Lightstone Value Plus REIT I, Inc. - Annual Report: 2007 (Form 10-K)
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, 2007
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.
Yes
o
No 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.
Yes
o
No 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 o
Accelerated 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, 2007, the aggregate market value of the common shares held by
non-affiliates of the registrant was $101,553,000. 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 14, 2008, there were 16.6 million 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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3 | |
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Item
1A.
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Risk
Factors
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3 | |
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Item
1B.
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Unresolved
Staff Comments
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Item
2.
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Properties
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34 | |
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Item
3.
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Legal
Proceedings
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34 | |
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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36 | |
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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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36 | |
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Item 6.
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Selected
Financial Data
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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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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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56 | |
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Item
8.
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Financial
Statements and Supplementary Data
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58 | |
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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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95 | |
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Item
9A.
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Controls
and Procedures
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96 | |
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Item
9B.
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Other
Information
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97 | |
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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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97 | |
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Item
11.
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Executive
Compensation
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100 | |
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management
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101 | |
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Item
13.
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Certain
Relationships and Related Transactions
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102 | |
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Item
14.
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Principal
Accounting Fees and Services
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104 | |
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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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106 | |
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Signatures
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109 |
2
This
annual report on Form 10-K, together with other statements and information
publicly disseminated by Lightstone Value Plus real Estate Investment Trust,
Inc. (the “Lightstone REIT” or the “Company”) contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. The Company intends such forward-looking statements to be covered
by
the safe harbor provisions for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995 and includes this statement
for
purposes of complying with these safe harbor provisions. Forward-looking
statements, which are based on certain assumptions and describe the Company’s
future plans, strategies and expectations, are generally identifiable by use
of
the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or
similar expressions. You should not rely on forward-looking statements since
they involve known and unknown risks, uncertainties and other factors, which
are, in some cases, beyond the Company’s control and which could materially
affect actual results, performances or achievements. Factors which may cause
actual results to differ materially from current expectations include, but
are
not limited to, (i) general economic and local real estate conditions,
(ii) the inability of major tenants to continue paying their rent
obligations due to bankruptcy, insolvency or general downturn in their business,
(iii) financing risks, such as the inability to obtain equity, debt, or
other sources of financing on favorable terms, (iv) changes in governmental
laws and regulations, (v) the level and volatility of interest rates and
foreign currency exchange rates, (vi) the availability of suitable
acquisition opportunities and (vii) increases in operating costs. Accordingly,
there is no assurance that the Company’s expectations will be
realized.
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.
PART I.
ITEM
1. BUSINESS:
General
Description of Business
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 portfolios and
individual properties, with its commercial holdings expected to consist of
retail (primarily multi-tenanted shopping centers), lodging (primarily extended
stay hotels), industrial and office properties primarily of multi-tenanted
shopping centers, industrial and office properties, and its residential
properties expected to consist of “Class B” multi-family complexes. Building
classifications in most markets refer to Class “A”, “B”, “C” and sometimes “D”
properties. Class “A”, “AA” and “AAA” properties are typically newer buildings
with superior construction and finish in excellent locations with easy access
are attractive to creditworthy tenants and offer valuable amenities such as
on-site management or covered parking. These buildings command the highest
rental rates in their market. As the classification of a building decreases
(e.g., Class “A” to Class “B”), one building attribute or another becomes less
desirable.
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 22,000 residential units as well as office, industrial and
retail properties totaling in excess of 25 million square feet of space in
27
states, the District of Columbia and Puerto Rico, and over 700 extended stay
hotels. 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.
3
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 the Advisor on July 6, 2004, for $10
per
share. The Lightstone REIT invested the proceeds from this sale in the Operating
Partnership, and as a result, held a 99.01% general partnership interest at
December 31, 2004 and 2005, and a 99.99% general partnership interest at
December 31, 2006 and 2007. 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 Lightstone REIT, 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
the
minimum offering from 1 million shares of common stock to 200,000 shares of
common stock. As of December 31, 2005, the Lightstone REIT 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 Lightstone REIT from escrow
and
invested in the Operating Partnership.
As
of
March 14, 2008, cumulative gross offering proceeds of approximately $161.3
million have been released to the Lightstone REIT and used for the purchase
of a
99.99% general partnership interest in the Operating Partnership. The Lightstone
REIT 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 periodically purchase special
general partner interests 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 repay
advances from the Advisor that were used to fund organizational and offering
costs incurred by the Lightstone REIT. Through December 31, 2007, the Lightstone
REIT offset proceeds of approximately $13.0 million from the sale of special
general partnership interests against approximately $13.0 million of
Advisor cash advances used for offering costs. Through March 14, 2008, the
Lightstone REIT offset proceeds of approximately $16.1 million from the sale
of
special general partnership interests against approximately $16.1 million
of Advisor cash advances used for offering costs, which represented 10% of
gross
offering proceeds during the same period.
Our
Advisor has not allocated any organizational costs to the Lightstone REIT as
of
December 31, 2007. Our Advisor is responsible for offering and organizational
costs exceeding 10% of the gross offering proceeds without recourse to the
Lightstone REIT.
Through
its Operating Partnership, the Lightstone REIT will seek to acquire and operate
commercial and residential properties, principally in the United States. Our
commercial holdings will consist of retail (primarily multi-tenanted shopping
centers), lodging (primarily extended stay hotels), industrial and office
properties. All such properties may be acquired and operated by the Lightstone
REIT alone or jointly with another party. The Lightstone REIT has completed
nine
acquisitions to date, three of which were completed prior to December 31, 2006.
To date, the Lightstone REIT acquired: the Belz Factory Outlet World, a retail
outlet shopping mall in St. Augustine, Florida, on March 31, 2006; four
multi-family communities in Southeast Michigan on June 29, 2006; the Oakview
Plaza, a retail shopping mall located in Omaha, Nebraska, on December 21, 2006;
an investment in a joint venture, formed to purchase a sub-ground lease to
an
office building in New York, NY, on January 4, 2007; a portfolio of 12
industrial and two office buildings in Louisiana and Texas, on February 1,
2007,
a 6.0 acre land parcel in Lake Jackson, Texas for immediate development of
a
61,287 square foot power center, two hotels in Houston, Texas, five multi family
apartment communities, one in Tampa, Florida, two in Greensboro, North Carolina
and two in Charlotte, North Carolina, and an industrial building in Sarasota,
Florida. See Item 7 for further discussion.
4
The
Lightstone REIT’s Advisor, Dealer Manager and Lightstone Value Plus REIT
Management LLC (the “Property 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 residential and commercial properties principally, substantially
all
of which will be located in the continental United States. Our acquisitions
may
include both portfolios and individual properties. We expect that our commercial
holdings will consist of retail (primarily multi-tenanted shopping centers),
lodging (primarily extended stay hotels), industrial and office properties
and
that our residential properties will be principally comprised of ‘‘Class B’’
multi-family complexes.
We
expect
that we will acquire the following types of real estate interests:
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Fee
interests in market-rate, middle market multifamily properties at
a
discount to replacement cost located either in emerging markets or
near
major metropolitan areas. We will attempt to identify those sub-markets
with job growth opportunities and demand demographics which support
potential long-term value appreciation for multifamily
properties.
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Fee
interests in well-located, multi-tenanted, community, power and lifestyle
shopping centers and malls located in highly trafficked retail corridors,
in selected high-barrier to entry markets and submarkets. We will
attempt
to identify those sub-markets with constraints on the amount of additional
property supply will make future competition less
likely.
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Fee
interests in improved, multi-tenanted, industrial properties located
near
major transportation arteries and distribution corridors with limited
management responsibilities.
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Fee
interests in improved, multi-tenanted, office properties located
near
major transportation arteries in urban and suburban
areas.
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Fee
interests in lodging properties located near major transportation
arteries
in urban and suburban areas.
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We
expect
that all of the properties will be owned by subsidiary limited partnerships
or
limited liability companies. These subsidiaries will be single-purpose entities
that we create to own a single property, and each will have no assets other
than
the property it owns. These entities represent a useful means of shielding
our
operating partnership from liability under state laws and will make the
underlying properties easier to transfer. However, tax law disregards
single-member LLCs and so it will be as if the operating partnership owns the
underlying properties for tax purposes. Use of single-purpose entities in this
manner is customary for REITs. Our independent directors are not required to
approve all transactions involving the creation of subsidiary limited liability
companies and limited partnerships that we intend to use for investment in
properties on our behalf. These subsidiary arrangements are intended to ensure
that no environmental or other liabilities associated with any particular
property can be attributed against other properties that the operating
partnership or we will own. The limited liability aspect of a subsidiary’s form
will shield parent and affiliated (but not subsidiary) companies, including
the
operating partnership and us, from liability assessed against it. No additional
fees will be imposed upon the REIT by the subsidiary companies’ managers and
these subsidiaries will notaffect our stockholders’ voting rights.
We
do not
intend to invest in single family residential properties; leisure home sites;
farms; ranches; timberlands; unimproved properties not intended to be developed;
or mining properties.
5
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, in order to achieve economies of scale where
possible. Our Sponsor currently maintains operations in Alabama, California,
Connecticut, District of Columbia, Florida, Georgia, Illinois, Indiana,
Louisiana, Maryland, Massachusetts, Michigan, Mississippi, Nebraska, 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 Lightstone REIT had $237.6 million in outstanding long-term
obligations as of December 31, 2007. In addition, the Lightstone REIT had $5.8
million outstanding in notes payable.
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 stockholders as of daily record
dates and aggregate and pay such dividends quarterly.
The
Board
of Directors of the Lightstone REIT declared a dividend for each quarter in
2007, 2006 and for the quarter ending March 31, 2008. The dividends have been
calculated based on stockholders of record each day during this three-month
period at a rate of $0.0019178 per day, which, if paid each day for a 365-day
period, would equal a 7.0% annualized rate based on a share price of $10.00.
Total dividends declared for the year ended December 31, 2007 and 2006 were
$7.1
million and $1.1 million, respectively. The dividend declared for the quarter
ending March 31, 2008 will be paid in cash, in April 2008, to stockholders
of
record as of March 31, 2008.
Tax
Status
We
elected and qualified 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 stockholders.
REITs are generally not subject to federal income tax on taxable income that
they distribute to their stockholders. It is our intention to adhere to these
requirements and maintain our REIT status. The Company has assessed that it
qualifies as a REIT in 2007.
6
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 other
REITs with asset acquisition objectives similar to ours that 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 those sought
by
the Lightstone REIT. Therefore, we will compete for institutional investors
in a
market where funds for real estate investment may decrease.
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 Lightstone REIT 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.
7
Available
Information
Stockholders
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.
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
Our
REIT is newly formed; therefore we have limited operating history to evaluate
our likely performance.
We
acquired our first real estate assets in early 2006. Accordingly, we do not
have
an extensive operating history upon which to evaluate our likely performance.
We
may not be able to implement our business plan successfully.
Our
dealer manager has limited experience in public offerings.
This
is
the first offering for our dealer manager, Lightstone Securities, LLC, such
as
this. This lack of experience may affect the way in which Lightstone Securities
conducts the offering. However, the President of our dealer manager has 30
years
of experience in the financial services business, including extensive experience
in national sales and marketing.
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:
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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.
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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.
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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.
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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.
8
We
do not
believe that our operating partnership or we will be considered an “investment”
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 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 our investments by the SEC or a court should deem them to be
investment securities, we could be deemed to be an investment company and
subject to additional restrictions.
Even
if
our operating partnership or we 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
price of our common stock is subjective and may not bear any relationship to
what a stockholder could receive if it was sold. Our
board
of directors arbitrarily determined the offering price of the common stock
and
such price bears no relationship to any established criteria for valuing issued
or outstanding shares. It determined the offering price of our shares of common
stock based primarily on the range of offering prices of other REITs that do
not
have a public trading market. In addition, our board of directors set the
offering price of our shares at $10, a round number, in order to facilitate
calculations relating to the offering price of our shares. However, the offering
price of our shares of common stock may not reflect the price at which the
shares may trade if they were listed on an exchange or actively traded by
brokers, nor of the proceeds that a stockholder may receive if we were
liquidated or dissolved.
Our
common stock is not currently listed on an exchange or trading market and are
illiquid.
There is
currently no public trading market for the shares. Following this offering,
our
common stock will not be listed on a stock exchange. Accordingly, we do not
expect a public trading market for our shares to develop. We may never list
the
shares for trading on a national stock exchange or include the shares for
quotation on a national market system. The absence of an active public market
for our shares could impair your ability to sell our stock at a profit or at
all. Therefore, our shares should be purchased as a long term investment
only.
9
Your
percentage of ownership may become diluted if we issue new shares of
stock.
Stockholders have no rights to buy additional shares of stock in the event
we
issue new shares of stock. We may issue common stock, convertible debt or
preferred stock pursuant to a subsequent public offering or a private placement,
upon exercise of options, or to sellers of properties we directly or indirectly
acquire instead of, or in addition to, cash consideration. We may also issue
common stock upon the exercise of the warrants issued and to be issued to
participating broker-dealers. Investors purchasing common stock in this offering
who do not participate in any future stock issues will experience dilution
in
the percentage of the issued and outstanding stock they own.
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
The
“Conflicts of Interest” section discusses in more detail the more significant of
these potential conflicts of interest, as well as the procedures that have
been
established to resolve a number of these potential conflicts.
There
are conflicts of interest between our dealer manager, advisor, property managers
and their affiliates and us.
David
Lichtenstein, our sponsor, is the founder of The Lightstone Group, LLC which
he
wholly owns and does business in his individual capacity under that name.
Through The Lightstone Group, Mr. Lichtenstein controls and indirectly owns
our
advisor, our property managers, our operating partnership, our dealer manager
and affiliates, except for us, although he owned 20,000 shares, or over 9%
of
our shares, indirectly through our Advisor at the time we reached the minimum
offering of $2,000,000. 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 our property managers will face conflicts of interest
relating to time management and the allocation of resources and investment
opportunities.
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. We encourage you to read the
“Conflicts of Interest” section of this prospectus for a further discussion of
these topics.
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.
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Certain
of our affiliates who provide services to us may be engaged in competitive
activities. Our
advisor, property managers 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
this offering, and after 75% of the total gross proceeds from the offering
of
the shares offered for sale pursuant to this offering 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 managers are 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 one of our property managers because the property manager may lose
fees associated with the management of the property. Specifically, because
the
property managers 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 managers 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.
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 debt, 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 managers and the advisor will manage our day-to-day operations and
properties pursuant to management agreements 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.
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Title
insurance services are being provided by an affiliated party. From
time to time, Lightstone purchases title insurance from an agent in which our
sponsor owns a fifty percent limited partnership interest. Because this title
insurance agent receives significant fees for providing title insurance, our
advisor may face a conflict of interest when considering the terms of purchasing
title insurance from this agent. However, prior to the purchase by Lightstone
of
any title insurance, an independent title consultant with more than 25 years
of
experience in the title insurance industry reviews the transaction, and performs
market research and competitive analysis on our behalf. This process results
in
terms similar to those that would be negotiated at an arm’s-length
basis.
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).
Our
organizational structure makes us 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 that 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.
This
restriction may:
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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
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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.
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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.
12
The
operating partnership agreement contains provisions that may discourage a third
party from acquiring us.
A
limited partner in the 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 our
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
Our
rights and the rights of our stockholders to take action against the directors
and our 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
our
Advisor, require us to indemnify our directors, officers, employees and agents
and our 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 willful misconduct. As a result, the
stockholders and we may have more limited rights against our directors,
officers, employees and agents, and our 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 our 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 our Sponsor and such affiliates’
employees, including salaries, other cash compensation and options. In addition,
our Dealer Manager and Property Manager will receive compensation for acting,
respectively, as our Dealer Manager and Advisor (although we will pay our Dealer
Manager fees and selling commissions with the proceeds from the sale of the
special general partner interests in our operating partnership to our 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, our Property Manager 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.
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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.
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.
Risks
Associated with our Properties and the Market
Real
Estate Investment Risks
Operating
risks.
Our
cash flows from real estate investments may become insufficient to pay
our operating expenses and to cover the dividends we have paid and/or
declared. Although
our operating cash flows are currently sufficient to pay both our expenses
and debt service payments and dividends at our historical per-share
amounts, we cannot assure you that we will be able to maintain sufficient
cash flows to fund operating expenses and debt service payments and dividend
at any particular level, if at all.
As
we continue to raise proceeds from this offering, the sufficiency of cash flow
to fund future dividend payments with respect to an increased number of
outstanding shares will depend on the pace at which we are able to identify
and
close on suitable cash-generating real property investments. Because the accrual
of offering proceeds may outpace the investment of these funds in real property
acquisitions, cash generated from such investments may become insufficient
to
fund operating expenses and continued dividend payments at historical
levels.
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.
14
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 you.
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.
15
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 from time to time experience
a
substantial influx of capital from investors. This substantial flow of capital,
combined with significant competition for real estate, may result in 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
un-expired 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.
16
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 there from.
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.
17
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:
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liabilities
for clean-up of undisclosed environmental
contamination;
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claims
by tenants, vendors or other persons dealing with the former owners
of the
properties;
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liabilities
incurred in the ordinary course of business;
and
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claims
for indemnification by general partners, directors, officers and
others
indemnified by the former owners of the
properties.
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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.
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.
18
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.
Current
state of debt markets could have a material adverse impact on our earnings
and
financial condition. The
commercial real estate debt markets are currently experiencing volatility as
a
result of certain factors including the tightening of underwriting standards
by
lenders and credit rating agencies and the significant inventory of unsold
Collateralized Mortgage Backed Securities in the market. Credit spreads for
major sources of capital have widened significantly as investors have demanded
a
higher risk premium. This is resulting in lenders increasing the cost for debt
financing. Should the overall cost of borrowings increase, either by increases
in the index rates or by increases in lender spreads, we will need to factor
such increases into the economics of our acquisitions. This may result in our
acquisitions generating lower overall economic returns and potentially reducing
cash flow available for distribution.
The
recent dislocations in the debt markets has reduced the amount of capital that
is available to finance real estate, which, in turn, (a) will no longer allow
real estate investors to rely on capitalization rate compression to generate
returns and (b) has slowed real estate transaction activity, all of which may
reasonably be expected to have a material impact, favorable or unfavorable,
on
revenues or income from the acquisition and operations of real properties and
mortgage loans. Investors will need to focus on market-specific growth dynamics,
operating performance, asset management and the long-term quality of the
underlying real estate.
In
addition, the state of the debt markets could have an impact on the overall
amount of capital investing in real estate which may result in price or value
decreases of real estate assets.
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.
19
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.
Retail
industry risks.
Our
retail properties are subject to the various risks discussed above. In addition,
they are 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 that we may derive from
percentage rent leases could decline upon a general economic downturn.
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.
20
Residential
industry risks.
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 result from an economic downturn and encourage potential
renters to purchase residences rather than lease them. Our residential
properties may experience declines in occupancy rate due to any such decline
in
residential mortgage interest rates.
Lodging
Industry Risks.
We
may be subject to the risks common to the lodging
industry.
Our
hotels will be subject to all of the risks common to the hotel industry and
subject to market conditions that affect all hotel properties. These risks
could
adversely affect hotel occupancy and the rates that can be charged for hotel
rooms as well as hotel operating expenses, and generally include:
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increases
in supply of hotel rooms that exceed increases in
demand;
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increases
in energy costs and other travel expenses that reduce business and
leisure
travel;
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reduced
business and leisure travel due to continued geo-political uncertainty,
including terrorism;
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adverse
effects of declines in general and local economic
activity;
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adverse
effects of a downturn in the hotel industry;
and
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risks
generally associated with the ownership of hotels and real estate,
as
discussed below.
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We
do not
have control over the market and business conditions that affect the value
of
our lodging properties, and adverse changes with respect to such conditions
could have an adverse effect on our results of operations, financial condition
and cash flows. Hotel properties, including extended stay hotels, are subject
to
varying degrees of risk generally common to the ownership of hotels, many of
which are beyond our control, including the following:
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increased
competition from other existing hotels in our
markets;
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new
hotels entering our markets, which may adversely affect the occupancy
levels and average daily rates of our lodging
properties;
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declines
in business and leisure travel;
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increases
in energy costs, increased threat of terrorism, terrorist events,
airline
strikes or other factors that may affect travel patterns and reduce
the
number of business and leisure
travelers;
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increases
in operating costs due to inflation and other factors that may not
be
offset by increased room rates;
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changes
in, and the related costs of compliance with, governmental laws and
regulations, fiscal policies and zoning ordinances;
and
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adverse
effects of international, national, regional and local economic and
market
conditions.
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Adverse
changes in any or all of these factors could have an adverse effect on our
results of operations, financial condition and cash flows, thereby adversely
impacting our ability to service debt and to make distributions to our
stockholders.
Third-Party
management of lodging properties can adversely affect our properties.
If
we
invest in lodging properties, such properties will be operated by a third-party
management company and could be adversely affected if that third-party
management company, or its affiliated brands, experiences negative publicity
or
other adverse developments. Any lodging properties we may acquire are expected
to be operated under brands owned by an affiliate of our sponsor and managed
by
a management company that is affiliated with such brands. Because of this
concentration, negative publicity or other adverse developments that affect
that
operator and/or its affiliated brands generally may adversely affect our results
of operations, financial condition, and consequently cash flows thereby
impacting our ability to service debt, and to make distributions to our
stockholders.
As
a REIT, we cannot directly operate our lodging
properties. We
cannot
and will not directly operate our lodging properties and, as a result, our
results of operations, financial position, ability to service debt and our
ability to make distributions to stockholders are dependent on the ability
of
our third-party management companies and our tenants to operate our extended
stay hotel properties successfully. In order for us to satisfy certain REIT
qualification rules, we cannot directly operate any lodging properties we may
acquire or actively participate in the decisions affecting their daily
operations. Instead, through a taxable REIT subsidiary, or taxable REIT
subsidiary (“TRS”) lessee, we must enter into management agreements with a
third-party management company, or we must lease our lodging properties to
third-party tenants on a triple-net lease basis. We cannot and will not control
this third-party management company or the tenants who operate and are
responsible for maintenance and other day-to-day management of our lodging
properties, including, but not limited to, the implementation of significant
operating decisions. Thus, even if we believe our lodging properties are being
operated inefficiently or in a manner that does not result in satisfactory
operating results, we may not be able to require the third-party management
company or the tenants to change their method of operation of our lodging
properties. Our results of operations, financial position, cash flows and our
ability to service debt and to make distributions to stockholders are,
therefore, dependent on the ability of our third-party management company and
tenants to operate our lodging properties successfully.
We
will
rely on a third-party hotel management company to establish and maintain
adequate internal controls over financial reporting at our lodging properties.
In doing this, the property manager should have policies and procedures in
place
which allows them to effectively monitor and report to us the operating results
of our lodging properties which ultimately are included in our consolidated
financial statements. Because the operations of our lodging properties
ultimately become a component of our consolidated financial statements, we
evaluate the effectiveness of the internal controls over financial reporting
at
all of our properties, including our lodging properties, in connection with
the
certifications we provide in our quarterly and annual reports on Form 10-Q
and
Form 10-K, respectively, pursuant to the Sarbanes Oxley Act of 2002. However,
we
will not control the design or implementation of or changes to internal controls
at any of our lodging properties. Thus, even if we believe that our lodging
properties are being operated without effective internal controls, we may not
be
able to require the third-party management company to change its internal
control structure. This could require us to implement extensive and possibly
inefficient controls at a parent level in an attempt to mitigate such
deficiencies. If such controls are not effective, the accuracy of the results
of
our operations that we report could be affected. Accordingly, our ability to
conclude that, as a company, our internal controls are effective is
significantly dependent upon the effectiveness of internal controls that our
third-party management company will implement at our lodging properties. Our
lodging operations were not significant to our overall results in 2007, and
while we do not consider it likely, it is possible that we could have a
significant deficiency or material weakness as a result of the ineffectiveness
of the internal controls at one or more of our lodging properties.
If
we
replace a third-party management company or tenant, we may be required by the
terms of the relevant management agreement or lease to pay substantial
termination fees, and we may experience significant disruptions at the affected
lodging properties. While it is our intent to enter into management agreements
with a third-party management company or tenants with substantial prior lodging
experience, we may not be able to make such arrangements in the future. If
we
experience such disruptions, it may adversely affect our results of operations,
financial condition and our cash flows, including our ability to service debt
and to make distributions to our stockholders.
22
Our
use of the taxable REIT subsidiary structure will increase our expenses.
A
TRS
structure will subject us to the risk of increased lodging operating expenses.
The performance of our TRS lessees will be based on the operations of our
lodging properties. Our operating risks will include not only changes in hotel
revenues and changes to our TRS lessees’ ability to pay the rent due to us under
the leases, but also increased hotel operating expenses, including, but not
limited to, the following cost elements:
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wage
and benefit costs;
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repair
and maintenance expenses;
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energy
costs;
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property
taxes;
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insurance
costs; and
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other
operating expenses.
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Any
increases in one or more these operating expenses could have a significant
adverse impact on our results of operations, cash flows and financial
position.
Failure
to properly structure our TRS leases could cause us to incur tax
penalties. A
TRS
structure will subject us to the risk that the leases with our TRS lessees
do
not qualify for tax purposes as arms-length which would expose us to potentially
significant tax penalties. Our TRS lessees will incur taxes or accrue tax
benefits consistent with a “C” corporation. If the leases between us and our TRS
lessees were deemed by the Internal Revenue Service to not reflect an
arms-length transaction as that term is defined by tax law, we may be subject
to
tax penalties as the lessor that would adversely impact our profitability and
our cash flows.
Failure
to maintain franchise licenses could decrease our revenues.
Our
inability or that of our third-party management company or our third-party
tenants to maintain franchise licenses could decrease our revenues. Maintenance
of franchise licenses for our lodging properties is subject to maintaining
our
franchisor’s operating standards and other terms and conditions. Franchisors
periodically inspect lodging properties to ensure that we, our third-party
tenants or our third-party management company maintain their standards. Failure
by us or one of our third-party tenants or our third-party management company
to
maintain these standards or comply with other terms and conditions of the
applicable franchise agreement could result in a franchise license being
canceled. If a franchise license terminates due to our failure to make required
improvements or to otherwise comply with its terms, we may also be liable to
the
franchisor for a termination fee. As a condition to the maintenance of a
franchise license, our franchisor could also require us to make capital
expenditures, even if we do not believe the capital improvements are necessary,
desirable, or likely to result in an acceptable return on our investment. We
may
risk losing a franchise license if we do not make franchisor-required capital
expenditures.
If
our
franchisor terminates the franchise license, we may try either to obtain a
suitable replacement franchise or to operate the lodging property without a
franchise license. The loss of a franchise license could materially and
adversely affect the operations or the underlying value of the lodging property
because of the loss associated with the brand recognition and/or the marketing
support and centralized reservation systems provided by the franchisor. A loss
of a franchise license for one or more lodging properties could materially
and
adversely affect our results of operations, financial condition and our cash
flows, including our ability to service debt and make distributions to our
stockholders.
23
Risks
associated with employing hotel employees. We
will
generally be subject to risks associated with the employment of hotel employees.
Any lodging properties we acquire will be leased to a wholly-owned TRS entity
and be subject to management agreements with a third-party manager to operate
the properties that we do not lease to a third party under a net lease. Hotel
operating revenues and expenses for these properties will be included in our
consolidated results of operations. As a result, although we do not directly
employ or manage the labor force at our lodging properties, we are subject
to
many of the costs and risks generally associated with the hotel labor force.
Our
third-party manager will be responsible for hiring and maintaining the labor
force at each of our lodging properties and for establishing and maintaining
the
appropriate processes and controls over such activities. From time to time,
the
operations of our lodging properties may be disrupted through strikes, public
demonstrations or other labor actions and related publicity. We may also incur
increased legal costs and indirect labor costs as a result of the aforementioned
disruptions, or contract disputes or other events. Our third-party manager
may
be targeted by union actions or adversely impacted by the disruption caused
by
organizing activities. Significant adverse disruptions caused by union
activities and/or increased costs affiliated with such activities could
materially and adversely affect our results of operations, financial condition
and our cash flows, including our ability to service debt and make distributions
to our stockholders.
