Lightstone Value Plus REIT I, Inc. - Quarter Report: 2013 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2013

OR

For the transition period from                      to

Commission file number 000-52610

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.

(Exact Name of Registrant as Specified in Its Charter)

(732) 367-0129

(Registrant’s Telephone Number, Including Area Code)

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    þ     No    ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  

Yes  þ     No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨  No þ

As of August 2, 2013, there were approximately 30.3 million outstanding shares of common stock of Lightstone Value Plus Real Estate Investment Trust, Inc., including shares issued pursuant to the dividend reinvestment plan.  

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

INDEX

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per share data)

The accompanying notes are an integral part of these consolidated financial statements.

PART I. FINANCIAL INFORMATION, CONTINUED:  

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data) (Unaudited)  

The accompanying notes are an integral part of these consolidated financial statements.

PART I. FINANCIAL INFORMATION, CONTINUED:  

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands) (Unaudited)  

The accompanying notes are an integral part of these consolidated financial statements.

PART I. FINANCIAL INFORMATION, CONTINUED:  

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Amounts in thousands) (Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

(Amounts in thousands) (Unaudited )

The accompanying notes are an integral part of these consolidated financial statements.

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

Lightstone Value Plus Real Estate Investment Trust, Inc., a Maryland corporation (“Lightstone REIT”) was formed on June 8, 2004 (date of inception) and subsequently qualified as a real estate investment trust (“REIT”) during the year ending December 31, 2006. Lightstone REIT 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.

Lightstone REIT is structured as an umbrella partnership REIT, or UPREIT, and substantially all of its 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”), in which Lightstone REIT as the general partner, held a 98.3% interest as of June 30, 2013.

The Lightstone REIT and the Operating Partnership and its subsidiaries are collectively referred to as the ‘‘Company’’ and the use of ‘‘we,’’ ‘‘our,’’ ‘‘us’’ or similar pronouns refers to the Lightstone REIT, its Operating Partnership or the Company as required by the context in which such pronoun is used.

The Company is managed by Lightstone Value Plus REIT, LLC (the “Advisor”), an affiliate of the Lightstone Group, Inc., under the terms and conditions of an advisory agreement. The Lightstone Group, Inc. previously served as the Company’s sponsor (the “Sponsor”) during its initial public offering, which closed on October 10, 2008. The Sponsor and Advisor are majority owned and controlled by David Lichtenstein, the Chairman of the Company’s board of directors (the “Board”) and its Chief Executive Officer.

The Company’s stock is not currently listed on a national securities exchange. The Company may seek to list its stock for trading on a national securities exchange only if a majority of its independent directors believe listing would be in the best interest of its stockholders. The Company does not intend to list its shares at this time. The Company does not anticipate that there would be any market for its shares of common stock until they are listed for trading. In the event the Company does not obtain listing prior to October 10, 2018 (the tenth anniversary of the completion of its initial public offering,) its charter requires that the Board of Directors must either (i) seek stockholder approval of an extension or amendment of this listing deadline; or (ii) seek stockholder approval to adopt a plan of liquidation of the corporation.

As of June 30, 2013, on a collective basis, the Company (i) wholly owned and consolidates the operating results and financial condition of 5 retail properties containing a total of approximately 0.9 million square feet of retail space, 15 industrial properties containing a total of approximately 1.3 million square feet of industrial space, 6 multi-family residential properties containing a total of 1,585 units, and 12 hotel hospitality properties containing a total of 1,620 rooms, (ii) majority owned and consolidates the operating results and financial condition of 1 residential development project, and (iii) owned an interest accounted for under the equity method of accounting in 1 office property containing a total of approximately 1.1 million square feet of office space. All of the Company’s properties are located within the United States. As of June 30, 2013, the retail properties, the industrial properties, the multi-family residential properties and the office property were 83.8%, 84.5%, 95.5% and 80.6% occupied based on a weighted-average basis, respectively. Its hotel hospitality properties’ average revenue per available room (“Rev PAR”) was $60.86 and occupancy was 66.6%, respectively for the three months ended June 30, 2013.

On July 30, 2012, the Company disposed of the Brazos Crossing Power Center (“Brazos”), a retailing shopping center located in Lake Jackson, Texas. The operating results of Brazos through its date of disposition have been classified as discontinued operations in the consolidated statements of operations.

Noncontrolling Interests

The noncontrolling interests consist of (i) parties of the Company that hold units in the Operating Partnership, (ii) notes receivable from noncontrolling interests and (iii) certain interests in consolidated subsidiaries. The units include SLP units, limited partner units, Series A Preferred Units and Common Units. The noncontrolling interests in consolidated subsidiaries include ownership interests in Pro-DFJV Holdings LLC (“PRO”), LVP Rego Park, LLC (the “Rego Park Joint Venture”), 50-01 2^nd St Associates LLC (the “2^nd Street Joint Venture”), LVP CY Baton Rouge Holdings LLC (“CY Baton Rouge”), LVP RI Baton Rouge Holdings LLC, (“RI Baton Rouge”), and LVP FFI Jonesboro Holdings LLC (“FFI Jonesboro”).

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

Basis of Presentation

The consolidated financial statements include the accounts of the Lightstone REIT and its Operating Partnership and its subsidiaries (over which the Company exercises financial and operating control). All inter-company balances and transactions have been eliminated in consolidation.

The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited Consolidated Financial Statements of the Company and related notes as contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012. The unaudited interim consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair statement of the results for the periods presented. The accompanying unaudited consolidated financial statements of Lightstone Value Plus Real Estate Investment Trust, Inc. and its Subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

The consolidated balance sheet as of December 31, 2012 included herein has been derived from the consolidated balance sheet included in the Company's Annual Report on Form 10-K.

The unaudited consolidated statements of operations for interim periods are not necessarily indicative of results for the full year or any other period.

Reclassifications

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

New Accounting Pronouncements

The Company has determined that no new accounting pronouncement issued or effective during the period had or is expected to have a material impact on the financial statements.

