HMG HMG Courtland Properties Incorporated

Item 7A. Quantitative and Qualitative Disclosures About Market Risks.

Not Applicable to the Company.

See notes to the consolidated financial statements

See notes to the consolidated financial statements

See notes to the consolidated financial statements

See notes to the consolidated financial statements

HMG/COURTLAND PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2020 and 2019

1.  DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business and Consolidation. The consolidated financial statements include the accounts of HMG/Courtland Properties, Inc. (“we” or the “Company” or “HMG”) and entities in which the Company owns a majority voting interest or controlling financial interest. The Company was organized in 1972 and (excluding its 95% owned subsidiary Courtland Investments, Inc., which files a separate tax return) qualifies for taxation as a real estate investment trust (“REIT”) under the Internal Revenue Code. The Company’s business is the ownership and management of income-producing commercial properties and its management considers other investments if such investments offer growth or profit potential. The Company’s recurring operating revenue is from property rental operations of its corporate offices.

All material transactions and balances with consolidated and unconsolidated entities have been eliminated in consolidation or as required under the equity method.

The Company’s consolidated subsidiaries are described below:

Courtland Investments, Inc. (“CII”). In March 2016, this 95% owned corporation of the Company amended its Certificate of Incorporation so that, as amended, the holders of Class A and Class B common stock of CII shall have and possess the exclusive right to notice of and to vote at any meeting of the stockholders and any adjournment thereof, and the exclusive right to express consent to corporate action in writing without a meeting. Class A and Class B shareholders of CII shall have equal voting rights. CII is the Company’s taxable REIT subsidiary which files a separate tax return. CII’s operations are not part of the REIT tax return.

HMG Fort Myers, LLC (“HMGFM”). This wholly owned limited liability company was formed in August 2018 and in September 2018 HMGFM joined as a 25% owner of Murano At Three Oaks Associates, LLC (the “Borrower”), a newly formed Florida limited liability company. In July 2019, pursuant to the terms of a Construction and Mini Perm Loan Agreement ("Loan Agreement"), between the “Borrower”, and PNC Bank, National Association ("Lender"), Lender provided a construction loan to the Borrower for the principal sum of approximately $41.59 million (“Loan”). The proceeds of the Loan shall be used to finance the construction of multi-family residential apartments containing 318 units totaling approximately 312,000 net rentable square feet on a 17.5-acre site located in Fort Myers, Florida ("Project"). The Project site was purchased by the Borrower concurrently with the closing of the Loan. Total development costs for the Project were approximately $54.08 million and the Borrower’s equity totals approximately $14.49 million. HMG’s share of the equity is 25%, or approximately $3.62 million.

260 River Corp (“260”). This wholly owned corporation of the Company owns an approximate 70% interest in a single tenant commercially zoned building located on 6.01 acres in Montpelier, Vermont. Development of this property was completed in March 2021 and the lease has commenced. The property will be transferred to a new entity once environmental liability protection is obtained. Once transferred the Company will own approximately 28% of the property.

HMG Bayshore, LLC (“HMGBS”). This is a wholly owned Florida limited liability company which owns an investment in an entity which invests in mortgages secured by real estate.

HMG Atlanta, LLC (“HMGATL”). This is a wholly owned Florida limited liability company which owns a 1.5% interest in an entity which owned and operated two residential real estate properties located in north east Atlanta, Georgia. In December 2019, one of the properties was sold and in January 2020 the other property was sold.

Baleen Associates, Inc. (“Baleen”). This corporation is wholly owned by CII and its sole asset is a 50% interest in a partnership which operates an executive suite rental business in Coconut Grove, Florida.

Preparation of Financial Statements. The preparation of consolidated 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Income Taxes. The Company qualifies as a real estate investment trust and distributes its taxable ordinary income to stockholders in conformity with requirements of the Internal Revenue Code and is not required to report deferred items due to its ability to distribute all taxable income. In addition, net operating losses can be carried forward to reduce future taxable income but cannot be carried back. Distributed capital gains on sales of real estate as they relate to REIT activities are not subject to taxes; however, undistributed capital gains are taxed as capital gains. State income taxes are not significant. The Company’s 95%-owned taxable REIT subsidiary, CII, files a separate income tax return and its operations are not included in the REIT’s income tax return. The Company accounts for income taxes in accordance with ASC Topic 740, “Accounting for Income Taxes” (“ASC Topic 740”). This requires a Company to use the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred taxes only pertain to CII.

