority interests
|
(1,164
|
)
|
-
|
||||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|||||||
|
Changes
in assets and liabilities:
|
|||||||
|
Increase
in accounts payable and accrued expenses
|
37,511
|
-
|
|||||
|
Increase
in due to affiliates, net
|
303,567
|
5,489
|
|||||
|
Net
provided by operating activities
|
223,507
|
5,489
|
|||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||||
|
Proceeds
from issuance of common stock
|
-
|
200,000
|
|||||
|
Offering
costs
|
(225,966
|
)
|
-
|
||||
|
Net
cash (used in) provided by financing activities
|
(225,966
|
)
|
200,000
|
||||
|
Net
change in cash
|
(2,459
|
)
|
205,489
|
||||
|
Cash,
beginning of period
|
205,489
|
-
|
|||||
|
Cash,
end of period
|
$
|
203,030
|
$
|
205,489
|
|||
|
SUPPLEMENTAL
FINANCING CASH FLOW DATA:
|
|||||||
|
Exchange
of due to affiliate for minority interest in operating
partnership
|
$
|
2,000
|
$
|
-
|
|||
The
accompanying notes are an integral part of these consolidated financial
statements.
45
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.
Notes
to Consolidated Financial Statements
December
31, 2005
1.
Organization
Lightstone
Value Plus Real Estate Investment Trust, Inc., a Maryland corporation
(“Lightstone
REIT” and, together with the Operating Partnership (as defined below), the
“Company”) was
formed on June 8, 2004
and
intends
to qualify as a real estate investment trust (“REIT”). The Company was formed
primarily
for the purpose of engaging in the business of investing in and owning
commercial and residential real estate properties located throughout the United
States and Puerto Rico.
The
Lightstone
REIT
is
structured as an umbrella partnership real estate investment trust, or UPREIT,
and substantially all of the Lightstone
REIT’s
current and future business is and will be conducted through Lightstone
Value Plus REIT, L.P., a Delaware limited partnership formed on July
12,
2004 (the
“Operating Partnership”). The
Lightstone REIT is managed by Lightstone
Value Plus REIT, LLC (the “Advisor”),
an
affiliate of the Lightstone Group (the “Sponsor”), under the terms and
conditions of an advisory agreement. The Sponsor and Advisor are owned and
controlled by David
Lichtenstein,
the
Chairman of the Company’s board of directors.
The
Company intends to sell a maximum of 30 million common shares, at a price of
$10
per share (exclusive of 4 million shares available pursuant to the Company’s
dividend reinvestment plan, 600,000 shares that could be obtained through the
exercise of selling dealer warrants when and if issued and 75,000 shares that
are reserved for issuance under the Company’s stock option plan). The Company’s
Registration Statement on Form S-11 (the “Registration Statement”) was declared
effective under the Securities Act of 1933 on April 22, 2005, and
on
May
24,
2005,
the
Lightstone REIT began offering its common shares for sale to the public.
Lightstone
Securities, LLC (the “Dealer Manager”), an affiliate of the Sponsor, is serving
as the dealer manager of the Company’s public offering (the “Offering”).
The
Company sold 20,000 shares to the Advisor on July 6, 2004, for $10 per share.
The Company invested the proceeds from this sale in the Operating Partnership,
and as a result, held a 99.01% limited partnership interest at December 31,
2004
and 2005, respectively. The Advisor also contributed $2,000 to the Operating
Partnership in exchange for 200 limited partner units in the Operating
Partnership. The limited partner has the right to convert operating partnership
units into cash or, at the option of the Company, an equal number of common
shares of the Company, as allowed by the limited partnership agreement.
A
Post-Effective Amendment to the Lightstone REIT’s Registration Statement was
declared effective on October 17, 2005. The Post-Effective Amendment reduced
the
minimum offering from 1 million shares of common stock to 200,000 shares of
common stock. As of December 31,
2005, the Company
had
reached its minimum offering by receiving subscriptions for approximately
226,000
of
its
common shares, representing gross offering proceeds of approximately
$2.3
million.
On
February 1, 2006, cumulative gross offering proceeds of approximately $2.7
million were released to the Company from escrow and invested in the Operating
Partnership.
As
of
March 27, 2006, cumulative gross offering proceeds of $4,826,158 have been
released to the Lightstone REIT and used for the purchase of a 99.96% limited
partnership interest in the Operating Partnership. The Company expects that
its
ownership percentage in the Operating Partnership will remain significant as
it
plans to continue to invest all net proceeds from the Offering in the Operating
Partnership.
Lightstone
SLP, LLC, an affiliate of the Advisor, intends to purchase special general
partner units in the Operating Partnership at a cost of $100,000 per unit for
each $1.0 million in offering subscriptions. Proceeds from the sale of the
special general partnership interests will be used to reimburse organizational
and offering costs paid by the Advisor on the Company’s behalf.
46
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.
Notes
to Consolidated Financial Statements
December
31, 2005
1.
Organization
(continued):
In
conjunction with its closing of escrow on February 1, 2006, the Lightstone
REIT
offset proceeds of approximately $226,000 from the sale of special general
partnership units against amounts due to the Advisor. Such offset was in partial
satisfaction of approximately $1.5 million of offering costs incurred by the
Advisor on the Company’s behalf. As of March 27, 2006, cumulative offering costs
advanced by the Advisor totaled approximately $1.7 million, representing 34.7%
of gross offering proceeds during the same period. The Advisor did not allocate
any organizational costs to the Company as of December 31, 2005. The Advisor
is
responsible for offering and organizational costs exceeding 10% of the gross
offering proceeds without recourse to the Company.
Through
its Operating Partnership, the Company will seek to acquire and operate
commercial and residential properties, principally in the United States. All
such properties may be acquired and operated by the Company alone or jointly
with another party. As of March 27, 2006, the Company hasn’t purchased any
properties, however it has identified the Belz Factory Outlet World in St.
Augustine, Florida as its first potential acquisition. The $28 million
transaction is expected to close by April 2006, but there can be no assurance
that this acquisition will be consummated. Prime Retail Property Management,
LLC, an affiliate of Lightstone Value Plus REIT Management LLC, (the “Property
Manager”), will serve as the property manager.
The
Company’s Advisor, Property Manager and Dealer Manager are each related parties.
Each of these entities will receive compensation and fees for services related
to the offering and for the investment and management of the Company’s assets.
These entities will receive fees during the offering, acquisition, operational
and liquidation stages. The compensation levels during the offering, acquisition
and operational stages are based on percentages of the offering proceeds sold,
the cost of acquired properties and the annual revenue earned from such
properties and other such fees outlined in each of the respective agreements.
(See Note 4, Related Party Transactions).
2.
Summary
of Significant Accounting Policies
Principles
of Consolidation
The
2005
financial statements include the accounts of the Lightstone REIT and Operating
Partnership. All inter-company balances and transactions have been eliminated
in
consolidation. The 2004 financial statements include the accounts of the
Lightstone REIT.
Use
of Estimates
The
presentation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires the
Company to make estimates and assumptions that affect the amounts of assets
and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements. Actual results could differ from those
estimates.
Cash
Equivalents
Cash
and
cash equivalents include cash in banks and money market funds, and temporary
investments in short-term instruments with original maturities equal to or
less
than three months.
Deferred
Offering Costs
Subject
to limitations in terms of the maximum percentage of costs to offering proceeds
that may be incurred by the Company, third-party offering expenses such as
registration fees, due diligence fees, marketing costs, and professional fees,
along with selling commissions and dealer manager fees paid to the Dealer
Manager, are accounted for as deferred offering expenses before being taken
as a
reduction against additional paid-in capital (“APIC”) as offering proceeds are
released to the Company.