During the first quarter of 2013, the Company received an additional $1.2 million related to the 2012 disposition of its ownership interest in Grand Prairie Holdings LLC (“GPH”) resulting from the satisfaction of certain conditions and recognized a gain on disposition of unconsolidated affiliated real estate entities in its consolidated statements of operations. See Note 13 for additional information.

During the first quarter of 2012, certain equity interests received as part of the consideration in connection with the 2010 disposition of the Company’s ownership interests in Prime Outlets Acquisition Company (“POAC”) and Mill Run LLC (“Mill Run”) were released from escrow because of the satisfaction of certain conditions and the Company recognized a previously deferred gain of $30.3 million in its consolidated statements of operations.

The entities discussed below are partially owned by the Company. The Company accounts for these investments under the equity method of accounting as the Company exercises significant influence, but does not control these entities. A summary of the Company’s investments in unconsolidated affiliated real estate entities is as follows:

1407 Broadway

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

The Company has a 49.0% ownership in 1407 Broadway, which has a sub-leasehold interest in a ground lease to an office building located at 1407 Broadway in New York, New York. During the second quarter of 2011, the Company’s share of cumulative losses resulting from its ownership interest in 1407 Broadway brought the carrying value of its investment in 1407 Broadway to zero. Since the Company was not obligated to fund 1407 Broadway’s deficits and the balance of the Company’s investment in 1407 Broadway was zero, the Company suspended the recording of its portion of equity losses or earnings from 1407 Broadway until such time as the Company’s investment in 1407 Broadway was greater than zero.

On March 11, 2013, 1407 Broadway completed a restructuring of its outstanding non-recourse mortgage note payable with a then outstanding principal balance of approximately $127.3 million with Swedbank AB. In connection with the restructuring, 1407 Broadway made a principal pay down of approximately $1.3 million, bringing the new loan balance to $126.0 million, and extended the maturity of the loan to January 12, 2023. Additionally, during the six months ended June 30, 2013, 1407 Broadway’s members made capital contributions aggregating $16.1 million, of which $13.5 million was placed into a capital reserve account with the lender pursuant to the terms of the restructuring. As a result of the Company’s capital contributions which totaled $12.1 million, it commenced recording equity earnings in the first quarter of 2013. The Company’s equity earnings for the six months ended June 30, 2013 include (i) an adjustment to record previously unrecorded losses aggregating $5.2 million through December 31, 2012 and (ii) $3.4 million of earnings representing its pro rata share of 1407 Broadway’s net income for the six months ended June 30, 2013.

1407 Broadway Financial Information

The following table represents the unaudited condensed income statement for 1407 Broadway:

* The six months ended June 30, 2013 includes an adjustment of $5,210 for previously unrecorded losses. 

The following table represents the unaudited condensed balance sheet for 1407 Broadway:

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

GPH

GPH was wholly owned by POAC through August 30, 2010. In connection with the 2010 disposition of its ownership interests in POAC and Mill Run, the Company retained its aggregate 40.0% ownership interest in GPH. The Operating Partnership and PRO owned a 25.0% and 15.0% membership interest in GPH, respectively. The Company’s ownership interest was a non-managing interest, with certain consent rights with respect to major decisions. An affiliate of the Company’s Sponsor was the majority owner and manager of GPH. Contributions, profits and cash distributions were allocated in accordance with each investor’s ownership percentage. The Company accounted for its ownership interest in GPH in accordance with the equity method of accounting.

GPH, through subsidiaries, held various ownership interests in certain entities, including ownership interests in a entity that owns an outlet center located in Grand Prairie, Texas (the “Grand Prairie Outlet Center”). On December 4, 2012, GPH disposed of these interests and on December 17, 2012, GPH was merged into Marco II LP Units, LLC which simultaneously distributed the Marco II OP Units it held to its members. As a result, the Company no longer has any investment in GPH.

GPH Financial Information

The following table represents the unaudited condensed income statement for GPH for the period indicated:

Livermore Valley Holdings LLC (“LVH”)

LVH was wholly owned by POAC through August 30, 2010. In connection with the 2010 disposition of its ownership interests in POAC and Mill Run, the Company retained its aggregate 40.0% ownership interest in LVH. The Operating Partnership and PRO owned 25.0% and 15.0% membership interests in LVH, respectively. The Company’s ownership interest was a non-managing interest, with certain consent rights with respect to major decisions. An affiliate of the Company’s Sponsor, was the majority owner and manager of LVH. Contributions, profit and cash distributions were allocated in accordance with each investor’s ownership percentage. The Company accounted for its ownership interest in LVH in accordance with the equity method of accounting.

LVH, through subsidiaries, held various ownership interests in certain entities, including ownership interests in the entity that owns an outlet center located in Livermore Valley, California (the “Livermore Valley Outlet Center”) and an entity that owns a parcel of land (the “Livermore Land Parcel”) located adjacent to the Livermore Outlet Center. On December 4, 2012, LVH disposed of these interests and on December 17, 2012, LVH was merged into Marco II LP Units, LLC which simultaneously distributed the Marco II OP Units it held to its members. As a result, the Company no longer has any investment in LVH.

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

LVH Financial Information

The following table represents the unaudited condensed income statement for LVH for the period indicated:

Arkansas Hotel Portfolio

On June 18, 2013, the Company, through FFI Jonesboro , a joint venture subsidiary of our Operating Partnership, and LVP Rogers Holdings LLC completed the portfolio acquisition of (i) a 95.0% ownership interest in a 83-room limited service hotel which operates as a Fairfield Inn & Suites by Marriott, located in Jonesboro, Arkansas which we refer to as the FFI Jonesboro Hotel, and (ii) a 100.0% ownership interest in a 130-room select service hotel which operates as a Starwood Hotel Group Aloft Hotel, located in Rogers, Arkansas which we refer to as the Aloft Rogers Hotel, collectively the “Arkansas Hotel Portfolio”, from certain limited liability companies controlled by the same seller, an unrelated third party. The remaining 5% ownership interest in FFI Jonesboro was acquired by FFIJ LLC, an unrelated third party.