The Company follows the provisions of ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes” which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with ASC Topic 740, and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This topic also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Based on our evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our consolidated financial statements. Our evaluation was performed for the tax years ended December 31, 2020 and 2019. The Company’s federal income tax returns since 2016 are subject to examination by the Internal Revenue Service, generally for a period of three years after the returns were filed.

We may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. In the event we have received an assessment for interest and/or penalties, it has been classified in the consolidated financial statements as selling, general and administrative expense.

Depreciation. Depreciation of the corporate office building is computed using the straight-line method over its estimated useful life of 39.5 years. Depreciation expense for the corporate offices for each of the years ended December 31, 2020 and 2019 was approximately $15,000.

Fair Value of Financial Instruments. The Company records its financial assets and liabilities at fair value, which is defined under the applicable accounting standards 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 measure date. The Company uses valuation techniques to measure fair value, maximizing the use of observable outputs and minimizing 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 which are the following:

An investment’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The carrying value of financial instruments including other receivables, notes and advances due from related parties (if any), accounts payable and accrued expenses and mortgages and notes payable approximate their fair values at December 31, 2020 and 2019, due to their relatively short terms or variable interest rates.

Cash equivalents are classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of transparency.

The valuation of other investments on a non-recurring basis requires significant judgment by the Company’s management due to the absence of quoted market values, inherent lack of liquidity and long-term nature of such assets . Such investments are valued initially based upon transaction price. Valuations are reviewed periodically utilizing available market data and additional factors to determine if the carrying value of these investments should be adjusted. In determining valuation adjustments, emphasis is placed on market participants’ assumptions and market-based information over entity-specific information and are classified as a Level 3 investment.

Marketable Securities. The entire marketable securities portfolio (equity and debt) is classified as trading consistent with the Company’s overall investment objectives and activities. Accordingly, all unrealized gains and losses on the Company’s marketable securities investment portfolio are included in the Consolidated Statements of Income.

Gross gains and losses on the sale of marketable securities are based on the first-in first-out method of determining cost.

Marketable securities from time to time are pledged as collateral pursuant to broker margin requirements. As of December 31, 2020, and 2019, there was no such margin balance outstanding.

Treasury bills, from time to time, are pledged as collateral pursuant to broker margin requirements. As of December 31, 2020 and 2019, there was zero and approximately $9.9 million in such margin balances outstanding, respectively.

Notes and other receivables. Management periodically performs a review of amounts due on its notes and other receivable balances to determine if they are impaired based on factors affecting the collectability of those balances. Management’s estimates of collectability of these receivables requires management to exercise significant judgment about the timing, frequency and severity of collection losses, if any, and the underlying value of collateral, which may affect recoverability of such receivables. As of December 31, 2020, and 2019, the Company had no allowances for bad debt.

Equity investments. Investments in which the Company does not have a majority voting or financial controlling interest but has the ability to exercise influence are accounted for under the equity method of accounting, even though the Company may have a majority interest in profits and losses. The Company follows ASC Topic 323-30 in accounting for its investments in limited partnerships. This guidance requires the use of the equity method for limited partnership investments of more than 3 to 5 percent. Investments accounted for under the equity method of accounting are initially recorded at cost and subsequently increases and decreases the investment’s carrying value by its proportionate share of the net income or loss and other comprehensive income or loss of the investee.

For equity investments that do not have readily available fair values, the Company made an accounting policy election for a measurement alternative. These other investments are carried at cost less adjustments for other than temporary declines in value. These investments do not have available quoted market prices, so we must rely on valuations and related reports and information provided to us by those entities for the purposes of determining other-than-temporary declines. These valuations are by their nature subject to estimates which could change significantly from period to period.

(Loss) income per common share. Net (loss) income per common share (basic and diluted) is based on the net (loss) income divided by the weighted average number of common shares outstanding during each year. Diluted net income per share includes the dilutive effect of options to acquire common stock. Common shares outstanding include issued shares less shares held in treasury. There were 9,600 stock options outstanding as of December 31, 2020 and 2019. These options were not included in the diluted earnings per share computation as their effect would have been de minimums or anti-dilutive.

Gain on sales of properties. Gain on sales of properties is recognized when the minimum investment requirements have been met by the purchaser and title passes to the purchaser.

Cash and cash Equivalents. For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash and cash equivalents.

Concentration of Credit Risk. Financial instruments that potentially subject the Company to concentration of credit risk are cash and cash equivalent deposits in excess of federally insured limits, marketable securities, other receivables and notes and mortgages receivable. From time to time the Company may have bank deposits in excess of federally insured limits (presently $250,000). The Company evaluates these excess deposits and transfers amounts to brokerage accounts and other banks to mitigate this exposure. As of December 31, 2020 and 2019, we had approximately $327,000 and $239,000, respectively, of deposits in excess of federally insured limits. The Company has not experienced any losses in such accounts and believes that it is not exposed to any significant credit risk on cash.