47
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.
Notes
to Consolidated Financial Statements
December
31, 2005
2.
Summary
of Significant Accounting Policies (continued):
Deferred
Offering Costs (continued):
The
Advisor, on the Company’s behalf, incurred approximately $1.5 million of
offering costs, including commission and dealer manager fees of approximately
$180,000 since Inception. Based on gross proceeds of approximately $2.3 million
from its public offering as of December 31, 2005, the Company’s responsibility
for the reimbursement of commissions and dealer manager fees was limited to
approximately $181,000 (or 8% of our gross offering proceeds), and its
obligation for organization and third-party offering costs was limited to
approximately $45,000 (or 2% of the gross offering proceeds). Accordingly,
an
accrual of approximately $226,000 for deferred offering costs has been recorded
at December 31, 2005. These deferred offering costs will be released
against offering proceeds when received.
Due
to Affiliate
As
of
December 31, 2005, approximately $309,000 was payable to the Advisor for
reimbursement of commissions and dealer manager fees ($181,000), offering
expenses ($45,000), expenses incurred in connection with the Company’s
administration and ongoing operations ($80,000), and advances of working capital
($3,000).
Fair
Value of Financial Instruments
Disclosure
about fair value of financial instruments is based on pertinent information
available to management. Considerable judgment is necessary to interpret market
data and develop estimated fair values. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts we could obtain on
disposition of the financial instruments. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
As
of
December 31, 2005 and 2004, management estimates that the carrying value of
cash, accounts payable and accrued expenses are recorded at amounts which
reasonably approximate fair value.
Reportable
Segments
FASB
Statement of Financial Accounting Standards (“SFAS”) No. 131, Disclosures
About Segments of Enterprise and Related Information,
establishes standards for reporting financial and descriptive information
about an enterprise’s reportable segments. Management has determined that the
Company has no reportable segments at December 31, 2005.
General
and Administrative Expenses
General
and administrative expenses consisted primarily of insurance premiums, fees
for
the Company’s independent directors and professional fees, totaling $117,571,
for the year ended December 31, 2005. No General and administrative costs
were incurred for the period ended December 31, 2004. We expect these expenses
to increase in the future based on a full year of operations as well as
increased activity as we make additional real estate investments in future
periods. No fees of any kind were paid to the Advisor for the year ended
December 31, 2005.
Per
Share Data
Loss
per
basic common share is calculated by dividing the net loss by the weighted
average number of common shares outstanding during such period. Diluted loss
per
common share equals basic loss per common share as there were no potentially
dilutive common shares for the year ended December 31, 2005, or for the
period from Inception through December 31, 2004.
48
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.
Notes
to Consolidated Financial Statements
December
31, 2005
2.
Summary
of Significant Accounting Policies (continued):
Income
Taxes
For
the
year ending December 31, 2006, the Company intends to make an election to be
taxed as a real estate investment trust (a “REIT”), under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended (the “Code”) and intends to
be taxed as such beginning with its taxable year ending December 31, 2006.
To
qualify as a REIT, the Company must meet certain organizational and operational
requirements, including a requirement to distribute at least 90% of its ordinary
taxable income to stockholders. As a REIT, the Company generally will not be
subject to federal income tax on taxable income that it distributes to its
stockholders. If the Company fails to qualify as a REIT in any taxable year,
it
will then be subject to federal income taxes on its taxable income at regular
corporate rates and will not be permitted to qualify for treatment as a REIT
for
federal income tax purposes for four years following the year during which
qualification is lost unless the Internal Revenue Service grants the Company
relief under certain statutory provisions. Such an event could materially
adversely affect the Company’s net income and net cash available for
distribution to stockholders. However, the Company believes that it will be
organized and operate in such a manner as to qualify for treatment as a REIT
and
intends to operate in such a manner so that the Company will remain qualified
as
a REIT for federal income tax purposes.
Newly
Adopted Accounting Pronouncements
In
December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement no. 153 ("SFAS 153"), "Exchanges of Non-monetary Assets," an amendment
of APB Opinion No. 29. SFAS 153 is effective for non-monetary transactions
occurring in fiscal periods beginning after June 15, 2005. SFAS 153
generally will no longer allow non-monetary exchanges to be recorded at book
value with no gain being recognized. Non-monetary exchanges will be
accounted for at fair value, recognizing any gain or loss, if the transactions
meet a commercial substance criterion and fair value is determinable. To
prevent gain recognition on exchanges of real estate when the risks and rewards
of ownership are not fully transferred, SFAS 153 precludes a gain from being
recognized if the entity has significant continuing involvement with the real
estate given up in the exchange. Adoption is not expected to affect the
Company.
In
December 2004, the FASB issued SFAS No. 123R (revised 2004), “Share-Based
Payment”, which is a revision of SFAS No. 123, “Accounting for Stock-Based
Compensation”. SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting
for Stock Issued to Employees” and amends SFAS No. 95, “Statement of Cash
Flows”. Generally, the approach in SFAS No. 123(R) is similar to the
approach described in SFAS No. 123. However, SFAS No. 123(R) requires all
share-based payments
to employees, including grants of employee stock options, to be recognized
in
the income statement based on their fair values. Pro forma disclosure is
no longer an alternative. Adoption is not expected to affect the
Company as no options have been granted under our current plan.
In
March
2005, the FASB issued Interpretation No. 47 ("FIN 47"), "Accounting for
Conditional Asset Retirement Obligations, an interpretation of FASB Statement
No. 143." FIN 47 refers to a legal obligation to perform an asset
retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of
the
entity. An entity is required to recognize a liability for the fair value
of a conditional asset retirement obligation if the fair value of the liability
can be reasonable estimated. The fair value of a liability for the
conditional asset retirement obligation should be recognized when incurred,
generally upon acquisition, construction, or development and through the normal
operation of the asset. This interpretation is effective no later than the
end of fiscal years ending after December 31, 2005. Adoption is not
expected to have a material effect on the Company.
In
May
2005, the FASB issued Statement No. 154 ("SFAS 154") "Accounting Changes and
Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement
No.
3." SFAS 154 changes the requirements for the accounting
49
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.
Notes
to Consolidated Financial Statements
December
31, 2005
2.
Summary
of Significant Accounting Policies (continued):
Newly
Adopted Accounting Pronouncements (continued):
for
and
reporting of a change in accounting principle. APB Opinion 20 previously
required that most voluntary changes in accounting principle be recognized
by
including in net income of the period of the change the cumulative effect of
changing to the new accounting principle. SFAS 154 requires retrospective
application to prior periods' financial statements of changes in accounting
principle, unless it is impracticable to determine either the period-specific
effects of the cumulative effect of the change. In the event of such
impracticality, SFAS 154 provides for other means of application. In the
event the Company changes accounting principles, it will evaluate the impact
of
SFAS 154.
In
June
2005, the FASB ratified the EITF's consensus on Issue No. 04-5 "Determining
Whether a General Partner, or the General Partners as a Group, Controls a
Limited Partnership or Similar Entity When the Limited Partners Have Certain
Rights."
This consensus establishes the presumption that general partners in a
limited partnership control that limited partnership regardless of the extent
of
the general partners' ownership interest in the limited partnership. The
consensus further establishes that the rights of the limited partners can
overcome the presumption of control by the general partners, if the limited
partners have either (a) the substantive ability to dissolve (liquidate) the
limited partnership or otherwise remove the general partners without cause
or
(b) substantive participating rights. Whether the presumption of control
is overcome is a matter of judgment based on the facts and circumstances, for
which the consensus provides additional guidance. This consensus is
currently applicable to the Company for new or modified partnerships, and will
otherwise be applicable to existing partnerships in 2006. This consensus
applies to limited partnerships or similar entities, such as limited liability
companies that have governing provisions that are the functional equivalent
of a
limited partnership. Adoption is not expected to have a material effect on
the Company.