The Arkansas Hotel Portfolio was acquired as part of a transaction in which the third party sellers sold a portfolio of four hotel properties, two of which comprise the Arkansas Hotel Portfolio, and two hotel properties acquired by Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone REIT II”).  The aggregate purchase price paid for the four properties was $29.1 million, of which $18.4 million related to the Arkansas Hotel Portfolio and such amount was determined based on an internal allocation of the purchase price which was approved by the separate boards of directors of the Company and Lightstone REIT II on April 11, 2013.  In real estate transactions, changes in market and economic conditions may result in upward or downward fluctuations in the estimated fair value of assets.  Because of such changes, the aggregate estimated fair value of Lightstone REIT II’s hotels exceeded their allocated purchase price by approximately $1.2 million as of the date of closing. Additionally, in connection with the acquisition, our advisor received an acquisition fee equal to 2.75% of the contractual purchase price of $18.4 million, or approximately $506.

The acquisition was funded with available cash.

We established a separate taxable REIT subsidiary, or TRS, for both the FFI Jonesboro Hotel and the Aloft Rogers Hotel, respectively, which have each entered into operating lease agreements for each respective hotel. At closing, each TRS entered into a separate management agreement with a management company for the management of the respective hotel. The management company for the FFI Jonesboro Hotel is controlled by the 5.0% minority owner of the hotel. Additionally, each respective TRS entered into a 20-year franchise agreement, or the Franchise Agreement, with Marriott and Starwood, pursuant to which the FFI Jonesboro Hotel and the Aloft Rogers Hotel, respectively, will continue to operate as a “Fairfield Inn & Suites by Marriott” and a “Starwood Hotel Group Aloft Hotel” , respectively, commencing on June 18, 2013.

The acquisition of the Arkansas Hotel Portfolio was accounted for under the purchase method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition of the Arkansas Hotel Portfolio has been allocated to the assets acquired based upon their fair values as of the date of the acquisition. The allocation of the purchase price of the Arkansas Hotel Portfolio is based upon certain preliminary valuations and other analyses that have not been completed as of the date of this filing. Any changes in the estimated fair values of the net assets recorded for these acquisitions upon the finalization of more detailed analyses will change the allocation of the purchase price.  As such, the purchase price allocations for this transaction are preliminary estimates, which are subject to change within the measurement period. Any subsequent changes to the purchase price allocations that are material will be adjusted retroactively. There was no contingent consideration related to this acquisition. Approximately $2.2 million was allocated to land and improvements, $14.2 million was allocated to building and improvements, and $2.0 million was allocated to furniture and fixtures and other assets.

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

The aggregate capitalization rate for the Arkansas Hotel Portfolio as of the closing of the acquisition was approximately 10.4%. We calculate the capitalization rate for a real property by dividing net operating income of the property by the purchase price of the property, excluding costs. For purposes of this calculation, net operating income is determined using the projected or budgeted net operating income based upon then-current projections. Additionally, net operating income is all gross revenues from the property less all operating expenses, including property taxes and management fees but excluding depreciation.

Baton Rouge Hotel Portfolio

On May 16, 2013, the Company, through LVP CY Baton Rouge Holdings LLC and LVP RI Baton Rouge Holdings, LLC, both joint venture subsidiaries of our Operating Partnership, completed the portfolio acquisition of 90% ownership interests in two limited service hotels with an a total of 229 rooms (the “Baton Rouge Hotel Portfolio”), which operate as Courtyard by Marriott and Residence Inn by Marriott, both in Baton Rouge, Louisiana, which we refer to as the CY Baton Rouge Hotel and the RI Baton Rouge Hotel, from certain limited liability companies controlled by the same seller, an unrelated third party. The remaining 10% ownership interests were acquired by PR Baton Rouge Property Partners LLC, for the CY Baton Rouge Hotel and Rouge Property Residence Inn Partners LLC, for the RI Baton Rouge Hotel, both unrelated third parties.

The aggregate cost for the Baton Rouge Hotel Portfolio was approximately $15.6 million. Additionally, in connection with the acquisition, our advisor received an acquisition fee equal to 2.75% of the contractual purchase price of $15.6 million, or approximately $0.4 million.

The acquisition was funded with available cash and the assumption of a $6.5 million mortgage due May 2017 with an interest rate of 5.56%.

We established a separate TRS for both the CY Baton Rouge Hotel and the RI Baton Rouge Hotel, respectively, which have each entered into operating lease agreements for each respective hotel. At closing, each TRS entered into a separate management agreement with a management company controlled by the minority owner of each hotel for the management of the respective hotel. Additionally, each TRS entered into a 20-year franchise agreement, or the Franchise Agreement, with Marriott, pursuant to which the CY Baton Rouge Hotel and the RI Baton Rouge Hotel will continue to operate as a “Courtyard by Marriott” and a “Residence-Inn by Marriott,” respectively, commencing on May 16, 2013.

The acquisition of the Baton Rouge Hotel Portfolio was accounted for under the purchase method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition of the Baton Rouge Hotel Portfolio has been allocated to the assets acquired based upon their fair values as of the date of the acquisition. The allocation of the purchase price of the Baton Rouge Hotel Portfolio is based upon certain preliminary valuations and other analyses that have not been completed as of the date of this filing. Any changes in the estimated fair values of the net assets recorded for these acquisitions upon the finalization of more detailed analyses will change the allocation of the purchase price.  As such, the purchase price allocations for this transaction are preliminary estimates, which are subject to change within the measurement period. Any subsequent changes to the purchase price allocations that are material will be adjusted retroactively. There was no contingent consideration related to this acquisition. Approximately $4.2 million was allocated to land and improvements, $9.7 million was allocated to building and improvements, and $1.7 million was allocated to furniture and fixtures and other assets.

The aggregate capitalization rate for the Baton Rouge Hotel Portfolio as of the closing of the acquisition was approximately 9.9%. We calculate the capitalization rate for a real property by dividing net operating income of the property by the purchase price of the property, excluding costs. For purposes of this calculation, net operating income is determined using the projected or budgeted net operating income based upon then-current projections. Additionally, net operating income is all gross revenues from the property less all operating expenses, including property taxes and management fees but excluding depreciation.