Travel
and hotel industries may be affected by economic slowdowns, terrorist attacks
and other world events. The
most
recent economic slowdown, terrorist attacks, military activity in the Middle
East, natural disasters and other world events impacting the global economy
had
adversely affected the travel and hotel industries, including extended stay
hotel properties, in the past and these adverse effects may continue or occur
in
the future. As a result of terrorist attacks around the world, the war in Iraq
and the effects of the economic recession, subsequent to 2001 the lodging
industry experienced a significant decline in business caused by a reduction
in
both business and leisure travel. We cannot presently determine the impact
that
future events such as military or police activities in the U.S. or foreign
countries, future terrorist activities or threats of such activities, natural
disasters or health epidemics could have on our business. Our business and
lodging properties may continue to be affected by such events, including our
hotel occupancy levels and average daily rates, and, as a result, our revenues
may decrease or not increase to levels we expect. In addition, other terrorist
attacks, natural disasters, health epidemics, acts of war, prolonged U.S.
involvement in Iraq or other significant military activity could have additional
adverse effects on the economy in general, and the travel and lodging industry
in particular. These factors could have a material adverse effect on our results
of operations, financial condition, and cash flows, thereby impacting our
ability to service debt and ability to make distributions to our
stockholders.
Hotel
industry is very competitive. The
hotel
industry is intensely competitive, and, as a result, if our third-party
management company and our third-party tenants are unable to compete
successfully or if our competitors’ marketing strategies are more effective, our
results of operations, financial condition, and cash flows including our ability
to service debt and to make distributions to our stockholders, may be adversely
affected. The hotel industry is intensely competitive. Our lodging properties
compete with other existing and new hotels in their geographic markets. Since
we
do not operate our lodging properties, our revenues depend on the ability of
our
third-party management company and our-third party tenants to compete
successfully with other hotels in their respective markets. Some of our
competitors have substantially greater marketing and financial resources than
we
do. If our third-party management company and our third-party tenants are unable
to compete successfully or if our competitors’ marketing strategies are
effective, our results of operations, financial condition, ability to service
debt and ability to make distributions to our stockholders may be adversely
affected.
Hotel
industry is seasonal which can adversely affect our hotel properties.
The
hotel
industry is seasonal in nature, and, as a result, our lodging properties may
be
adversely affected. The seasonality of the hotel industry can be expected to
cause quarterly fluctuations in our revenues. In addition, our quarterly
earnings may be adversely affected by factors outside our control, such as
extreme or unexpectedly mild weather conditions or natural disasters, terrorist
attacks or alerts, outbreaks of contagious diseases, airline strikes, economic
factors and other considerations affecting travel. To the extent that cash
flows
from operations are insufficient during any quarter, due to temporary or
seasonal fluctuations in revenues, we may attempt to borrow in order to make
distributions to our stockholders or be required to reduce other expenditures
or
distributions to stockholders.
24
Expanding
use of internet travel websites by customers can adversely affect our
profitability. The
increasing use of internet travel intermediaries by consumers may experience
fluctuations in operating performance during the year and otherwise adversely
affect our profitability and cash flows. Our third party hotel management
company will rely upon Internet travel intermediaries such as Travelocity.com,
Expedia.com, Orbitz.com, Hotels.com and Priceline.com to generate demand for
our
lodging properties. As Internet bookings increase, these intermediaries may
be
able to obtain higher commissions, reduced room rates or other significant
contract concessions from our third-party management company. Moreover, some
of
these Internet travel intermediaries are attempting to offer hotel rooms as
a
commodity, by increasing the importance of price and general indicators of
quality (such as “three-star downtown hotel”) at the expense of brand
identification. Consumers may eventually develop brand loyalties to their
reservations system rather than to our third-party management company and/or
our
brands, which could have an adverse effect on our business because we will
rely
heavily on brand identification. If the amount of sales made through Internet
intermediaries increases significantly and our third-party management company
and our third-party tenants fail to appropriately price room inventory in a
manner that maximizes the opportunity for enhanced profit margins, room revenues
may flatten or decrease and our profitability may be adversely
affected.
Real
Estate Financing Risks
General
Financing Risks
We
plan to incur mortgage indebtedness and other borrowings, which may increase
our
business risks.
We
acquire and intend to continue 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.
Our
mortgage debt contains 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, our financing
arrangements involving balloon payment obligations 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.
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.
25
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 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.
That
limitation could have adverse business consequences such as:
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limiting
our ability to purchase additional
properties;
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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;
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causing
operational problems if there are cash flow shortfalls for working
capital
purposes; and
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resulting
in the loss of a property if, for example, financing was necessary
to
repay a default on a mortgage.
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Our
debt
financing for acquisitions is frequently determined from appraised values in
lieu of acquisition cost. As appraisal values are typically greater than
acquisition cost for the type of value assets we seek to acquire, our debt
can
be expected to exceed certain leverage limitations of the Lightstone REIT.
Our
Board, including all of its independent directors, has approved and will
continue to approve any leverage exceptions as required by the Lightstone REIT's
Articles of Incorporation.
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.
26
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 may 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.
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 commercial owners purchase specific coverage
against terrorism 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.
27
In
December 2007, the Terrorism Risk Insurance Extension Act of 2007 (“TRIEA”) was
enacted into law. TRIEA extends the federal terrorism insurance backstop through
2014. TRIEA 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 2014,
and
thus mitigate certain of 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.
Property
values may also be affected by the proximity of such properties 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 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.
28
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 treatments. 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.
29
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
If
we invest our capital in marketable securities of real estate related companies
pending an acquisition of real estate, our profits may be adversely affected
by
the performance of the specific investments we make. A
resolution passed by our Board of Directors allows us from time to time to
invest up to 30% of our available cash in marketable securities of real estate
related companies. Issuers of real estate securities generally invest in real
estate or real estate related assets and are subject to the inherent risks
associated with real estate related investments discussed below, including
risks
relating to rising interest rates or volatility in the credit markets. Our
investments in marketable securities of real estate related companies will
involve special risks relating to the particular issuer of securities, including
the financial condition and business outlook of the issuer. As of December
31,
2007, the cost basis of our marketable securities of real estate related
companies was approximately $12 million, and we included approximately $1.2
million of unrealized losses related to such securities in accumulated other
comprehensive loss. Substantial market price volatility caused by general
economic or market conditions, including disruptions in the credit markets,
may
require us to mark down the value of these investments, and our profits and
results of operations may be adversely affected.
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.
Current
state of debt markets could have a material adverse impact on our earnings
and
financial condition. The
commercial real estate debt markets are currently experiencing volatility as
a
result of certain factors including the tightening of underwriting standards
by
lenders and credit rating agencies and the significant inventory of unsold
Collateralized Mortgage Backed Securities in the market. Credit spreads for
major sources of capital have widened significantly as investors have demanded
a
higher risk premium. This is resulting in lenders increasing the cost for debt
financing. Should the overall cost of borrowings increase, either by increases
in the index rates or by increases in lender spreads, we will need to factor
such increases into the economics of our acquisitions. This may result in our
acquisitions generating lower overall economic returns and potentially reducing
cash flow available for distribution.
The
recent dislocations in the debt markets has reduced the amount of capital that
is available to finance real estate, which, in turn, (a) will no longer allow
real estate investors to rely on capitalization rate compression to generate
returns and (b) has slowed real estate transaction activity, all of which may
reasonably be expected to have a material impact, favorable or unfavorable,
on
revenues or income from the acquisition and operations of real properties and
mortgage loans. Investors will need to focus on market-specific growth dynamics,
operating performance, asset management and the long-term quality of the
underlying real estate.
In
addition, the state of the debt markets could have an impact on the overall
amount of capital investing in real estate which may result in price or value
decreases of real estate assets.
30
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 maintain our REIT status, our dividends will not be deductible to us,
and our income will be subject to taxation. We intend to maintain our REIT
status under the Internal Revenue Code, which will afford us significant tax
advantages. The requirements to maintain 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.
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.
We
qualified as a REIT in 2006. 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. Our legal counsel, 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 represented
Proskauer Rose LLP’s legal judgment based on the law in effect as of the date of
our 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.
31
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.
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.
32
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.
|
33
ITEM
1B. UNRESOLVED STAFF COMMENTS:
None
applicable.
ITEM
2. PROPERTIES:
|
Location
|
|
Year
Built (Range of years built)
|
|
Leasable
Square Feet
|
|
Percentage
Occupied as of 12/31/07
|
|
Revenue
per Square Foot at 12/31/07
|
||||||||
|
Wholly-Owned
Real Estate Properties:
|
||||||||||||||||
|
St.
Augustine Outlet Malls (2)
|
St.
Augstine, FL
|
1998
|
253,346
|
60.33
|
%
|
$
|
10.24
|
|||||||||
|
Oakview
Power Center
|
Omaha,
NE
|
1999
- 2005
|
177,331
|
99.19
|
%
|
$
|
14.11
|
|||||||||
|
7
Flex/Office/Industrial Buildings
|
New
Orleans, LA
|
1980-2000
|
339,700
|
93.14
|
%
|
$
|
9.16
|
|||||||||
|
4
Flex/Industrial Buildings
|
San
Antonio, TX
|
1982-1986
|
484,260
|
94.12
|
%
|
$
|
4.15
|
|||||||||
|
3
Flex/Industrial Buildings
|
Baton
Rouge, LA
|
1985-1987
|
182,792
|
100.00
|
%
|
$
|
6.46
|
|||||||||
|
Brazos
Crossing Power Center
|
Lake
Jackson, TX
|
2007-2008
|
(1
|
)
|
||||||||||||
|
Sarasota
Industrial Building
|
Sarasota,
FL
|
1992
|
281,276
|
0.00
|
%
|
$
|
-
|
|||||||||
|
Portfolio
total
|
1,718,705
|
74.69
|
%
|
|||||||||||||
|
(1)
Opened March 2008
|
|
|
(2)
Currently
undergoing expansion/renovation
|
|
|
Location
|
|
|
Year
Built (Range of years built)
|
|
Leasable
Units
|
|
|
Percentage
Occupied as of 12/31/07
|
|
|
Revenue
per Unit at 12/31/07
|
|||||
|
Four
Multi Family Apartment Buildings
|
Detroit,
MI
|
1965-1970
|
1,017
|
91.54
|
%
|
$
|
7,764.88
|
|||||||||
|
Five
Multi Family Apartment Buildings
|
Greensboro
and Charlotte, NC/Tampa, FL
|
1980-1985
|
1,576
|
86.93
|
%
|
$
|
6,671.85
|
|||||||||
|
Portfolio
total
|
2,593
|
88.74
|
%
|
|
Location
|
|
|
Year
Built
|
|
|
Available
Rooms
|
|
|
Vacancy
Percentage as of 12/31/07
|
|
|
Revenue
per Available Room at 12/31/07
|
||||
|
Wholly-Owned
Operating Properties:
|
(3
|
)
|
(2
|
)
|
||||||||||||
|
Katy
and Sugarland Extended Stay Hotels
|
Houston,
TX
|
1998
|
22,040
|
52.50
|
%
|
$
|
23.70
|
|
(3)
Represents period of Ownership from 10/17/07 Acquisition
|
|
Location
|
|
|
Year
Built
|
|
|
Leasable
Square Feet
|
|
|
Percentage
Occupied as of 12/31/07
|
|
|
Revenue
per Square Foot at 12/31/07
|
||||
|
Unconsolidated
Joint Venture
|
||||||||||||||||
|
Properties:
|
||||||||||||||||
|
1407
Broadway
(4)
|
New
York, NY
|
1952
|
914,762
|
89.68
|
%
|
$
|
39.74
|
|
(4)
Currently undergoing renovations
|
34
ITEM
3. LEGAL PROCEEDINGS:
From
time
to time in the ordinary course of business, the Lightstone REIT may become
subject to legal proceedings, claims or disputes.
On
March
29, 2006, Jonathan Gould, a former member of our Board of Directors and Senior
Vice-President-Acquisitions, filed a lawsuit against us in the District Court
for the Southern District of New York. The suit alleges, among other things,
that Mr. Gould was insufficiently compensated for his services to us as director
and officer. Mr. Gould sought damages of (i) up to $11,500,000 or (ii) a 2.5%
ownership interest in all properties that we acquire and an option to acquire
up
to 5% of the membership interests of Lightstone SLP, LLC. We filed a motion
to
dismiss the lawsuit. After review of the motion to dismiss, counsel for Mr.
Gould represented that Mr. Gould was dropping his claim for ownership interest
in the properties we acquire and his claim for membership interests. Mr. Gould’s
counsel represented that he would be suing only under theories of quantum merit
and unjust enrichment seeking the value of work he performed. Counsel for
the Lightstone REIT made motion to dismiss Mr. Gould’s complaint, which was
granted by Judge Sweeney. Mr. Gould has filed an appeal of the decision
dismissing his case, which is pending. Management believes that this suit
is frivolous and entirely without merit and intends to defend against these
charges vigorously.
On
January 4, 2007, 1407 Broadway Real Estate LLC ("Office Owner"), an indirect,
wholly owned subsidiary of 1407 Broadway Mezz II LLC ("Mezz II"), consummated
the acquisition of a sub-leasehold interest (the "Sublease Interest") in an
office building located at 1407 Broadway, New York, New York (the "Office
Property"). Mezz II is a joint venture between LVP 1407 Broadway LLC ("LVP
LLC"), a wholly owned subsidiary of our operating partnership, and Lightstone
1407 Manager LLC ("Manager"), which is wholly owned by David Lichtenstein,
the
Chairman of our Board of Directors and our Chief Executive Officer, and Shifra
Lichtenstein, his wife.
The
Sublease Interest was acquired pursuant to a Sale and Purchase of Leasehold
Agreement with Gettinger Associates, L.P. ("Gettinger"). In July 2006, Abraham
Kamber Company, as sublessor under the sublease ("Sublessor"), served two
notices of default on Gettinger (the "Default Notices"). The first alleged
that
Gettinger had failed to satisfy its obligations in performing certain
renovations and the second asserted numerous defaults relating to Gettinger's
purported failure to maintain the Office Property in compliance with its
contractual obligations.
In
response to the Default Notices, Gettinger commenced legal action and obtained
an injunction that extends its time to cure any default, prohibits interference
with its leasehold interest and prohibits Sublessor from terminating its
sublease pending resolution of the litigation. A motion by Sublessor for partial
summary judgment, alleging that certain work on the Office Property required
its
prior approval, was denied by the Supreme Court, New York County. Subsequently,
by agreement of the parties, a stay was entered precluding the termination
of
the Sublease Interest pending a final decision on Sublessor's claim of defaults
under the Sublease Interest. In addition, the parties stipulated to the
intervention of Office Owner as a party to the proceedings. The parties have
been directed to engage in and complete discovery. We consider the litigation
to
be without merit.
Prior
to
consummating the acquisition of the Sublease Interest, Office Owner received
a
letter from Sublessor indicating that Sublessor would consider such acquisition
a default under the original sublease, which prohibits assignments of the
Sublease Interest when there is an outstanding default there under. On February
16, 2007, Office Owner received a Notice to Cure from Sublessor stating the
transfer of the Sublease Interest occurred in violation of the Sublease given
Sublessor's position that Office Seller is in default. Office Owner will
commence and vigorously pursue litigation in order to challenge the default,
receive an injunction and toll the termination period provided for in the
Sublease.
On
September 4, 2007, Office Owner commenced a new action against Sublessor
alleging a number claims, including the claims that Sublessor has breached
the
sublease and committed intentional torts against Office Owner by (among other
things) issuing multiple groundless default notices, with the aim of prematurely
terminating the sublease and depriving Office Owner of its valuable interest
in
the sublease. The complaint seeks a declaratory judgment that Office Owner
has not defaulted under the sublease, damages for the losses Office Owner has
incurred as a result of Sublessor’s wrongful conduct, and an injunction to
prevent Sublessor from issuing further default notices without valid grounds
or
in bad faith.
As
of the
date hereof, we are not a party to any other material pending legal
proceedings.
35
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None.
PART II.
ITEM
5. MARKETS FOR COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS:
As
of
March 14, 2008, we had 16.6 million common shares outstanding, held by a
total of 4,053 stockholders. The number of stockholders 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, subject to restrictions
and applicable law. A selling stockholder must be unaffiliated with us, 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 offering period;
|
|
|
·
|
$9.50
per share during the 12 months following the close of the offering;
and
|
|
|
·
|
$10
per share thereafter.
|
Redemption
of shares, when requested, will be made quarterly. 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 stockholders 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, 2007. 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 stockholders as of daily record
dates and aggregate and pay such dividends quarterly.
36
The
Board
of Directors of the Lightstone REIT declared a dividend for each quarter in
2007, 2006 and for the quarter ending March 31, 2008. The dividends have been
calculated based on stockholders of record each day during this three-month
period at a rate of $0.0019178 per day, which, if paid each day for a 365-day
period, would equal a 7.0% annualized rate based on a share price of $10.00.
Total dividends declared for the year ended December 31, 2007 and 2006 were
$7.1
million and $1.1 million, respectively. The dividend declared for the quarter
ending March 31, 2008 will be paid in cash, in April 2008, to stockholders
of
record as of March 31, 2008.
Recent
Sales of Unregistered Securities
During
the period covered by this 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. During the period from May 1, 2006 through June 8, 2006
(the “Period”), we continued to offer our common stock while our post-effective
amendments containing the December 31, 2005 financial statements were on file
with the SEC but had not been declared effective. The offer and sale of our
common stock during the Period may have been in violation of the rules and
regulations under the Securities Act of 1933 (“Securities Act”), and the
interpretations of the SEC. If a violation of Section 5 of the Securities Act
did in fact occur, stockholders who purchased during the Period would have
a
right to rescind their purchase of the common stock. The Securities Act
generally requires that any claim brought for a violation of Section 5 be
brought within one year of the violation. If all of the stockholders who
purchased during the Period demanded rescission within that one-year period,
we
would be obligated to repay approximately $3,525,000, which we would repay
using
offering proceeds that we have received. This period has expired and we are
no
longer obligated to repay these amounts.
Use
of Initial Public Offering Proceeds
On
April
22, 2005, our Registration Statement on Form S-11 (File No. 333-117367),
covering a public offering, which we refer to as the “Offering,” of up to
30,000,000 common shares for $10 per share (exclusive of 4,000,000 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) was declared effective under the Securities Act of 1933.
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.
Through
December 31, 2007, we had sold approximately 13.6 million shares for gross
offering proceeds of approximately $131.5 million. This amount includes
approximately 228,000 shares sold pursuant to our Dividend Reinvestment Plan
for
gross proceeds of approximately $2.2 million. From the effective date of our
public offering through December 31, 2007, we have incurred the following
expenses in connection with the issuance and distribution of the registered
securities:
|
Type
of Expense Amount
Estimated/Actual
|
|||||||
|
Underwriting
discounts and commissions
|
$
|
9,468,297
|
Actual
|
||||
|
Finders’
fees
|
-
|
||||||
|
Expenses
paid to or for underwriters
|
-
|
||||||
|
Other
expenses to affiliates
|
-
|
||||||
|
Other
expenses paid to non-affiliates
|
3,706,724
|
Actual
|
|||||
|
Total
expenses
|
$
|
13,175,021
|
37
With
net offering proceeds of $131.5 million as of
December 31, 2007, and new mortgage debt in the amount of $237.6 million, and
proceeds from note s payable of $5.8 million, as reflected under “Cash Flows
from Financing Activities” in our consolidated statements of cash flows, we
acquired approximately $305.2 million in real estate investments and related
assets. Cumulatively, we have used the net offering proceeds as
follows:
|
At
December 31, 2007
|
||||
|
Construction
of plant, building and facilities
|
$
|
-
|
||
|
Purchase
of real estate interests
|
89,903,993
|
|||
|
Acquisition
of other businesses
|
-
|
|||
|
Repayment
of indebtedness
|
-
|
|||
|
Purchase
and installation of machinery and equipment
|
-
|
|||
|
Working
capital (as of December 31, 2007)
|
29,589,815
|
|||
|
Temporary
investments (as of December 31, 2007)
|
11,952,188
|
|||
|
Other
uses
|
-
|
|||
|
Total
uses
|
$
|
131,445,996
|
||
As
of
March 14, 2008, we have sold approximately 16.6 million shares at an aggregate
offering price of $161.3 million.
|
2007
|
2006
|
2005
|
2004 (1) | ||||||||||
|
Operating
Data:
|
|||||||||||||
|
Revenues
|
$
|
25,259,655
|
$
|
8,262,667
|
—
|
$
|
—
|
||||||
|
|
|||||||||||||
|
Loss
from investment in unconsolidated Joint Venture
|
(7,267,949
|
)
|
-
|
-
|
-
|
||||||||
|
Net
loss before loss allocated to minority interests
|
(9,242,416
|
)
|
(1,536,430
|
)
|
(117,571
|
)
|
—
|
||||||
|
Loss
allocated to minority interests
|
26
|
86
|
1,164
|
—
|
|||||||||
|
Net
loss applicable to common shares
|
(9,242,390
|
)
|
(1,536,344
|
)
|
(116,407
|
)
|
—
|
||||||
|
Basic
and diluted loss per common share
|
(0.98
|
)
|
(0.96
|
)
|
(5.82
|
)
|
—
|
||||||
|
Distributions
declared per common share
|
7,125,331
|
1,101,708
|
—
|
—
|
|||||||||
|
Weighted
average common shares outstanding-basic and diluted
|
9,195,369
|
1,594,060
|
20,000
|
20,000
|
|||||||||
|
Balance
Sheet Data:
|
|||||||||||||
|
Total
assets
|
$
|
369,701,354
|
$
|
140,708,217
|
$
|
430,996
|
$
|
205,489
|
|||||
|
Long-term
obligations
|
$
|
243,435,657
|
$
|
95,475,000
|
—
|
$
|
—
|
||||||
|
Stockholder's
Equity
|
$
|
100,112,198
|
$
|
35,975,704
|
$
|
83,593
|
$
|
200,000
|
|||||
|
(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.
|
38
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. (the “Lightstone REIT” or
“Company”) intends to acquire and operate commercial, residential and
hospitality properties, principally in the United States. Principally through
the Lightstone Value Plus REIT, LP, (the “Operating Partnership”), Our
acquisitions may include both portfolios and individual properties. We expect
that our commercial holdings will consist of retail (primarily multi-tenanted
shopping centers), lodging (primarily extended stay hotels), industrial and
office properties and that our residential properties will
be
principally comprised of ‘‘Class B’’ multi-family complexes. 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 mid-scale,
extended stay lodging properties and 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;
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. As of December
31, 2007, Lightstone REIT has completed nine acquisitions as of December 31,
2007: the Belz Factory Outlet World, a retail outlet shopping mall in St.
Augustine, Florida, on March 31, 2006; four multi-family communities in
Southeast Michigan on June 29, 2006; the Oakview Plaza, a retail shopping mall
located in Omaha, Nebraska, on December 21, 2006; a 49% equity interest in
a
joint venture, formed to purchase a sub-leasehold interest in a ground
lease to an office building in New York, NY, on January 4, 2007; a
portfolio of 12 industrial and 2 office buildings in Louisiana and Texas,
on February 1, 2007; and a land parcel in Lake Jackson, TX, intended for
immediate development as a power retail center, on June 29, 2007, two hotels
in
Houston, Texas on October 17, 2007, five multi family apartment communities,
one
in Tampa, Florida, two in Greensboro, North Carolina and two in Charlotte,
North
Carolina on November 16, 2007, and an industrial building in Sarasota, Florida
on November 13, 2007.
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, in order to achieve economies of scale where
possible. Our Sponsor currently maintains operations throughout the United
States (Hawaii, South Dakota, Vermont and Wyoming excluded), the District of
Columbia, Puerto Rico and Canada.
39
We
have
and will continue 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. Aggregate long-term permanent borrowings in
excess of 75% of the aggregate fair market value of all properties, currently
exceeds 75% and was appropriately 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. At December 31, 2006, we qualified as a REIT and have elected
to be
taxed as a REIT for the taxable year ending December 31, 2007 and 2006. We
plan
to own substantially all of our assets and conduct our operations through the
Operating Partnership. The Company has assessed it qualified as a REIT for
the
year ended December 31, 2007.
We
do not have employees. We entered into an advisory agreement dated April 22,
2005 with Lightstone Value Plus REIT LLC, a Delaware limited liability company,
which we refer to as the “Advisor,” pursuant to which the 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 pay
the
Advisor fees for services related to the investment and management of our
assets, and we will reimburse the Advisor for certain expenses incurred on
our
behalf.
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”). As of December 31, 2005, the Company had reached its minimum
offering of $2.0 million 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 December 31, 2007, cumulative gross offering
proceeds of approximately $131.5
million
have been released to the Lightstone REIT and used for the purchase of a 99.99%
general 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 periodically purchase special
general partner interests (“SLP 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 SLP Units will be used to fund organizational and offering
costs incurred by the Company. As of December 31, 2007, offering costs of $13.2
million have been substantially offset by $13.0 million of proceeds from the
sale of SLP Units. Lightstone SLP, LLC has purchased an additional $0.2 million
of SLP Units subsequent to December 31, 2007
We
are
not aware of any material trends or uncertainties, favorable or unfavorable,
other than national economic conditions affecting real estate generally, that
may be reasonably anticipated to have a material impact on either capital
resources or the revenues or income to be derived from the acquisition and
operation of real estate and real estate related investments, other than those
referred to in this Form 10-Q.
40
Beginning
with the year ended December 31, 2006, the Company qualified 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”). Accordingly, no
provision for income tax was recorded to date. 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. As of December 31, 2007, the Company has complied with the
requirements for maintaining its REIT status.
2007
Acquisitions
Manhattan
Office
Building
On
January 4, 2007, the Company, through LVP 1407 Broadway LLC, a wholly owned
subsidiary of the Operating Partnership, entered into a joint venture with
an
affiliate of the Sponsor (the “Joint Venture”). On the same date, an indirect,
wholly owned subsidiary acquired a sub-leasehold interest in a ground lease
to
an office building located at 1407 Broadway, New York, New York (the “Sublease
Interest”). The seller of the Sublease Interest, Gettinger Associates, L.P., is
not an affiliate of the Company, its Sponsor or its subsidiaries. The property,
a 42 story office building built in 1952, fronts on Broadway, 7th Avenue and
39th Street in midtown Manhattan. The property has approximately 915,000
leasable square feet, and as of the acquisition date, was 87.6%
occupied (approximately 300 tenants) and leased by tenants generally
engaged in the female apparel business. The ground lease, dated as of January
14, 1954, provides for multiple renewal rights, with the last renewal period
expiring on December 31, 2048. The Sublease Interest runs concurrently with
this
ground lease.
The
acquisition price for the Sublease Interest was $122 million, exclusive of
acquisition-related costs incurred by the Joint Venture ($3.5 million), pro
rated operating expenses paid at closing ($4.1 million), financing-related
costs
($1.9 million) and construction, insurance and tax reserves ($1.0 million).
The
acquisition was funded through a combination of $26.5 million of capital and
a
$106.0 million advance on a $127.3 million variable rate mortgage loan funded
by
Lehman Brothers Holding, Inc. As an inducement to Lender to make the loan,
Owner
has agreed to provide Lender with a 35% net profit interest in the project,
which is contingent upon a capital transaction, as defined as any transaction
involving the sale, assignment, transfer, liquidation, condemnation or
settlement in lieu thereof, disposition, financing, refinancing or any other
conversion to cash of all or any portion of the property or equity or membership
interests in Borrower, directly, other than the leasing of space for occupancy
and/or any other transaction with respect to the Property or the direct or
indirect ownership interests in Borrower outside the ordinary course of
business. To date, the lender did not share in any net profits of the
project. The lender also has a conversion option, which if upon exercised,
would
grant the lender a special membership interest in the Joint Venture whereby
the
lender will receive 35% of all distributions resulting from a Capital
transaction after the return of the member’s equity investment plus the member’s
allowed returns as specified in the “Net Profits Agreement”. In
addition, the Company paid $1.6 million to the Advisor as an
acquisition fee and legal fees to its attorney of approximately $0.1
million. The acquisition and legal fees were charged to expense by the
Company during the first quarter of 2007, and are included in general and
administrative expenses for the year ended December 31, 2007.