3.
Stockholder’s Equity
Preferred
Shares
Shares
of
preferred stock may be issued in the future in one or more series as authorized
by the Company’s board of directors. Prior to the issuance of shares of any
series, the board of directors is required by the Company’s charter to fix the
number of shares to be included in each series and the terms, preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications and terms or conditions of
redemption for each series. Because the Company’s board of directors has the
power to establish the preferences, powers and rights of each series of
preferred stock, it may provide the holders of any series of preferred stock
with preferences, powers and rights, voting or otherwise, senior to the rights
of holders of our common stock. The issuance of preferred stock could have
the
effect of delaying, deferring or preventing a change in control of the Company,
including an extraordinary transaction (such as a merger, tender offer or sale
of all or substantially all of our assets) that might provide a premium price
for holders of the Company’s common stock. As
of
December 31, 2005 and 2004, the Company had no outstanding preferred
shares.
Common
Shares
All
of
the common stock being offered by the Company will be duly authorized, fully
paid and nonassessable. Subject to the preferential rights of any other class
or
series of stock and to the provisions of its charter regarding the restriction
on the ownership and transfer of shares of our stock, holders of the Company’s
common stock will be entitled to receive distributions if authorized by the
board of directors and to share ratably in the Company’s assets available for
distribution to the stockholders in the event of a liquidation, dissolution
or
winding-up.
Each
outstanding share of the Company’s common stock entitles the holder to one vote
on all matters submitted to a vote of stockholders, including the election
of
directors. There is no cumulative voting in the election of directors, which
means that the holders of a majority of the outstanding common stock can elect
all of the directors then standing for election, and the holders of the
remaining common stock will not be able to elect any directors.
50
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.
Notes
to Consolidated Financial Statements
December
31, 2005
3.
Stockholder’s Equity (continued):
Common
Shares (continued):
Holders
of the Company’s common stock have no conversion, sinking fund, redemption or
exchange rights, and have no preemptive rights to subscribe for any of its
securities. Maryland law provides that a stockholder has appraisal rights in
connection with some transactions. However, the Company’s charter provides that
the holders of its stock do not have appraisal rights unless a majority of
the
board of directors determines that such rights shall apply. Shares of the
Company’s common stock have equal dividend, distribution, liquidation and other
rights.
Under
its
charter, the Company cannot make some material changes to its business form
or
operations without the approval of stockholders holding at least a majority
of
the shares of our stock entitled to vote on the matter. These include (1)
amendment of its charter, (2) its liquidation or dissolution, (3) its
reorganization, and (4) its merger, consolidation or the sale or other
disposition of its assets. Share exchanges in which the Company is the acquirer,
however, do not require stockholder approval. The
Company
had 20,000 shares of common stock outstanding as of December 31, 2005 and
2004.
Equity
Compensation Plan
The
Company has adopted a stock option plan under which its independent directors
are eligible to receive annual nondiscretionary awards of nonqualified stock
options. The Company’s stock option plan is designed to enhance the Lightstone
REIT’s profitability and value for the benefit of stockholders by enabling the
Company to offer independent directors stock-based incentives, thereby creating
a means to raise the level of equity ownership by such individuals in order
to
attract, retain and reward such individuals and strengthen the mutuality of
interests between such individuals and the Company’s stockholders.
The
Company has authorized and reserved 75,000 shares of its common stock for
issuance under the stock option plan. The board of directors may make
appropriate adjustments to the number of shares available for awards and the
terms of outstanding awards under the stock option plan to reflect any change
in
the Company’s capital structure or business, stock dividend, stock split,
recapitalization, reorganization, merger, consolidation or sale of all or
substantially all of its assets.
The
Lightstone REIT’s stock option plan provides for the automatic grant of a
nonqualified stock option to each of the Company’s independent directors,
without any further action by the board of directors or the stockholders, to
purchase 3,000 shares of the Company’s common stock on the date of each annual
stockholders meeting. The exercise price for all stock options granted under
the
stock option plan will be fixed at $10 per share until the termination of the
Company’s initial public offering, and thereafter the exercise price for stock
options granted to the independent directors will be equal to the fair market
value of a share on the last business day preceding the annual meeting of
stockholders. The term of each such option will be 10 years. Options granted
to
non-employee directors will vest and become exercisable on the second
anniversary of the date of grant, provided that the independent director is
a
director on the board of directors on that date. No options have been granted
under the Company’s current plan.
Notwithstanding
any other provisions of the Company’s stock option plan to the contrary, no
stock option issued pursuant thereto may be exercised if such exercise would
jeopardize the Lightstone REIT’s status as a REIT under the Internal Revenue
Code.
51
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.
Notes
to Consolidated Financial Statements
December
31, 2005
3.
Stockholder’s Equity (continued):
Dividends
On
January 26, 2006, the Company’s board of directors declared a dividend for the
two-month period ending March 31, 2006. The dividend will be calculated based
on
shareholders of record each day during this period at a rate of $0.0019178
per
day, and will equal a daily amount that, if paid each day for a 365-day period,
would equal a 7.0 percent annualized rate based on a share price of $10.00.
The
dividend will be paid in cash in April 2006. The amount of dividends to be
distributed to stockholders in the future will be determined by the Board of
Directors and are dependent on a number of factors, including funds available
for payment of dividends, our financial condition, capital expenditure
requirements and annual distribution requirements needed to maintain our status
as a REIT under the Internal Revenue Code.
4.
Related
Party Transactions
The
Company has agreements with the Dealer Manager, Advisor and Property Manager
to
pay certain fees, as follows, in exchange for services performed by these
entities and other affiliated entities. The Company’s ability to secure
financing and subsequent real estate operations are dependent upon its Advisor,
Property Manager, Dealer Manager and their affiliates to perform such services
as provided in these agreements.
|
Fees
|
|
Amount
|
|||
|
Selling
Commission
|
|
The
Dealer Manager will be paid up to 7% of the gross offering proceeds
before
reallowance of commissions earned by participating broker-dealers.
Selling
commissions are expected to be approximately $21,000,000 if the maximum
offering of 30 million shares is sold.
|
|||
|
Dealer
Management Fee
|
|
The
Dealer Manager will be paid up to 1% of gross offering proceeds before
reallowance to participating broker-dealers. The estimated dealer
management fee is expected to be approximately $3,000,000 if the
maximum
offering of 30 million shares is sold.
|
|||
|
Soliciting
Dealer Warrants
|
|
The
Dealer Manager may buy up to 600,000 warrants at a purchase price
of
$.0008 per warrant. Each warrant will be exercisable for one share
of the
company’s common stock at an exercise price of $12.00 per
share.
|
|||
|
Reimbursement
of Offering Expenses
|
Reimbursement
of all offering costs, including the commissions and dealer management
fees indicated above, are estimated at approximately $30 million
if the
maximum offering of 30 million shares is sold. The Company will sell
a
special general partnership interest in the Operating Partnership
to
Lightstone SLP, LLC (an affiliate of the Sponsor) and apply all the
sales
proceeds to reimburse offering costs paid to the Advisor or its affiliates
on the Company’s behalf.
|
||||
|
Acquisition
Fee
|
|
The
Advisor will be paid an acquisition fee equal to 2.75% of the gross
contract purchase price (including any mortgage assumed) of each
property
purchased. The Advisor will also be reimbursed for expenses that
it incurs
in connection with the purchase of a property. The Company anticipates
that acquisition expenses will be between 1% and 1.5% of a property’s
purchase price, and acquisition fees and expenses are capped at 5%
of the
gross contract purchase price of a property. The actual amounts of
these
fees and reimbursements depend upon results of operations and, therefore,
cannot be determined at the present time. However, $33,000,000 may
be paid
as an acquisition fee and for the reimbursement of acquisition expenses
if
the maximum offering is sold, assuming aggregate long-term permanent
leverage of approximately 75%.
|
|||
52
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.