Noncontrolling Interest. Noncontrolling interest represents the noncontrolling or minority partners’ proportionate share of the equity of the Company’s majority owned subsidiaries. A summary for the years ended December 31, 2020 and 2019 is as follows:

Revenue recognition. CII is the lessor of the Company’s principal executive offices and corporate offices of HMGA, Inc. (the “Adviser”). This lease agreement is classified as an operating lease and accordingly all rental revenue is recognized as earned based upon total fixed cash flow over the initial term of the lease, using the straight-line method. In December 2020, the lease was renewed for one year expiring on December 1, 2021, with an increase of 5% in rent for each year extended. Beginning in December 2020 the base rent is $64,324 per year payable in equal monthly installments plus sales tax during the term of the lease. The Adviser, as tenant, pays utilities, certain maintenance and security expenses relating to the leased premises.

Impairment of long-lived assets. The Company periodically reviews the carrying value of its properties and long-lived assets in relation to historical results, current business conditions and trends to identify potential situations in which the carrying value of assets may not be recoverable. If such reviews indicate that the carrying value of such assets may not be recoverable, the Company will estimate the undiscounted sum of the expected future cash flows of such assets or analyze the fair value of the asset, to determine if such sum or fair value is less than the carrying value of such assets to ascertain if a permanent impairment exists. If a permanent impairment exists, the Company would determine the fair value by using quoted market prices, if available, for such assets, or if quoted market prices are not available, the Company would discount the expected future cash flows of such assets and would adjust the carrying value of the asset to fair value. There was no impairment of long-lived assets in 2020 and 2019.

Share-based compensation.

The Company accounts for share-based compensation in accordance with ASC Topic 718 “Share-Based Payments”. The Company has used the Black-Scholes option pricing model to estimate the fair value of stock options on the dates of grant.

New accounting pronouncements.

In April 2019, the FASB made significant amendments (listed below) to ASU 2016-01 by ASU 2019-04 effective for fiscal years beginning after December 15, 2019, including interim periods therein.

HTM debt securities fair value disclosures — The amendments clarify that entities other than public business entities are exempt from the “fair value disclosure requirements for financial instruments not measured at fair value on the balance sheet.”

Measurement alternative in ASC 321-10-35-2 — The amendments in ASU 2019-04 indicate that the measurement alternative in ASC 321-10-35-2 for equity securities without readily determinable fair values represents a nonrecurring fair value measurement under ASC 820; therefore, such securities should be remeasured at fair value when an entity identifies an orderly transaction “for an identical or similar investment of the same issuer,” and applicable ASC 820 disclosures are required.

Remeasurement of equity securities at historical exchange rates — The amendments clarify that (1) an entity should remeasure equity securities without readily determinable fair values subject to the measurement alternative at historical exchange rates and (2) the historical exchange rate used should be that at the later of the acquisition date or the most recent fair value measurement date.

The amendments related to equity securities without readily determinable fair values require prospective application. The Company adopted the ASU on January 1, 2020 and did not have a material impact on the Company’s Consolidated Financial Statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments (“ASU No. 2016-13”) and subsequently issued ASU 2020-02 to clarify the adoption of ASU 2016-13. ASU No. 2016-13 affects entities holding financial assets and net investments in leases that are not accounted for at fair value through net income.  The amendments in ASU No. 2016-13 require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected.  The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net carrying value at the amount expected to be collected on the financial asset.  ASU No. 2016-13 also amends the impairment model for available-for-sale securities.  An entity will recognize an allowance for credit losses on available-for-sale debt securities as a contra-account to the amortized cost basis rather than as a direct reduction of the amortized cost basis of the investment, as is currently required.  ASU No. 2016-13 also requires new disclosures.  For financial assets measured at amortized cost, an entity will be required to disclose information about how it developed its allowance for credit losses, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes.  For financing receivables and net investments in leases measured at amortized cost, an entity will be required to further disaggregate the information it currently discloses about the credit quality of these assets by year of the asset’s origination for as many as five annual periods. For available-for-sale securities, an entity will be required to provide a roll-forward of the allowance for credit losses and an aging analysis for securities that are past due.  ASU No. 2016-13 is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework -Changes to the Disclosure Requirements for Fair Value Measurement (“ASU No. 2018-13”).  The primary focus of ASU 2018-13 is to improve the effectiveness of the disclosure requirements for fair value measurements.  ASU No. 2018-13 removes the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for the timing of transfers between levels and the valuation processes for Level 3 fair value measurements. It also adds a requirement to disclose changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and to disclose the range and weighted average of significant unobservable inputs used to develop recurring and nonrecurring Level 3 fair value measurements. For certain unobservable inputs, entities may disclose other quantitative information in lieu of the weighted average if the other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop the Level 3 fair value measurements.  In addition, public entities are required to provide information about the measurement uncertainty of recurring Level 3 fair value measurements from the use of significant unobservable inputs if those inputs reasonably could have been different at the reporting date. ASU No. 2018-13 was adopted on January 1, 2020, and did not have a material impact on the Company's consolidated financial statements.