The
Company accounted for the investment in this unconsolidated joint venture under
the equity method of accounting as the Company exercises significant influence,
but does not control these entities. Initial equity from our co-venturer totaled
$13.5 million (representing a 51% ownership interest). Our initial capital
investment, funded with proceeds from our common stock offering, was $13.0
million (representing a 49% ownership interest). This $13.0 million investment
was recorded initially at cost and will be subsequently adjusted for cash
contributions and distributions, and the Company’s share of earnings and losses.
The Company contributed an additional $0.6 million in 2007. Earnings for each
investment are recognized in accordance with this investment agreement and
where
applicable, based upon an allocation of the investment’s net assets at book
value as if the investment was hypothetically liquidated at the end of each
reporting period. For the year ended December 31, 2007, the Company’s results
included a $7.3 million loss from investment in this unconsolidated joint
venture, resulting in a net investment balance of approximately $6.3 million
as
of December 31, 2007. The Joint Venture plans to continue an ongoing
renovation project at the property that consists of lobby, elevator and window
redevelopment projects. Additional loan proceeds of up to $16.4 million are
available to fund these improvements.
41
In-place
rents, net of rent concessions, and average occupancy for the property at
December 31, 2007 was as follows:
|
As
of
December
31, 2007
|
||||
|
In-place
annualized rents
|
$
|
36.4
million
|
||
|
Occupancy
Percentage
|
89.7
|
%
|
||
Gulf
Coast Industrial Portfolio
On
February 1, 2007, the Company, through wholly owned subsidiaries of the
Operating Partnership, acquired a portfolio of industrial and office
properties located in New Orleans, LA (5 industrial and 2
office properties), Baton Rouge, LA (3 industrial properties) and San
Antonio, TX (4 industrial properties). As a group, the properties were 92%
occupied at the acquisition, and represent approximately 1.0 million leasable
square feet principally suitable for flexible industrial (54%), distribution
(36%) and office (10%) uses. The properties were independently appraised at
$70.7 million.
The
acquisition price for the properties was $63.9 million, exclusive of
approximately $1.9 million of closing costs, escrow funding for immediate
repairs ($0.9 million) and insurance ($0.1 million), and financing related
costs
of approximately $0.6 million. In connection with the transaction, the Advisor
received an acquisition fee equal to 2.75% of the purchase price, or
approximately $1.8 million. The acquisition was funded through a combination
of
$14.4 million in offering proceeds and approximately $53.0 million in loan
proceeds from a fixed rate mortgage loan secured by the properties. The Company
does not intend to make significant renovations or improvements to the
properties. The Company believes the properties are adequately
insured.
In-place
rents, net of rent concessions, and occupancy for the properties at December
31,
2007 were as follows:
|
As
of
December
31, 2007
|
||||
|
In-place
annualized rents
|
$
|
6.3
million
|
||
|
Occupancy
Percentage
|
94.9
|
%
|
||
Brazos
Crossing Mall
On
June
29, 2007, a subsidiary of the Operating Partnership acquired a 6.0 acre land
parcel in Lake Jackson, Texas for immediate development of a 61,287 square
foot
power center. The land was purchased for $1.65 million cash and was funded
100%
from the proceeds of the Company’s offering. Upon completion in March 2008, the
center will be occupied by three triple net tenants: Pet Smart, Office Depot
and
Best Buy.
The
purchase and sale agreement (the “Land Agreement”) for this transaction was
negotiated between Lake Jackson Crossing Limited Partnership (formerly an
affiliate of the Sponsor) and Starplex Operating, LP, an unaffiliated entity
(the "Land Seller"). Prior to the closing, a 99% limited partnership interest
in
the Lake Jackson Limited Partnership was assigned to the Operating Partnership
and the membership interests in Brazos Crossing LLC (the 1% general partner
of
the Lake Jackson Limited Partnership) were assigned to the Company.
The
land
parcel was acquired at what represents a $2.1 million discount from the
expressed $3.75 million purchase price, with such difference being subsidized
and funded by a retail affiliate of the Sponsor. The sale of the land parcel
was
a condition of the Seller’s agreement to execute a new movie theater lease at
the Sponsor affiliate’s nearby retail mall. The Company owns a 100% fee simple
interest in the land parcel and retail power center. The Sponsor’s affiliate
will receive no future benefit or ownership interests from this
transaction.
42
The
Company entered into a construction loan to fund the development of the power
retail center at its Lake Jackson, Texas Location. The loan requires monthly
installments of interest only through the first 12 months and bears interest
at
150 basis points (1.5%) in excess of LIBOR. For the second twelve months,
principal payments shall be made in monthly installments in amounts equal to
one-twelfth of the principal component of an annual amortization of the
principal of the loan on the basis of an assumed interest rate of 6.82% and
a
thirty year term. The loan is secured by acquired real estate and is
non-recourse to the Company. The total cost of the project, inclusive of project
construction, tenant incentives, leasing costs, and land is estimated at $10.2
million. Because the debt financing for the acquisition may exceed certain
leverage limitations of the REIT, the Board, including all of its independent
directors has approved any leverage exceptions as required by the Company’s
Articles of Incorporation.
Three
tenants will occupy 100% of the property’s rentable square footage. The
following table sets forth the name, business type, primary lease terms and
certain other information with respect to each of these major
tenants:
|
Name
of Tenant
|
|
BusinessType
|
|
Square
Feet Leased
|
|
Percentage
of Leasable Space
|
|
Annual
Rent Payments
|
|
Lease
Term from Commencement
|
|
Party
with Renewal Rights
|
|||||||
|
Best
Buy
|
Electronics
Retailer
|
20,200
|
32.90
|
%
|
$
|
260,000
|
10
years
|
Tenant
|
|||||||||||
|
Office
Depot
|
Office
Supplies Retailer
|
21,000
|
34.30
|
%
|
$
|
277,200
|
10
years
|
Tenant
|
|||||||||||
|
Petsmart
|
Pet
Supply Retailer
|
20,087
|
32.80
|
%
|
$
|
231,001
|
10
years
|
Tenant
|
|||||||||||
Houston
Extended Stay Hotels
On
October 17, 2007, the Company, through TLG Hotel Acquisitions LLC, a wholly
owned subsidiary of our operating partnership (together with such subsidiary,
the “Houston Partnership”), acquired two hotels located in Houston, TX (the
“Katy Hotel”) and Sugar Land, TX (the “Sugar Land Hotel” and together with the
Katy Hotel, the “Hotels”) from Morning View Hotels - Katy, LP, Morning View
Hotels - Sugar Land, LP and Point of Southwest Gardens, Ltd . , pursuant to
an
Asset Purchase and Sale Agreement. The seller is not an affiliate of the Company
or its subsidiaries.
Prior
to
the acquisition of the Hotels, our board of directors expanded the Company’s
eligible investments to include the acquisition, holding and disposition of
hotels (primarily extended stay hotels). The reasons for such change include
the
expertise of our sponsor who acquired the Extended Stay Hotels group of
companies (“ESH”) and control of its management company (HVM L.L.C.) which
operates 684 extended stay hotels. The ability to draw upon their expertise,
the
intense competition in the real estate market for all types of assets and the
ability to better diversify the Company’s portfolio, caused our board of
directors to review the Company’s investment objectives and expand them to
include lodging facilities.
The
Hotels were recently remodeled by the previous owner; however the Company
intends to make a $2.8 million dollar investment in capital expenditures to
convert the Hotels to Extended Stay Deluxe (“ESD”) brand properties. The ESD
brand is under license from an affiliate within the Extended Stay Hotels group
of companies. The Company expects these additional renovations to be conducted
over a 1-year period and will include implementing ESD’s national reservation
system, new carpeting, new paint, new signage, exterior façade improvements,
re-striping parking lot, guest room upgrades, landscaping and constructing
pools.
The
acquisition price for the Hotels was $16 million inclusive of closing costs.
In
connection with the transaction, the Company’s advisor received an acquisition
fee equal to 2.75% of the contract price ($15.2 million), or approximately
$0.4
million.
The
acquisition was funded through a combination of $6.0 million in offering
proceeds and approximately $10 million in loan proceeds from a floating rate
mortgage loan secured by the Hotels.
43
The
Company has established a taxable REIT subsidiary, LVP Acquisitions Corp. (“LVP
Corp”), which has entered into operating lease agreements with each of the Katy
Hotel and the Sugar Land Hotel, respectively, and LVP Corp. has entered into
management agreements with HVM L.L.C., a controlled affiliate of our sponsor,
for the management of the hotels.
In
connection with the acquisition of the Hotels, the Houston Partnership along
with ESD #5051 - Houston - Sugar Land, LLC and ESD #5050 - Houston - Katy
Freeway, LLC, its wholly owned subsidiaries (the “Houston Borrowers”) secured a
mortgage loan from Bank of America, N.A. in the principal amount of $12.85
million, which includes up to an additional $2.8 million of renovation proceeds
which will be borrowed as the renovation proceeds.
The
mortgage loan has a term of one year with the option of a 6-month term
extension, bears interest on a daily basis expressed as a floating rate equal
to
the lesser of (i) the maximum non-usurious rate of interest allowed by
applicable law or (ii) the British Bankers Association Libor Daily Floating
Rate
plus one hundred seventy-five basis points (1.75%) per annum rate and requires
monthly installments of interest only through the first 12 months. The mortgage
loan will mature on October 16, 2008, subject to the 6-month extension option
described above, at which time payment of the entire principal balance, together
with all accrued and unpaid interest and all other amounts payable thereunder
will be due. The mortgage loan will be secured by the Hotels and will be
non-recourse to the Company. The Company intends to extend, repay or refinance
this loan upon its maturity in October of 2008.
In
connection with the Loan, the Company guaranteed the complete performance of
the
Houston Borrowers’ obligations with respect to the renovations and certain other
customary guarantees.
Camden
Properties
On
November 16, 2007, the Company through wholly owned subsidiaries of the
partnership acquired five apartment communities (“Camden Properties”) located in
Tampa, Florida (one property), Charlotte, North Carolina (two properties) and
Greensboro, North Carolina (two properties) from Camden Operating, L.P. (the
“Seller”). The Seller is not affiliated with the Company or its subsidiaries.
The
Properties, built between 1980 and 1987, are comprised of 1,576 apartment units,
in the aggregate, contain a total of 1,124,249 net rentable square feet, and
were 94% occupied at acquisition.
The
aggregate acquisition price for the Camden Properties was approximately $99.3
million, including acquisition-related transaction costs. Approximately $20.0
million of the acquisition cost was funded with offering proceeds from the
sale
of the Company’s common stock and approximately $79.3 million was funded with
five substantially similar fixed rate loans with Fannie Mae secured by each
of
the Camden Properties.
In
connection with the acquisition of the properties, our Advisor received an
acquisition fee of 2.75% of the gross contract price for the Camden Properties
or approximately $2.65 million.
On
November 16, 2007, in connection with the acquisition of the Camden Properties,
the Company through its wholly owned subsidiaries obtained from Fannie Mae
five
substantially similar fixed rate mortgages aggregating $79.3 million (the
“Loans”). The loans have a 30 year amortization period, mature in 7 years, and
bear interest at a fixed rate of 5.44% per annum. The loans require monthly
installments of interest only through the first three years and monthly
installments of principal and interest throughout the remainder of their stated
terms. The Loans will mature on December 1, 2014, at which time a balance of
approximately $75.0 million will be due. Although the loans were allocated
among
the Camden Properties, the aggregate loan amount is secured by all of the
Properties.
44
In-place
rents, net of rent concessions, and occupancy for the properties at December
31,
2007 were as follows:
|
As
of
December
31, 2007
|
||||
|
In-place
annualized rents
|
$
|
10.5
million
|
||
|
Occupancy
Percentage
|
86.9
|
%
|
||
Sarasota,
Florida
On
March
1, 2007, the Company entered into an option agreement to participate in a
joint-venture with its Sponsor (the “JV Option” with respect to the potential
joint venture, the “Joint Venture”) for the purchase of a property located at
2150 Whitfield Avenue, Sarasota, Florida (the “Sarasota Property”). On November
15, 2007, the Company exercised the JV Option and, through a wholly-owned
subsidiary of the Company’s operating partnership, entered into the Joint
Venture and acquired the Sarasota Property.
In
July,
2007, CAD Funding, LLC (“CAD”), an affiliate of Park Avenue Funding, LLC, had
the highest bid on the Sarasota Property in a foreclosure action. Park Avenue
Funding, LLC, is a real estate lending company founded in 2004 and an affiliate
of the Company’s Advisor and Sponsor. CAD initiated the foreclosure action
following the default of an unaffiliated third party on a loan made to the
third
party by CAD, for which the Sarasota Property served as security. Prior to
the
entry of the foreclosure judgment, the Sponsor expressed an interest in bidding
at the foreclosure sale in anticipation that the Registrant would exercise
the
JV Option. On August 6, 2007, the Sarasota Property was indirectly acquired
by
the Sponsor. The Sarasota Property was contributed to the Joint Venture prior
to
the Registrant’s exercise of the JV Option. The contribution to the Joint
Venture by the Company was $13.1 million of offering proceeds used to acquire
the Sarasota Property. The property was independently appraised in May of 2006
for $17.4 million. At December 31, 2007, the Company holds a 100% interest
in
the Joint Venture, and the Sponsor remains a member in the joint
venture
The
Company now owns 100% of the joint venture and the joint venture is fully
consolidated in the Company’s financial statements for the year ended December
31, 2007.
In
evaluating the Sarasota Property as a potential acquisition, we have considered
a variety of factors, and determined that the acquisition cost was at a
substantial discount to current market value. The Sarasota Property is subject
to competition from similar properties within its market area, and economic
performance could be affected by changes in local economic conditions. The
Sarasota Property currently does not possess a tenant and is experiencing
negative cash flows, however the Venture is currently negotiating with
prospective tenants.
As
of
December 31, 2007, the approximate fixed future minimum rentals from the
Company’s commercial real estate properties, excluding Brazos Crossing which was
not yet open at December 31, 2007, are as follows:
|
Beyond
|
Total
|
|||||||||||||||||||||
|
Building
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2012
|
|
Min.
Rent
|
|||||||||
|
St
Augustine
|
$
|
1,848,478
|
$
|
1,319,168
|
$
|
659,593
|
$
|
242,863
|
$
|
24,516
|
$
|
9,842
|
$
|
4,104,460
|
||||||||
|
Oakview
Plaza
|
2,543,280
|
2,432,693
|
1,929,906
|
1,592,466
|
1,592,466
|
1,633,716
|
11,724,527
|
|||||||||||||||
|
Gulf
Industrial Portfolio
|
5,833,708
|
4,478,402
|
2,458,461
|
1,483,635
|
433,669
|
28,274
|
14,716,149
|
|||||||||||||||
|
Total
|
$
|
10,225,466
|
$
|
8,230,263
|
$
|
5,047,960
|
$
|
3,318,964
|
$
|
2,050,651
|
$
|
1,671,832
|
$
|
30,545,136
|
||||||||
45
Critical
Accounting Policies
General.
The
consolidated financial statements of the Lightstone REIT included in this annual
report include the accounts of Lightstone REIT and the Operating Partnership
(over which Lightstone REIT exercises financial and operating control). 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.
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 39
years for buildings and improvements, 5 to 10 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.
46
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.
Upon
acquisition of real estate operating properties, the Company estimates the
fair
value of acquired tangible assets (consisting of land, building and
improvements) and identified intangible assets and liabilities (consisting
of
above and below-market leases, in-place leases and tenant relationships),
assumed debt issued in accordance with SFAS No. 141, Business Combinations
(“SFAS No. 141”), at the date of acquisition, based on evaluation of
information and estimates available at that date. Based on these estimates,
the
Company allocates the initial purchase price to the applicable assets and
liabilities. As final information regarding fair value of the assets acquired
and liabilities assumed is received and estimates are refined, appropriate
adjustments are made to the purchase price allocation. The allocations are
finalized within twelve months of the acquisition date.
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.
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. Currently,
our
leases range from one month to 11 years. The value of customer relationship
intangibles will be amortized to expense over the initial term 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 will be charged to expense.
47
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 an entity, such entities will 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, we will 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.
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 stockholders’ 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.
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.
48
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 Lightstone REIT are
expensed as incurred. Such fees include acquisition fees associated with the
purchase of a joint venture interest, 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
or
capitalized to the basis of acquired assets, as appropriate.
Lightstone
SLP, LLC, an affiliate of our Sponsor, has and continues to purchase special
general partner interests in the Operating Partnership. These special
general partner interests, 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. Lightstone SLP LLC has not received any portion of regular
distributions made by the Operating Partnership through March 14,
2008.
Our
Advisor is responsible for offering and organizational costs exceeding 10%
of
the gross offering proceeds without recourse to the Company. As of December
31,
2007, offering costs of $13.2 million have been substantially offset by $13.0
million of proceeds from the sale of SLP Units. Lightstone SLP, LLC has
purchased an additional $0.2 million of SLP Units subsequent to December
31, 2007
Income
Taxes
We
elected 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 stockholders.
REITs are generally not subject to federal income tax on taxable income that
they distribute to their stockholders. 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 Lightstone REIT
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.
The
Company has net operating loss carryforwards for Federal income tax purposes
for
the years ended December 31, 2007 and 2006. The availability of such loss
carryforwards will begin to expire in 2026. As the Company does not consider
it
likely that it will realize any future benefit from its loss carry-forward,
any
deferred asset resulting from the final determination of its tax losses will
be
fully offset by a valuation allowance of the same amount.
49
We
commenced operations on February 1, 2006 upon the release of our offering
proceeds from escrow. We acquired our three initial real estate properties
on
March 31, 2006, June 29, 2006, and December 21, 2006, respectively. We continued
to acquire properties throughout 2008, on January 4, 2007; a portfolio of 12
industrial and 2 office buildings in Louisiana and Texas, on February 1,
2007; and a land parcel in Lake Jackson, TX, intended for immediate development
as a power retail center, on June 29, 2007, two hotels in Houston, Texas on
October 17, 2007, five multi family apartment communities, one in Tampa,
Florida, two in Greensboro, North Carolina and two in Charlotte, North Carolina
on November 16, 2007, and an industrial building in Sarasota, Florida on
November 13, 2007. Our management is not aware of any material trends or
uncertainties, other than national economic conditions affecting real estate
generally that may reasonably be expected to have a material impact, favorable
or unfavorable, on revenues or income from the acquisition, management and
operation of real estate and real estate related investments.
The
analysis included in the management discussion and analysis below is not on
a
property by property basis. As we have a limited operating history, and we
have
completed our first nine acquisitions over the past two years, the majority
of
any all fluctuations are the result of these acquisitions.
Comparison
of the year ended December 31, 2007 versus the year ended December 31,
2006
Revenues
Total
revenues more than tripled as compared to 2006. Total Revenues for 2007 were
$25.3 million compared to $8.3 million for the year ended December 31, 2006.
Rental income increased by approximately $14.3 million primarily as a result
of
our acquiring the Belz Outlets in St. Augustine, Florida on March 31, 2006
and
the southeastern Michigan multi-family properties on June 29, 2006, a portfolio
of 12 industrial and 2 office buildings in Louisiana and Texas, on February
1, 2007; and a land parcel in Lake Jackson, TX, intended for immediate
development as a power retail center, on June 29, 2007, two hotels in Houston,
Texas on October 17, 2007, five multi family apartment communities, one in
Tampa, Florida, two in Greensboro, North Carolina and two in Charlotte, North
Carolina on November 16, 2007. Tenant recovery income increased by approximately
$2.7 million primarily as a result of our acquiring the Belz Outlets in St.
Augustine, Florida, the Oakview Center in Omaha, Nebraska, and the portfolio
of
12 industrial and 2 office buildings in Louisiana and Texas.
Total
Property Expenses
Total
expenses increased by $14.2 million to approximately $22.2 million, for the
year
ended December 31, 2007, compared to $8.0 million for the same period last
year.
Increases in property operating expenses ($5.9 million), real estate taxes
($1.9
million), and depreciation and amortization ($3.5 million) were primarily the
result of the acquisition of a full year of expenses for the 2006 acquisitions,
and the additional expenses associated with all of the 2007 acquisitions.
General
and administrative expenses
General
and administrative costs increased by $2.9 million to $3.7 million, primarily
as
a result of the payment of acquisition and legal fees in the amount of $1.6
million and $0.1 million, respectively, related to the Lightstone REIT’s
investment in the sub lease interest to a ground lease of a Manhattan office
building payment, and asset management fees in the amount of $1.0 million,
and
costs incurred related to outside consulting fees to advise the Company
regarding Sarbanes Oxley compliance testing performed in 2007. General and
administrative expenses for the year ended December 31, 2006 totaled $0.8
million, which included asset management fees of $0.3 million. We expect general
and administrative expenses to increase in the future as a result of
acquisitions in future periods.
Depreciation
and Amortization
Depreciation
and amortization expense increased by $3.5 million, in 2007 as compared to
2006 primarily due to the inclusion of a full year of expenses for the 2006
acquisitions, and the additional expenses associated with all of the 2007
acquisitions.
50
Interest
Income
Interest
income increased by approximately $1.4 million, due primarily to the increase
in
interest and dividend income recorded on the short-term investments and
marketable securities. The Cash and cash equivalents, including marketable
securities at December 31, 2007, was $40.3 million, or a $21.0 million increase
over the balance at December 31, 2006.
Other
Income
Other
income increased by approximately $0.8 million due to increases in vending
and
other ancillary revenue sources at primarily our multi family properties
acquired in June of 2006 and November of 2007.
Interest
expense
Interest
expense increased $6.8 million for the year ended December 31, 2007 as compared
to 2006, due to the inclusion of a full year of expenses for the 2006
acquisitions, and the additional expenses associated with all of the 2007
acquisitions.
Minority
interest
The
loss
allocated to minority interests of approximately $26 and $86 for the year ended
December 31, 2007 and 2006, respectively, relates to the interests in the
Operating Partnership held by our Sponsor.
Comparison
of the year ended December 31, 2006 versus the year ended December 31,
2005
Revenues
Total
revenues increased 100%, or $8.3 million for the year ended December 31, 2006
compared to $0 for the same period last year. Rental income increased by
approximately $7.3 million primarily as a result of our acquiring the Belz
Outlets in St. Augustine, Florida on March 31, 2006 and the southeastern
Michigan multi-family properties on June 29, 2006. Tenant recovery income
increased by approximately $1.0 million primarily as a result of our acquiring
the Belz Outlets in St. Augustine, Florida. The Lightstone REIT also acquired
a
retail property in Omaha, Nebraska on December 21, 2006. Due to the limited
period of ownership, it did not have a significant impact on our 2006 financial
results.
Total
Property Expenses
Total
expenses increased by $7.9 million to approximately $8.0 million, for the year
ended December 31, 2006, compared to $0.1 million for the same period last
year.
Increases in property operating expenses ($3.7 million), real estate taxes
($0.9
million), and depreciation and amortization ($2.7 million) were primarily the
result of the acquisition of two new properties on March 31, 2006 and June
29,
2006, respectively. The Lightstone REIT also acquired a retail property in
Omaha, Nebraska on December 21, 2006. Due to the limited period of ownership,
it
did not have a significant impact on our 2006 financial results.
General
and administrative expenses
General
and administrative costs increased by $0.7 million to $0.8 million, primarily
as
a result of the payment of asset management fees, director’s and officer’s
liability insurance and fees to our board of directors, auditors and
attorneys. General and administrative expenses for the year ended
December 31, 2005 totaled $117,571. We expect general and administrative
expenses to increase in the future as a result of acquisitions in future
periods. No fees of any kind were paid to the Advisor for the year ended
December 31, 2005.
Depreciation
and Amortization
Depreciation
and amortization expense increased by $2.7 million, in 2006 as compared to
2005 primarily due to the acquisition and financing of two new properties on
March 31, 2006 and June 29, 2006, respectively. The Lightstone REIT also
acquired a retail property in Omaha, Nebraska on December 21, 2006. Due to
the
limited period of ownership, it did not have a significant impact on our 2006
financial results.
51
Interest
Income
Interest
income increased by approximately $0.5 million, due to the increase in the
Company’s average balance of cash and cash equivalents for the twelve-month
period ending December 31, 2006.
Other
Income
Other
income increased by approximately $0.4 million related to vending and other
ancillary revenue sources primarily at our south eastern Michigan multi-family
properties acquired on June 29, 2006.
Interest
expense
Interest
expense increased 100%, or approximately $2.6 million for the year ended
December 31, 2006, primarily as a result of the acquisition and financing of
two
new properties on March 31, 2006 and June 29, 2006, respectively. The Lightstone
REIT also acquired a retail property in Omaha, Nebraska on December 21, 2006.
Due to the limited period of ownership, it did not have a significant impact
on
our 2006 financial results.
Minority
interest
The
loss
allocated to minority interests of approximately $86 and $1,164 for the year
ended December 31, 2006 and 2005, respectively, relates to the interests in
the Operating Partnership held by our Sponsor.
Overview:
We
intend
that rental revenue will be the principal source of funds to pay operating
expenses, debt service, capital expenditures and dividends, excluding
non-recurring capital expenditures. To the extent that our cash flow from
operating activities is insufficient to finance non-recurring capital
expenditures such as property acquisitions, development and construction costs
and other capital expenditures, we are dependent upon the net proceeds to be
received from our public offering to conduct such proposed activities. We have
financed and expect to continue to finance such activities through debt and
equity financings. 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
expect
to meet our short-term liquidity requirements generally through funds received
in our public offering, working capital, and net cash provided by operating
activities. We frequently examine potential property acquisitions and
development projects and, at any given time, one or more acquisitions or
development projects may be under consideration. Accordingly, the ability to
fund property acquisitions and development projects is a major part of our
financing requirements. We expect to meet our financing requirements through
funds generated from our public offering and long-term and short-term
borrowings.
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.
Our
source 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 have two loans which mature
in 2008, which had an outstanding balance of $10.4 million at December 31,
2007.
The Company intends to extend, repay or refinance this loan upon its maturity
in
October of 2008.
52
We
currently have $237.6 million of outstanding mortgage debt, and an additional
$5.8 million of outstanding notes payable. 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.
The
Company has two development projects which were ongoing at December 31, 2007.
The Company is in the process of expanding and renovating its St. Augustine
center. The Company expects to complete the expansion and renovation in the
fourth quarter of 2008. The Company purchased the land adjacent to the existing
center and the related development rights in the fourth quarter of 2007, and
began the renovation and expansion. Total project costs to date at December
31,
2007 totaled approximately $5.0 million, including the purchase of the land
and
the development rights. Total project costs are expected to estimate
approximately $35.2 million. The Company intends to fund the costs of this
project using a portion of the proceeds from our offering.
In
addition, the Company completed it development of its Brazos Crossing Center
in
March of 2008. The total project costs are estimated to be approximately $10.2
million, and will be funded primarily with the $8.2 million of notes payable.
The Company had drawn $5.8 million as of December 31, 2007. The remainder of
the
costs will be funded using proceeds of the offering. Other than those discussed
above, the Company does not have any other significant capital plans for
2008.
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. As of December 31, 2007, our total borrowings
represented 216% of net assets.
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.
53
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.
Total
property management fees of $1.1 million, $0.3 million and $0 were recorded
for
amounts due to the Advisor or its affiliates for the years ended
December 31, 2007, 2006 and 2005, respectively.
Total
asset management and acquisition fees to the Advisor of $7.6 million, $3.0
million and $0 were recorded for the years ended December 31, 2007, 2006
and 2005, respectively. As of December 31, 2007, there were less than $0.1
million due to an affiliate of our Advisor, for the reimbursement of property
level operating expenses. As of December 31, 2006, approximately $0.5
million was due to our Property Manager, an affiliate of our Advisor, for the
reimbursement of property level operating expenses. As of December 31, 2005,
approximately $0.3 million was due to the Advisor for the 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 Lightstone REIT
($3,000). This amount was fully repaid during the year ended December 31,
2006.
As
of
December 31, 2007, we had approximately $29.6 million of cash and cash
equivalents on hand and $9.6 million of refundable escrow deposits. In addition,
we held marketable securities in the amount of $10.8 million at December 31,
2007. Our cash and cash equivalents on hand resulted primarily from proceeds
from our Offering.
Summary
of Cash Flows.