Notes
to Consolidated Financial Statements
December
31, 2005
4.
Related
Party Transactions (continued):
|
Fees
|
|
Amount
|
|
|
Property
Management -Residential
/ Retail
|
The
Property Manager will be paid a monthly management fee of 5% of the
gross
revenues from residential and retail properties. In addition, the
Company
may pay the Property Manager a separate fee for the one-time initial
rent-up or leasing-up of newly constructed properties in an amount
not to
exceed the fee customarily charged in arm’s length transactions by others
rendering similar services in the same geographic area for similar
properties as determined by a survey of brokers and agents in such
area.
|
||
|
Property
Management -
Office
/ Industrial
|
The
Property Manager will be paid monthly property management and leasing
fees
of up to 4.5% of gross revenues from office and industrial properties.
In
addition, the Company may pay the Property Manager a separate fee
for the
one-time initial rent-up or leasing-up of newly constructed properties
in
an amount not to exceed the fee customarily charged in arm’s length
transactions by others rendering similar services in the same geographic
area for similar properties as determined by a survey of brokers
and
agents in such area.
|
||
|
Asset
Management Fee
|
The
Advisor or its affiliates will be paid an asset management fee of
0.55% of
the Company’s average invested assets, as defined, payable quarterly in an
amount equal to 0.1375 of 1% of average invested assets as of the
last day
of the immediately proceeding quarter.
For
any year in which the Company qualifies as a REIT, the Advisor must
reimburse the Company for the amounts, if any, by which the total
operating expenses, the sum of the advisor asset management fee plus
other
operating expenses paid during the previous fiscal year exceed the
greater
of 2% of average invested assets, as defined, for that fiscal year,
or,
25% of net income for that fiscal year. Items such as interest payments,
taxes, non-cash expenditures, the special liquidation distribution,
the
special termination distribution, organization and offering expenses,
and
acquisition fees and expenses are excluded from the definition of
total
operating expenses, which otherwise includes the aggregate expense
of any
kind paid or incurred by the Company.
|
||
|
Reimbursement
of Other Expenses
|
The
Advisor or its affiliates will be reimbursed for expenses that may
include
costs of goods and services, administrative services and non-supervisory
services performed directly for the Company by independent
parties.
|
||
53
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.
Notes
to Consolidated Financial Statements
December
31, 2005
4.
Related
Party Transactions (continued):
Lightstone SLP,
LLC intends
to purchase special general partner units in the Operating Partnership. These
special general partner units, the purchase price of which will be repaid only
after stockholders receive a stated preferred return and their net investment,
will entitle Lightstone SLP,
LLC to
a
portion of any regular distributions made by the Operating Partnership. Such
distributions will always be subordinated until stockholders receive a stated
preferred return, as described below:
|
Operating
Stage
Distributions
|
Amount
of Distribution
|
|
|
7%
Stockholder Return Threshold
|
|
Once
a 7% return on their net investment is realized by stockholders,
Lightstone SLP, LLC will receive available distributions from the
Operating Partnership until it has received an amount equal to a
cumulative non-compounded return of 7% per year on the purchase price
of
the special general partner interests. “Net investment” refers to $10 per
share, less a pro rata share of any proceeds received from the sale
or
refinancing of the Company’s assets.
|
|
12%
Stockholder Return Threshold
|
|
Once
a cumulative non-compounded return of 12% per year is realized by
stockholders on their net investment (including amounts equaling
a 7%
return on their net investment as described above), 70% of the aggregate
amount of any additional distributions from the Operating Partnership
will
be payable to the stockholders, and 30% of such amount will be payable
to
Lightstone SLP, LLC.
|
|
Returns
in Excess of 12%
|
After
the 12% return threshold is realized by stockholders and Lightstone
SLP,
LLC, 60% of any remaining distributions from the Operating Partnership
will be distributable to stockholders, and 40% of such amount will
be
payable to Lightstone SLP, LLC.
|
|
The
special general partner units will also entitle Lightstone SLP,
LLC to
a
portion of any liquidating distributions made by the Operating Partnership.
The
value of such distributions will depend upon the net sale proceeds upon the
liquidation of the Company and, therefore, cannot be determined at the present
time. Liquidating distributions to Lightstone SLP,
LLC
will always be subordinated until stockholders receive a distribution equal
to
their initial investment plus a stated preferred return, as described
below:
|
Liquidating
Stage
Distributions
|
Amount
of Distribution
|
|||
|
7%
Stockholder Return Threshold
|
|
Once
stockholders have received liquidation distributions, and a cumulative
non-compounded 7% return on their initial net investment, Lightstone
SLP,
LLC will receive available distributions until it has received an
amount
equal to its initial purchase price of the special general partner
interests plus a cumulative non-compounded return of 7% per
year.
|
||
|
12%
Stockholder Return Threshold
|
|
Once
stockholders have received liquidation distributions, and a cumulative
non-compounded return of 12% per year on their initial net investment
(including amounts equaling a 7% return on their net investment as
described above), 70% of the aggregate amount of any additional
distributions from the Operating Partnership will be payable to the
stockholders, and 30% of such amount will be payable to Lightstone
SLP,
LLC.
|
||
|
Returns
in Excess of 12%
|
After
stockholders and Lightstone LP, LLC have received liquidation
distributions, and a cumulative non-compounded return of 12% per
year on
their initial net investment, 60% of any remaining distributions
from the
Operating Partnership will be distributable to stockholders, and
40% of
such amount will be payable to Lightstone SLP,
LLC.
|
|||
54
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.
Notes
to Consolidated Financial Statements
December
31, 2005
5.
Quarterly Financial Data (Unaudited)
The
following table presents selected unaudited quarterly financial data for each
quarter during the year ended December 31, 2005:
|
2005
|
|||||||||||||
|
31-Dec
|
30-Sep
|
30-Jun
|
31-Mar
|
||||||||||
|
Total
revenue
|
$
|
-
|
-
|
-
|
-
|
||||||||
|
Net
income
|
(116,407
|
)
|
-
|
-
|
-
|
||||||||
|
Net
income per common share, basic and diluted
|
(5.82
|
)
|
-
|
-
|
-
|
||||||||
55
PART II.
CONTINUED:
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
There
were no disagreements on accounting or financial disclosure during
2005.
On
June
24, 2005, Lightstone Value Plus Real Estate Investment Trust, Inc. (the
“Company”) engaged Amper, Politziner & Mattia, P.C. (“Amper”) as its
independent registered public accounting firm. No audit or similar committee
of
the Board of Directors of the Company (the “Board”) made the decision to engage
Amper, however the audit committee subsequently ratified the appointment of
Amper on August 11, 2005. Since its incorporation and through June 24, 2005,
the
Company has not consulted with Amper in respect of the Company’s consolidated
financial statements for the year ended December 31, 2004 regarding any of
the
matters or events set forth in Items 304(a)(2)(i) and (ii) of Regulation
S-K.