HI Auburn

On January 18, 2013, the Company acquired a Holiday Inn Express Hotel & Suites (the “HI Auburn”) located in Auburn, Alabama, from Inkbridge Acquisitions, LLC, an unrelated third party, for aggregate cash consideration of approximately $5.7 million, excluding closing and other related transaction costs. The acquisition of the HI Auburn was funded from cash. Additionally, in connection with the acquisition of the HI Auburn, the Company’s Advisor received an aggregate acquisition fee equal to 2.75% of the aggregate acquisition price, or approximately $0.2 million.

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

The acquisition of the HI Auburn was accounted for under the purchase method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition of the HI Auburn has been allocated to the assets acquired based upon their fair values as of the date of the acquisition. There was no contingent consideration related to this acquisition. Approximately $0.6 million was allocated to land, $4.3 million was allocated to building and improvements, and $0.8 million was allocated to furniture and fixtures and other assets.

The capitalization rate for the HI Auburn as of the closing of the acquisition was 14.2%. The Company calculates the capitalization rate for real property by dividing the net operating income of the property by the purchase price of the property, excluding costs. For purposes of this calculation, net operating income was determined using the projected or budgeted net operating income of the property based upon then-current projections. Additionally, net operating income is all gross revenues from the property less all operating expenses, including property taxes and management fees but excluding depreciation and amortization.

The Company established a taxable REIT subsidiary (“TRS”) for the HI Auburn which has entered into an operating lease agreement for the respective hotel. At closing, the TRS entered into a separate management agreement with an unrelated third party for the management of the respective hotel.

Financial Information

The following table provides the total amount of rental revenue and net income included in the Company’s consolidated statements of operations from the HI Auburn, the Baton Rouge Hotel Portfolio and the Arkansas Hotel Portfolio since their respective dates of acquisition for the period indicated:

The following table provides unaudited pro forma results of operations for the period indicated, as if the HI Auburn, the Baton Rouge Hotel Portfolio and the Arkansas Hotel Portfolio had been acquired at the beginning of that period. Such pro forma results are not necessarily indicative of the results that actually would have occurred had these acquisitions been completed on the date indicated, nor are they indicative of the future operating results of the combined company.

Marketable Securities:

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

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

The Marco OP Units and the Marco II OP Units are exchangeable for a similar number of common operating partnership units (“Simon OP Units”) of Simon Property Group, L.P., (“Simon OP”), the operating partnership of Simon Inc. (“Simon”). Subject to the various conditions, the Company may elect to exchange the Marco OP Units and/or the Marco II OP Units to Simon OP Units which must be immediately delivered to Simon in exchange for cash or similar number of shares of Simon’s common stock (“Simon Stock”). During the second quarter of 2013 the Company sold 156,000 Marco OP units with a cost basis of approximately $13.6 million for gross proceeds of approximately $27.5 million and realized a gain of approximately $13.9 million, which is included in gain/(loss) on sale of marketable securities, for the three and six months ended June 30, 2013 on the consolidated statements of operations .

All of the MBS were issued by various U.S. government-sponsored enterprises (Freddie Mac and Fannie Mae). The Company considers the declines in market value of its investment portfolio to be temporary in nature. The unrealized losses on the Company’s investments were caused primarily by changes in market interest rates or widening credit spreads. When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s amortized cost basis. During the three months ended June 30, 2013 and 2012, the Company did not recognize any impairment charges. As of June 30, 2013, the Company does not consider any of its investments to be other-than-temporarily impaired.

The Company may sell certain of its investments prior to their stated maturities for strategic purposes, in anticipation of credit deterioration, or for duration management. For both the three and six months ended June 30, 2013 the Company realized $13.8 million of gross gains related primarily to the sale of 156,000 Marco OP units and for the three and six months ended June 30, 2012 the Company realized $0.3 million and $0.4 million of gross losses, related to sales of securities and early redemptions of MBS by the security issuer. The maturities of the Company’s MBS generally ranged from 27 years to 30 years.

Margin Loan

The Company has access to a margin loan (the “Margin Loan”) from a financial institution that holds custody of certain of the Company’s marketable securities. The Margin Loan, which is due on demand, bears interest at Libor plus 0.85% (1.05% as of June 30, 2013) and is collateralized by the marketable securities in the Company’s account. The amounts available to the Company under the Margin Loan are at the discretion of the financial institution and not limited to the amount of collateral in its account. The amount outstanding under this Margin Loan is $22.3 million and $38.3 million as of June 30, 2013 and December 31, 2012, respectively, and is included in Notes Payable on the consolidated balance sheets.

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

Line of Credit

On September 14, 2012, the Company entered into a non-revolving credit facility (the “Line of Credit”) with a financial institution which permits borrowings up to $25.0 million. The Line of Credit expires on September 14, 2013, but may be extended at the option of the Borrower for an additional one year subject to lender’s approval. The Line of Credit bears interest at Libor plus 3.00%.

The amount outstanding under the Line of Credit is $19.9 million as of both June 30, 2013 and December 31, 2012 and is included in Notes Payable on the consolidated balance sheets.

The Line of Credit is collateralized by 440,311 Marco OP Units and PRO guaranteed the Line of Credit.

Derivative Financial Instruments

In order to manage risk related to changes in the price of Simon Stock, in 2010, the Company entered into a hedge of its Marco OP Units.  The hedge transactions were executed with Morgan Stanley on 527,803 of the Marco OP Units.  The hedges were structured as a collar where a series of puts were purchased at an average strike price of $90.32 per share and a series of calls were sold at an average strike price of $109.95 per share.  Morgan Stanley is restricted under the agreement from assigning its rights to this hedge to another counter party.

The initial collateral requirement was approximately $6.9 million and is subject to change based on changes in the share price of Simon stock.  The hedge cost $5.6 million, or $10.70 per share, and expires in December 2013. The dividends, if any, on the hedged shares continue to accrue to the Company, however Morgan Stanley has the right to adjust the put strike price for any future increases in the dividend declared by Simon Inc. and as of June 30, 2013, the strike price of the calls was adjusted to $107.73 per share.