In January 2020, the FASB issued ASU 2020-01: Investments Equity Securities (Topic 321), Investments Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The amendments clarify the treatment of transactions that require a company to apply or discontinue the equity method of accounting. The amendments are effective January 1, 2021; the Company does not expect the adoption to have a material impact on the consolidated financial statements and disclosures of the Company.

The Company does not believe that any recently issued, but not yet effective accounting standards, if currently adopted, will have a material effect on the Company’s consolidated financial position, results of operations and cash flows.

2.  INVESTMENT PROPERTIES

The components of the Company’s investment properties and the related accumulated depreciation information follow:

In March 2021, the building under construction located in Montpelier, Vermont was completed, and the single tenant’s lease commenced.

In March 2021, CII sold the 53 acres of land located in Hopkinton, Rhode Island. The sales price approximated the cost basis of the land. In July 2019, CII purchased approximately 3 acres of land contiguous to the 50 acres previously owned in Hopkinton, Rhode Island for approximately $44,000.

3. INVESTMENTS IN MARKETABLE SECURITIES

Investments in marketable securities consist primarily of large capital corporate equity and debt securities in varying industries or issued by government agencies with readily determinable fair values. These securities are stated at market value, as determined by the most recent traded price of each security at the balance sheet date. All unrealized gains (losses) on this portfolio are recorded in income. Included in investments in marketable securities is approximately $1.66 million and $1.86 million of preferred stock in large capital real estate investment trusts (REITs) as of December 31, 2020 and 2019, respectively.

For the years ended December 31, 2020 and 2019, net unrealized gains (losses) on marketable securities were approximately $93,000 and $236,000, respectively.

As of December 31, 2020, debt securities are scheduled to mature as follows:

Net (loss) gain from investments in marketable securities for the years ended December 31, 2020 and 2019 is summarized below:

Net realized loss from sales of marketable securities consisted of approximately $176,000 of losses net of $61,000 of gains for the year ended December 31, 2020. The comparable amounts in fiscal year 2019 were approximately $108,000 of gains net of $66,000 of losses.

Unrealized gains or losses of marketable securities on hand are recorded in income.

Investment gains and losses on marketable securities may fluctuate significantly from period to period in the future and could have a significant impact on the Company’s net earnings. However, the amount of investment gains or losses on marketable securities for any given period has no predictive value and variations in amount from period to period have no practical analytical value.

Investments in marketable securities give rise to exposure resulting from the volatility of capital markets. The Company attempts to mitigate its risk by diversifying its marketable securities portfolio.

4. OTHER INVESTMENTS

The Company’s other investments consist primarily of nominal equity interests in various privately held entities, including limited partnerships whose purpose is to invest venture capital funds in growth-oriented enterprises. The Company does not have significant influence over any investee and the Company’s investment typically represents less than 5% of the investee’s ownership. These investments do not meet the criteria of accounting under the equity method and accordingly are carried at cost less distributions and other than temporary unrealized losses.

The Company’s portfolio of other investments consists of 46 individual investments primarily in limited partnerships with varying investment objectives and focus. Management has categorized these investments by investment focus: technology and communications, diversified businesses, real estate related and other.

As of December 31, 2020, and 2019, other investments had an aggregate carrying value of $4.94 million and $5.59 million, respectively. As of December 31, 2020, the Company has committed to fund an additional $653,000 as required by agreements with current investees or for new investments. The carrying value of these investments is equal to contributions less distributions and other than temporary impairment loss adjustments. During the years ended December 31, 2020 and 2019 the Company made cash contributions in these investments of approximately $414,000 and $1.0 million, respectively, and received cash distributions of $750,000 and $2.1 million, respectively.

The Company’s other investments are summarized below.