On
June
24, 2005, the Company dismissed Kamler, Lewis and Noreman LLP (“Kamler”) as its
independent registered public accounting firm. Kamler’s report on the financial
statements of the Company since its incorporation did not contain any adverse
opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principles. Further, since the Company’s
incorporation and through June 24, 2005, there were no disagreements with Kamler
regarding accounting principles or practices, financial statement disclosure
or
auditing scope or procedure, which disagreement, if not resolved to Kamler’s
satisfaction, would have caused Kamler to reference the disagreement’s subject
matter in connection with its report. Finally, since the Company’s incorporation
and through June 24, 2005, there have been no “reportable events,” as defined in
Regulation S-K, Item 304(a)(1)(v). No audit or similar committee of the Board
of
Directors of the Company (the “Board”) made the decision to dismiss
Kamler.
Evaluation
of Disclosure Controls and Procedures
The
Company has established disclosure controls and procedures to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to the officers who certify the Company’s financial
reports and to the members of senior management and the Board of Directors.
Based
on
management’s evaluation as of December 31, 2005, the chief executive officer and
chief financial officer of the Company have concluded that the Company’s
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934) are effective to ensure that the
information required to be disclosed by the Company in the reports that it
files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms.
Changes
in Internal Controls
There
were no changes to the Company’s internal control over financial reporting
during the fourth quarter ended December 31, 2005 that have materially affected,
or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.
None.
56
PART
III.
Directors
The
following table presents certain information as of March 1, 2006 concerning
each
of our directors serving in such capacity:
|
Name
|
Age
|
Principal
Occupation and Postions Held
|
Year
Term of Office Will Expire
|
Served
as a Director Since
|
||||
|
David
Lichtenstein
|
45
|
Chief
Executive Officer, President and Chairman of the Board of
Directors
|
2006
|
2004
|
||||
|
John
E. D’Elisa
|
|
66
|
|
Director
|
2006
|
2005
|
||
|
Edwin
J. Glickman
|
|
73
|
|
Director
|
2006
|
2005
|
||
|
Joel
M. Pashcow
|
|
63
|
|
Director
|
2006
|
2005
|
||
|
Bruno
de Vinck
|
|
60
|
|
Chief
Operating Officer, Senior Vice President, Secretary and
Director
|
2006
|
2005
|
DAVID
LICHTENSTEIN is the Chairman of our board of directors and our Chief Executive
Officer and President. Mr. Lichtenstein has been a member of our board of
directors since June 8, 2004. Mr. Lichtenstein founded both American Shelter
Corporation and The Lightstone Group in 1988 and directs all aspects of the
acquisition, financing and management of a diverse portfolio of multi-family,
retail and industrial properties located in 26 states and Puerto Rico that
is
owned by these companies. He is a member of the International Council of
Shopping Centers and NAREIT. Mr. Lichtenstein is the Chairman of the board
of
directors of Prime Group Realty Trust, a publicly registered REIT trading on
the
NYSE, as well as Prime Retail and Park Avenue Bank, both private companies.
JOHN
E.
D’ELISA has served as an independent director since 2005. Mr. D’Elisa is an
associate member of NAREIT and a member of ICSC. Since July 2000, Mr. D’Elisa
has been Managing Director and Real Estate Group head of Chatsworth Securities
LLC, a private company that focuses on private placements as well as providing
traditional investment banking services for real estate owners and developers.
In addition, Mr. D’Elisa was Managing Director-Investment Banking at Josephthal
and Co. and Ladenburg Thalman, two private companies, from September 1996 to
June 2000 and was a partner and founder of Brookstone Partners, Inc., a real
estate consulting firm that specialized in turnarounds, bankruptcy, and asset
management, from May 1989 to September 1996. Mr. D’Elisa received his B.S.E.E
from Bucknell University, attended graduate school at Yale University and
received his M.S.E.E. from Polytechnic Institute of Brooklyn.
EDWIN
J.
GLICKMAN has served as an independent director since 2005. In January 1995,
Mr.
Glickman co-founded Capital Lease Funding, a leading mortgage lender for
properties net leased to investment grade tenants, where he remained as
Executive Vice President until May 2003. Since April 2002, Mr. Glickman has
consulted for Right Track Recording with respect to restructuring debt
obligations and recapitalizing the company. Since June 2003, Mr. Glickman has
consulted for Capital Lease Funding with respect to proposed loan transactions
that he introduces to the company. Mr. Glickman has been a trustee of RPS Realty
Trust, a public real estate investment trust that made participating mortgage
loans, and its predecessor entities since their founding in October 1980. Mr.
Glickman has been a trustee of Atlantic Realty Trust, a public company, since
its spin off from RPS Realty Trust in May 1996 and has been co-chair of its
Asset Liquidation Committee since June 1996. Mr. Glickman graduated from
Dartmouth College.
57
PART
III, CONTINUED:
ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT,
CONTINUED:
JOEL
M.
PASHCOW has served as an independent director since 2005. Mr. Pashcow has been
a
member of the bar of the State of New York since 1968. Mr. Pashcow has been
Chairman, Chief Executive Officer and President of Atlantic Realty Trust, a
public company, since its inception on February 29, 1996 and was the Chairman
of
RPS Realty Trust. Atlantic Realty Trust’s predecessor, from its inception in
December 1988 until May 1996. Mr. Pashcow is also a trustee of Ramco-Gershenson
Properties Trust (formerly RPS Realty Trust), a public real estate investment
trust listed on the New York Stock Exchange that invests in retail properties,
and is Chairman of its Executive Committee. Mr. Pashcow graduated from Cornell
University and Harvard Law School.
BRUNO
DE
VINCK is our Chief Operating Officer, Senior Vice President, Secretary and
a
Director. Mr. de Vinck is also a Director of the privately held Park Avenue
Bank, and Prime Group Realty Trust, a publicly registered REIT trading on the
NYSE. Mr. de Vinck is a Senior Vice President with the Lightstone Group, a
company he joined in April 1994. Mr. de Vinck was previously General Manager
of
JN Management Co. from November 1992 to January 1994, AKS Management Co., Inc.
from September 1988 to July 1992 and Heritage Management Co., Inc. from May
1986
to September 1988. In addition, Mr. de Vinck worked as Senior Property Manager
at Hekemien & Co. from May 1975 to May 1986, as a Property Manager at
Charles H. Greenthal & Co. from July 1972 to June 1975 and in sales and
residential development for McDonald & Phillips Real Estate Brokers from May
1970 to June 1972. From July 1982 to July 1984 Mr. de Vinck was the founding
president of the Ramsey Homestead Corp., a not-for-profit senior citizen
residential health care facility, and, from July 1984 until October 2004, was
Chairman of its board of directors. Mr. de Vinck studied Architecture at Pratt
Institute and then worked for the Bechtel Corporation from February 1966 to
May
1970 in the engineering department as a senior structural
draftsman.