The hedges were classified as fair value hedges and initially recorded on the consolidated balance sheets under prepaid and other assets with changes in the fair value of the hedge reported on the consolidated statements of operations. As of June 30, 2013 and December 31, 2012, the fair value of the hedges was a liability of $26.0 million and $24.2 million, respectively, recorded on the consolidated balance sheets under accounts payable and accrued expenses and the collateral requirement was approximately $27.5 million and $25.4 million, respectively. The collateral is recorded on the consolidated balance sheets under restricted escrows. For the three and six months ended June 30, 2013, a loss of $0.2 million and $1.8 million, respectively, and, for the three and six months ended June 30, 2012, a loss of $5.4 million and $13.1 million, respectively, was recorded within the consolidated statements of operations.

Fair Value Measurements

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

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

Marketable securities, available for sale, and derivative financial instruments measured at fair value on a recurring basis as of the dates indicated are as follows:

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

The Company did not have any other significant financial assets or liabilities, which would require revised valuations that are recognized at fair value.

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

Mortgages payable consists of the following:

Libor as of June 30, 2013 and December 31, 2012 was 0.19% and 0.21%, respectively. Our loans are secured by the indicated real estate and are non-recourse to the Company, with the exception of the Houston Extended Stay Hotels loans which are 35.0% recourse to the Company.

The following table shows the contractually scheduled principal maturities during the next five years and thereafter as of June 30, 2013:

Pursuant to the Company’s loan agreements, escrows in the amount of approximately $10.1 million and $9.4 million were held in restricted escrow accounts as of June 30, 2013 and December 31, 2012, respectively. Such escrows will be released in accordance with the applicable loan agreements for payments of real estate taxes, insurance and capital improvement transactions, as required. Additionally, approximately $7.0 million of cash collateral required for the 2^nd Street Project mortgage loan was held in restricted escrows as of December 31, 2012. The $7.0 million was released during the first quarter of 2013 and no cash collateral was held in escrow as of June 30, 2013. Certain of our mortgages payable also contain clauses providing for prepayment penalties.

The two loans secured by the Houston Extended Stay Hotels were scheduled to mature on June 16, 2013.  However, the Company requested, and the lender granted, a one-year extension of the loans through June 16, 2014.

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

In connection with the acquisition of the CY Baton Rouge Hotel a $6.5 million mortgage due May 2017 with an interest rate of 5.56% was assumed.

On April 18, 2013, the Company entered into a $45.0 million revolving credit facility (the “Revolving Credit Facility”) with GE Capital Franchise Finance. The Revolving Facility bears interest at Libor plus 4.95% and provides a line of credit over the next three years, with two, one-year options to extend. Under the terms of the Revolving Credit Facility, the Company may designate properties as collateral that allow the Company to borrow up to 60% of the loan-to-value ratio of the properties. The initial loan of $14.2 million under the Revolving Credit Facility was secured by the Courtyard by Marriott located in Willoughby, Ohio and both the Fairfield Inn & Suites by Marriott and the SpringHill Suites by Marriott located in West Des Moines, Iowa. The outstanding balance of the Revolving Credit Facility was $14.2 million as of June 30, 2013 and the remaining amount available under the Revolving Credit Facility was $30.8 million.

Certain of the Company’s debt agreements require the maintenance of certain ratios, including debt service coverage. The Company currently is in compliance with all of its debt covenants, with the exception of certain debt service coverage ratios on the debt associated with the Gulf Coast Industrial Portfolio.

As a result of not meeting certain debt service coverage ratios on the non-recourse mortgage indebtedness secured by the Gulf Coast Industrial Portfolio, the lender elected to retain the excess cash flow from these properties beginning in July 2011 until such time as the required coverage ratios are met for two successive quarters.  During the third quarter of 2012, the loan was transferred to a special servicer, who discontinued scheduled debt service payments and notified us that the loan was in default and due on demand.

Although the lender is currently not charging or being paid interest at the stated default rate, approximately $0.7 million of default interest was accrued during 2012 and $0.5 and $1.1 million of default interest was accrued during the three and six months ended June 30, 2013 pursuant to the terms of the loan agreement and is included in accounts payable, accrued expenses and other liabilities on our consolidated balance sheets as of June 30, 2013 and December 31, 2012, respectively.  We are currently engaged in discussions with the special servicer to restructure the loan and do not expect to pay the default interest as this mortgage indebtedness is non-recourse to us.  We believe the continued loss of excess cash flow from these properties and the placement of the non-recourse mortgage indebtedness in default will not have a material impact on our results of operations or financial position.

During the second quarter of 2012, Brazos met the criteria to be classified as held for sale. On July 30, 2012, the Company disposed of Brazos, a retail shopping center located in Lake Jackson, Texas for approximately $7.7 million. In connection with the disposition, the Company repaid in full the then outstanding mortgage indebtedness of approximately $6.2 million, which was scheduled to mature in December 2012. The Company recognized a gain on disposition of $2.1 million during the third quarter of 2012. The operating results of Brazos through the date of disposition are classified as discontinued operations in the Consolidated Statements of Operations.  

The following summary presents the operating results of Brazos included in discontinued operations in the Consolidated Statements of Operations for the periods indicated.

Cash flows generated from discontinued operations are presented separately on the Company’s consolidated statements of cash flows.

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

Basic net earnings per share is calculated by dividing net income/(loss) attributable to common shareholders by the weighted-average number of shares of common stock outstanding during the applicable period. Diluted net income/(loss) per share includes the potentially dilutive effect, if any, which would occur if our outstanding options to purchase our common stock were exercised. For all periods presented, the effect of these exercises was insignificant and, therefore, diluted net income/(loss) per share is equivalent to basic net income/(loss) per share.

The Company has agreements with the Advisor and Lightstone Value Plus REIT Management LLC (the “Property Manager”) to pay certain fees in exchange for services performed by these entities and other affiliated entities. The Company’s ability to secure financing and subsequent real estate operations are dependent upon its Advisor, Property Manager and their affiliates to perform such services as provided in these agreements. 