The
following summary discussion of our cash flows is based on the consolidated
statements of cash flows and is not meant to be an all-inclusive discussion
of
the changes in our cash flows for the periods presented below:
|
|
|
Year
Ended December 31, 2007
|
|
Year
Ended December 31, 2006
|
|
Year
Ended December 31, 2005
|
||||
|
Cash
flows provided by (used in) operating activities
|
$
|
6,651,989
|
$
|
1,722,853
|
$
|
(80,060
|
)
|
|||
|
Cash
flows used in investing activities
|
(227,971,386
|
)
|
(119,467,655
|
)
|
-
|
|||||
|
Cash
flows provided by financing activities
|
231,628,502
|
136,820,482
|
79,601
|
|||||||
|
Cash,
beginning of the period
|
19,280,710
|
205,030
|
205,489
|
|||||||
|
Cash,
end of the period
|
$
|
29,589,815
|
$
|
19,280,710
|
$
|
205,030
|
||||
Our
principal source of cash flow is currently derived from the issuance of our
common stock and the operation of our rental properties. We intend that our
properties will provide a relatively consistent stream of cash flow that
provides us with resources to fund operating expenses, debt service and
quarterly dividends. Cash flows from operating activities were generated
primarily from our retail property in St. Augustine, Florida acquired in March
of 2006, the four residential apartment communities we acquired in June of
2006,
the Oakview Plaza in Omaha, Nebraska acquired on December 21, 2006 and the
Gulf
Coast industrial portfolio acquired on February 1, 2007, two hotels acquired
in
Houston, Texas on October 17, 2007, five multi family apartment communities
acquired on November 16, 2007, substantially offset by the payment of a $1.6
million acquisition fee related to our investment in a joint venture which
acquired a sub-leasehold interest in a ground lease to an office building
located at 1407 Broadway, New York, New York.
Our
principal demands for liquidity are our property operating expenses, real estate
taxes, insurance, tenant improvements, leasing costs, acquisition and
development activities, debt service and distributions to our stockholders.
The
principal sources of funding for our operations are operating cash flows, the
sale of properties, and the issuance of equity and debt securities and the
placement of mortgage loans.
54
Cash
used
in investing activities of $228.0 million resulted primarily from the purchases
of the Gulf Coast Industrial portfolio on February 1, 2007, the investment
in
the unconsolidated joint venture, two hotels acquired in Houston, Texas on
October 17, 2007, five multi family apartment communities acquired on November
16, 2007, as well as the purchase of an industrial building in Sarasota,
Florida, the purchase of marketable securities of $27.7 million offset by the
proceeds from the sale of Marketable securities of $17.0 million.
Cash
provided by financing activities is primarily the proceeds from mortgage
financing and notes payable ($148.2 million) and the proceeds from the issuance
of common stock ($88.6 million), and the proceeds from the sale of general
partnership units ($8.9 million).
Mortgages
payable, totaling approximately $237.6 million at December 31, 2007, consists
of
the following:
|
Property
|
Loan
Amount
|
|
Interest
Rate
|
|
Maturity
Date
|
|
Amount
Due at maturity
|
||||||
|
St.
Augustine
|
$
|
27,051,571
|
6.09
|
%
|
April
2016
|
$
|
23,747,523
|
||||||
|
Southeastern
Michigan Multi Family Properties
|
40,725,000
|
5.96
|
%
|
July
2016
|
38,138,605
|
||||||||
|
Oakview
Plaza
|
27,500,000
|
5.49
|
%
|
January
2017
|
25,583,137
|
||||||||
|
Gulf
Coast Industrial Portfolio
|
53,025,000
|
5.83
|
%
|
February
2017
|
49,556,985
|
||||||||
|
Houston
Extended Stay Hotels (Two Individual Loans)
|
10,040,000
|
LIBOR
+ 1.75
|
%
|
October
2008
|
10,040,000
|
||||||||
|
Camden
Multi Family Properties - (Five Individual Loans)
|
79,268,800
|
5.44
|
%
|
December
2014
|
74,955,771
|
||||||||
|
Total
of eleven outstanding mortgage loans at December 31, 2007
|
$
|
237,610,371
|
$
|
222,022,022
|
|||||||||
LIBOR
at
December 31, 2007 was 4.60%. Monthly installments of interest only are required
through the first 12 months for the St. Augustine loan, and monthly installments
of principal and interest are required throughout the remainder of its stated
term. Monthly installments of interest only are required through the first
60
months for the Southeastern Michigan multi-family properties, and through the
first 48 months for the Camden Multi-Family properties’ loans, and monthly
installments of principal and interest are required throughout the remainder
of
its stated term. The remaining loans are interest only until their maturity,
when the amounts listed in the table above are due, assuming no prior principal
prepayment. Each of the loans is secured by acquired real estate and is
non-recourse to the Company.
The
following table shows the mortgage debt maturing during the next five years
and
thereafter at December 31, 2007:
|
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
2012
|
Thereafter |
Total
|
|||||||||||
|
Fixed
rate mortgages
|
$
|
10,353,360
|
$
|
338,052
|
$
|
359,526
|
$
|
1,586,957
|
$
|
2,781,012
|
$
|
222,191,464
|
$
|
237,610,371
|
||||||||
New
Accounting Pronouncements
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities Including an Amendment of FASB
Statement No. 115” (“SFAS No. 159”). This standard permits entities to choose to
measure many financial instruments and certain other items at fair value and
is
effective for the first fiscal year beginning after November 15, 2007. The
Company does not expect SFAS No. 159 to have a material impact on its financial
statements.
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements.
This
Statement applies under other accounting pronouncements that require or permit
fair value measurements. Accordingly, this Statement does not require any new
fair value measurements. However, for some entities, the application of this
Statement will change current practice. This Statement clarifies that market
participant assumptions include assumptions about risk, for example, the risk
inherent in a particular valuation technique used to measure fair value (such
as
a pricing model) and/or risk inherent in the inputs to the valuation technique.
This Statement clarifies that market participant assumptions also include
assumptions about the effect of a restriction on the sale or use of an asset.
This Statement also clarifies that a fair value measurement for a liability
reflects its nonperformance risk. The statement is effective in the fiscal
first
quarter of 2008 except for non-financial assets and liabilities recognized
or
disclosed at fair value on a recurring basis, for which the effective date
is
fiscal years beginning after November 15, 2008. The
Company is currently evaluating the impact that the adoption of SFAS No. 157,
but does not expect the adoption of SFAS No. 157 will have a material effect
on
the Company’s consolidated financial statements.
55
In
June
2007, the AICPA issued Statement of Position (“SOP”) 07-1, “Clarification of the
Scope of the Audit and Accounting Guide, Investment Companies and Accounting
by
Parent Companies and Equity Method Investors for Investments in Investment
Companies.” SOP 07-1 provides guidance for determining whether an entity is
within the scope of the AICPA Audit and Accounting Guide, “Investment Companies”
(the “Guide”) and when companies that own or have significant stakes in
investment companies should and should not retain, in their financial
statements, the specialized industry accounting under the Guide. Management
does
not anticipate, the application of SOP 07-1 will have a material impact on
our
consolidated financial statements. This statement is effective for financial
statements issued for fiscal years beginning after December 15, 2007, and
interim periods within those fiscal years.
In
December 2007, the FASB issued FASB No. 141(R) which establishes principles
and requirements for how the acquirer shall recognize and measure in its
financial statements the identifiable assets acquired, liabilities assumed,
any
noncontrolling interest in the acquiree and goodwill acquired in a business
combination. This statement is effective for business combinations for which
the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The Company is
currently assessing the potential impact that the adoption of FASB No. 141(R)
will have on its financial position and results of operations.
In
December 2007, the FASB issued No. 160, which establishes and expands accounting
and reporting standards for minority interests, which will be recharacterized
as
noncontrolling interests, in a subsidiary and the deconsolidation of a
subsidiary. FASB 160 is effective for business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. This statement is effective
for fiscal years beginning on or after December 15, 2008. The Company
is currently assessing the potential impact that the adoption of FASB No. 160
will have on its financial position and results of operations.
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
borrowings used to maintain liquidity and fund the expansion and refinancing
of
our real estate investment portfolio and operations. Our interest rate risk
management objectives will be to limit the impact of interest rate changes
on
earnings, prepayment penalties and cash flows and to lower overall borrowing
costs while taking into account variable interest rate risk. To achieve our
objectives, we may borrow at fixed rates or variable rates. We may also enter
into derivative financial instruments such as interest rate swaps and caps
in
order to mitigate our interest rate risk on a related financial instrument.
We
will not enter into derivative or interest rate transactions for speculative
purposes. We have not entered into any swap agreements or derivative
transactions to date.
We
also
hold equity securities for general investment return purposes. We have incurred
significant unrealized losses to date, and could be required to record material
impairment charges related to these securities.
At
December 31, 2007, we had mortgage debt totaling approximately $237.6 million
as
follows:
|
Property
|
Loan
Amount
|
|
Interest
Rate
|
|
Maturity
Date
|
|
Amount
Due at maturity
|
||||||
|
St.
Augustine
|
$
|
27,051,571
|
6.09
|
%
|
April
2016
|
$
|
23,747,523
|
||||||
|
Southeastern
Michigan Multi Family Properties
|
40,725,000
|
5.96
|
%
|
July
2016
|
38,138,605
|
||||||||
|
Oakview
Plaza
|
27,500,000
|
5.49
|
%
|
January
2017
|
25,583,137
|
||||||||
|
Gulf
Coast Industrial Portfolio
|
53,025,000
|
5.83
|
%
|
February
2017
|
49,556,985
|
||||||||
|
Houston
Extended Stay Hotels (Two Individual Loans)
|
10,040,000
|
LIBOR
+ 1.75
|
%
|
October
2008
|
10,040,000
|
||||||||
|
Camden
Multi Family Properties - (Five Individual Loans)
|
79,268,800
|
5.44
|
%
|
December
2014
|
74,955,771
|
||||||||
|
Total
of eleven outstanding mortgage loans at December 31, 2007
|
$
|
237,610,371
|
$
|
222,022,022
|
|||||||||
56
LIBOR
at
December 31, 2007 was 4.60%. Monthly installments of interest only are required
through the first 12 months for the St. Augustine loan, and monthly installments
of principal and interest are required throughout the remainder of its stated
term. Monthly installments of interest only are required through the first
60
months for the Southeastern Michigan multi-family properties, and through the
first 48 months for the Camden Multi-Family properties’ loans, and monthly
installments of principal and interest are required throughout the remainder
of
its stated term. The remaining loans are interest only until their maturity,
when the amounts listed in the table above are due, assuming no prior principal
prepayment. Each of the loans is secured by acquired real estate and is
non-recourse to the Company.
The
following table shows the mortgage debt maturing during the next five
years:
|
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Thereafter
|
Total
|
|||||||||
|
Fixed
rate mortgages
|
$
|
10,353,360
|
$
|
338,052
|
$
|
359,526
|
$
|
1,586,957
|
$
|
2,781,012
|
$
|
222,191,464
|
$
|
237,610,371
|
||||||||
Our
combined future earnings, cash flows and fair values relating to financial
instruments are currently not dependent upon prevalent market rates of interest
as a result of our having only fixed rate debt and limited cash balances
available for investment. The fair value of our debt approximates its
carrying amount at December 31, 2007.
In
addition to changes in interest rates, the value of our real estate and real
estate related investments is subject to fluctuations based on changes in local
and regional economic conditions and changes in the creditworthiness of lessees,
which may affect our ability to refinance our debt if necessary. As of December
31, 2007, the Company has no off-balance sheet arrangements nor has it entered
into any derivative instruments.
57
|
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
|
|
Lightstone
Value Plus Real Estate Investment Trust, Inc. and
Subsidiaries
|
|
(a
Maryland corporation)
|
|
Index
|
Page
|
|||
|
|
|
|||
|
Report
of Independent Registered Public Accounting Firm on Consolidated
Financial
Statements
|
59 | |||
|
|
||||
|
Financial
Statements:
|
60 | |||
|
|
||||
|
Consolidated
Balance Sheets as of December 31, 2007 and 2006
|
60 | |||
|
|
||||
|
Consolidated
Statements of Operations for the years ended December 31, 2007, 2006
and
2005
|
61 | |||
|
|
||||
|
Consolidated
Statements of Stockholders' Equity for the years ended December 31,
2007,
2006 and 2005
|
62 | |||
|
|
||||
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2007, 2006
and
2005
|
63 | |||
|
|
||||
|
Notes
to Consolidated Financial Statements
|
64 | |||
|
|
||||
|
Real
Estate and Accumulated Depreciation (Schedule III)
|
94 | |||
Schedules
not filed:
All
schedules other than the one listed in the Index have been omitted as the
required information is inapplicable or the information is presented in the
financial statements or related notes.
58
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Stockholders
Lightstone
Value Plus Real Estate Investment Trust, Inc. and its Subsidiaries
We
have
audited the accompanying consolidated balance sheets of Lightstone Value Plus
Real Estate Investment Trust, Inc. and Subsidiaries (the “Company’) as of
December 31, 2007 and 2006, and the related consolidated statements of
operations, stockholders’ equity and cash flows for each of the years in the
three year period ended December 31, 2007. 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 audits.
We
conducted our audits 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 such 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 audits provide 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 Subsidiaries as of December
31, 2007 and 2006, and the results of their operations and their cash flows
for
each of the years in the three year period ended December 31, 2007, in
conformity with accounting principles generally accepted in the United States
of
America.
We
have
also audited the consolidated financial statement schedule, Schedule III -
Real
Estate and Accumulated Depreciation, as of December 31, 2007. In our opinion,
the related financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly,
in
all material respects, the information set forth therein.
/s/
Amper, Politziner & Mattia, P.C.
March
28,
2008
Edison,
New Jersey
59
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND
SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
As
of December 31, 2007 and 2006
|
December
31,
2007
|
December
31,
2006
|
||||||
|
Assets
|
|
|
|||||
|
Investment
property:
|
|
|
|||||
|
Land
|
$
|
62,032,138
|
$
|
20,141,357
|
|||
|
Building
|
240,221,044
|
82,217,115
|
|||||
|
Construction
in Progress
|
7,499,319
|
-
|
|||||
|
|
|||||||
|
|
309,752,501
|
102,358,472
|
|||||
|
Less
accumulated depreciation
|
(5,455,550
|
)
|
(1,184,590
|
)
|
|||
|
Net
investment property
|
304,296,951
|
101,173,882
|
|||||
|
|
|||||||
|
Investment
in unconsolidated real estate joint venture
|
6,284,675
|
-
|
|||||
|
Cash
and cash equivalents
|
29,589,815
|
19,280,710
|
|||||
|
Marketable
Securities
|
10,752,910
|
-
|
|||||
|
Restricted
escrows
|
9,595,453
|
6,912,578
|
|||||
|
Deposit
for purchase of real estate
|
-
|
8,435,000
|
|||||
|
Due
from escrow agent
|
-
|
163,949
|
|||||
|
|
|||||||
|
Tenant
and other accounts receivable, net
|
1,531,180
|
316,232
|
|||||
|
Acquired
in-place lease intangibles (net of accumulated amortization of $2,646,629
and $1,365,512, respectively)
|
1,982,292
|
1,801,678
|
|||||
|
Acquired
above market lease intangibles (net of accumulated amortization of
$373,175 and $75,258, respectively)
|
830,727
|
601,987
|
|||||
|
Deferred
intangible leasing costs (net of accumulated amortization of $605,093
and
$119,807, respectively)
|
1,153,712
|
735,079
|
|||||
|
Deferred
leasing costs (net of accumulated amortization of $50,606 and $3,423,
respectively)
|
154,879
|
23,359
|
|||||
|
Deferred
financing costs (net of accumulated amortization of $172,939 and
$26,813,
respectively)
|
2,154,560
|
691,777
|
|||||
|
Prepaid
expenses and other assets
|
1,374,200
|
571,986
|
|||||
|
Total
Assets
|
$
|
369,701,354
|
$
|
140,708,217
|
|||
|
|
|||||||
|
Liabilities
and Stockholders' Equity
|
|||||||
|
Mortgage
payable
|
$
|
237,610,371
|
$
|
95,475,000
|
|||
|
Note
payable
|
5,825,286
|
-
|
|||||
|
Accounts
payable and accrued expenses
|
6,332,962
|
1,980,052
|
|||||
|
Tenant
allowances and deposits payable
|
943,854
|
301,970
|
|||||
|
Distributions
payable
|
2,463,361
|
601,286
|
|||||
|
Prepaid
rental revenues
|
1,066,724
|
81,020
|
|||||
|
Acquired
below market lease intangibles (net of accumulated amortization of
$1,874,843 and $953,435, respectively)
|
2,391,883
|
2,011,063
|
|||||
|
|
256,634,441
|
100,450,391
|
|||||
|
Minority
interest in partnership
|
12,954,715
|
4,282,122
|
|||||
|
Commitments
and contingencies
|
|||||||
|
Stockholders'
equity:
|
|||||||
|
Preferred
shares, 10,000,000 shares authorized, none outstanding
|
-
|
-
|
|||||
|
Common
stock, $.01 par value; 60,000,000 shares authorized, 13,606,609 and
4,316,389 shares issued and outstanding, respectively
|
136,066
|
43,170
|
|||||
|
Additional
paid-in-capital
|
120,297,590
|
38,686,993
|
|||||
|
Accumulated
other comprehensive loss
|
(1,199,278
|
)
|
-
|
||||
|
Accumulated
distributions in addition to net loss
|
(19,122,180
|
)
|
(2,754,459
|
)
|
|||
|
Total
stockholders' equity
|
100,112,198
|
35,975,704
|
|||||
|
Total
Liabilities and Stockholders' Equity
|
$
|
369,701,354
|
$
|
140,708,217
|
|||
The
Company’s notes are an integral part of these consolidated financial
statements.
60
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
For
the Years ended December 31, 2007, 2006 and 2005
|
Year
ended
December
31,
2007
|
Year
ended
December
31,
2006
|
Year
ended
December
31,
2005
|
||||||||
|
Revenues:
|
|
|
|
|||||||
|
Rental
income
|
$
|
21,530,205
|
$
|
7,271,738
|
$
|
-
|
||||
|
Tenant
recovery income
|
3,729,450
|
990,929
|
-
|
|||||||
|
|
25,259,655
|
8,262,667
|
-
|
|||||||
|
Expenses:
|
||||||||||
|
Property
operating expenses
|
9,579,830
|
3,656,914
|
-
|
|||||||
|
Real
estate taxes
|
2,739,866
|
882,212
|
-
|
|||||||
|
General
and administrative costs
|
3,710,363
|
808,502
|
117,571
|
|||||||
|
Depreciation
and amortization
|
6,163,437
|
2,674,819
|
-
|
|||||||
|
|
22,193,496
|
8,022,447
|
117,571
|
|||||||
|
Operating
income (loss)
|
3,066,159
|
240,220
|
(117,571
|
)
|
||||||
|
Other
income
|
1,162,040
|
350,961
|
-
|
|||||||
|
Interest
income
|
1,879,768
|
459,916
|
-
|
|||||||
|
Gain
on sale of securities
|
1,301,949
|
-
|
-
|
|||||||
|
Interest
expense
|
(9,384,383
|
)
|
(2,587,527
|
)
|
-
|
|||||
|
Loss
from investment in unconsolidated Joint Venture
|
(7,267,949
|
)
|
-
|
-
|
||||||
|
Minority
interest
|
26
|
86
|
1,164
|
|||||||
|
Net
loss applicable to common shares
|
$
|
(9,242,390
|
)
|
$
|
(1,536,344
|
)
|
$
|
(116,407
|
)
|
|
|
Net
loss per common share, basic and diluted
|
$
|
(1.01
|
)
|
$
|
(0.96
|
)
|
$
|
(5.82
|
)
|
|
|
Weighted
average number of common shares outstanding, basic and
diluted
|
9,195,369
|
1,594,060
|
20,000
|
|||||||
The
Company’s notes are an integral part of these consolidated financial
statements.
61
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
For
the Years ended December 31, 2007, December 31, 2006 and December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Distribtions
|
|
|
|
|
|
|
|
|
Preferred
Shares
|
|
|
Common
Shares
|
|
|
Additional
|
|
|
Other
|
in
Net
|
Total
|
|||||||||||
|
Preferred
|
Common
|
Paid-In
|
Comprehensive
|
Addition
to
|
Stockholders'
|
||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Loss
|
|
Loss
|
Equity
|
|||||||||||||||||
|
BALANCE,
January 1, 2005
|
-
|
$
|
-
|
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
|
||||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,536,344
|
)
|
(1,536,344
|
)
|
|||||||||||||||
|
Distributions
declared
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,101,708
|
)
|
(1,101,708
|
)
|
|||||||||||||||
|
Proceeds
from offering
|
-
|
-
|
4,276,165
|
42,762
|
42,570,940
|
-
|
-
|
42,613,702
|
|||||||||||||||||
|
Selling
commissions and dealer manager fees
|
-
|
-
|
-
|
-
|
(3,337,501
|
)
|
-
|
-
|
(3,337,501
|
)
|
|||||||||||||||
|
Other
offering costs
|
-
|
-
|
-
|
-
|
(943,869
|
)
|
-
|
-
|
(943,869
|
)
|
|||||||||||||||
|
Proceeds
from distribution reinvestment program
|
-
|
-
|
20,824
|
208
|
197,623
|
-
|
-
|
197,831
|
|||||||||||||||||
|
BALANCE,
December 31, 2006
|
-
|
-
|
4,316,989
|
43,170
|
38,686,993
|
-
|
(2,754,459
|
)
|
35,975,704
|
||||||||||||||||
|
Comprehensive
loss:
|
|||||||||||||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(9,242,390
|
)
|
(9,242,390
|
)
|
|||||||||||||||
|
Unrealized
loss on available for sale securities
|
-
|
-
|
-
|
-
|
-
|
(1,199,278
|
)
|
-
|
(1,199,278
|
)
|
|||||||||||||||
|
Total
comprehensive loss
|
-
|
-
|
-
|
-
|
-
|
(1,199,278
|
)
|
(9,242,390
|
)
|
(10,441,668
|
)
|
||||||||||||||
|
Distributions
declared
|
-
|
-
|
-
|
-
|
-
|
-
|
(7,125,331
|
)
|
(7,125,331
|
)
|
|||||||||||||||
|
Proceeds
from offering
|
-
|
-
|
9,082,793
|
90,828
|
88,541,468
|
-
|
-
|
88,632,296
|
|||||||||||||||||
|
Selling
commissions and dealer manager fees
|
-
|
-
|
-
|
-
|
(6,130,796
|
)
|
-
|
-
|
(6,130,796
|
)
|
|||||||||||||||
|
Other
offering costs
|
-
|
-
|
-
|
-
|
(2,762,855
|
)
|
-
|
-
|
(2,762,855
|
)
|
|||||||||||||||
|
Proceeds
from distribution reinvestment program
|
-
|
-
|
206,826
|
2,068
|
1,962,780
|
-
|
-
|
1,964,848
|
|||||||||||||||||
|
|
|||||||||||||||||||||||||
|
BALANCE,
December 31, 2007
|
-
|
$
|
-
|
13,606,608
|
$
|
136,066
|
$
|
120,297,590
|
$
|
(1,199,278
|
)
|
$
|
(19,122,180
|
)
|
$
|
100,112,198
|
|||||||||
The
Company’s notes are an integral part of these consolidated financial
statements.
62
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the Years ended December 31, 2007, 2006 and December 31,
2005
|
|
Year
ended
December
31,
2007
|
Year
ended
December
31,
2006
|
Year
ended
December
31,
2005
|
|||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|||||||
|
Net
loss
|
$
|
(9,242,390
|
)
|
$
|
(1,536,344
|
)
|
$
|
(116,407
|
)
|
|
|
Loss
allocated to minority interests
|
(26
|
)
|
(86
|
)
|
(1,164
|
)
|
||||
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
||||||||||
|
Depreciation
and amortization
|
5,617,908
|
1,186,076
|
-
|
|||||||
|
Gain
on sale of marketable securities
|
(1,301,949
|
)
|
-
|
-
|
||||||
|
Amortization
of deferred financing costs
|
146,126
|
26,813
|
-
|
|||||||
|
Amortization
of deferred leasing costs
|
545,529
|
123,230
|
-
|
|||||||
|
Amortization
of above and below-market lease intangibles
|
(628,150
|
)
|
487,335
|
-
|
||||||
|
Net
equity in loss from investment in unconcolidated joint
venture
|
7,267,949
|
-
|
-
|
|||||||
|
Changes
in assets and liabilities:
|
||||||||||
|
Increase
in prepaid expenses and other assets
|
(518,555
|
)
|
(573,470
|
)
|
-
|
|||||
|
Increase
in tenant and other accounts receivable
|
(1,214,948
|
)
|
(316,232
|
)
|
-
|
|||||
|
Increase
in tenant allowance and security deposits payable
|
641,884
|
301,970
|
-
|
|||||||
|
Increase
in accounts payable and accrued expenses
|
4,352,908
|
1,942,541
|
37,511
|
|||||||
|
Increase
in prepaid rents
|
985,703
|
81,020
|
-
|
|||||||
|
Net
cash provided by operating activities
|
6,651,989
|
1,722,853
|
(80,060
|
)
|
||||||
|
|
||||||||||
|
CASH
FLOWS USED IN INVESTING ACTIVITIES:
|
||||||||||
|
Purchase
of investment property, net
|
(201,085,650
|
)
|
(104,120,077
|
)
|
-
|
|||||
|
Purchase
of marketable securities
|
(27,689,153
|
)
|
-
|
-
|
||||||
|
Proceeds
from sale of marketable securities
|
17,038,915
|
-
|
-
|
|||||||
|
Investment
in unconcolidated joint venture
|
(13,552,623
|
)
|
-
|
-
|
||||||
|
Funding
of restricted escrows
|
(2,682,875
|
)
|
(6,912,578
|
)
|
-
|
|||||
|
|
||||||||||
|
Refundable
deposit for investment in real estate
|
-
|
(8,435,000
|
)
|
-
|
||||||
|
Net
cash used in investing activities
|
(227,971,386
|
)
|
(119,467,655
|
)
|
-
|
|||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||
|
Proceeds
from mortgage financing
|
142,333,800
|
95,475,000
|
-
|
|||||||
|
Proceeds
from notes payable
|
5,825,286
|
-
|
-
|
|||||||
|
Mortgage
payments
|
(198,429
|
)
|
-
|
-
|
||||||
|
Payment
of loan fees and expenses
|
(1,608,909
|
)
|
(718,590
|
)
|
-
|
|||||
|
Proceeds
from issuance of common stock
|
88,632,296
|
42,613,702
|
-
|
|||||||
|
Proceeds
from issuance of special general partnership units
|
8,672,567
|
4,281,369
|
-
|
|||||||
|
Payment
of offering costs
|
(8,893,651
|
)
|
(4,055,404
|
)
|
(225,966
|
)
|
||||
|
Decrease
(increase) in amounts due from escrow agent
|
163,949
|
(163,949
|
)
|
-
|
||||||
|
Decrease
(increase) in amounts due to affiliates, net
|
-
|
(309,055
|
)
|
305,567
|
||||||
|
Distributions
paid
|
(3,298,407
|
)
|
(302,591
|
)
|
-
|
|||||
|
Net
cash provided by financing activities
|
231,628,502
|
136,820,482
|
79,601
|
|||||||
|
|
||||||||||
|
Net
change in cash and cash equivalents
|
10,309,105
|
19,075,680
|
(459
|
)
|
||||||
|
Cash
and cash equivalents, beginning of year
|
19,280,710
|
205,030
|
205,489
|
|||||||
|
|
||||||||||
|
Cash
and cash equivalents, end of year
|
$
|
29,589,815
|
$
|
19,280,710
|
$
|
205,030
|
||||
|
|
||||||||||
|
Supplemental
disclosure of cash flow information:
|
||||||||||
|
Cash
paid for interest
|
$
|
8,696,812
|
$
|
2,329,904
|
$
|
-
|
||||
|
Dividends
declared
|
$
|
7,125,331
|
$
|
1,101,708
|
$
|
-
|
||||
|
Unrealized
loss on available for sale securities
|
$
|
(1,199,278
|
)
|
$
|
-
|
$
|
-
|
|||
|
Proceeds
from shares issued in distribution reinvestment program
|
$
|
1,964,848
|
$
|
197,831
|
$
|
-
|
||||
The
Company’s notes are an integral part of these consolidated financial
statements.