Executive
Officers:
The
following table presents certain information as of March 1, 2006 concerning
each
of our executive officers serving in such capacities:
|
Name
|
Age
|
Principal
Occupation and Postions Held
|
||
|
David
Lichtenstein
|
45
|
Chief
Executive Officer, President and Chairman of the Board of
Directors
|
||
|
Bruno
de Vinck
|
|
60
|
|
Chief
Operating Officer, Senior Vice President, Secretary and
Director
|
|
Michael
M. Schurer
|
|
44
|
|
Chief
Financial Officer and Treasurer
|
|
Angela
Mirizzi-Olsen
|
|
43
|
|
Chief
Investment Officer and Vice President
|
|
Adriana
M. Peters
|
|
37
|
|
General
Counsel
|
|
Samuel
Moerman
|
|
42
|
|
Vice-President,
Property Management
|
DAVID
LICHTENSTEIN is the Chairman of our board of directors and our Chief Executive
Officer and President. Mr. Lichtenstein has been a member of our board of
directors since June 8, 2004. Mr. Lichtenstein founded both American Shelter
Corporation and The Lightstone Group (our Advisor and Sponsor) in 1988 and
directs all aspects of the acquisition, financing and management of a diverse
portfolio of multi-family, retail and industrial properties located in 26 states
and Puerto Rico that is owned by these companies. He is a member of the
International Council of Shopping Centers and NAREIT. Mr. Lichtenstein is the
Chairman of the board of directors of Prime Group Realty Trust, a publicly
registered REIT trading on the NYSE, as well as Prime Retail and Park Avenue
Bank, both private companies.
BRUNO
DE
VINCK is our Chief Operating Officer, Senior Vice President, Secretary and
a
Director. Mr. de Vinck is also a Director of the privately held Park Avenue
Bank, a Trustee of Prime Group Realty Trust, a publicly registered REIT trading
on the NYSE, and a Senior Vice President with our Advisor and Sponsor. Mr.
De
Vinck joined The Lightstone Group in April 1994, and was previously General
Manager of JN Management Co. from November 1992 to January 1994, AKS Management
Co., Inc. from September 1988 to July 1992 and Heritage Management Co., Inc.
from May 1986 to September 1988. In addition, Mr. de Vinck worked as Senior
Property Manager at Hekemien & Co. from May 1975 to May 1986, as a Property
Manager at Charles H. Greenthal & Co. from July 1972 to June 1975 and in
sales and residential development for McDonald & Phillips Real Estate
Brokers from May 1970 to June 1972. From July 1982 to July 1984 Mr. de Vinck
was
the founding president of the Ramsey Homestead Corp., a not-for-profit senior
citizen residential health care facility, and, from July 1984 until October
2004, was Chairman of its board of directors. Mr. de Vinck studied Architecture
at Pratt Institute and then worked for the Bechtel Corporation from February
1966 to May 1970 in the engineering department as a senior structural
draftsman.
58
PART
III, CONTINUED:
ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT,
CONTINUED:
MICHAEL
M. SCHURER is our Chief Financial Officer and Treasurer. Mr. Schurer is also
a
Trustee of Prime Group Realty Trust, a publicly registered REIT trading on
the
NYSE, and the Chief Financial Officer of our Advisor and Sponsor. Prior to
joining The Lightstone Group in April 2005, Mr. Schurer was Chief Financial
Officer and Vice President of Northwest Hotel Group (formally Grand Heritage
Hotel Group), a private operator of luxury, boutique and historic hotels in
the
United States and Caribbean, from August 2004 to April 2005. From January 2001
through August 2004, Mr. Schurer was Chief Financial Officer, Treasurer and
Secretary of Humphrey Hospitality Trust, Inc., a public, limited service hotel
REIT that held as many as 93 properties during his time there. From March 1997
to September 2000, Mr. Schurer was Chief Financial Officer and Executive Vice
President of Crown Golf Properties, LP, a private golf course development,
management and construction company. Prior to 1997, Mr. Schurer served as
Division Controller, Senior Manager and Audit Manager with Marriott
International, and as an independent auditor with Pannell Kerr Forster and
Ernst
& Young. Mr. Schurer received a Bachelor of Arts in Accounting from Rutgers
University and earned his CPA designation in 1987.
ANGELA
MIRIZZI-OLSEN is our Chief Investment Officer and Vice President. Ms.
Mirizzi-Olsen also serves as a Director of the privately held Park Avenue Bank
and as the Chief Investment Officer of our Sponsor and Advisor. Ms.
Mirizzi-Olsen oversees all financing activities of The Lightstone Group and
is
involved in a variety of complex joint venture and wholly-owned transactions
in
varied property types including multifamily, hotel, retail, office, and
industrial. Ms. Olsen has over 20 years of real estate banking and structured
finance experience. Prior to joining The Lightstone Group in July 2001, Ms.
Mirizzi-Olsen was a Vice President of Arbor Commercial Mortgage, a national
real
estate financing organization, from May 1997 through June 2001. Ms Olsen
underwrote, structured and originated mezzanine, bridge and preferred equity
transactions. In addition, Ms. Mirizzi-Olsen was a Vice President at ARCS from
January 1996 to May 1997, where she underwrote Fannie Mae and Freddie Mac
mortgages. She has also worked as an independent real estate consultant for
Citicorp Securities from April 1993 to January 1996 and as an Assistant Vice
President at American Savings Bank from February 1991 until April 1993.
SAMUEL
MOERMAN is our Vice-President-Property Management. Mr. Moerman has the same
position with our Sponsor and Property Manager, where his responsibilities
range
from ensuring the smooth absorption of our sponsor’s diverse acquisitions to the
oversight of the property and asset management teams tasked with enhancing
the
performance of our sponsor’s portfolio. Mr. Moerman also coordinates resources
for all capital projects and tenant build-outs. Before joining our Sponsor,
Mr.
Moerman was Chief Operating Officer of Webspan Communications, an internet
service provider, from February 1997 to February 1999. While there, he was
responsible for creating the company’s infrastructure and aggressively growing
its membership and revenues, which ultimately led to its acquisition by a large
public company. Mr. Moerman joined American Shelter Corporation in February
of
1999. Since that time, he has held the position of Vice President of Property
Management. Mr. Moerman has worked for either American Shelter Corporation
or
The Lightstone Group since 1999.
ADRIANA
M. PETERS is our General Counsel and has also serves as General Counsel to
our
Sponsor and Advisor. Ms. Peters joined The Lightstone Group in May of 2000
with
responsibility for the oversight of all legal functions as well as support
of
the acquisition and financing departments of the company. Prior to joining
The
Lightstone Group, Ms. Peters was in private practice from November 1998 to
May
2000, specializing in commercial and residential real estate transactions.
Prior
to November 1998, Ms. Peters was a member of the corporate department at Sills
Cummis Epstein & Gross. Ms. Peters obtained her BA from Villanova
University, cum laude, in 1990, and her JD from Hofstra University in 1993.
Our
common stock is not registered pursuant to Section 12 of the Exchange Act of
1934. Our directors, executive officers and the holders of more than 10%
of our common stock are not subject to Section 16(a), and they were not required
to file reports under Section 16(a) for the fiscal year ended December 31,
2005.
59
PART
III, CONTINUED:
ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT,
CONTINUED:
Information
Regarding Audit Committee
Our
Board
established an audit committee in April 2005. The charter of audit committee
is
available in print to any shareholder who requests it c/o Lightstone Value
Plus
REIT, 326 Third Street, Lakewood, NJ 08701. Since April 2005, the audit
committee has consisted of Messrs. John
E.
D’Elisa and Edwin J. Glickman, each of whom is “independent” within the meaning
of the NYSE listing standards. The Board determined that Messrs.
John
E.
D’Elisa and Edwin J. Glickman are qualified as audit committee financial experts
as defined in Item 401 (h) of Regulation S-K. For more information
regarding
Messrs.
John
E.
D’Elisa and Edwin J. Glickman, relevant professional experience, see
“Trustees”.
ITEM
11. EXECUTIVE COMPENSATION
Compensation
of Executive Officers
We
currently have no employees. Our day-to-day management functions are performed
by our Advisor. Our executive officers are all employees of the Advisor. We
do
not pay any of these individuals for serving in their respective positions.