The Company, pursuant to the related party arrangements, has recorded the following amounts for the periods indicated:

Lightstone SLP, LLC, an affiliate of the Company’s Sponsor, has purchased subordinated profits interests in the Operating Partnership (“SLP units”). These SLP units, the purchase price of which will be repaid only after stockholders receive a stated preferred return and their net investment, entitle Lightstone SLP, LLC to a portion of any regular distributions made by the Operating Partnership.

During the three months ended June 30, 2013, distributions of $0.5 million were declared and paid on the SLP units and are part of non controlling interests. Since inception through June 30, 2013, cumulative distributions declared were $11.8 million, of which $11.3 million were paid. See Notes 3 and 4 for other related party transactions.

Loans Due from Affiliate

During the second quarter of 2013, the Company issued a $7.0 million demand note (the “Demand Note”) to Lightstone REIT II. The Demand Note is due on demand and bears interest at a floating rate of LIBOR plus 4.95% (5.14% as of June 30, 2013) payable on demand. As a result of a $3.0 million paydown, the outstanding balance of the Demand Note was $4.0 million as of June 30, 2013. Additionally, in connection with the acquisitions of the Baton Rouge Hotel Portfolio and the FFI Jonesboro Hotel, the Company issued loans aggregating $0.7 million to the noncontrolling interests.

CP Boston Joint Venture

On June 27, 2013 the Company repaid Lightstone REIT II the approximately $2.3 million remaining outstanding balance on the Note it owed in connection with the purchase of its 20.0% joint venture ownership interest in the CP Boston Joint Venture effective January 1, 2012.

Rego Park Joint Venture

On April 12, 2011, LVP Rego Park, LLC, (“the Rego Park Joint Venture”) a joint venture in which the Company and Lightstone REIT II have 90.0% and 10.0%, ownership interests, respectively, acquired a $19.5 million, nonrecourse second mortgage note (the “Second Mortgage Loan”) for approximately $15.1 million from Kelmar Company, LLC ( “Kelmar”), an unrelated third party. The purchase price reflected a discount of approximately $4.4 million to the outstanding principal balance. The Company’s share of the aggregate purchase price was approximately $18.0 million. The Company consolidates the operating results and financial condition of the Rego Park Joint Venture and accounts for Lightstone REIT II’s ownership interest as a noncontrolling interest.

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

The Second Mortgage Loan was originated by Kelmar in May 2008 with an original principal balance of $19.5 million, was due May 31, 2013 and was collateralized by a 417 unit apartment complex located in Queens, New York. The Second Mortgage Loan bore interest at a fixed rate of 5.0% per annum with monthly interest only payments of approximately $0.1 million through maturity. The Rego Park Joint Venture accreted the discount using the effective interest rate method through maturity. On June 27, 2013 all amounts due to the Rego Park Joint Venture related to the Second Mortgage Loan were repaid in full.

During the six months ended June 30, 2013, the Rego Park Joint Venture made aggregate distributions of approximately $20.0 million to its members, of which approximately $2.0 million was distributed to Lightstone REIT II.

Consolidated Joint Venture

On August 18, 2011, the Operating Partnership and its Sponsor formed the 2^nd Street Joint Venture to own and operate 50-01 2^nd Street Associates LLC (the “2^nd Street Owner”).  The Operating Partnership initially owned a 75.0% membership interest in the 2^nd Street Joint Venture (the “2^nd Street JV Interest”).  The 2^nd Street JV Interest is a managing membership interest.  The Sponsor initially had a 25.0% non managing membership interest with certain consent rights with respect to major decisions. Contributions are allocated in accordance with each investor’s ownership percentage.  Profit and cash distributions, if any, will be allocated in accordance with each investor’s ownership percentage.   In addition, the 2^nd Street JV Interest had a put option (the “Put”) whereby the Operating Partnership could put a portion or all of its interest to the Sponsor through August 18, 2012 in exchange for the corresponding dollar value of its capital contributions as of the date of exercise.  On August 14, 2012, the Operating Partnership exercised the Put pursuant to which it would transfer 15.0% of its membership interest to the Sponsor effective upon obtaining a construction loan (the “Construction Loan”) for a residential project (the “2^nd Street Project”). On September 28, 2012, the Construction Loan closed and the Sponsor reimbursed the Operating Partnership approximately $4.1 million.

As of June 30, 2013, the Operating Partnership owned a 60.0% managing membership interest in the 2^nd Street Joint Venture and the Sponsor owned a 40.0% non managing membership interest. As the Operating Partnership through the 2^nd Street JV Interest has the power to direct the activities of the 2^nd Street Joint Venture that most significantly impact the performance, beginning August 18, 2011, the Company has consolidated the operating results and financial condition of the 2^nd Street Joint Venture and has accounted for the ownership interest of the Sponsor as a noncontrolling interest. 

On August 18, 2011, the 2^nd Street Owner, which is wholly owned by the 2^nd Street Joint Venture, acquired a parcel of land located in Queens, New York for approximately $19.3 million from an unaffiliated third party. The 2^nd Street Joint Venture contributed approximately $19.3 million in cash to the 2^nd Street Owner to fund the land acquisition. In connection with the acquisition of the land, the 2^nd Street Owner also obtained a $13.5 million interim Loan. During the second quarter of 2012, the 2^nd Street Owner commenced construction of the 2^nd Street Project on the acquired land.  The 2^nd Street Project is currently expected to consist of approximately 200 apartment units at an estimated total development cost of approximately $81.4 million, inclusive of the land acquisition cost, with an estimated completion in mid-2014. On September 28, 2012 the 2^nd Street Owner entered into the Construction Loan and used proceeds advanced at closing to repay the Interim Loan in full. The outstanding balance of the Construction Loan was $29.0 million and $13.5 million as of June 30, 2013 and December 31, 2012, respectively. As of June 30, 2013, the remaining amount available under the Construction Loan was $22.0 million.

The carrying amounts of cash and cash equivalents, restricted escrows, tenants’ accounts receivable, interest receivable from related parties, loans due from affiliates, accounts payable and accrued expenses, and notes payable approximated their fair values as of June 30, 2013 because of the short maturity of these instruments. The carrying amount of the mortgages receivable approximated their fair value as of June 30, 2013 based upon current market information that would have been used by a market participant to estimate the fair value of such loan.