63
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 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 subsequently qualified as
a real estate investment trust (“REIT”) during the year ending December 31,
2006. 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 and its Chief Executive Officer.
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 99.9% limited partnership interest in the Operating
Partnership. 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
December 31, 2007, cumulative gross offering proceeds of approximately $131.5
million have been released to the Lightstone REIT and used for the purchase
of a
99.99% general 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.
64
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005 (continued)
Lightstone
SLP, LLC, an affiliate of the Advisor, intends to periodically purchase special
general partner interests (“SLP 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 SLP Units will be used to fund organizational and offering
costs incurred by the Company. As of December 31, 2007, offering costs of
$13.2
million have been substantially offset by $13.0 million of proceeds from
the
sale of SLP Units. Lightstone SLP, LLC has purchased an additional $0.2 million
of SLP Units subsequent to December 31, 2007
The
Advisor is responsible for offering and organizational costs exceeding 10%
of
the gross offering proceeds without recourse to the Company. Since its
inception, and through December 31, 2007, the Advisor has not allocated any
organizational costs to the Company. Advances for offering costs in excess
of
the 10% will only be reimbursed to the Advisor as additional offering proceeds
are received by the Company. As of December 31, 2007, offering costs incurred
were approximately $0.5 million in excess of 10%.
Through
its Operating Partnership, the Company will seek to acquire and operate
commercial, residential, and hospitality properties, principally in the
United States. Primarily all such properties may be acquired and operated by
the
Company alone or jointly with another party. Since inception, the Company has
completed the acquisition of the Belz Factory Outlet World in St. Augustine,
Florida, four multi-family communities in Southeast Michigan, a retail power
center and raw land in Omaha, Nebraska and a portfolio of industrial and office
properties located in New Orleans, LA (5 industrial and 2
office properties), Baton Rouge, LA (3 industrial properties) and San
Antonio, TX (4 industrial properties). In addition, the Company has made an
investment in a sub-leasehold interest in a ground lease to an office building
located at 1407 Broadway in New York, NY, purchased a land parcel in Lake
Jackson, TX on which it completed the development of a retail power center
in
the first quarter of 2008, an 8.5-acre parcel of undeveloped land, including
development rights, which is intended to be used for further development of
the
adjacent Belz Outlet mall, five apartment communities located in Tampa, FL
(one
property), Charlotte, North Carolina (two properties) and Greensboro, North
Carolina (two properties), and two hotels located in Houston, TX . All of the
acquired properties and development activities are managed by affiliates of
Lightstone Value Plus REIT Management LLC (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 9, Related Party Transactions).
2. Summary
of Significant Accounting Policies
Basis
of Presentation
The
consolidated financial statements include the accounts of the Company and the
Operating Partnership and its subsidiaries (over which Lightstone REIT exercises
financial and operating control). As of December 31, 2007, the Company had
a
99.99% general partnership interest in the Operating Partnership. All
inter-company balances and transactions have been eliminated in consolidation.
The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP).
GAAP requires the Company’s management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities and the reported amounts of revenues and
expenses during a reporting period. The most significant assumptions and
estimates relate to the valuation of real estate, depreciable lives, revenue
recognition, the collectability of trade accounts receivable and the
realizability of deferred tax assets. Application of these assumptions requires
the exercise of judgment as to future uncertainties and, as a result, actual
results could differ from these estimates.
65
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005 (continued)
Investments
in real estate partnerships where the Company has the ability to exercise
significant influence, but does not exercise financial and operating control,
are accounted for using the equity method. See further discussion in Note
3.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with an original maturity of
three months or less when purchased to be cash equivalents. All cash and cash
equivalents are held in commercial paper and money market funds. To date, the
Company has not experienced any losses on its cash and cash
equivalents.
Marketable
Securities
Our
marketable securities consist of equity securities that are designated as
available-for-sale and are recorded at fair value, in accordance with Statement
of Financial Accounting Standards (FAS) No. 115, Accounting
for Certain Investments in Debt and Equity Securities.
Unrealized holding gains or losses are reported as a component of accumulated
other comprehensive income (loss). Realized gains or losses resulting from
the
sale of these securities are determined based on the specific identification
of
the securities sold. Marketable securities with original maturities greater
than
three months and less than one year are classified as short-term; otherwise
they
are classified as long-term. An impairment charge is recognized when the decline
in the fair value of a security below the amortized cost basis is determined
to
be other-than-temporary. We consider various factors in determining whether
to
recognize an impairment charge, including the duration and severity of any
decline in fair value below our amortized cost basis, any adverse changes in
the
financial condition of the issuers’ and our intent and ability to hold the
investment for a period of time sufficient to allow for any anticipated recovery
in market value. The Board has authorized the Company to from time to time
to
invest the Company’s available cash in marketable securities of real estate
related companies. The Board has approved investments up to 30% of the Company’s
total assets to be made at the Company’s discretion, subject to compliance with
any REIT or other restrictions. At December 31, 2007, the Company has included
$1.2 million of unrealized losses in accumulated other comprehensive loss.
The
following is a summary of the Company’s available for sale securities at
December 31, 2007:
|
|
|
|
|
Gross
|
|
Fair
|
||||
|
|
|
|
|
Unrealized
|
|
Value
|
||||
|
|
|
Cost
|
|
Losses
|
|
|||||
|
Equity
securities
|
$
|
11,952,188
|
$
|
(1,199,278
|
)
|
$
|
10,752,910
|
|||
Revenue
Recognition
Minimum
rents are recognized on an accrual basis, over the terms of the related leases
on a straight-line basis. The capitalized above-market lease values and the
capitalized below-market lease values are amortized as an adjustment to rental
income over the initial lease term. Percentage rents, which are based on
commercial tenants’ sales, are recognized once the sales reported by such
tenants exceed any applicable breakpoints as specified in the tenants’ leases.
Recoveries from commercial tenants for real estate taxes, insurance and other
operating expenses, and from residential tenants for utility costs, are
recognized as revenues in the period that the applicable costs are incurred.
The
Company recognizes differences between estimated recoveries and the final billed
amounts in the subsequent year.
66
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005 (continued)
Accounts
Receivable
The
Company makes estimates of the uncollectability of its accounts receivable
related to base rents, expense reimbursements and other revenues. The Company
analyzes accounts receivable and historical bad debt levels, customer credit
worthiness and current economic trends when evaluating the adequacy of the
allowance for doubtful accounts. In addition, tenants in bankruptcy are analyzed
and estimates are made in connection with the expected recovery of pre-petition
and post-petition claims. The Company’s reported net income is directly affected
by management’s estimate of the collectability of accounts receivable. The total
allowance for doubtful accounts was approximately $0.2 million and $0 at
December 31, 2007 and 2006, respectively.
Investment
in Real Estate
Accounting
for Acquisitions
The
Company accounts for acquisitions of Properties in accordance with SFAS No.
141,
“Business Combinations” (“SFAS No. 141”). The fair value of the real estate
acquired is allocated to the acquired tangible assets, consisting of land,
building and tenant improvements, and identified intangible assets and
liabilities, consisting of the value of above-market and below-market leases
for
acquired in-place leases and the value of tenant relationships, based in each
case on their fair values. Purchase accounting is applied to assets and
liabilities related to real estate entities acquired based upon the percentage
of interest acquired. Fees incurred related to acquisitions are generally
capitalized. Fees incurred in the acquisition of joint venture interest are
expensed as incurred.
Upon
the
acquisition of real estate operating properties, the Company estimates the
fair
value of acquired tangible assets (consisting of land, building and
improvements) and identified intangible assets and liabilities (consisting
of
above and below-market leases, in-place leases and tenant relationships), and
assumed debt in accordance with SFAS No. 141, at the date of acquisition,
based on evaluation of information and estimates available at that date. Based
on these estimates, the Company allocates the initial purchase price to the
applicable assets and liabilities. As final information regarding fair value
of
the assets acquired and liabilities assumed is received and estimates are
refined, appropriate adjustments are made to the purchase price allocation.
The
allocations are finalized within twelve months of the acquisition
date.
In
determining the fair value of the identified intangible assets and liabilities
of an acquired property, above-market and below-market in-place lease values
are
recorded based on the present value (using an interest rate which reflects
the
risks associated with the leases acquired) of the difference between (i) the
contractual amounts to be paid pursuant to the in-place leases and (ii)
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. The capitalized above-market lease values and the capitalized
below-market lease values are amortized as an adjustment to rental income over
the initial non-cancelable lease term.
The
aggregate value of in-place leases is determined by evaluating various factors,
including an estimate of carrying costs during the expected lease-up periods,
current market conditions and similar leases. In estimating carrying costs,
management includes real estate taxes, insurance and other operating expenses,
and estimates of lost rental revenue during the expected lease-up periods based
on current market demand. Management also estimates costs to execute similar
leases including leasing commissions, legal and other related costs. The value
assigned to this intangible asset is amortized over the remaining lease terms
ranging from one month to approximately 11 years. Optional renewal periods
are
not considered.
67
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005 (continued)
The
aggregate value of other acquired intangible assets includes tenant
relationships. Factors considered by management in assigning a value to these
relationships include: assumptions of probability of lease renewals, investment
in tenant improvements, leasing commissions and an approximate time lapse in
rental income while a new tenant is located. The value assigned to this
intangible asset is amortized over the remaining lease terms ranging from one
month to approximately 11 years.
Carrying
Value of Assets
The
amounts to be capitalized as a result of periodic improvements and additions
to
real estate property, and the periods over which the assets are depreciated
or
amortized, are determined based on the application of accounting standards
that
may require estimates as to fair value and the allocation of various costs
to
the individual assets. Differences in the amount attributed to the assets can
be
significant based upon the assumptions made in calculating these
estimates.
Impairment
Evaluation
Management
evaluates the recoverability of its investment in real estate assets in
accordance with Statement of Financial Accounting Standard No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144). This
statement requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that recoverability of the asset
is
not assured.
The
Company evaluates the long-lived assets, in accordance with SFAS No. 144 on
a
quarterly basis and will record an impairment charge when there is an indicator
of impairment and the undiscounted projected cash flows are less than the
carrying amount for a particular property. Management concluded no impairment
adjustment was required through December 31, 2007. The estimated cash flows
used
for the impairment analysis and the determination of estimated fair value are
based on the Company’s plans for the respective assets and the Company’s views
of market and economic conditions. The estimates consider matters such as
current and historical rental rates, occupancies for the respective Properties
and comparable properties, and recent sales data for comparable properties.
Changes in estimated future cash flows due to changes in the Company’s plans or
views of market and economic conditions could result in recognition of
impairment losses, which, under the applicable accounting guidance, could be
substantial.
Depreciation
and Amortization
Depreciation
expense for real estate assets is computed using a straight-line method using
a
weighted average composite life of thirty-nine years for buildings and
improvements and five to ten years for equipment and fixtures. Expenditures
for
tenant improvements and construction allowances paid to commercial tenants
are
capitalized and amortized over the initial term of each lease, currently one
month to 11 years. Maintenance and repairs are charged to expense as
incurred.
Deferred
Costs
The
Company capitalizes initial direct costs in accordance with SFAS No. 91,
“Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases.” The costs are capitalized
upon the execution of the loan or lease and amortized over the initial term
of
the corresponding loan or lease. Amortization of deferred loan costs begins
in
the period during which the loan was originated. Deferred leasing costs are
not
amortized to expense until the earlier of the store opening date or the date
the
tenant’s lease obligation begins.
68
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005 (continued)
Income
Taxes
The
Company made an election in 2006 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”), beginning with its first taxable year, which ended
December 31, 2005. Accordingly, no provision for income tax has been
recorded.
We
elected and qualified 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. To maintain its status 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 maintain 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. Through December
31,
2007, the Company has complied with the requirements for maintaining its REIT
status.
The
Company has net operating loss carryforwards for Federal income tax purposes
for
the years ended December 31, 2007 and 2006. The availability of such loss
carryforwards will begin to expire in 2026. As the Company does not consider
it
likely that it will realize any future benefit from its loss carry-forward,
any
deferred asset resulting from the final determination of its tax losses will
be
fully offset by a valuation allowance of the same amount.
Effective
January 1, 2007, the Company adopted FIN No. 48, Accounting
for Uncertainty in Income Taxes—an interpretation of FASB Statement No.
109.
The
adoption of FIN 48 did not have a material impact on the Company’s financial
position, results of operation, or cash flows. As of December 31, 2007, the
Company had no material uncertain income tax positions. The tax years 2004
through 2007 remain open to examination by the major taxing jurisdictions to
which the Company is subject.
Organization
and Offering Costs
The
Company estimates offering costs of approximately $300,000 if the minimum
offering of 200,000 shares is sold, and approximately $30,000,000 if the maximum
offering of 30,000,000 shares is sold. 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 a reduction
against additional paid-in capital (“APIC”) as offering proceeds are released to
the Company.
Through
December 31, 2007, the Advisor has advanced approximately $13.0 million to
the
Company for offering costs, including commission and dealer manager fees, and
the Company has directly funded an additional $0.2 million of offering costs
pending further advances from the Advisor which has been subsequently repaid
in
January 2008. Based on gross proceeds of approximately $131.5 million from
its public offering as of December 31, 2007, the Company’s responsibility for
the reimbursement of advances for commissions and dealer manager fees was
limited to approximately $10.6 million (or 8% of the gross offering proceeds),
and its obligation for advances for organization and third-party offering costs
was limited to approximately $2.7 million (or 2% of the gross offering
proceeds).
69
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005 (continued)
Financial
Instruments
The
carrying amounts of cash and cash equivalents, accounts receivable and accounts
payable approximate their fair values because of the short maturity of these
instruments. The fair value of the fixed-rate mortgage debt and notes payable
as
of December 31, 2007 approximated the book value of approximately $243.4
million. The fair value of the mortgage debt and notes payable was determined
by
discounting the future contractual interest and principal payments by a market
rate.
Use
of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Net
Loss per Share
Net
loss
per share is computed in accordance with SFAS No. 128, Earnings
per Share
by
dividing the net loss by the weighted average number of shares of common stock
outstanding. The Company has 9,000 options issued and outstanding, and does
not
have any warrants outstanding. As such, the numerator and the denominator used
in computing both basic and diluted net loss per share allocable to common
stockholders for each year presented are equal due to the net operating loss.
The 9,000 options are not included in the dilutive calculation as they are
anti
dilutive as a result of the net operating loss applicable to
stockholders.
New
Accounting Pronouncements
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities Including an Amendment of FASB
Statement No. 115” (“SFAS No. 159”). This standard permits entities to choose to
measure many financial instruments and certain other items at fair value and
is
effective for the first fiscal year beginning after November 15, 2007. The
Company does not expect SFAS No. 159 to have a material impact on its financial
statements.
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements.
This
Statement applies under other accounting pronouncements that require or permit
fair value measurements. Accordingly, this Statement does not require any new
fair value measurements. However, for some entities, the application of this
Statement will change current practice. This Statement clarifies that market
participant assumptions include assumptions about risk, for example, the risk
inherent in a particular valuation technique used to measure fair value (such
as
a pricing model) and/or risk inherent in the inputs to the valuation technique.
This Statement clarifies that market participant assumptions also include
assumptions about the effect of a restriction on the sale or use of an asset.
This Statement also clarifies that a fair value measurement for a liability
reflects its nonperformance risk. The statement is effective in the fiscal
first
quarter of 2008 except for non-financial assets and liabilities recognized
or
disclosed at fair value on a recurring basis, for which the effective date
is
fiscal years beginning after November 15, 2008. The
Company is currently evaluating the impact that the adoption of SFAS No. 157,
but does not expect the adoption of SFAS No. 157 will have a material effect
on
the Company’s consolidated financial statements.
70
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005 (continued)
In
June
2007, the AICPA issued Statement of Position (“SOP”) 07-1, “Clarification of the
Scope of the Audit and Accounting Guide, Investment Companies and Accounting
by
Parent Companies and Equity Method Investors for Investments in Investment
Companies.” SOP 07-1 provides guidance for determining whether an entity is
within the scope of the AICPA Audit and Accounting Guide, “Investment Companies”
(the “Guide”) and when companies that own or have significant stakes in
investment companies should and should not retain, in their financial
statements, the specialized industry accounting under the Guide. Management
does
not anticipate, the application of SOP 07-1 will have a material impact
on our
consolidated financial statements. This statement is effective for financial
statements issued for fiscal years beginning after December 15, 2007, and
interim periods within those fiscal years.
In
December 2007, the FASB issued FASB No. 141(R) which establishes principles
and requirements for how the acquirer shall recognize and measure in its
financial statements the identifiable assets acquired, liabilities assumed,
any
noncontrolling interest in the acquiree and goodwill acquired in a business
combination. This statement is effective for business combinations for which
the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008.
In
December 2007, the FASB issued No. 160, which establishes and expands accounting
and reporting standards for minority interests, which will be recharacterized
as
noncontrolling interests, in a subsidiary and the deconsolidation of a
subsidiary. FASB 160 is effective for business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. This statement is effective
for fiscal years beginning on or after December 15, 2008. The Company
is currently assessing the potential impact that the adoption of FASB No. 160
will have on its financial position and results of operations.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current year
presentation.
3. Acquisitions
St
Augustine Retail Outlet Mall
On
November 30, 2005, Prime Outlets Acquisition Company LLC (“Prime”), an affiliate
of the Advisor, entered into a Purchase and Sale Agreement with St. Augustine
Outlet World, Ltd, an unaffiliated third party, to purchase Belz Outlets at
St.
Augustine, Florida. On March 31, 2006, Prime assigned its interest in the
Purchase and Sale Agreement to LVP St. Augustine Outlets, LLC (“LVP St.
Augustine”), a single purpose, wholly owned subsidiary of the Operating
Partnership, and LVP St. Augustine simultaneously completed the acquisition
of
the property. The total acquisition price, including acquisition-related
transaction costs, was $26,921,450. In connection with the transaction, the
Advisor received an acquisition fee equal to 2.75% of the purchase price, or
$715,000.
Approximately
$22.4 million of the total acquisition cost was funded by a mortgage loan from
Wachovia Bank, National Association (“Wachovia”) and approximately $4.5 million
was funded with offering proceeds from the sale of the Company’s common stock.
Loan proceeds from Wachovia were also used to fund approximately $4.8 million
of
escrows for future leasing-related expenditures, real estate taxes, insurance
and debt service.
|
As
of December
31,
|
|
||||||
|
|
|
2007
|
|
2006
|
|||
|
In-place
annualized rents
|
$
|
2.6
million
|
$
|
2.8
million
|
|||
|
Occupancy
Percentage
|
60.33
|
%
|
69.42
|
%
|
|||
71
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005 (continued)
At
December 31, 2007, the Company has also temporarily leased 33% of the property.
The Company is in the process of expanding and renovating its St. Augustine
center. The Company expects to complete the expansion and renovation in
the
fourth quarter of 2008. The Company purchased the land adjacent to the
existing
center and the related development rights in the fourth quarter of 2007,
and
began the renovation and expansion. Total project costs to date at December
31,
2007 totaled approximately $5.0 million, including the purchase of the
land and
the development rights. Total project costs are expected to estimate
approximately $35.2 million. The Company intends to fund the costs of this
project using a portion of the proceeds from our
offering.
Southeastern
Michigan Multi-Family Properties
On
April
26, 2006, the Sponsor entered into a Purchase and Sale Agreement with Home
Properties, L.P. and Home Properties WMF I, LLC, affiliates of Home Properties,
Inc., a New York Stock Exchange listed real estate investment trust
(collectively, “Sellers”), each an unaffiliated third party, to purchase 19
multifamily apartment communities. On June 29, 2006, the Sponsor assigned the
purchaser’s interest in the Purchase and Sale Agreement with respect to four of
the apartment communities to each of four single purpose, wholly owned
subsidiaries of LVP Michigan Multifamily Portfolio LLC (“LVP MMP”), and the LVP
MMP subsidiaries simultaneously completed the acquisition of the four
properties. The Operating Partnership holds a 99% membership interest in LVP
MMP, while the Lightstone REIT holds a 1% membership interest in
LVP MMP. The properties are located in Southeast Michigan and were valued
by an independent third-party appraiser retained by Citigroup Global Markets
Realty Corp. (“Citigroup”) at an aggregate value equal to $54.3
million.
The
total
acquisition price, excluding acquisition-related transaction costs, was
approximately $42.2 million. In connection with the transaction, the Advisor
received an acquisition fee equal to 2.75% of the purchase price, or
approximately $1.1 million. Other closing and financing related costs totaled
approximately $400,000, and net pro ration adjustments for assumed liabilities,
prepaid rents, real estate taxes and interest totaled $500,000.
Approximately
$40.7 million of the total acquisition cost was funded by a mortgage loan from
Citigroup, and approximately $4.6 million was funded with offering proceeds
from
the sale of the Company’s common stock. Loan proceeds from Citigroup were also
used to fund approximately $1.1 million of escrows for capital improvements,
real estate taxes, and insurance.
In-place
rents, net of rent concessions, and average occupancy for the four properties
as
of December 31, 2007 and 2006 was as follows:
|
|
As
of December 31,
|
||||||
|
|
2007
|
2006
|
|||||
|
In-place
annualized rents
|
$
|
7.9
million
|
$
|
8.6
million
|
|||
|
Occupancy
Percentage
|
91.50
|
%
|
91.60
|
%
|
|||
72
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005 (continued)
Oakview
Plaza
On
December 21, 2006, the Company, through LVP Oakview Strip Center LLC, a wholly
owned subsidiary of the Operating Partnership, acquired a retail shopping mall
in Omaha, Nebraska from Oakview Plaza North, LLC (“Oakview”), Frank R. Krejci,
Vera Jane Krejci, George W. Venteicher and Susan J. Venteicher (Oakview, Mr.
and
Mrs. Krejci and Mr. and Mrs. Venteicher, collectively, “Seller”), none of whom
are affiliated with the Company.
The
property was purchased subject to a commitment to acquire a 2.1 acre parcel
of
land (the “Option Land”) located immediately adjacent to the property. The
unimproved Option Land was subsequently acquired in July of 2007 by a subsidiary
of the Operating Partnership from Oakview for a fixed contract price of
$650,000. The acquisition price for the property, exclusive of the Option Land,
was $33.5 million, including an acquisition fee paid to the Advisor of $0.9
million and $47,000 in other acquisition-related transaction costs.
Approximately $6.0 million of the acquisition cost was funded with offering
proceeds from the sale of our common stock and the remainder was funded with
a
$27.5 million fixed rate loan from Wachovia secured by the property. Offering
proceeds were also used to fund financing related costs ($.2 million) and
insurance and tax reserves ($.2 million), as well as the acquisition of the
Option Land. The Property was independently appraised at $38.0 million.
Manhattan
Office Building
On
January 4, 2007, the Company, through LVP 1407 Broadway LLC, a wholly owned
subsidiary of the Operating Partnership, entered into a joint venture with
an
affiliate of the Sponsor (the “Joint Venture”). On the same date, an indirect,
wholly owned subsidiary acquired a sub-leasehold interest in a ground lease
to
an office building located at 1407 Broadway, New York, New York (the “Sublease
Interest”). The seller of the Sublease Interest, Gettinger Associates, L.P., is
not an affiliate of the Company, its Sponsor or its subsidiaries. The property,
a 42 story office building built in 1952, fronts on Broadway, 7th Avenue and
39th Street in midtown Manhattan. The property has approximately 915,000
leasable square feet, and as of the acquisition date, was 87.6%
occupied (approximately 300 tenants) and leased by tenants generally
engaged in the female apparel business. The ground lease, dated as of January
14, 1954, provides for multiple renewal rights, with the last renewal period
expiring on December 31, 2048. The Sublease Interest runs concurrently with
this
ground lease.
The
acquisition price for the Sublease Interest was $122 million, exclusive of
acquisition-related costs incurred by the Joint Venture ($3.5 million), pro
rated operating expenses paid at closing ($4.1 million), financing-related
costs
($1.9 million) and construction, insurance and tax reserves ($1.0 million).
The
acquisition was funded through a combination of $26.5 million of capital and
a
$106.0 million advance on a $127.3 million variable rate mortgage loan funded
by
Lehman Brothers Holding, Inc. As an inducement to Lender to make the loan,
Owner
has agreed to provide Lender with a 35% net profit interest in the project,
which is contingent upon a capital transaction, as defined as any transaction
involving the sale, assignment, transfer, liquidation, condemnation or
settlement in lieu thereof, disposition, financing, refinancing or any other
conversion to cash of all or any portion of the property or equity or membership
interests in Borrower, directly, other than the leasing of space for occupancy
and/or any other transaction with respect to the Property or the direct or
indirect ownership interests in Borrower outside the ordinary course of
business. To date, the lender did not share in any net profits of the
project. The lender also has a conversion option, which if upon exercised,
would
grant the lender a special membership interest in the Joint Venture whereby
the
lender will receive 35% of all distributions resulting from a capital
transaction after the return of the member’s equity investment plus the member’s
allowed return’s as specified in the “Net Profits Agreement”. In
addition, the Company paid $1.6 million to the Advisor as an
acquisition fee and legal fees to its attorney of approximately $0.1
million. The acquisition and legal fees were charged to expense by the
Company during the first quarter of 2007, and are included in general and
administrative expenses for the year ended December 31, 2007.
73
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005 (continued)
The
Company accounted for the investment in this unconsolidated joint venture under
the equity method of accounting as the Company exercises significant influence,
but does not control these entities. Initial equity from our co-venturer totaled
$13.5 million (representing a 51% ownership interest). Our initial capital
investment, funded with proceeds from our common stock offering, was $13.0
million (representing a 49% ownership interest). This $13.0 million investment
was recorded initially at cost and will be subsequently adjusted for cash
contributions and distributions, and the Company’s share of earnings and losses.
The Company contributed an additional $0.6 million in 2007. Earnings for each
investment are recognized in accordance with this investment agreement and
where
applicable, based upon an allocation of the investment’s net assets at book
value as if the investment was hypothetically liquidated at the end of each
reporting period. For the year ended December 31, 2007, the Company’s results
included a $7.3 million loss from investment in this unconsolidated joint
venture, resulting in a net investment balance of approximately $6.3 million
as
of December 31, 2007. The Joint Venture plans to continue an ongoing
renovation project at the property that consists of lobby, elevator and window
redevelopment projects. Additional loan proceeds of up to $16.4 million are
available to fund these improvements.
In-place
rents, net of rent concessions, and average occupancy for the property at
December 31, 2007 was as follows:
|
As
of
December
31,
2007
|
||||
|
In-place
annualized rents
|
$
|
36.4
million
|
||
|
Occupancy
Percentage
|
89.7
|
%
|
||
The
following table represents the condensed income statement for the unconsolidated
joint venture for the period from January 4, 2007(date of inception) through
December 31, 2007 (information derived from audited financial statements as
of
December 31, 2007):
|
|
|
For
period from
January
4, 2007
(date
of inception)
through
December
31, 2007
|
||
|
Total
revenue
|
$
|
37,447,442
|
||
|
Total
property expenses
|
26,701,480
|
|||
|
Depreciation
and amortization
|
16,214,919
|
|||
|
Interest
expense
|
9,490,576
|
|||
|
Operating
loss
|
(14,959,533
|
)
|
||
|
Other
income
|
126,985
|
|||
|
Net
loss
|
(14,832,548
|
)
|
||
|
Company's share
of net operating loss (49%)
|
$
|
(7,267,949
|
)
|
|
74
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005 (continued)
|
As
of
December
31, 2007
|
||||
|
Real
estate, at cost (net):
|
$
|
120,370,913
|
||
|
Cash
and restricted cash
|
11,458,097
|
|||
|
Other
assets
|
9,475,857
|
|||
|
Total
assets
|
$
|
141,304,867
|
||
|
Mortgage
note payable
|
110,847,201
|
|||
|
Other
liabilities
|
17,640,362
|
|||
|
Members'
capital
|
12,817,304
|
|||
|
Total
liabilities and members' capital
|
$
|
141,304,867
|
||
|
49%
Investment in Joint Venture
|
$
|
6,284,675
|
Gulf
Coast Industrial Portfolio
On
February 1, 2007, the Company, through wholly owned subsidiaries of the
Operating Partnership, acquired a portfolio of industrial and office
properties located in New Orleans, LA (5 industrial and 2
office properties), Baton Rouge, LA (3 industrial properties) and San
Antonio, TX (4 industrial properties). As a group, the properties were 92%
occupied at the acquisition, and represent approximately 1.0 million leasable
square feet principally suitable for flexible industrial (54%), distribution
(36%) and office (10%) uses. The properties were independently appraised at
$70.7 million.