Compensation
of Board of Directors
We
pay
our independent directors an annual fee of $30,000. Pursuant to our Employee
and
Director Incentive Share Plan, in lieu of receiving his or her annual fee in
cash, an independent director is entitled to receive the annual fee in the
form
of our common shares or a combination of common shares and cash.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
Name
and Address of Beneficial Owner
|
Number
of Shares of Common Stock of the Lightstone REIT Beneficially
Owned
|
Percent
of All Common Shares of the Lightstone REIT
|
|||||
|
David
Lichtenstein
|
20,000
|
100
|
%
|
||||
|
John
E. D'Elisa
|
-
|
-
|
|||||
|
Edwin
J. Glickman
|
-
|
-
|
|||||
|
Joel
M. Pashcow
|
-
|
-
|
|||||
|
Bruno
de Vinck
|
-
|
-
|
|||||
|
Michael
M. Schurer
|
-
|
-
|
|||||
|
Angela
Mirizzi-Olsen
|
-
|
-
|
|||||
|
Samuel
Moerman
|
-
|
-
|
|||||
|
Adriana
M. Peters
|
-
|
-
|
|||||
|
Our
trustees and executive officers as a group (9 persons)
|
20,000
|
100
|
%
|
||||
60
PART
III, CONTINUED:
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS, CONTINUED:
EQUITY
COMPENSATION PLAN INFORMATION
We
have
adopted a stock option plan under which our independent directors are eligible
to receive annual nondiscretionary awards of nonqualified stock options. Our
stock option plan is designed to enhance our profitability and value for the
benefit of our stockholders by enabling us to offer independent directors
stock-based incentives, thereby creating a means to raise the level of equity
ownership by such individuals in order to attract, retain and reward such
individuals and strengthen the mutuality of interests between such individuals
and our stockholders.
We
have
authorized and reserved 75,000 shares of our common stock for issuance under
our
stock option plan. The board of directors may make appropriate adjustments
to
the number of shares available for awards and the terms of outstanding awards
under our stock option plan to reflect any change in our capital structure
or
business, stock dividend, stock split, recapitalization, reorganization, merger,
consolidation or sale of all or substantially all of our assets.
Our
stock
option plan provides for the automatic grant of a nonqualified stock option
to
each of our independent directors, without any further action by our board
of
directors or the stockholders, to purchase 3,000 shares of our common stock
on
the date of each annual stockholders meeting. The exercise price for all stock
options granted under our stock option plan will be fixed at $10 per share
until
the termination of our initial public offering, and thereafter the exercise
price for stock options granted to our independent directors will be equal
to
the fair market value of a share on the last business day preceding the annual
meeting of stockholders. The term of each such option will be 10 years. Options
granted to non-employee directors will vest and become exercisable on the second
anniversary of the date of grant, provided that the independent director is
a
director on the board of directors on that date. No options have been granted
under our current plan.
Notwithstanding
any other provisions of our stock option plan to the contrary, no stock option
issued pursuant thereto may be exercised if such exercise would jeopardize
our
status as a REIT under the Internal Revenue Code.
The
following table sets forth information regarding securities authorized for
issuance under our Employee and Director Incentive Share Plan as of
December 31, 2005:
|
|
|
|
Number
of Securities
|
|||||||
|
|
Number
of
|
|
Remaining
Available
|
|||||||
|
|
Securities
to be
|
|
for
Future Issuance
|
|||||||
|
|
Issued
Upon
|
Weighted-Average
|
Under
Equity
|
|||||||
|
|
Exercise
of
|
Exercise
Price of
|
Compensation
Plans
|
|||||||
|
|
Outstanding
|
Outstanding
|
(Excluding
|
|||||||
|
|
Options,
Warrants
|
Options,
Warrants
|
Securities
Reflected
|
|||||||
|
Plan
Category
|
and
Rights
|
and
Rights
|
in
Column (a))
|
|||||||
|
|
|
|
|
|||||||
|
|
(a)
|
(b)
|
(c)
|
|||||||
|
Equity
Compensation Plans approved by security holders
|
0
|
$
|
0
|
75,000
|
||||||
|
Equity
Compensation Plans not approved by security holders
|
N/A
|
N/A
|
N/A
|
|||||||
|
Total
|
0
|
$
|
0
|
75,000
|
||||||
61
PART
III, CONTINUED:
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
David
Lichtenstein serves as the Chairman of our Board of Directors, our Chief
Executive Officer and our President. The Dealer Manager, Advisor and Property
Manager are wholly owned subsidiaries of our Sponsor, The Lightstone Group,
which is wholly owned by Mr. Lichtenstein. On April 22, 2005, we
entered into agreements with the Dealer Manager, Advisor and Property Manager
to
pay certain fees, as described below, in exchange for services performed by
these and other affiliated entities. As the indirect owner of those entities,
Mr. Lichtenstein benefits from fees and other compensation that they receive
pursuant to these agreements.
We
have
agreed to pay the Property Manager a monthly management fee of 5% of the gross
revenues from our residential and retail properties. In addition, for the
management and leasing of our office and industrial properties, we will pay
to
our Property Manager property management and leasing fees of up to 4.5% of
gross
revenues from our office and industrial properties. We may pay our Property
Manager a separate fee for the one-time initial rent-up or leasing-up of newly
constructed office and industrial properties in an amount not to exceed the
fee
customarily charged in arm’s length transactions by others rendering similar
services in the same geographic area for similar properties as determined by
a
survey of brokers and agents in such area. Our Property Manager will also be
paid a monthly fee for any extra services equal to no more than that which
would
be payable to an unrelated party providing the services. The actual amounts
of
these fees are dependent upon results of operations and, therefore, cannot
be
determined at the present time.
We
pay
the Dealer Manager selling commissions of up to 7% of gross offering proceeds,
or approximately
$21,000,000 if the maximum offering is sold,
before
reallowance of commissions earned by participating broker-dealers. The Dealer
Manager expects to reallow 100% of commissions earned for those transactions
that involve participating broker-dealers. We also pay to the Dealer Manager
a
dealer manager fee of up to 1% of gross offering proceeds, or approximately
$3,000,000 if the maximum offering is sold,
before
reallowance to participating broker-dealers. The Dealer Manager, in its sole
discretion, may reallow a portion of its dealer manager fee of up to 1% of
the
gross offering proceeds to be paid to such participating broker-dealers.
Finally,
the Dealer Manager may buy up to 600,000 warrants at a purchase price of $.0008
per warrant, each of which would be exercisable for one share of the Company’s
common stock at an exercise price of $12.00 per share.
We
will
pay our Advisor an acquisition fee equal to 2.75% of the gross contract purchase
price (including any mortgage assumed) of each property purchased and will
reimburse our Advisor for expenses that it incurs in connection with the
purchase of a property. We anticipate that acquisition expenses will be between
1% and 1.5% of a property’s purchase price, and acquisition fees and expenses
are capped at 5% of the gross contract purchase price of a property. The Advisor
will also be paid an advisor asset management fee of 0.55% of our average
invested assets and we will reimburse some expenses of the Advisor. The actual
amounts of these fees and reimbursements depend upon results of operations
and,
therefore, cannot be determined at the present time. However, $33,000,000 may
be
paid as an acquisition fee and for the reimbursement of acquisition expenses
if
the maximum offering is sold, assuming aggregate long-term permanent leverage
of
approximately 75%.
On
April
22, 2005, the Operating Partnership entered into an agreement with Lightstone
SLP, LLC pursuant to which the Operating Partnership has issued and will
continue to issue special general partner interests to Lightstone SLP, LLC
in an
amount equal to all expenses, dealer manager fees and selling commissions that
we incur in connection with our organization and the offering of our common
stock. As of March 27, 2006, Lightstone SLP, LLC had contributed $482,616 to
the
Operating Partnership in exchange for special general partner interests. As
the
sole member of our Sponsor, which wholly owns Lightstone SLP, LLC, Mr.