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

The estimated fair value (in millions) of the Company’s mortgage debt is summarized as follows:

The fair value of the mortgages payable was determined by discounting the future contractual interest and principal payments by estimated current market interest rates.

The Company currently operates in four business segments as of June 30, 2013: (i) retail real estate (the “Retail Segment”), (ii) multi-family residential real estate (the “Multi-family Residential Segment”), (iii) industrial real estate (the “Industrial Segment”) and (iv) hotel hospitality (the “Hotel Hospitality Segment”). 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 three and six months ended June 30, 2013 and 2012 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 June 30, 2013 and December 31, 2012. The accounting policies of the segments are the same as those described in Note 2: Summary of Significant Accounting Policies of the Company’s December 31, 2012 Annual Report on Form 10-K. Unallocated assets, revenues and expenses relate to corporate related accounts.

The Company evaluates performance based upon net operating income/(loss) from the combined properties in each real estate segment.

As discussed in Note 8, the results of operations presented below exclude Brazos due to its classification as discontinued operations for all periods presented. Brazos was previously included in the Company’s retail segment.

Selected results of operations for the three months ended June 30, 2013 and 2012, and total assets as of June 30, 2013 and December 31, 2012 regarding the Company’s operating segments are as follows:

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

Selected results of operations for the six months ended June 30, 2012 and 2011 regarding the Company’s operating segments are as follows:

Legal Proceedings

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

On March 29, 2006, Jonathan Gould, a former member of our Board 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 has sued for damages under theories of quantum meruit and unjust enrichment seeking the value of work he performed. On April 17, 2013, the Company agreed to settle the suit with Mr. Gould for $210.

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

On January 4, 2007, 1407 Broadway Real Estate LLC ("Office Owner"), an indirect, wholly owned subsidiary of 1407 Broadway Mezz II LLC ("1407 Broadway "), 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"). 1407 Broadway 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.

On April 12, 2012, the Supreme Court, New York County decided in favor of the Company with respect to all matters before the Court. Sublessor filed a Notice of Appeal on June 7, 2012 and, after fully briefing the issues, the parties argued the appeal on January 30, 2013.  On February 21, 2013, the Appellate Division, First Department rendered its decision largely affirming the lower court’s determination.  The Appellate Division did determine that there were two 2007 defaults that had not been cured and that the assignment of the sublease had occurred at a time when defaults existed.  The Appellate Division determined that the remedy for such defaults was not a forfeiture of the sublease.  Instead, the Appellate Division remanded to the lower court with direction that the lower court fashion a remedy short of forfeiture.  A hearing on this matter is currently pending.

On July 13, 2011, JF Capital Advisors, filed a lawsuit against The Lightstone Group, LLC, the Company, and Lightstone REIT II in the Supreme Court of the State of New York seeking payment for services alleged to have been rendered, and to be rendered prospectively, under theories of unjust enrichment and breach of contract. The plaintiff had a limited business arrangement with The Lightstone Group, LLC; that arrangement has been terminated. We filed a motion to dismiss the action and, on January 31, 2012, the Supreme Court dismissed the complaint in its entirety, but granted the plaintiff leave to replead two limited causes of action. 

The plaintiff filed an amended complaint on May 18, 2012, bringing limited claims under theories of unjust enrichment and quantum meruit. On November 21, 2012, the court dismissed this second complaint in part, leaving only approximately $164 (plus interest) in potential damages.  The plaintiff appealed this decision and we have cross-appealed arguing that the case should have been dismissed in full. We continue to believe these claims to be without merit and will defend the case vigorously.

While any proceeding or litigation has an element of uncertainty, management currently believes that the likelihood of an unfavorable outcome with respect to any of the aforementioned legal proceedings is remote. No provision for loss has been recorded in connection therewith.

As of the date hereof, the Company is not a party to any material pending legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on its results of operations or financial condition, which would require accrual or disclosure of the contingency and possible range of loss.

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

Tax Protection Agreements

In connection with the contribution of the certain ownership interests (the “Mill Run Interest”) in Mill Run and certain ownership interests (the “POAC Interest”) in POAC, our Operating Partnership entered into certain tax protection agreements (the “POAC/Mill Run Tax Protection Agreements”) with each of Arbor JRM, Arbor CJ, AR Prime, TRAC, Central Jersey and JT Prime (collectively, the “Contributors”). Under the POAC/Mill Run Tax Protection Agreements, our Operating Partnership was required to indemnify each of Arbor JRM, Arbor CJ, TRAC and Central Jersey with respect to Mill Run’s properties (the “Mill Run Properties”), and AR Prime and JT Prime, with respect to POAC’s properties (the “POAC Properties”), from June 26, 2008 for Arbor JRM, Arbor CJ and AR Prime and from August 25, 2009 for TRAC, Central Jersey and JT Prime to June 26, 2013 for, among other things, certain income tax liability that would result from the income or gain which Arbor JRM, Arbor CJ, TRAC, Central Jersey on the one hand, or AR Prime, JT Prime, on the other hand, would recognize upon the Operating Partnership’s failure to maintain the current level of debt encumbering the Mill Run Properties or the POAC Properties, respectively, or the sale or other disposition by the Operating Partnership of the Mill Run Properties, the Mill Run Interest, the POAC Properties, or the POAC Interest (each, an “Indemnifiable Event”). Under the terms of the POAC/Mill Run Tax Protection Agreements, our Operating Partnership was indemnifying the Contributors for certain income tax liabilities based on income or gain which the Contributors were deemed to be required to include in their gross income for federal or state income tax purposes (assuming the Contributors are subject to tax at the highest regional, U.S. federal, state and local tax rates imposed on individuals residing in New York City) as a result of an Indemnifiable Event. This indemnity covers income taxes, interest and penalties and was required to be made on a "grossed up" basis that effectively results in the Contributors receiving the indemnity payment on a net, after-tax basis. The amount of the potential tax indemnity to the Contributors under the POAC/Mill Run Tax Protection Agreements, including a gross-up for taxes on any such payment, using current tax rates, was estimated to be approximately $95.7 million. The POAC/Mill Run Tax Protection Agreements expired on June 26, 2013 and the Company has not recorded any liability in its consolidated balance sheets as the Company believes that the potential liability is remote as of June 30, 2013.