The
acquisition price for the properties was $63.9 million, exclusive of
approximately $1.9 million of closing costs, escrow funding for immediate
repairs ($0.9 million) and insurance ($0.1 million), and financing related
costs
of approximately $0.6 million. In connection with the transaction, the Advisor
received an acquisition fee equal to 2.75% of the purchase price, or
approximately $1.8 million. The acquisition was funded through a combination
of
$14.4 million in offering proceeds and approximately $53.0 million in loan
proceeds from a fixed rate mortgage loan secured by the properties. The Company
does not intend to make significant renovations or improvements to the
properties. The Company believes the properties are adequately
insured.
In-place
rents, net of rent concessions, and occupancy for the properties at December
31,
2007 were as follows:
|
As
of
December
31,
2007
|
||||
|
In-place
annualized rents
|
$
|
6.3
million
|
||
|
Occupancy
Percentage
|
94.9
|
%
|
||
75
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005 (continued)
Brazos
Crossing Mall
On
June
29, 2007, a subsidiary of the Operating Partnership acquired a 6.0 acre land
parcel in Lake Jackson, Texas for immediate development of a 61,287 square
foot
power center. The land was purchased for $1.65 million cash and was funded
100%
from the proceeds of the Company’s offering. Upon completion in March 2008, the
center opened and is occupied by three triple net tenants: Pet Smart, Office
Depot and Best Buy.
The
purchase and sale agreement (the “Land Agreement”) for this transaction was
negotiated between Lake Jackson Crossing Limited Partnership (formerly an
affiliate of the Sponsor) and Starplex Operating, LP, an unaffiliated entity
(the "Land Seller"). Prior to the closing, a 99% limited partnership interest
in
the Lake Jackson Limited Partnership was assigned to the Operating Partnership
and the membership interests in Brazos Crossing LLC (the 1% general partner
of
the Lake Jackson Limited Partnership) were assigned to the Company.
The
land
parcel was acquired at what represents a $2.1 million discount from the
expressed $3.75 million purchase price, with such difference being subsidized
and funded by a retail affiliate of the Sponsor. The sale of the land parcel
was
a condition of the Seller’s agreement to execute a new movie theater lease at
the Sponsor affiliate’s nearby retail mall. The Company owns a 100% fee simple
interest in the land parcel and retail power center. The Sponsor’s affiliate
will receive no future benefit or ownership interests from this
transaction.
The
Company entered into a construction loan in December 2007 to fund the
development of the power retail center at its Lake Jackson, Texas Location.
The
loan requires monthly installments of interest only through the first 12 months
and bears interest at 150 basis points (1.5%) in excess of LIBOR. For the second
twelve months, principal payments shall be made in monthly installments in
amounts equal to one-twelfth of the principal component of an annual
amortization of the principal of the loan on the basis of an assumed interest
rate of 6.82% and a thirty year term. The loan is secured by acquired real
estate and is non-recourse to the Company. The loan allows the Company to draw
up to $8.2 million, and then will require monthly installments of interest
only
through the first 12 months and bears interest at 150 basis points (1.5%) in
excess of LIBOR. For the second twelve months, principal payments shall be
made
in monthly installments in amounts equal to one-twelfth of the principal
component of an annual amortization of the principal of the loan on the basis
of
an assumed interest rate of 6.82% and a thirty year term. The loan is secured
by
acquired real estate and is non-recourse to the Company. The loan is guaranteed
by the Company. The balance at December 31, 2007 was $5.8 million. The loan
matures on December 4, 2009.
The
total
cost of the project, inclusive of project construction, tenant incentives,
leasing costs, and land is estimated at $10.2 million. Because the debt
financing for the acquisition may exceed certain leverage limitations of the
REIT, the Board, including all of its independent directors has approved any
leverage exceptions as required by the Company’s Articles of
Incorporation.
Three
tenants will occupy 100% of the property’s rentable square footage. The
following table sets forth the name, business type, primary lease terms and
certain other information with respect to each of these major
tenants:
|
Name
of Tenant
|
BusinessType
|
Square
Feet Leased
|
Percentage
of Leasable Space
|
Annual
Rent Payments
|
Lease
Term from Commencement
|
Party
with Renewal Rights
|
|||||||||||||
|
Best
Buy
|
Electronics
Retailer
|
20,200
|
32.90
|
%
|
$
|
260,000
|
10
years
|
Tenant
|
|||||||||||
|
Office
Depot
|
Office
Supplies Retailer
|
21,000
|
34.30
|
%
|
$
|
277,200
|
10
years
|
Tenant
|
|||||||||||
|
Petsmart
|
Pet
Supply Retailer
|
20,087
|
32.80
|
%
|
$
|
231,001
|
10
years
|
Tenant
|
|||||||||||
76
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005 (continued)
Houston
Extended Stay Hotels
On
October 17, 2007, the Company, through TLG Hotel Acquisitions LLC, a wholly
owned subsidiary of our operating partnership (together with such subsidiary,
the “Houston Partnership”), acquired two hotels located in Houston, TX (the
“Katy Hotel”) and Sugar Land, TX (the “Sugar Land Hotel” and together with the
Katy Hotel, the “Hotels”) from Morning View Hotels - Katy, LP, Morning View
Hotels - Sugar Land, LP and Point of Southwest Gardens, Ltd ., pursuant to
an
Asset Purchase and Sale Agreement. The seller is not an affiliate of the Company
or its subsidiaries.
Prior
to
the acquisition of the Hotels, our board of directors expanded the Company’s
eligible investments to include the acquisition, holding and disposition of
hotels (primarily extended stay hotels). The reasons for such change include
the
expertise of our sponsor who acquired the Extended Stay Hotels group of
companies (“ESH”) and control of its management company (HVM L.L.C.) which
operates 684 extended stay hotels. The ability to draw upon their expertise,
the
intense competition in the real estate market for all types of assets and the
ability to better diversify the Company’s portfolio, caused our board of
directors to review the Company’s investment objectives and expand them to
include lodging facilities.
The
Hotels were recently remodeled by the previous owner; however the Company
intends to make a $2.8 million dollar investment in capital expenditures in
2008
to convert the Hotels to Extended Stay Deluxe (“ESD”) brand properties. The ESD
brand is under license from an affiliate within the Extended Stay Hotels group
of companies. The Company expects these additional renovations to be conducted
over a 1-year period and will include implementing ESD’s national reservation
system, new carpeting, new paint, new signage, exterior façade improvements,
re-striping parking lot, guest room upgrades, landscaping and constructing
pools.
The
acquisition price for the Hotels was $16 million inclusive of closing costs.
In
connection with the transaction, the Company’s advisor received an acquisition
fee equal to 2.75% of the contract price ($15.2 million), or approximately
$0.4
million.
The
acquisition was funded through a combination of $6.0 million in offering
proceeds and approximately $10 million in loan proceeds from a floating rate
mortgage loan secured by the Hotels.
The
Company has established a taxable REIT subsidiary, LVP Acquisitions Corp. (“LVP
Corp”), which has entered into operating lease agreements with each of the Katy
Hotel and the Sugar Land Hotel, respectively, and LVP Corp. has entered into
management agreements with HVM L.L.C., a controlled affiliate of our sponsor,
for the management of the hotels.
In
connection with the acquisition of the Hotels, the Houston Partnership along
with ESD #5051 - Houston - Sugar Land, LLC and ESD #5050 - Houston - Katy
Freeway, LLC, its wholly owned subsidiaries (the “Houston Borrowers”) secured a
mortgage loan from Bank of America, N.A. in the principal amount of $12.85
million, which includes up to an additional $2.8 million of renovation proceeds
which will be borrowed as the renovation proceeds.
The
mortgage loan has a term of one year with the option of a 6-month term
extension, bears interest on a daily basis expressed as a floating rate equal
to
the lesser of (i) the maximum non-usurious rate of interest allowed by
applicable law or (ii) the British Bankers Association Libor Daily Floating
Rate
plus one hundred seventy-five basis points (1.75%) per annum rate and requires
monthly installments of interest only through the first 12 months. The mortgage
loan will mature on October 16, 2008, subject to the 6-month extension option
described above, at which time payment of the entire principal balance, together
with all accrued and unpaid interest and all other amounts payable thereunder
will be due. The mortgage loan will be secured by the Hotels and will be
non-recourse to the Registrant.
77
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005 (continued)
In
connection with the Loan, the Company guaranteed the complete performance of
the
Houston Borrowers’ obligations with respect to the renovations and certain other
customary guarantees.
Camden
Properties
On
November 16, 2007, the Company through wholly owned subsidiaries of the
partnership acquired five apartment communities (“Camden Properties”) located in
Tampa, Florida (one property), Charlotte, North Carolina (two properties) and
Greensboro, North Carolina (two properties) from Camden Operating, L.P. (the
“Seller”). The Seller is not affiliated with the Company or its subsidiaries.
The
Properties, built between 1980 and 1987, are comprised of 1,576 apartment units,
in the aggregate, contain a total of 1,124,249 net rentable square feet, and
were 94% occupied at acquisition.
The
aggregate acquisition price for the Camden Properties was approximately $99.3
million, including acquisition-related transaction costs. Approximately $20.0
million of the acquisition cost was funded with offering proceeds from the
sale
of the Company’s common stock and approximately $79.3 million was funded with
five substantially similar fixed rate loans with Fannie Mae secured by each
of
the Camden Properties.
In
connection with the acquisition of the properties, our Advisor received an
acquisition fee of 2.75% of the gross contract price for the Camden Properties
or approximately $2.65 million.
On
November 16, 2007, in connection with the acquisition of the Camden Properties,
the Company through its wholly owned subsidiaries obtained from Fannie Mae
five
substantially similar fixed rate mortgages aggregating $79.3 million (the
“Loans”). The loans have a 30 year amortization period, mature in 7 years, and
bear interest at a fixed rate of 5.44% per annum. The loans require monthly
installments of interest only through the first three years and monthly
installments of principal and interest throughout the remainder of their stated
terms. The Loans will mature on December 1, 2014, at which time a balance of
approximately $75.0 million will be due. Although the loans were allocated
among
the Camden Properties, the aggregate loan amount is secured by all of the
Properties.
In-place
rents, net of rent concessions, and occupancy for the properties at December
31,
2007 were as follows:
|
|
As
of
December
31,
2007
|
|||
|
In-place
annualized rents
|
$
|
10.5
million
|
||
|
Occupancy
Percentage
|
86.9
|
%
|
||
Sarasota,
Florida
On
March
1, 2007, the Company entered into an option agreement to participate in a
joint-venture with its Sponsor (the “JV Option” with respect to the potential
joint venture, the “Joint Venture”) for the purchase of a property located at
2150 Whitfield Avenue, Sarasota, Florida (the “Sarasota Property”). On November
15, 2007, the Company exercised the JV Option and, through a wholly-owned
subsidiary of the Company’s operating partnership, entered into the Joint
Venture and acquired the Sarasota Property.
78
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005 (continued)
In
July,
2007, CAD Funding, LLC (“CAD”), an affiliate of Park Avenue Funding, LLC, had
the highest bid on the Sarasota Property in a foreclosure action. Park Avenue
Funding, LLC, is a real estate lending company founded in 2004 and an affiliate
of the Company’s Advisor and Sponsor. CAD initiated the foreclosure action
following the default of an unaffiliated third party on a loan made to the
third
party by CAD, for which the Sarasota Property served as security. Prior to
the
entry of the foreclosure judgment, the Sponsor expressed an interest in bidding
at the foreclosure sale in anticipation that the Registrant would exercise
the
JV Option. On August 6, 2007, the Sarasota Property was indirectly acquired
by
the Sponsor. The Sarasota Property was contributed to the Joint Venture prior
to
the Registrant’s exercise of the JV Option. The contribution to the Joint
Venture by the Company was $13.1 million of offering proceeds used to acquire
the Sarasota Property. The property was independently appraised in May of 2006
for $17.4 million. At December 31, 2007, the Company holds a 100% interest
in
the Joint Venture, and the Sponsor remains a member in the joint
venture
The
Company now owns 100% of the joint venture and the joint venture is fully
consolidated in the Company’s financial statements for the year ended December
31, 2007.
In
evaluating the Sarasota Property as a potential acquisition, the Company has
considered a variety of factors, and determined that the acquisition cost was
at
a substantial discount to current market value. The Sarasota Property is subject
to competition from similar properties within its market area, and economic
performance could be affected by changes in local economic conditions. The
Sarasota Property currently does not possess a tenant and is experiencing
negative cash flows; however the Venture is currently negotiating with
prospective tenants. The Company evaluated the asset in accordance with SFAS
144, and determined that its valuation exceeded its carrying value at December
31, 2007.
As
of
December 31, 2007, the approximate fixed future minimum rentals from the
Company’s commercial real estate properties, excluding Brazos Crossing which was
not yet open at December 31, 2007, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Beyond
|
|
Total
|
|
||||||||
|
Building
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2012
|
|
Min.
Rent
|
||||||||
|
St
Augustine
|
1,848,478
|
1,319,168
|
659,593
|
242,863
|
24,516
|
9,842
|
4,104,460
|
|||||||||||||||
|
Oakview
Plaza
|
2,543,280
|
2,432,693
|
1,929,906
|
1,592,466
|
1,592,466
|
1,633,716
|
11,724,527
|
|||||||||||||||
|
Gulf
Industrial Portfolio
|
5,833,708
|
4,478,402
|
2,458,461
|
1,483,635
|
433,669
|
28,274
|
14,716,149
|
|||||||||||||||
|
Total
|
10,225,466
|
8,230,263
|
5,047,960
|
3,318,964
|
2,050,651
|
1,671,832
|
30,545,136
|
|||||||||||||||
The
following unaudited pro forma combined condensed statements of operations set
forth the consolidated results of operations for the year ended December 31,
2007 and December 31, 2006, respectively, as if the above described acquisitions
had occurred at January 1, 2006. The unaudited pro forma information does not
purport to be indicative of the results that actually would have occurred if
the
acquisitions had been in effect for the year ended December 31, 2007 and
December 31, 2006, respectively, or for any future period.
|
Year
ended
|
|
||||||
|
|
|
December
31,
|
|
||||
|
|
|
2007
|
|
2006
|
|||
|
Real
estate revenues
|
$
|
39,256,808
|
$
|
39,825,189
|
|||
|
Equty
in loss from investment in unconsolidated joint venture
|
(7,267,949
|
)
|
(8,548,062
|
)
|
|||
|
Net
loss
|
(9,993,332
|
)
|
(16,380,741
|
)
|
|||
|
Basic
and diluted loss per share
|
$
|
(0.71
|
)
|
$
|
(2.97
|
)
|
|
79
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005 (continued)
4. Mortgages
Payable
Mortgages
payable, totaling approximately $237.6 million at December 31, 2007, consists
of
the following:
|
Property
|
Loan
Amount
|
|
Interest
Rate
|
|
Maturity
Date
|
|
Amounts
due at Maturity
|
||||||
|
St.
Augustine
|
$
|
27,051,571
|
6.09
|
%
|
April
2016
|
$
|
23,747,523
|
||||||
|
Southeastern
Michigan Multi Family Properties
|
40,725,000
|
5.96
|
%
|
July
2016
|
38,138,605
|
||||||||
|
Oakview
Plaza
|
27,500,000
|
5.49
|
%
|
January
2017
|
25,583,137
|
||||||||
|
Gulf
Coast Industrial Portfolio
|
53,025,000
|
5.83
|
%
|
February
2017
|
49,556,985
|
||||||||
|
Houston
Extended Stay Hotels (Two Individual Loans)
|
10,040,000
|
LIBOR
+ 1.75
|
%
|
October
2008
|
10,040,000
|
||||||||
|
Camden
Multi Family Properties - (Five Individual Loans)
|
79,268,800
|
5.44
|
%
|
December
2014
|
74,955,771
|
||||||||
|
Total
of eleven outstanding mortgage loans at December 31, 2007
|
$
|
237,610,371
|
$
|
222,022,021
|
|||||||||
LIBOR
at
December 31, 2007 was 4.60%. Monthly installments of interest only are required
through the first 12 months for the St. Augustine loan, and monthly installments
of principal and interest are required throughout the remainder of its stated
term. Monthly installments of interest only are required through the first
60
months for the Southeastern Michigan multi-family properties, and through the
first 48 months for the Camden Multi-Family properties’ loans, and monthly
installments of principal and interest are required throughout the remainder
of
its stated term. The remaining loans are interest only until their maturity,
when the amounts listed in the table above are due, assuming no prior principal
prepayment. Each of the loans is secured by acquired real estate and is
non-recourse to the Company.
The
following table shows the mortgage debt maturing during the next five years
and
thereafter at December 31, 2007:
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
Total
|
||||||||||||||||
|
Fixed
rate mortgages
|
$
|
10,353,360
|
$
|
338,052
|
$
|
359,526
|
$
|
1,586,957
|
$
|
2,781,012
|
$
|
222,191,464
|
$
|
237,610,371
|
||||||||
Lightstone
Holdings, LLC (“Guarantor”), a company wholly owned by the Advisor, has
guaranteed to the extent of a $27.2 million mortgage loan on the St. Augustine,
Florida property, the payment of losses that the lender (“Wachovia”) may sustain
as a result of fraud, misappropriation, misuse of loan proceeds or other acts
of
misconduct by the Company and/or its principals or affiliates. Such
losses are recourse to the Guarantor under the guaranty regardless of
whether Wachovia has attempted to procure payment from the Company or any other
party. Further, in the event of the Company's voluntary bankruptcy,
reorganization or insolvency, or the interference by the Company or its
affiliates in any foreclosure proceedings or other remedy exercised
by Wachovia, Guarantor has guaranteed the payment of any unpaid loan
amounts. The Company has agreed, to the maximum extent permitted by its
Charter, to indemnify Guarantor for any liability
that it incurs under this guaranty.
Pursuant
to the Company’s loan agreements, escrows in the amount of $9.6 million were
held in restricted escrow accounts at December 31, 2007. These escrows will
be
released in accordance with the loan agreements as payments of real estate
taxes, insurance and capital improvement transactions, as required. Our mortgage
debt also contains clauses providing for prepayment penalties.
In
connection with the acquisition of the Hotels, the Houston Partnership along
with ESD #5051 - Houston - Sugar Land, LLC and ESD #5050 - Houston - Katy
Freeway, LLC, its wholly owned subsidiaries (the “Houston Borrowers”) secured a
mortgage loan from Bank of America, N.A. in the principal amount of $12.85
million, which includes up to an additional $2.8 million of renovation proceeds
which will be borrowed as the renovation proceeds.
80
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005 (continued)
The
mortgage loan has a term of one year with the option of a 6-month term
extension, bears interest on a daily basis expressed as a floating rate equal
to
the lesser of (i) the maximum non-usurious rate of interest allowed by
applicable law or (ii) the British Bankers Association Libor Daily Floating
Rate
plus one hundred seventy-five basis points (1.75%) per annum rate and requires
monthly installments of interest only through the first 12 months. The mortgage
loan will mature on October 16, 2008, subject to the 6-month extension option
described above, at which time payment of the entire principal balance, together
with all accrued and unpaid interest and all other amounts payable thereunder
will be due. The mortgage loan is secured by the Hotels and will be non-recourse
to the Company. The Company intends to extend, repay or refinance this loan
upon
its maturity in October of 2008.
On
November 16, 2007, in connection with the acquisition of the Camden Properties,
the Company through its wholly owned subsidiaries obtained from Fannie Mae
five
substantially similar fixed rate mortgages aggregating $79.3 million (the
“Loans”). The loans have a 30 year amortization period, mature in 7 years, and
bear interest at a fixed rate of 5.44% per annum. The loans require monthly
installments of interest only through the first three years and monthly
installments of principal and interest throughout the remainder of their stated
terms. The Loans will mature on December 1, 2014, at which time a balance of
approximately $75.0 million will be due. Although the loans were allocated
among
the Camden Properties, the aggregate loan amount is secured by all of the
Properties.
The
Company is required to maintain minimum debt service coverage ratios as defined
in the loan documents for the St. Augustine, Houston extended stay hotels and
Southeastern Michigan multi family properties. The Company was in compliance
with its financial covenants at December 31, 2007.
5. Notes
Payable
On
December 5, 2007, the Company entered into a construction loan to fund the
development of the power retail center at its Lake Jackson, Texas Location.
The
loan allows the Company to draw up to $8.2 million, and then will require
monthly installments of interest only through the first 12 months and bears
interest at 150 basis points (1.5%) in excess of LIBOR. For the second twelve
months, principal payments shall be made in monthly installments in amounts
equal to one-twelfth of the principal component of an annual amortization of
the
principal of the loan on the basis of an assumed interest rate of 6.82% and
a
thirty year term. The loan is secured by acquired real estate and is
non-recourse to the Company. The loan is guaranteed by the Company. The balance
at December 31, 2007 was $5.8 million. The loan matures on December 4,
2009.
81
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005 (continued)
6. Intangible
Assets
At
December 31, 2007, the Company had intangible assets relating to above-market
leases from property acquisitions, intangible assets related to leases in place
at the time of acquisition, intangible assets related to leasing costs, and
intangible liabilities relating to below-market leases from property
acquisitions.
In
accordance with SFAS No. 141, during the fourth quarter of 2006, based on
additional information obtained subsequent to the close of the St. Augustine,
Florida property, the Company adjusted the purchase price allocation for this
property.
The
following table sets forth the Company’s intangible assets as of December 31,
2007 and December 31, 2006:
|
|
At
December 31, 2007
|
At
December 31, 2006
|
|||||||||||||||||
|
|
Cost
|
Accumulated
Amortization
|
Net
|
Cost
|
Accumulated
Amortization
|
Net
|
|||||||||||||
|
Acquired
in-place lease intangibles
|
$
|
4,628,921
|
$
|
(2,646,629
|
)
|
$
|
1,982,292
|
$
|
3,167,190
|
$
|
(1,365,512
|
)
|
$
|
1,801,678
|
|||||
|
|
|||||||||||||||||||
|
Acquired
above market lease intangibles
|
1,203,902
|
(373,175
|
)
|
830,727
|
677,245
|
(75,258
|
)
|
601,987
|
|||||||||||
|
|
|||||||||||||||||||
|
Acquired
leasing costs
|
1,758,805
|
(605,093
|
)
|
1,153,712
|
854,886
|
(119,807
|
)
|
735,079
|
|||||||||||
|
|
|||||||||||||||||||
|
Acquired
below market lease intangibles
|
4,266,726
|
(1,874,843
|
)
|
2,391,883
|
2,964,498
|
(953,435
|
)
|
2,011,063
|
|||||||||||
The
following table presents the amortization of the acquired in-place lease
intangibles, acquired above market lease costs and the below market lease costs
for properties owned at December 31, 2007:
|
Amortization
of:
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
Total
|
|||||||||||||||
|
Acquired
above market lease value
|
$
|
386,759
|
$
|
206,755
|
$
|
97,974
|
$
|
53,943
|
$
|
23,379
|
$
|
61,917
|
$
|
830,727
|
||||||||
|
|
||||||||||||||||||||||
|
Acquired
below market lease value
|
(1,116,755
|
)
|
(578,214
|
)
|
(282,515
|
)
|
(137,611
|
)
|
(94,455
|
)
|
(182,333
|
)
|
(2,391,883
|
)
|
||||||||
|
|
||||||||||||||||||||||
|
Projected
future net rental income decrease
|
$
|
(729,997
|
)
|
$
|
(371,458
|
)
|
$
|
(184,541
|
)
|
$
|
(83,668
|
)
|
$
|
(71,076
|
)
|
$
|
(120,416
|
)
|
$
|
(1,561,156
|
)
|
|
|
|
||||||||||||||||||||||
|
Acquired
in-place lease value
|
$
|
812,091
|
$
|
520,951
|
$
|
228,538
|
$
|
113,896
|
$
|
72,985
|
$
|
233,831
|
$
|
1,982,292
|
||||||||
Actual
total amortization expense included in depreciation and amortization expense
in
our statement of operations was $1.9 million, $1.5 million and $0 for the years
ended December 31, 2007, 2006 and 2005. Amortization of acquired above and
below
market lease values is included in total revenues on our statement of operations
was $0.6 million, $0.9 million and $0 for the years ended December 31, 2007,
2006 and 2005.
82
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005 (continued)
7.
Distributions Payable
On
September 24, 2007, the Company’s Board of Directors declared a dividend for the
three-month period ending December 31, 2007. The dividend was calculated based
on stockholders of record each day during this period at a rate of $0.0019178
per day. If paid each day for a 365-day period, the dividend represented a
7.0
percent annualized rate based on a share price of $10.00. The dividend in the
amount of $2.2 million was paid in full in January 2008 using a combination
of
cash ($1.3 million), and pursuant to the Company’s Distribution Reinvestment
Program, shares of the Company’s stock at a discounted price of $9.50 per share
($0.9 million). 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. On September 24, 2007, the Company’s Board of Directors also declared
dividends for its special general partner interests. The distribution for the
fourth quarter 2007 in the amount of $0.2 million was included in distributions
payable at December 31, 2007 and was paid in January 2008.
8.
Deposit for Real Estate Purchase
At
December 31, 2006, the Company recorded $8.4 million as a refundable deposit
for
two real estate transactions that subsequently closed in the first quarter.
Deposits for real estate were returned to the Company upon the conclusion of
its
due diligence where such properties are deemed infeasible for acquisition.
At
December 31, 2007, there were no refundable deposits recorded.
9.
Stockholder’s Equity
Preferred
Shares
Shares
of
preferred stock may be issued in the future in one or more series as authorized
by the Lightstone REIT’s board of directors. Prior to the issuance of shares of
any series, the board of directors is required by the Lightstone REIT’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 Lightstone REIT’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
Lightstone REIT, 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 Lightstone REIT’s common stock. As of
December 31, 2007 and 2006, the Lightstone REIT had no outstanding
preferred shares.
Common
Shares
All
of
the common stock being offered by the Lightstone REIT 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
Lightstone REIT’s common stock will be entitled to receive distributions if
authorized by the board of directors and to share ratably in the Lightstone
REIT’s assets available for distribution to the stockholders in the event of a
liquidation, dissolution or winding-up.
Each
outstanding share of the Lightstone REIT’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.
83
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005 (continued)
Holders
of the Lightstone REIT’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 Lightstone REIT’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 Lightstone REIT’s common stock have equal dividend,
distribution, liquidation and other rights.
Under
its
charter, the Lightstone REIT 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 Lightstone REIT is
the
acquirer, however, do not require stockholder approval. The Lightstone REIT
had
13.6 million and 4.3 million shares of common stock outstanding as of
December 31, 2007 and 2006, respectively.
Equity
Compensation Plan
The
Lightstone REIT has adopted a stock option plan under which its independent
directors are eligible to receive annual nondiscretionary awards of nonqualified
stock options. The Lightstone REIT’s stock option plan is designed to enhance
the Lightstone REIT’s profitability and value for the benefit of stockholders by
enabling the Lightstone REIT 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
Lightstone REIT’s stockholders.
The
Lightstone REIT 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 Lightstone REIT’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 Lightstone REIT’s independent
directors, without any further action by the board of directors or the
stockholders, to purchase 3,000 shares of the Lightstone REIT’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 Lightstone REIT’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.
The
Company granted 9,000 options to its independent directors on the date of the
annual stockholder’s meeting on July 9, 2007 under the Lightstone REIT’s current
plan. The expense required to be recorded by the Company was
insignificant.