Lichtenstein is the indirect, beneficial owner of such special general partner
interests and will thus receive an indirect benefit from any distributions
made
in respect thereof.
These
special general partner interests will entitle Lightstone SLP, LLC to a portion
of any regular and liquidation distributions that we make to stockholders,
but
only after stockholders have received a stated preferred return. Although the
actual amounts are dependent upon results of operations and, therefore, cannot
be determined at the present time, distributions to Lightstone SLP, LLC, as
holder of the special general partner interests, could be
substantial.
62
PART
III, CONTINUED:
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Amper,
Politziner & Mattia audited our financial statements for the year ended
December 31, 2005, and Kamler, Lewis & Norman LLP audited our financial
statements for the period from June 8, 2004 (date of inception) to December
31,
2004. Both Amper, Politziner & Mattia and Kamler, Lewis & Norman LLP
report directly to our audit committee.
Principal
Accounting Firm Fees
The
following table presents the aggregate fees billed to the Company for the year
ended December 31, 2005 and the period from June 8, 2004 (date of
inception) to December 31, 2004 by the Company’s principal accounting firms of
Amper, Politziner & Mattia and Kamler, Lewis & Norman LLP, respectively:
|
|
2005
|
2004
|
|||||
|
|
|
|
|||||
|
Audit
Fees (a)
|
$
|
70,000
|
$
|
48,500
|
|||
|
Audit-Related
Fees (b)
|
—
|
—
|
|||||
|
Tax
Fees (c)
|
—
|
—
|
|||||
|
All
Other Fees (d)
|
—
|
—
|
|||||
|
|
|||||||
|
Total
Fees
|
$
|
70,000
|
$
|
48,500
|
|||
| a) |
Fees
for audit services billed in 2005 consisted of the audit of the Company’s
annual financial statements, and reviews of the Company’s quarterly
financial statements. Fees for audit services billed in 2004 consisted
of
the audit of the Company’s annual financial statements and other services
related to SEC matters.
|
| (b) |
There
were no fees for audit-related services billed in 2005 or
2004.
|
| (c) |
There
were no fees for tax services billed in 2005or
2004.
|
| (d) |
There
were no fees for other services billed in 2005 or
2004.
|
In
considering the nature of the services provided by the independent auditor,
the
audit committee determined that such services are compatible with the provision
of independent audit services. The audit committee discussed these services
with
the independent auditor and Company management to determine that they are
permitted under the rules and regulations concerning auditor independence
promulgated by the SEC to implement the related requirements of the
Sarbanes-Oxley Act of 2002, as well as the American Institute of Certified
Public Accountants.
AUDIT
COMMITTEE REPORT
To
the Directors of Lightstone Value Plus Real Estate Investment Trust,
Inc.:
We
have reviewed and discussed with management Lightstone Value Plus Real Estate
Investment Trust, Inc.’s audited financial statements as of and for the year
ended December 31, 2005.
We
have discussed with the independent auditors the matters required to be
discussed by Statement on Auditing Standards No. 61, Communication with
Audit Committees, as amended by Statement on Auditing Standards No. 90,
Audit Committee Communications, by the Auditing Standards Board of the American
Institute of Certified Public Accountants.
We
have received and reviewed the written disclosures and the letter from the
independent auditors required by Independence Standards Board Standard
No. 1, Independence Discussions with Audit Committees, as amended, by the
Independence Standards Board, and have discussed with the auditors the auditors’
independence.
Based
on the reviews and discussions referred to above, we recommend to the board
of
directors that the financial statements referred to above be included in
Lightstone Value Plus Real Estate Investment Trust, Inc.’s Annual Report on
Form 10-K for the year ended December 31, 2005.
Audit
Committee
John
E.
D’Elisa
Edwin
J.
Glickman
63
PART
IV.
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.
Annual
Report on Form 10-K
for
the
fiscal year ended December 31, 2005
EXHIBIT
INDEX
The
following exhibits are filed as part of this Annual Report on Form 10-K or
incorporated by reference herein:
|
Exhibit
Number
|
Description
|
|||
|
3.1
|
*
|
|
Amended
and Restated Charter of Lightstone Value Plus Real Estate Investment
Trust, Inc.
|
|
|
3.2
|
*
|
|
Bylaws
of Lightstone Value Plus Real Estate Investment Trust,
Inc.
|
|
|
4.1
|
*
|
|
Amended
and Restated Agreement of Limited Partnership of Lightstone Value
Plus
REIT LP.
|
|
|
10.1
|
*
|
|
Escrow
Agreement by and among Lightstone Value Plus Real Estate Investment
Trust,
Inc., Trust Company of America and Lightstone
Securities.
|
|
|
10.2
|
*
|
|
Advisory
Agreement by and among Lightstone Value Plus Real Estate Investment
Trust,
Inc., Lightstone Value Plus REIT, LLC.
|
|
|
10.3
|
*
|
|
Management
Agreement, by and among Lightstone Value Plus Real Estate Investment
Trust, Inc., Lightstone Value Plus REIT LP and Lightstone Value Plus
REIT
Management LLC.
|
|
|
10.4
|
*
|
|
Form
of the Company’s Stock Option Plan.
|
|
|
10.5
|
*
|
|
Form
of Indemnification Agreement by and between The Lightstone Group
and the
directors and executive officers of Lightstone Value Plus Real Estate
Investment Trust, Inc.
|
|
|
10.6
|
* |
Agreement
by and among Lightstone Value Plus REIT LP, Lightstone SLP, LLC,
and David
Lichtenstein.
|
||
|
31.1
|
|
|
Certification
Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of
the
Sarbanes-Oxley Act of 2002
|
|
|
31.2
|
|
|
Certification
Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of
the
Sarbanes-Oxley Act of 2002
|
|
|
32.1
|
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002
|
||
|
32.2
|
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002
|
||
|
*
|
Incorporated
by reference from Lightstone Value Plus Real Estate Investment Trust,
Inc.’s Registration Statement on Form S-11 (File No. 333-117367).
|
|||
64
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, INC.
|
||
| |
|
|
|
Date: March
28, 2006
|
By: |
/s/ David
Lichtenstein
|
|
David Lichtenstein |
||
|
Chief
Executive Officer, President and Chairman of the Board of
Directors
(Principal
Executive Officer)
|
||
Pursuant
to the requirements of the Securities Act of 1933, as amended, this Registration
Statement has been signed by the following persons in the capacities and on
the
dates indicated.
|
NAME
|
CAPACITY
|
DATE
|
|
|
|
|
|
/s/
David Lichtenstein
David
Lichtenstein
|
Chief
Executive Officer, President and Chairman of the Board of
Directors
|
March
28, 2006
|
|
|
|
|
|
/s/
Michael M. Schurer
Michael
M. Schurer
|
Chief
Financial Officer and Treasurer
|
March
28, 2006
|
|
|
|
|
|
/s/
Bruno
de Vinck
Bruno
de Vinck
|
Director
|
March
28, 2006
|
|
|
|
|
|
/s/
John
E. D’Elisa
John
E. D’Elisa
|
Director
|
March
28, 2006
|
|
|
|
|
|
/s/
Edwin
J. Glickman
Edwin
J. Glickman
|
Director
|
March
28, 2006
|
|
|
|
|
|
/s/
Joel
M. Pashcow
Joel
M. Pashcow
|
Director
|
March
28, 2006
|
65