Each of the POAC/Mill Run Tax Protection Agreements imposed certain restrictions upon our Operating Partnership relating to transactions involving the Mill Run Properties and the POAC Properties which could have resulted in taxable income or gain to the Contributors. Our Operating Partnership could not dispose or transfer any of the Mill Run Properties or any of the POAC Properties without first proving that the Operating Partnership possessed the requisite liquidity, including the proceeds from any such transaction, to make any payments that would have come due pursuant to the POAC/Mill Run Tax Protection Agreements. However, our Operating Partnership could have taken the following actions: (i) (A) as to the POAC Properties, commencing with the period one year and thirty-one days following the date of the POAC/Mill Run Tax Protection Agreements, our Operating Partnership could have sold on an annual basis part or all of any of the POAC Properties with an aggregate value of ten percent or less of the total value of the POAC Properties as of the date of contribution (and any amounts of the ten percent value not sold could have been applied to sales in future years); and (B) as to the Mill Run Properties either the same ten percent test as set forth above in (i)(A) with respect to the Mill Run Properties or the sale of the property then known as Designer Outlet Center; and (ii) our Operating Partnership could have entered into a non-recognition transaction with either the consent of the Contributors or an opinion from an independent law or accounting firm advising that it is “more likely than not” that the transaction would not give rise to current taxable income or gain.

On August 30, 2010, the Company, its Operating Partnership and PRO (collectively, the “LVP Parties”) completed the disposition of the POAC Interest and Mill Run Interest (collectively, the “POAC/Mill Run Transaction”) to Simon and contemporaneously entered into a tax matters agreement with Simon. Additionally, the Company was advised by an independent law firm that it was “more likely than not” that the POAC/Mill Run Transaction did not give rise to current taxable income or loss.  Accordingly, the Company believed the POAC/Mill Run Transaction was a non-recognition transaction and not an Indemnifiable Event under the POAC/Mill Run Tax Protection Agreements.  Pursuant to the terms of the tax matters agreement, Simon generally may not engage in a transaction that could result in the recognition of the “built-in gain” with respect to POAC and Mill Run at the time of the closing for specified periods of up to eight years following the closing date. Simon has a number of obligations with respect to the allocation of partnership liabilities to the LVP Parties. For example, Simon agreed to maintain certain of the outstanding mortgage loans that are secured by POAC Properties and Mill Run Properties until their respective maturities, and the LVP Parties have provided and will continue to have the opportunity to provide guaranties of collection with respect to a revolving credit facility (or indebtedness incurred to refinance the revolving credit facility) for at least four years following the closing of the POAC/Mill Run Transaction. The LVP Parties were also given the opportunity to enter into agreements to make specified capital contributions to Simon Property Group, L.P. (“Simon OP”) in the event that it defaults on certain of its indebtedness. If Simon breaches its obligations under the tax matters agreement, Simon will be required to indemnify the LVP Parties for certain taxes that they are deemed to incur, including taxes relating to the recognition of “built-in gains” with respect to POAC Properties and Mill Run Properties, and gains recognized as a result of a reduction in the allocation of partnership liabilities. These indemnification payments will be “grossed up” such that the amount of the payments will equal, on an after-tax basis, the tax liability deemed incurred because of the breach.

Simon generally is required to indemnify the LVP Parties and certain affiliates of the Lightstone Group for liabilities and obligations under the POAC/Mill Run Tax Protection Agreements relating to the contributions of the Mill Run Interest and the POAC Interest (see POAC/Mill Run Tax Protection Agreements above) that are caused by Simon OP’s and Simon’s actions subsequent to the closing of the POAC/Mill Run Transaction (the “Indemnified Liabilities”). The Company and its Operating Partnership were required to indemnify Simon OP and Simon for all liabilities and obligations under the POAC/Mill Run Tax Protection Agreements other than the Indemnified Liabilities through March 1, 2012, of which there were none.

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

On December 9, 2011 and December 4, 2012, GPH, LVH and certain of their subsidiaries (collectively, the “Holding Entities”) completed the disposition of their ownership interests in the Grand Prairie Outlet Center, the Livermore Valley Outlet Center and the Livermore Land Parcel (the “Outlet Centers Transactions”) to Simon. In connection with the closing of the Outlet Centers Transactions, the Holdings Entities, the Company, the Operating Partnership, PRO and the Sponsor’s Affiliates (collectively, the “Outlet Centers Parties”) entered into a tax matters agreement with Simon pursuant to which Simon generally may not engage in a transaction that could result in the recognition of the “built-in gain” with respect to the Grand Prairie Outlet Center and the Livermore Valley Outlet Center at the time of the closing for specified periods of up to eight years following the closing date. Simon has a number of obligations with respect to the allocation of partnership liabilities to the Outlet Centers Parties For example, Simon agreed to maintain a debt level of no less than the cash portion of the proceeds from the Outlet Centers Transaction until at the fourth anniversary of the closing, and the Outlet Centers Parties have provided and will continue to have the opportunity to provide guaranties of collection with respect to a revolving credit facility (or indebtedness incurred to refinance the revolving credit facility) for at least four years following the closing of the Outlet Centers Transactions. The Outlet Centers Parties were also given the opportunity to enter into agreements to make specified capital contributions to Simon OP in the event that it defaults on certain of its indebtedness. If Simon breaches its obligations under the tax matters agreement, Simon will be required to indemnify the Outlet Centers Parties for certain taxes that they are deemed to incur, including taxes relating to the recognition of “built-in gains” with respect to the Grand Prairie Outlet Center and the Livermore Valley Outlet Center, and gains recognized as a result of a reduction in the allocation of partnership liabilities. These indemnification payments will be “grossed up” such that the amount of the payments will equal, on an after-tax basis, the tax liability deemed incurred because of the breach.