84
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005 (continued)
Effective
January 1, 2006, the Company adopted the provisions of, and accounts for
stock-based compensation in accordance with, FAS No. 123(R), Share-Based
Payment (FAS
123(R)). Under the fair value recognition provisions of this statement,
stock-based compensation cost is measured at the grant date based on the fair
value of the award and is recognized as expense over the requisite service
period, which is the vesting period. The Company has applied the modified
prospective method of adoption, under which prior periods are not restated
for
comparative purposes. Under the modified prospective method, FAS 123(R) applies
to new awards and to awards that were outstanding as of December 31, 2005
that are subsequently modified, repurchased or cancelled. There were no options
grants prior to 2007, and as such, there was no compensation expense recognized
during the years ended December 31, 2006 and 2005. The compensation expense
included in general and administrative expenses for the year ended December
31,
2007, was insignificant. Stock-based compensation is classified within general
and administrative expense in the consolidated statements of operations. As
stock-based compensation expense recognized in the consolidated statements
of
operations is based on awards ultimately expected to vest, the amount of expense
has been reduced for estimated forfeitures, which is an immaterial adjustment.
FAS 123(R) requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. Forfeitures are estimated based on historical experience.
Notwithstanding
any other provisions of the Lightstone REIT’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.
Dividends
The
Board
of Directors of the Lightstone REIT declared a dividend for each quarter in
2007, 2006 and for the quarter ending March 31, 2008. The dividends have been
calculated based on stockholders of record each day during this three-month
period at a rate of $0.0019178 per day, which, if paid each day for a 365-day
period, would equal a 7.0% annualized rate based on a share price of $10.00.
Total dividends declared for the year ended December 31, 2007 and 2006 were
$7.1
million and $1.1 million, respectively. The dividend declared for the quarter
ending March 31, 2008 will be paid in cash, in April 2008, to stockholders
of
record as of March 31, 2008.
10. Related
Party Transactions
The
Lightstone REIT 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 Lightstone REIT’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.
|
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
Lightstone REIT’s common stock at an exercise price of $12.00 per
share.
|
85
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005 (continued)
|
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 Lightstone REIT
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 offset such costs.
|
|
|
|
|
|
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 Lightstone REIT
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 the 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%.
|
|
Fees
|
|
Amount
|
|
Property
Management - Residential/Retail/
Hospitality
|
|
The
Property Manager will be paid a monthly management fee of up to 5%
of the
gross revenues from residential, hospitality and retail properties.
Lightstone REIT 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 Lightstone REIT 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 Lightstone REIT’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 preceeding
quarter.
|
86
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005 (continued)
|
Fees
|
|
Amount
|
|
Reimbursement
of
Other
expenses
|
|
For
any year in which the Lightstone REIT qualifies as a REIT, the Advisor
must reimburse the Lightstone REIT 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 property
operating expenses, depreciation and amortization expenses, 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 Lightstone
REIT.
|
|
|
|
|
|
|
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 Lightstone REIT by independent
parties.
|
Lightstone
SLP, LLC, an affiliate of our Sponsor, has and continues to purchase special
General partner interests in the Operating Partnership. These special general
partner interests, 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. Distributions of $0.7 million were declared and
$0.5
million were paid during the year ended December 31, 2007. The distribution
for
the fourth quarter 2007 in the amount of $0.2 million was paid in January 2008.
Such distributions, paid current at a 7% annualized rate of return to Lightstone
SLP, LLC through December 31, 2007 and will always be subordinated until
stockholders receive a stated preferred return, as described below:
The
special general partner interests 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 Lightstone REIT 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 per year 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.
|
87
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005 (continued)
|
Liquidating
Stage
Distributions
|
|
Amount
of Distribution
|
|
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.
|
|
Operating
Stage
|
|
|
|
Distributions
|
|
Amount
of Distribution
|
|
7%
stockholder Return
Threshold
|
Once
a cumulative non-compounded return of 7% return on their net investment
is
realized by stockholders, Lightstone SLP, LLC is eligible to 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 Lightstone REIT’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.
|
|
88
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005 (continued)
The
Lightstone REIT pursuant to the arrangements described above has recorded the
following amounts as of December 31, 2007, 2006 and 2005:
|
|
2007
|
|
2006
|
|
2005
|
|||||
|
Acquisition
fees
|
$
|
6,551,896
|
$
|
2,771,992
|
-
|
|||||
|
Asset
management fees
|
1,033,371
|
274,724
|
-
|
|||||||
|
Property
management fees
|
1,057,272
|
328,532
|
-
|
|||||||
|
Acquisition
expenses reimbursed to Advisor
|
635,848
|
-
|
-
|
|||||||
|
Total
|
$
|
9,278,387
|
$
|
3,375,248
|
-
|
|||||
In
July
of 2007, the Company purchased a $16.0 million certificate of deposit with
an
affiliate of the Advisor. The certificate of deposit matured in less than three
months, and earned interest at 10 percent. The Company redeemed the certificate
of deposit in September of 2007, and has included $0.3 million in interest
income from this investment.
11.
Segment Information
The
Company currently operates in five business segments as of December 31, 2007:
(i) retail real estate, (ii) residential real estate, (iii) industrial real
estate (iv) office real estate and (v) hospitality. The Company’s advisor and
its affiliates provide leasing, property and facilities management, acquisition,
development, construction and tenant-related services for its portfolio. The
Company’s revenues for the years ended December 31, 2007, 2006 and 2005 were
exclusively derived from activities in the United States. No revenues from
foreign countries were received or reported. The Company had no long-lived
assets in foreign locations as of December 31, 2007, 2006 and 2005. The
accounting policies of the segments are the same as those described in Note
2:
Summary of Significant Accounting Policies, excluding depreciation and
amortization.
The
Company evaluates performance based upon net operating income from the combined
properties in each real estate segment.
89
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005 (continued)
Selected
results of operations for the years ended December 31, 2007, 2006 and 2005,
and
selected asset information regarding the Company’s operating segments are as
follows:
|
Retail
|
Residential
|
Industrial
|
Hospitality
|
Office
|
Corporate
|
Year
Ended December 31, 2007
|
||||||||||||||||
|
Revenues:
|
|
|
|
|
|
|
|
|||||||||||||||
|
Rental
income
|
$
|
5,870,238
|
$
|
9,115,538
|
$
|
6,010,341
|
$
|
534,088
|
$
|
-
|
$
|
-
|
$
|
21,530,205
|
||||||||
|
Tenant
recovery income
|
2,077,295
|
129,533
|
1,520,368
|
2,254
|
-
|
-
|
3,729,450
|
|||||||||||||||
|
|
7,947,533
|
9,245,071
|
7,530,709
|
536,342
|
-
|
-
|
25,259,655
|
|||||||||||||||
|
Expenses:
|
||||||||||||||||||||||
|
Property
operating expenses
|
2,735,067
|
4,431,535
|
1,805,789
|
607,439
|
-
|
-
|
9,579,830
|
|||||||||||||||
|
Real
estate taxes
|
949,572
|
1,056,977
|
698,489
|
34,828
|
-
|
-
|
2,739,866
|
|||||||||||||||
|
General
and adminsitrative costs
|
6,205
|
252,591
|
5,919
|
1,568
|
-
|
3,444,080
|
3,710,363
|
|||||||||||||||
|
Depreciation
and amortization
|
2,210,951
|
1,306,107
|
2,579,386
|
66,993
|
-
|
-
|
6,163,437
|
|||||||||||||||
|
Operating
expenses
|
5,901,795
|
7,047,210
|
5,089,583
|
710,828
|
-
|
3,444,080
|
22,193,496
|
|||||||||||||||
|
Net
property operations
|
2,045,738
|
2,197,861
|
2,441,126
|
(174,486
|
)
|
-
|
(3,444,080
|
)
|
3,066,159
|
|||||||||||||
|
|
||||||||||||||||||||||
|
Other
income / (expense)
|
25,020
|
1,151,017
|
13,021
|
259,661
|
-
|
(286,679
|
)
|
1,162,040
|
||||||||||||||
|
Interest
income
|
99,779
|
4,413
|
12,047
|
1,763,529
|
1,879,768
|
|||||||||||||||||
|
Gain
on Sale of Securities
|
1,301,949
|
1,301,949
|
||||||||||||||||||||
|
Interest
expense
|
(3,276,738
|
)
|
(3,045,229
|
)
|
(2,900,529
|
)
|
(161,887
|
)
|
-
|
-
|
(9,384,383
|
)
|
||||||||||
|
Loss
in Unconsolidated joint ventures
|
-
|
-
|
-
|
-
|
(7,267,949
|
)
|
-
|
(7,267,949
|
)
|
|||||||||||||
|
Minority
interest
|
-
|
-
|
-
|
-
|
-
|
26
|
26
|
|||||||||||||||
|
Net
loss applicable to common shares
|
$
|
(1,106,201
|
)
|
$
|
308,062
|
$
|
(434,335
|
)
|
$
|
(76,712
|
)
|
$
|
(7,267,949
|
)
|
$
|
(665,255
|
)
|
$
|
(9,242,390
|
)
|
||
|
|
||||||||||||||||||||||
|
Balance
sheet financial data at December 31, 2007:
|
||||||||||||||||||||||
|
|
||||||||||||||||||||||
|
Real
estate assets, net
|
$
|
70,071,922
|
$
|
141,155,304
|
$
|
76,820,677
|
$
|
16,249,048
|
$
|
-
|
$
|
-
|
$
|
304,296,951
|
||||||||
|
Restricted
escrows
|
5,937,368
|
2,665,972
|
992,113
|
-
|
-
|
-
|
9,595,453
|
|||||||||||||||
|
Investment
in unconsolidated joint venture
|
-
|
-
|
-
|
-
|
6,284,675
|
-
|
6,284,675
|
|||||||||||||||
|
Due
from Affiliate
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Tenant
and other accounts receivable
|
758,060
|
338,685
|
372,683
|
61,752
|
-
|
-
|
1,531,180
|
|||||||||||||||
|
Acquired
in-place lease intangibles, net
|
1,079,320
|
-
|
902,972
|
-
|
-
|
-
|
1,982,292
|
|||||||||||||||
|
Acquired
above market lease intangibles, net
|
437,907
|
116,077
|
276,743
|
-
|
-
|
-
|
830,727
|
|||||||||||||||
|
Deferred
leasing costs, net
|
634,205
|
-
|
674,386
|
-
|
-
|
-
|
1,308,591
|
|||||||||||||||
|
Deferred
financing costs, net
|
676,163
|
1,060,173
|
312,298
|
105,926
|
-
|
-
|
2,154,560
|
|||||||||||||||
|
Other
assets
|
126,652
|
676,521
|
200,877
|
251,786
|
-
|
118,364
|
1,374,200
|
|||||||||||||||
|
Non-segmented
assets
|
-
|
-
|
-
|
-
|
-
|
40,342,725
|
40,342,725
|
|||||||||||||||
|
|
||||||||||||||||||||||
|
Total
Assets
|
$
|
79,721,597
|
$
|
146,012,732
|
$
|
80,552,749
|
$
|
16,668,512
|
$
|
6,284,675
|
$
|
40,461,089
|
$
|
369,701,354
|
||||||||
|
Total
Mortage and Note Payable
|
$
|
60,376,858
|
$
|
119,993,800
|
$
|
53,025,000
|
$
|
10,040,000
|
$
|
-
|
$
|
-
|
$
|
243,435,658
|
||||||||
90
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005 (continued)
|
Retail
|
|
|
Residential
|
|
|
Industrial
|
|
|
Hospitality
|
|
|
Office
|
|
|
Corporate
|
|
|
Year
Ended December 31, 2006
|
||||
|
Revenues:
|
||||||||||||||||||||||
|
Rental
income
|
$
|
3,292,292
|
$
|
3,979,446
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
7,271,738
|
||||||||
|
Tenant
recovery income
|
990,929
|
-
|
-
|
-
|
-
|
-
|
990,929
|
|||||||||||||||
|
|
4,283,221
|
3,979,446
|
-
|
-
|
-
|
-
|
8,262,667
|
|||||||||||||||
|
Expenses:
|
||||||||||||||||||||||
|
Property
operating expenses
|
1,666,335
|
1,990,579
|
-
|
-
|
-
|
-
|
3,656,914
|
|||||||||||||||
|
Real
estate taxes
|
400,968
|
481,244
|
-
|
-
|
-
|
-
|
882,212
|
|||||||||||||||
|
Depreciation
and amortization
|
1,279,376
|
1,395,443
|
-
|
-
|
-
|
-
|
2,674,819
|
|||||||||||||||
|
General
and adminsitrative costs
|
-
|
-
|
-
|
-
|
-
|
808,502
|
808,502
|
|||||||||||||||
|
Operating
expenses
|
3,346,679
|
3,867,266
|
-
|
-
|
-
|
808,502
|
8,022,447
|
|||||||||||||||
|
Net
property operations
|
936,542
|
112,180
|
-
|
-
|
-
|
(808,502
|
)
|
240,220
|
||||||||||||||
|
|
||||||||||||||||||||||
|
Other
income
|
59,256
|
291,705
|
-
|
-
|
-
|
-
|
350,961
|
|||||||||||||||
|
Interest
income
|
70,339
|
-
|
-
|
-
|
-
|
389,577
|
459,916
|
|||||||||||||||
|
Interest
expense
|
(1,322,050
|
)
|
(1,265,477
|
)
|
-
|
-
|
-
|
-
|
(2,587,527
|
)
|
||||||||||||
|
Minority
interest
|
-
|
-
|
-
|
-
|
-
|
86
|
86
|
|||||||||||||||
|
Net
income applicable to common shares
|
$
|
(255,913
|
)
|
$
|
(861,592
|
)
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
(418,839
|
)
|
$
|
(1,536,344
|
)
|
||||
|
|
||||||||||||||||||||||
|
Balance
sheet financial data at December 31, 2006:
|
||||||||||||||||||||||
|
|
||||||||||||||||||||||
|
Real
estate assets, net
|
$
|
59,195,731
|
$
|
41,978,151
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
101,173,882
|
||||||||
|
Restricted
escrows
|
5,167,687
|
1,744,891
|
-
|
-
|
-
|
-
|
6,912,578
|
|||||||||||||||
|
Deposit
for real estate purchase
|
-
|
-
|
-
|
-
|
-
|
8,435,000
|
8,435,000
|
|||||||||||||||
|
Tenant
and other accounts receivable
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Acquired
in-place lease intangibles, net
|
1,553,340
|
248,338
|
-
|
-
|
-
|
-
|
1,801,678
|
|||||||||||||||
|
Acquired
above market lease intangibles, net
|
601,987
|
-
|
601,987
|
|||||||||||||||||||
|
Deferred
financing costs, net
|
758,438
|
-
|
-
|
-
|
-
|
-
|
758,438
|
|||||||||||||||
|
Other
assets
|
113,426
|
446,900
|
-
|
-
|
-
|
11,660
|
571,986
|
|||||||||||||||
|
Non-segmented
assets
|
-
|
-
|
20,452,668
|
20,452,668
|
||||||||||||||||||
|
|
||||||||||||||||||||||
|
Total
Assets
|
$
|
67,390,609
|
$
|
44,418,280
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
28,899,328
|
$
|
140,708,217
|
||||||||
|
Total
mortgage and note payable
|
$
|
54,750,000
|
$
|
40,725,000
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
95,475,000
|
|
Retail
|
Multi
Family
|
Industrial
|
Hospitality
|
Office
|
Corporate
|
Year
Ended December 31, 2005
|
||||||||||||||||
|
Revenues:
|
|
|
|
|
|
|
|
|||||||||||||||
|
Rental
income
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||
|
Tenant
recovery income
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Expenses:
|
||||||||||||||||||||||
|
Property
operating expenses
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Real
estate taxes
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Depreciation
and amortization
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
General
and adminsitrative costs
|
-
|
-
|
-
|
-
|
-
|
117,571
|
117,571
|
|||||||||||||||
|
Operating
expenses
|
-
|
-
|
-
|
-
|
-
|
117,571
|
117,571
|
|||||||||||||||
|
Net
property operations
|
-
|
-
|
-
|
-
|
-
|
(117,571
|
)
|
(117,571
|
)
|
|||||||||||||
|
|
||||||||||||||||||||||
|
Interest
and other income
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Interest
expense
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Minority
interest
|
-
|
-
|
-
|
-
|
-
|
1,164
|
1,164
|
|||||||||||||||
|
Net
income applicable to common shares
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
(116,407
|
)
|
$
|
(116,407
|
)
|
||||||
|
|
||||||||||||||||||||||
|
Balance
sheet financial data at December 31, 2005:
|
||||||||||||||||||||||
|
|
||||||||||||||||||||||
|
Real
estate assets, net
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||
|
Restricted
escrows
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Deposit
for real estate purchase
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Tenant
and other accounts receivable
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Acquired
in-place lease intangibles, net
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Acquired
above market lease intangibles, net
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Deferred
financing costs, net
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Other
assets
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Non-segmented
assets
|
-
|
-
|
-
|
-
|
-
|
430,996
|
430,996
|
|||||||||||||||
|
|
||||||||||||||||||||||
|
Total
Assets
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
430,996
|
$
|
430,996
|
||||||||
91
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005 (continued)
12.
Quarterly Financial Data (Unaudited)
The
following table presents selected unaudited quarterly financial data for each
quarter during the year ended December 31, 2007 and 2006:
|
2007
|
|
|||||||||||||||
|
|
|
Year ended
|
|
Quarter ended
|
|
Quarter
ended
|
|
Quarter
ended
|
|
Quarter
ended
|
|
|||||
|
|
|
December 31,
|
|
December 31,
|
|
September
30,
|
|
June
30,
|
|
March
31,
|
||||||
|
Total
revenue
|
$
|
25,259,655
|
$
|
7,985,616
|
$
|
6,051,962
|
$
|
6,006,174
|
$
|
5,215,903
|
||||||
|
|
||||||||||||||||
|
Net
loss
|
(9,242,390
|
)
|
(543,596
|
)
|
(1,884,211
|
)
|
(2,451,828
|
)
|
(4,362,755
|
)
|
||||||
|
|
||||||||||||||||
|
Net
loss per common share, basic and diluted
|
$
|
(1.01
|
)
|
$
|
(0.04
|
)
|
$
|
(0.17
|
)
|
$
|
(0.32
|
)
|
$
|
(0.86
|
)
|
|
|
2006
|
||||||||||||||||
|
Year ended
|
|
Quarter ended
|
|
Quarter
ended
|
|
Quarter
ended
|
|
Quarter
ended
|
|
|||||||
|
|
|
December 31,
|
|
December 31,
|
|
September
30,
|
|
June
30,
|
|
March
31,
|
||||||
|
Total
revenue
|
$
|
8,262,667
|
$
|
3,698,776
|
$
|
3,071,771
|
$
|
1,479,310
|
$
|
12,810
|
||||||
|
|
||||||||||||||||
|
Net
income (loss)
|
(1,536,344
|
)
|
(739,636
|
)
|
(822,606
|
)
|
116,060
|
(90,162
|
)
|
|||||||
|
|
||||||||||||||||
|
Net
income (loss) per common share, basic and diluted
|
$
|
(0.96
|
)
|
$
|
(0.22
|
)
|
$
|
(0.46
|
)
|
$
|
0.13
|
$
|
(0.37
|
)
|
||
13. Legal
Proceedings
From
time to time in the ordinary course of business, the Lightstone REIT may become
subject to legal proceedings, claims or disputes.
On
March
29, 2006, Jonathan Gould, a former member of our Board of Directors and Senior
Vice-President-Acquisitions, filed a lawsuit against us in the District Court
for the Southern District of New York. The suit alleges, among other things,
that Mr. Gould was insufficiently compensated for his services to us as director
and officer. Mr. Gould sought damages of (i) up to $11,500,000 or (ii) a 2.5%
ownership interest in all properties that we acquire and an option to acquire
up
to 5% of the membership interests of Lightstone SLP, LLC. We filed a motion
to
dismiss the lawsuit. After review of the motion to dismiss, counsel for Mr.
Gould represented that Mr. Gould was dropping his claim for ownership interest
in the properties we acquire and his claim for membership interests. Mr. Gould’s
counsel represented that he would be suing only under theories of quantum merit
and unjust enrichment seeking the value of work he performed. Counsel for
the Lightstone REIT made motion to dismiss Mr. Gould’s complaint, which was
granted by Judge Sweeney. Mr. Gould has filed an appeal of the decision
dismissing his case, which is pending. Management believes that this suit
is frivolous and entirely without merit and intends to defend against these
charges vigorously.
On
January 4, 2007, 1407 Broadway Real Estate LLC ("Office Owner"), an indirect,
wholly owned subsidiary of 1407 Broadway Mezz II LLC ("Mezz II"), consummated
the acquisition of a sub-leasehold interest (the "Sublease Interest") in an
office building located at 1407 Broadway, New York, New York (the "Office
Property"). Mezz II is a joint venture between LVP 1407 Broadway LLC ("LVP
LLC"), a wholly owned subsidiary of our operating partnership, and Lightstone
1407 Manager LLC ("Manager"), which is wholly owned by David Lichtenstein,
the
Chairman of our Board of Directors and our Chief Executive Officer, and Shifra
Lichtenstein, his wife.
92
PART II.
CONTINUED:
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
CONTINUED:
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005 (continued)
The
Sublease Interest was acquired pursuant to a Sale and Purchase of Leasehold
Agreement with Gettinger Associates, L.P. ("Gettinger"). In July 2006, Abraham
Kamber Company, as sublessor under the sublease ("Sublessor"), served two
notices of default on Gettinger (the "Default Notices"). The first alleged
that
Gettinger had failed to satisfy its obligations in performing certain
renovations and the second asserted numerous defaults relating to Gettinger's
purported failure to maintain the Office Property in compliance with its
contractual obligations.
In
response to the Default Notices, Gettinger commenced legal action and obtained
an injunction that extends its time to cure any default, prohibits interference
with its leasehold interest and prohibits Sublessor from terminating its
sublease pending resolution of the litigation. A motion by Sublessor for partial
summary judgment, alleging that certain work on the Office Property required
its
prior approval, was denied by the Supreme Court, New York County. Subsequently,
by agreement of the parties, a stay was entered precluding the termination
of
the Sublease Interest pending a final decision on Sublessor's claim of defaults
under the Sublease Interest. In addition, the parties stipulated to the
intervention of Office Owner as a party to the proceedings. The parties have
been directed to engage in and complete discovery. We consider the litigation
to
be without merit.
Prior
to
consummating the acquisition of the Sublease Interest, Office Owner received
a
letter from Sublessor indicating that Sublessor would consider such acquisition
a default under the original sublease, which prohibits assignments of the
Sublease Interest when there is an outstanding default there under. On February
16, 2007, Office Owner received a Notice to Cure from Sublessor stating the
transfer of the Sublease Interest occurred in violation of the Sublease given
Sublessor's position that Office Seller is in default. Office Owner will
commence and vigorously pursue litigation in order to challenge the default,
receive an injunction and toll the termination period provided for in the
Sublease.
On
September 4, 2007, Office Owner commenced a new action against Sublessor
alleging a number claims, including the claims that Sublessor has breached
the
sublease and committed intentional torts against Office Owner by (among other
things) issuing multiple groundless default notices, with the aim of prematurely
terminating the sublease and depriving Office Owner of its valuable interest
in
the sublease. The complaint seeks a declaratory judgment that Office Owner
has not defaulted under the sublease, damages for the losses Office Owner has
incurred as a result of Sublessor’s wrongful conduct, and an injunction to
prevent Sublessor from issuing further default notices without valid grounds
or
in bad faith.
As
of the
date hereof, we are not a party to any other material pending legal
proceedings.
93
|
Lightstone
Value Plus REIT, Inc.
|
||||||||||||||||||||||||||||||
|
(A
Maryland Corporation)
|
||||||||||||||||||||||||||||||
|
Schedule
III
|
||||||||||||||||||||||||||||||
|
Real
Estate and Accumulated Depreciation
|
||||||||||||||||||||||||||||||
|
December
31, 2007
|
|
|
|
|
|
Initial
Cost (A)
|
|
Costs
Capitalized Subsequent
|
Gross
amount at which carried
at
end of period
|
Accumulated | |||||||||||||||||||||||
|
Encumbrance
|
Land
|
Buildings
and Improvements
|
to
Acquisition
|
Land
and Improvements
|
Buildings
and Improvements
|
Total
(B)
|
Depreciation
(C)
|
Date
Acquired
|
Depreciable
Life (D)
|
||||||||||||||||||||||
|
Belz
Factory Outlet St Augustine, FL
|
27,051,571
|
$
|
5,384,290
|
$
|
22,374,795
|
$
|
38,595
|
$
|
5,384,290
|
$
|
22,413,390
|
$
|
27,797,680
|
$
|
(1,512,275
|
)
|
3/29/2006
|
(D
|
)
|
||||||||||||
|
|
|||||||||||||||||||||||||||||||
|
Four
Residential Communities
|
|||||||||||||||||||||||||||||||
|
Southeatern,
Michigan
|
40,725,000
|
8,051,125
|
34,297,538
|
413,552
|
8,116,520
|
34,645,695
|
42,762,215
|
(1,318,109
|
)
|
6/29/2006
|
(D
|
)
|
|||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||
|
Oakview
Plaza
|
|||||||||||||||||||||||||||||||
|
Omaha,
Nebraska
|
27,500,000
|
6,705,942
|
25,462,968
|
660,521
|
7,355,942
|
25,473,490
|
32,829,432
|
(804,789
|
)
|
12/21/2006
|
(D
|
)
|
|||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||
|
Gulfcoast
Industrial Portfolio
|
|||||||||||||||||||||||||||||||
|
New
Orleans/Baton Rouge, Louisiana & San Antonio, Texas
|
53,025,000
|
12,767,476
|
51,648,719
|
482,798
|
12,767,476
|
52,131,516
|
64,898,992
|
(1,552,037
|
)
|
2/1/2007
|
(D
|
)
|
|||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||
|
Brazos
Crossing
|
|||||||||||||||||||||||||||||||
|
Lake
Jackson, Texas
|
-
|
1,688,326
|
-
|
-
|
1,688,326
|
-
|
1,688,326
|
-
|
6/29/2007
|
(D
|
)
|
||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||
|
Belz
Factory Outlet
|
|||||||||||||||||||||||||||||||
|
St
Augustine, FL
|
-
|
2,842,650
|
-
|
-
|
2,842,650
|
-
|
2,842,650
|
-
|
10/2/2007
|
N/A
|
|||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||
|
Houston
ES Hotels
|
|||||||||||||||||||||||||||||||
|
Houston,
Texas
|
10,040,000
|
1,900,546
|
14,359,818
|
-
|
1,900,546
|
14,359,818
|
16,260,364
|
(62,315
|
)
|
10/17/2007
|
(D
|
)
|
|||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||
|
Sarasota
|
|||||||||||||||||||||||||||||||
|
Sarasota,
Florida
|
-
|
2,000,000
|
11,291,586
|
-
|
2,000,000
|
11,291,586
|
13,291,586
|
(35,286
|
)
|
11/15/2007
|
(D
|
)
|
|||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||
|
Camden
Apartments
|
|||||||||||||||||||||||||||||||
|
Tampa,
Florida
|
79,268,800
|
19,976,388
|
79,905,549
|
-
|
19,976,388
|
79,905,549
|
99,881,937
|
(170,739
|
)
|
11/16/2007
|
(D
|
)
|
|||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||
|
Total
|
$
|
237,610,371
|
$
|
61,316,743
|
$
|
239,340,973
|
$
|
1,595,466
|
$
|
62,032,138
|
$
|
240,221,044
|
$
|
302,253,182
|
$
|
(5,455,550
|
)
|
||||||||||||||
94
Notes
To
Schedule III:
(A)
The
initial cost to the Company represents the original purchase price of the
property, including amounts incurred subsequent to acquisition which were
contemplated at the time the property was acquired.
(B)
Reconciliation of total real estate owned:
|
2007
|
2006
|
2005
|
||||||||
|
Balance
at beginning of year
|
$
|
102,358,472
|
$
|
-
|
$
|
-
|
||||
|
Purchases
of investment properties
|
201,484,789
|
104,093,295
|
-
|
|||||||
|
Acquired
in-place lease intangibles
|
(1,461,731
|
)
|
(3,167,190
|
)
|
-
|
|||||
|
Acquired
in-place lease intangibles (commissions)
|
(903,919
|
)
|
(677,245
|
)
|
-
|
|||||
|
Acquired
above market lease intangibles
|
(526,657
|
)
|
(854,886
|
)
|
-
|
|||||
|
Acquired
below market lease intangibles
|
1,302,228
|
2,964,498
|
-
|
|||||||
|
|
|
|
|
|||||||
|
Balance
at end of year
|
$
|
302,253,182
|
$
|
102,358,472
|
$
|
-
|
(C)
Reconciliation of accumulated depreciation, note amortization is not included
for purposes of this disclosure:
|
For
the years ended Decmeber 31,
|
||||||||||
|
|
2007
|
|
2006
|
|
2005
|
|||||
|
|
|
|
|
|||||||
|
Balance
at beginning of period
|
$
|
1,184,590
|
$
|
-
|
$
|
-
|
||||
|
Depreciation
expense
|
4,298,367
|
1,184,590
|
-
|
|||||||
|
Disposals
|
(27,407
|
)
|
-
|
-
|
||||||
|
Balance
at end of period
|
$
|
5,455,550
|
$
|
1,184,590
|
$
|
-
|
||||
(D)
Depreciation is computed based upon the following estimated lives:
|
Buildings
and improvements
|
15-39
years
|
|||
|
Tenant
improvements and equipment
|
5-10
years
|
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
2007.
Item 9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not
applicable.
95
Item 9A. CONTROLS
AND PROCEDURES
Disclosure
Controls and Procedures.
As of
December 31, 2007, we conducted an evaluation under the supervision and
with the participation of the Advisor’s management, including the our Chairman
and Chief Executive Officer and Interim Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. The term “disclosure controls and procedures,” as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
or the Exchange Act, means controls and other procedures of a company that
are
designed to ensure that information required to be disclosed by the company
in
the reports it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC’s rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by a company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the company’s management,
including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate, to allow timely decisions
regarding required disclosure. Based on this evaluation, our Chairman and Chief
Executive Officer and Interim Chief Financial Officer concluded as of
December 31, 2007 that our disclosure controls and procedures were adequate
and effective.
Management’s
Report on Internal Control over Financial Reporting.
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). Our internal control system is a process designed
by,
or under the supervision of, our Chairman and Chief Executive Officer and
Interim Chief Financial Officer and effected by our Board of Directors,
management and other personnel to provide reasonable assurance regarding the
reliability of our financial reporting and the preparation of financial
statements for external reporting purposes in accordance with generally accepted
accounting principles.
Our
internal control over financial reporting includes policies and procedures
that:
|
|
·
|
|
pertain
to the maintenance of records that, in reasonable detail, accurately
and
fairly reflect transactions and disposition of assets;
|
|
|
·
|
|
provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of financial statements in accordance with generally
accepted
accounting principles, and that receipts and expenditures are being
made
only in accordance with the authorization of our management and directors;
and
|
|
|
·
|
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could
have
a material effect on our financial statements.
|
Because
of inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management
assessed the effectiveness of our internal control over financial reporting
as
of December 31, 2007. In making this assessment, they used the control
criteria framework of the Committee of Sponsoring Organizations, or COSO, of
the
Treadway Commission published in its report entitled Internal
Control—Integrated Framework.
Based
on this evaluation, our management has concluded that our internal control
over
financial reporting was effective as of December 31, 2007.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.
Changes
in Internal Control over Financial Reporting.
There
were no changes in our internal control over financial reporting during the
quarter ended December 31, 2007 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
96
Limitations
on the Effectiveness of Controls.
Our
Advisor’s management, including our Chairman and Chief Executive Officer and
Interim Chief Financial Officer, does not expect that our disclosure controls
and procedures or our internal control over financial reporting will prevent
all
error and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of
the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud,
if
any, within an organization have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and
that
breakdowns can occur because of simple error or mistake.
Additionally,
controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the control.
The
design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving our stated goals under all potential future
conditions. Over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
None.
Directors
The
following table presents certain information as of March 14, 2008 concerning
each of our directors serving in such capacity:
|
Year
Term of
|
Served
as
|
|||||||
|
|
|
Principal
Occupation and
|
Office
Will
|
a
Director
|
||||
|
Name
|
Age
|
Positions
Held
|
Expire
|
Since
|
||||
|
David
Lichtenstein
|
47
|
Chief
Executive Officer, President and Chairman of the Board of
Directors
|
2008
|
2004
|
||||
|
Edwin
J. Glickman
|
75
|
Director
|
2008
|
2005
|
||||
|
George
R. Whittemore
|
58
|
Director
|
2008
|
2006
|
||||
|
Shawn
R. Tominus
|
48
|
Director
|
2008
|
2006
|
||||
|
Bruno
de Vinck
|
62
|
Chief
Operating Officer, Senior Vice President, Secretary and
Director
|
2008
|
2005
|
David
Lichtenstein
is the
Chairman of our board of directors and our Chief Executive Officer. 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
27 states, the District of Columbia and Puerto Rico. Mr. Lichtenstein is a
member of the International Council of Shopping Centers and NAREIT. Mr.
Lichtenstein also serves as the Chairman of the board of trustees 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.
97
Edwin
J. Glickman is
one of
our independent directors and the Chairman of our audit committee. 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. Mr. Glickman was previously a trustee
of publicly traded RPS Realty Trust from October 1980 through May 1996, and
Atlantic Realty Trust from May 1996 to March 2006. Mr. Glickman graduated from
Dartmouth College.
George
R. Whittemore
is one
of our independent directors. Mr. Whittemore also serves as Audit Committee
Chairman of Prime Group Realty Trust, as a Director of Village Bank & Trust
in Richmond, Virginia and as a Director of Supertel Hospitality, Inc. in
Norfolk, Nebraska, all publicly traded companies. Mr. Whittemore previously
served as President and Chief Executive Officer of Supertel Hospitality Trust,
Inc. from November 2001 until August 2004 and as Senior Vice President and
Director of both Anderson & Strudwick, Incorporated, a brokerage firm based
in Richmond, Virginia, and Anderson & Strudwick Investment Corporation, from
October1996 until October 2001. Mr. Whittemore has also served as a Director,
President and Managing Officer of Pioneer Federal Savings Bank and its parent,
Pioneer Financial Corporation, from September 1982 until August 1994, and as
President of Mills Value Adviser, Inc., a registered investment advisor. Mr.
Whittemore is a graduate of the University of Richmond.
Shawn
R. Tominus
is one
of our independent directors. Mr. Tominus is the founder and President of Metro
Management, a real estate investment and management company founded in 1994
which specializes in the acquisition, financing, construction and redevelopment
of residential, commercial and industrial properties. He also serves as a member
of the audit committee of Prime Group Realty Trust, a publicly traded REIT
located in Chicago. Mr. Tominus has over 25 years experience in real estate
and
serves as a national consultant focusing primarily on market and feasibility
analysis. Prior to his time at Metro Management, Mr. Tominus held the position
of Senior Vice President at Kamson Corporation, where he managed a portfolio
of
over 5,000 residential units as well as commercial and industrial
properties.
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. Mr. de Vinck is a Senior Vice
President with the Lightstone Group, and has been employed by Lightstone since
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.
98
Executive
Officers:
The
following table presents certain information as of March 1, 2008 concerning
each
of our executive officers serving in such capacities:
|
Name
|
|
Age
|
|
Principal
Occupation and Positions Held
|
|
David
Lichtenstein
|
|
47
|
|
Chief
Executive Officer, President and Chairman of the Board of
Directors
|
|
Bruno
de Vinck
|
|
62
|
|
Chief
Operating Officer, Senior Vice President, Secretary and
Director
|
|
Stephen
Hamrick
|
|
55
|
|
President
|
|
Joseph
Teichman
|
|
34
|
|
General
Counsel
|
|
Jenniffer
Collins
|
|
38
|
|
Interim
Chief Financial Officer and Interim Treasurer
|
|
Joshua
Kornberg
|
|
34
|
|
Vice
Presdient, Acquisitions
|
David
Lichtenstein
for
biographical information about Mr. Lichtenstein, see ‘‘Management —
Directors.”
Bruno
de Vinck
for
biographical information about Mr. Lichtenstein, see ‘‘Management —
Directors.”
Stephen
H. Hamrick is
our
President and the President and CEO of our broker dealer. Mr. Hamrick previously
served as our Vice President of Investor Relations. Prior to joining us in
July
of 2006, Mr. Hamrick served five years as President of Carey Financial
Corporation and Managing Director of W.P. Carey & Co. Mr. Hamrick is a
member of the Committee on Securities for the American Stock Exchange and The
Board of Trustees of The Saratoga Group of Funds. In the 1990s, Mr. Hamrick
developed an electronic trading business utilized by the institutional customers
of Cantor Fitzgerald, including brokerage firms and banks, to trade privately
held securities; spent two years as CEO of a full-service, investment brokerage
business at Wall Street Investor Services, where he executed a turnaround
strategy and the ultimate sale of that business; and served as Chairman of
Duroplas Corporation, a development stage company building on proprietary
technology that enables the production of thermoplastic compounds. From 1988
until 1994, Mr. Hamrick headed up Private Investments at PaineWebber
Incorporated and was a member of the firm’s Management Council. From 1975 until
joining PaineWebber, he was associated with E.F. Hutton & Company, holding
positions ranging from Account Executive to National Director of Private
Placements. Mr. Hamrick has served on the Listings Panel for NASDAQ, as Chairman
of the Securities Industry Association’s Direct Investment Committee and as
Chairman of the Investment Program Association. He is a Certified Financial
Planner and was graduated with degrees in English and Economics from Duke
University.
Joseph
E. Teichman
is our
General Counsel and also serves as General Counsel of our Advisor and Sponsor.
Prior to joining us in January 2007, Mr. Teichman had been an Associate with
Paul, Weiss, Rifkind, Wharton & Garrison LLP in New York, NY from September
2001 to January 2007. Mr. Teichman was admitted to the Bar in the State of
New
York after having earned his J.D. from the University of Pennsylvania Law School
in May 2001. Mr. Teichman earned a B.A. in Talmudic Law from Beth Medrash
Govoha, Lakewood, NJ in April 1997.
Jenniffer
Collins is
our
interim Chief Financial Officer and interim Treasurer and previously served
as
our Controller from October of 2006 until September of 2007. Prior to joining
us, Mrs. Collins served as the Corporate Controller for Orchid Cellmark, Inc.,
a
publicly traded bio-technology company, from February 2004 through October
2006.
From August 2001 through January 2004, Mrs. Collins served as the Director
of
Finance and Investor Relations for Tellium, Inc., an optical switching company
which was purchased by Zhone Technologies, Inc. in November of 2003. Prior
to
that, Mrs. Collins spent two years at Keynote Systems, Inc., a start-up internet
services company that went public in September of 1998. Mrs. Collins has over
seven years experience in public accounting including a position with
PricewaterhouseCoopers in the audit practice for the real estate group. She
earned her CPA in New Jersey in 1993 and graduated with a B.S. in accounting
from Lehigh University.
99
Joshua
Kornberg is
our
Vice President, Acquisitions and is also Senior Vice President, Director of
Acquisitions for The Lightstone Group. Prior to joining the Lightstone Group
in
2006, Mr. Kornberg developed more than 10 years of experience in acquisitions,
development, and asset management with The RREEF Funds, Morgan Stanley and
TrizecHahn. Mr. Kornberg holds an MBA from York University with a dual
specialization in Finance and Real Estate.
Section
16 (a) Beneficial Ownership Reporting Compliance
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 years ended December 31,
2007
and 2006.
Information
Regarding Audit Committee
Our
Board
established an audit committee in April 2005. The charter of audit committee
is
available at www.lightstonereit.com
or in
print to any shareholder who requests it c/o Lightstone Value Plus REIT, 326
Third Street, Lakewood, NJ 08701. Our audit committee consists of Messrs. Edwin
J. Glickman, George R. Whittemore and Shawn Tominus, each of whom is
“independent” within the meaning of the NYSE listing standards. The Board
determined that Messrs. Glickman and Whittemore are qualified as audit committee
financial experts as defined in Item 401 (h) of Regulation S-K. For more
information regarding the relevant professional experience of Messrs. Glickman,
Whittemore and Tominus, see “Directors”.
ITEM
11. EXECUTIVE COMPENSATION
Compensation
of Executive Officers
We
currently have no employees. Our Advisor performs our day-to-day management
functions. 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.
100
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Executive
Officers:
The
following table presents certain information as of March 1, 2008 concerning
each
of our directors and executive officers serving in such capacities:
|
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
|
0.1
|
%
|
||||
|
Edwin
J. Glickman
|
-
|
-
|
|||||
|
George
R. Whittemore
|
-
|
-
|
|||||
|
Shawn
Tominus
|
-
|
-
|
|||||
|
Bruno
de Vinck
|
-
|
-
|
|||||
|
Jenniffer
Collins
|
-
|
-
|
|||||
|
Joseph
Teichman
|
-
|
-
|
|||||
|
Stephen
Hamrick
|
10,000
|
0.1
|
%
|
||||
|
Joshua
Kornberg
|
-
|
-
|
|||||
|
Our directors
and executive officers as a group (9 persons)
|
30,000
|
0.2
|
%
|
||||
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.
101
The
following table sets forth information regarding securities authorized for
issuance under our Employee and Director Incentive Share Plan as of
December 31, 2007:
|
|
|
|
|
|
|
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
|
9,000
|
$
|
10.00
|
66,000
|
||||||
|
Equity
Compensation Plans not approved by security holders
|
N/A
|
N/A
|
N/A
|
|||||||
|
Total
|
9,000
|
$
|
10.00
|
66,000
|
||||||
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. Our 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 our 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 our Property Manager a monthly management fee of up to 5% of
the
gross revenues from our residential, hospitality 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. Total property management
fees paid for the year ended December 31, 2007 and 2006 totaled approximately
$1.1 million and $0.3 million, respectively.
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 our
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. Our 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,
our 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 Lightstone
REIT's common stock at an exercise price of $12.00 per share. Total fees paid
to
the dealer manager in 2006 were $3.3 million.
102
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. 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%. 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. Total acquisition fees recorded
for
the year ended December 31, 2007 and 2006 were approximately $6.6 million and
$2.8 million, respectively. Total asset management fees recorded for the year
ended December 31, 2007 and 2006 were approximately $1.0 million and $0.3
million, respectively. Total acquisition expenses recorded to the Advisor for
the year ended December 31, 2007 and 2006 were $0.6 million and $0,
respectively.
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 December 31, 2007 and 2006, Lightstone SLP, LLC had contributed
$13.0 million and $4.3 million, respectively to the Operating Partnership in
exchange for special general partner interests. Lightstone SLP, LLC contributed
an additional $0.2 million in January 2008 related to 2007 offering costs.
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.
From
time
to time, Lightstone purchases title insurance from an agent in which our sponsor
owns a fifty percent limited partnership interest. Because this title insurance
agent receives significant fees for providing title insurance, our advisor
may
face a conflict of interest when considering the terms of purchasing title
insurance from this agent. However, prior to the purchase by Lightstone of
any
title insurance, an independent title consultant with more than 25 years of
experience in the title insurance industry reviews the transaction, and performs
market research and competitive analysis on our behalf. This process results
in
terms similar to those that would be negotiated at an arm’s-length
basis.
On
January 4, 2007, the Company, through LVP 1407 Broadway LLC, a wholly owned
subsidiary of the Operating Partnership, entered into a joint venture with
an
affiliate of the Sponsor (the “Joint Venture”). The Company accounted for the
investment in this unconsolidated joint venture under the equity method of
accounting as the Company exercises significant influence, but does not control
these entities. Initial equity from our co-venturer totaled $13.5 million
(representing a 51% ownership interest). Our initial capital investment, funded
with proceeds from our common stock offering, was $13.0 million (representing
a
49% ownership interest). On the same date, an indirect, wholly owned subsidiary
acquired a sub-leasehold interest in a ground lease to an office building
located at 1407 Broadway, New York, New York (the “Sublease Interest”). The
seller of the Sublease Interest, Gettinger Associates, L.P., is not an affiliate
of the Company, its Sponsor or its subsidiaries. The property, a 42 story office
building built in 1952, fronts on Broadway, 7th Avenue and 39th Street in
midtown Manhattan. The property has approximately 915,000 leasable square feet,
and as of the acquisition date, was 87.6% occupied (approximately 300
tenants) and leased by tenants generally engaged in the female apparel business.
The ground lease, dated as of January 14, 1954, provides for multiple renewal
rights, with the last renewal period expiring on December 31, 2048. The Sublease
Interest runs concurrently with this ground lease.
103
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Amper,
Politziner & Mattia audited our financial statements for the year ended
December 31, 2007 and 2006. Amper, Politziner & Mattia report directly
to our audit committee.
Principal
Accounting Firm Fees
The
following table presents the aggregate fees billed to the Lightstone REIT for
the year ended December 31, 2007 and 2006 by the Lightstone REIT’s
principal accounting firm of Amper, Politziner & Mattia:
|
|
2007
|
2006
|
|||||
|
Audit
Fees
|
$
|
150,000
|
$
|
125,000
|
|||
|
Audit-Related
Fees
|
18,250
|
41,500
|
|||||
|
Tax
Fees
|
-
|
-
|
|||||
|
All
Other Fees
|
-
|
-
|
|||||
|
|
|
|
|||||
|
Total
Fees
|
$
|
168,250
|
$
|
166,500
|
|||
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 Lightstone REIT 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.
104
PART
III, CONTINUED:
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
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, 2007.
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, 2007.
Audit
Committee
George
R.
Whittemore
Edwin
J.
Glickman
Shawn
R.
Tominus
105
PART
IV.
LIGHTSTONE
VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.
Annual
Report on Form 10-K
For
the
fiscal year ended December 31, 2007
The
following exhibits are filed as part of this Annual Report on Form 10-K or
incorporated by reference herein:
|
EXHIBIT
NO.
|
|
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.
|
|||
|
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
|
|||
|
10.7*
|
|
Purchase
and Sale Agreement between St. Augustine Outlet World, Ltd. and Prime
Outlets Acquisition Company LLC
|
|||
|
10.8*
|
|
Assignment
and Assumption of Purchase and Sale Agreement by and between Prime
Outlets
Acquisition Company LLC and LVP St. Augustine Outlets LLC
|
|||
|
10.9*
|
|
Note
and Mortgage Modification Agreement Evidencing Renewal Promissory
Note
Including Future Advance and Amended and Restated Mortgage, Security
Agreement and Fixture Filing by LVP St. Augustine Outlets LLC in
favor of
Wachovia Bank, National Association
|
|||
|
10.10*
|
|
Renewal
Promissory Note Including Future Advance by LVP St. Augustine Outlets
LLC
to the order of Wachovia Bank, National Association
|
|||
|
10.11*
|
|
Guaranty
by Lightstone Holdings, LLC for the benefit of Wachovia Bank, National
Association
|
|||
|
10.12*
|
|
Purchase
and Sale Agreement among Home Properties, L.P., Home Properties WMF
I, LLC
and The Lightstone Group, LLC
|
|||
|
10.13*
|
|
First
Amendment to Purchase and Sale Agreement among Home Properties, L.P.,
Home
Properties WMF I, LLC and The Lightstone Group, LLC
|
|||
|
10.14*
|
|
Second
Amendment to Purchase and Sale Agreement among Home Properties, L.P.,
Home
Properties WMF I, LLC and The Lightstone Group, LLC
|
|||
|
10.15*
|
|
Contribution
Agreement among Scotsdale Borrower, LLC, Carriage Park MI LLC, LLC,
Macomb
Manor MI LLC, Carriage Hill MI LLC and Citigroup Global Markets Realty
Corp.
|
|||
|
10.16*
|
|
Assignment
and Assumption of Agreement for Purchase and Sale of Interests between
The
Lightstone Group, LLC and LVP Michigan Multifamily Portfolio LLC
|
|||
|
10.17*
|
|
Loan
and Security Agreement among Scotsdale MI LLC, Carriage Park MI LLC,
Macomb Manor MI LLC, Carriage Hill MI LLC and Citigroup Global Markets
Realty Corp.
|
|||
|
10.18*
|
|
Promissory
Note by Scotsdale MI LLC, Carriage Park MI LLC, Macomb Manor MI LLC
and
Carriage Hill MI LLC in favor of Citigroup Global Markets Realty
Corp.
|
|||
|
10.19*
|
|
Mortgage
by Scotsdale MI LLC in favor of Citigroup Global Markets Realty Corp.
|
|||
|
10.20*
|
|
Mortgage
by Carriage Park MI LLC in favor of Citigroup Global Markets Realty
Corp.
|
|||
|
10.21*
|
|
Mortgage
by Macomb Manor MI LLC in favor of Citigroup Global Markets Realty
Corp.
|
|||
|
10.22*
|
|
Mortgage
by Carriage Hill MI LLC in favor of Citigroup Global Markets Realty
Corp.
|
|||
|
10.23*
|
|
Environmental
Indemnity Agreement among Scotsdale MI LLC, Carriage Park MI LLC,
Macomb
Manor MI LLC, Carriage Hill MI LLC and Citigroup Global Markets Realty
Corp.
|
106
|
EXHIBIT
NO.
|
|
DESCRIPTION
|
|||
|
10.24*
|
|
Exceptions
to Non-Recourse Guaranty by Lightstone Value Plus Real Estate Investment
Trust, Inc. and Lightstone Value Plus REIT LP for the benefit of
Citigroup
Global Markets Realty Corp.
|
|||
|
10.25*
|
|
Conditional
Assignment of Management Agreement among Scotsdale MI LLC, Carriage
Park
MI LLC, Macomb Manor MI LLC, Carriage Hill MI LLC and Citigroup Global
Markets Realty Corp.
|
|||
|
10.26**
|
|
Purchase
and Sale Agreement among Oakview Plaza North, LLC, the other sellers
identified therein and Lightstone Value Plus REIT LP
|
|||
|
10.27**
|
|
First
Amendment to Purchase and Sale Agreement among Oakview Plaza North,
LLC,
the other sellers identified therein and Lightstone Value Plus REIT
LP
|
|||
|
10.28**
|
|
Second
Amendment to Purchase and Sale Agreement among Oakview Plaza North,
LLC,
the other sellers identified therein and Lightstone Value Plus REIT
LP
|
|||
|
10.29***
|
|
Promissory
Note by LVP Oakview Strip Center LLC in favor of Wachovia Bank, National
Association
|
|||
|
10.30***
|
|
Guaranty
by Lightstone Value Plus Real Estate Investment Trust, Inc. in favor
of
Wachovia Bank, National Association
|
|||
|
10.31***
|
|
Assignment
of Leases and Rents and Security Deposits by LVP Oakview Strip Center
LLC
in favor of Wachovia Bank, National Association
|
|||
|
10.32***
|
|
Deed
of Trust, Security Agreement, Assignment of Rents and Fixture Filing
by
LVP Oakview Strip Center LLC in favor of Wachovia Bank, National
Association
|
|||
|
10.33***
|
|
Consent
and Agreement of Beacon Property Management, LLC
|
|||
|
10.34+
|
|
Assignment
and Assumption of Seller’s Interest in Operating Lease between Gettinger
Associates, L.P. and 1407 Broadway Real Estate LLC
|
|||
|
10.35+
|
|
Participation
Agreement between Gettinger Associates, L.P. and 1407 Broadway Real
Estate
LLC
|
|||
|
10.36+
|
|
Property
Management Agreement between 1407 Broadway Real Estate LLC and Trebor
Management Corp.
|
|||
|
10.37+
|
|
Leasehold
Mortgage, Assignment of Leases and Rents, Security Agreement and
Fixture
Financing Statement by 1407 Broadway Real Estate LLC in favor of
Lehman
Brothers Holdings Inc.
|
|||
|
10.38+
|
|
Promissory
Note by 1407 Broadway Real Estate LLC in favor of Lehman Brothers
Holdings
Inc.
|
|||
|
10.39+
|
|
Guaranty
of Recourse Obligations by Lightstone Holdings LLC in favor of Lehman
Brothers Holdings Inc.
|
|||
|
10.40+
|
|
Net
Profits Agreement between 1407 Broadway Real Estate LLC in favor
and
Lehman Brothers Holdings Inc.
|
|||
|
10.41++
|
|
Agreement
of Purchase and Sale
|
|||
|
10.42++
|
|
First
Amendment to Agreement of Purchase and Sale
|
|||
|
10.43+++
|
|
Assignment
and Assumption of Agreement of Purchase and Sale
|
|||
|
10.44+++
|
|
Mortgage
and Security Agreement by LVP Gulf Coast Industrial Portfolio LLC
in favor
of Wachovia Bank, National Association
|
|||
|
10.45+++
|
|
Promissory
Note by LVP Gulf Coast Industrial Portfolio LLC and the other borrowers
identified therein in favor of Wachovia Bank, National Association
|
|||
|
10.46
#
|
|
Form
of Limited Liability Company Agreement of 1407 Broadway Mezz II LLC
|
|||
|
10.47##
|
Limited
Liability Company Agreement of Whitfield Sarasota LLC.
|
||||
|
10.48##
|
Improved
Commercial Property Earnest Money Contract between Camden Operating,
L.P.
and Lightstone Value Plus REIT, L.P.
|
||||
|
10.49##
|
Form
of Multifamily Mortgage, Assignment of Rents and Security Agreement
for
the Camden Portfolio (each property in the Camden Portfolio had
substantially similar mortgages).
|
||||
|
10.50
|
Consolidated
Financial Statements for 1407 Broadway Mezz II LLC and Subsidiaries
as of
December 31, 2007.
|
||||
|
21.1
|
Subsidiaries
of the Registrant
|
||||
|
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 Rule 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
||||
|
32.2
|
Certification
Pursuant to Rule 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
107
|
EXHIBIT
NO.
|
|
DESCRIPTION
|
|||
|
99*
|
|
Letter
from Lightstone Securities to Subscribers
|
|
*
|
Incorporated
by reference from Lightstone Value Plus Real Estate Investment Trust,
Inc.’s Registration Statement on Form S-11 (File No. 333-117367)
|
|
**
|
Incorporated
by reference from Lightstone Value Plus Real Estate Investment Trust,
Inc.’s Current Report on Form 8-K, filed with the Securities and Exchange
Commission on November 6, 2006
|
|
***
|
Incorporated
by reference from Lightstone Value Plus Real Estate Investment Trust,
Inc.’s Current Report on Form 8-K, filed with the Securities and Exchange
Commission on December 27, 2006
|
|
+
|
Incorporated
by reference from Lightstone Value Plus Real Estate Investment Trust,
Inc.’s Current Report on Form 8-K, filed with the Securities and Exchange
Commission on January 10, 2007
|
|
++
|
Incorporated
by reference from Lightstone Value Plus Real Estate Investment Trust,
Inc.’s Current Report on Form 8-K, filed with the Securities and Exchange
Commission on January 18, 2007
|
|
+++
|
Incorporated
by reference from Lightstone Value Plus Real Estate Investment Trust,
Inc.’s Current Report on Form 8-K, filed with the Securities and Exchange
Commission on February 7, 2007
|
|
#
|
Incorporated
by reference from Lightstone Value Plus Real Estate Invest Trust,
Inc’s
Annual Report on Form 10-K For The Fiscal Year Ended December 31,
2006.
|
|
##
|
Incorporated
by reference from Lightstone Value Plus Real Estate Investment Trust,
Inc.’s Pre-Effective Amendment No. 1 to Post-Effective Amendment No. 12
to
the Registration Statement on Form S-11 filed with the Securities
and
Exchange Commission on January 15,
2007.
|
108
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, 2008
|
By: |
/s/
David Lichtenstein
|
|
|
David
Lichtenstein
Chief
Executive Officer 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
|
Chief
Executive Officer and Chairman of the Board
of Directors
|
March
31, 2008
|
||
|
David
Lichtenstein
|
|
|
||
|
/s/
Jenniffer Collins
|
Interim
Chief Financial Officer and Treasurer
|
March
31, 2008
|
||
|
Jenniffer
Collins
|
|
|
||
|
/s/
Bruno de Vinck
|
Director
|
March
31, 2008
|
||
|
Bruno
de Vinck
|
|
|
||
|
/s/
Shawn R. Tominus
|
Director
|
March
31, 2008
|
||
|
Shawn
R. Tominus
|
|
|
||
|
/s/
Edwin J. Glickman
|
Director
|
March
31, 2008
|
||
|
Edwin
J. Glickman
|
|
|
||
|
/s/
George R. Whittemore
|
Director
|
March
31, 2008
|
||
|
George
R. Whittemore
|
|
109