Income from other investments is summarized below (excluding other than temporary impairment loss):

(a)          The gains in 2020 and 2019 consist of various cash distributions primarily from investments owning real estate and related investments and diversified businesses which made cash distributions from the sale or refinancing of operating companies or properties. During the year ended December 31, 2020, we received cash distributions from other investments of approximately $749,000. In 2020, we received a total of approximately $123,000 from a partnership which sold the remaining of its two rental apartments in Atlanta, Georgia and we recognized a gain of $123,000 (the other rental apartment was sold in December 2019 at a gain of $109,000 and we had no remaining basis in the second apartment building). In 2020, we received a total of approximately $65,000 from investments in two collateralized mortgage entities. This included a $31,000 profit distribution from the satisfaction of one residential mortgage and regular quarterly 8% preferred returns of approximately $34,000. The remaining gains from real estate and related investments were from distributions made in excess of our carrying value. The gains in 2019 primarily consisted of $429,000 from a partnership which sold its sole asset, a multifamily residential property located in Austin, Texas.

(b)          The gain from investments in diversified businesses in 2020 primarily consists of $43,000 in distributions from a private equity fund in excess of our carrying value. The gains in 2019 primarily consists $66,000 from our redemption of a stock fund and cash distributions from various investments in partnerships owning diversified businesses which made cash distributions in excess of their carrying value.

(c)          The increased net loss in 2020 as compared to 2019 from the Company’s 49% owned affiliate, T.G.I.F. Texas, Inc. (“TGIF”) was primarily due to less interest income earned by TGIF due to lower loan balances outstanding and lower interest rates. In 2020 and 2019 TGIF declared and paid a cash dividend of which the Company’s portion was approximately $221,000 in each year. These dividends were recorded as reduction in the investment carrying value as required under the equity method of accounting for investments (reference is made to Note 6, Investment in Affiliate).

Other than temporary impairment losses from other investments

The Company regularly reviews the underlying assets in its investment portfolio for events, including but not limited to bankruptcies, closures and declines in estimated fair value, that may indicate the investment has suffered other-than-temporary decline in value. When a decline is deemed other-than-temporary, an investment loss is recognized.

For year ended December 31, 2020, we have recognized a total of approximately $407,000 in impairment valuation adjustments in other investments. We recorded a total of $232,000 in OTTI adjustments representing the complete write down relating to an investment in a small business investment company licensed by the Small Business Administration in which we originally invested $300,000 in 2007 and had received distributions to date of $68,000. The other OTTI adjustment in 2020 was for $175,000 for an investment in a $2 billion global fund which invests in oil exploration and production which we committed $500,000 (plus recallable distributions) in September 2015. To date we have funded $658,000 and have received $206,000 in distributions from this investment. The write down was based on net asset value reported by the sponsor and takes into consideration the current disruptions in the oil markets because of the economic fall out of the pandemic. The adjusted carrying value in this investment as of December 31, 2020 is $277,000 and are valued on a nonrecurring basis as a Level 3 investment.

There were no OTTI losses for the year ended December 31, 2019.

Net gain or loss from other investments may fluctuate significantly from period to period in the future and could have a significant impact on the Company’s net earnings. However, the amount of investment gain or loss from other investments for any given period has no predictive value and variations in amount from period to period have no practical analytical value.

Unrealized losses from other investments

The following tables present gross unrealized losses and fair values for those investments that were in an unrealized loss position as of December 31, 2020 and 2019, aggregated by investment category and the length of time that investments have been in a continuous loss position:

5. FAIR VALUE INSTRUMENTS

In accordance with ASC Topic 820, the Company measures cash and cash equivalents, marketable debt and equity securities at fair value on a recurring basis. Other investments are measured at fair value on a nonrecurring basis.

The following are the major categories of assets and liabilities measured at fair value on a recurring basis during the years ended December 31, 2020 and 2019, using quoted prices in active markets for identical assets (Level 1) and significant other observable inputs (Level 2). For the years ended December 31, 2020 and 2019, there were no major assets or liabilities measured at fair value on a recurring basis which uses significant unobservable inputs (Level 3):

Carrying amount is the estimated fair value for corporate debt securities and time deposits based on a market-based approach using observable (Level 2) inputs such as prices of similar assets in active markets.

6. INVESTMENT IN AFFILIATE

Investment in affiliate consists of CII’s 49% equity interest in T.G. I.F. Texas, Inc. (“TGIF”). TGIF is a corporation which holds promissory notes receivable from its shareholders, including CII and Maurice Wiener, the Chairman of both the Company and TGIF. Reference is made to Note 9 for discussion on notes payable by CII to TGIF. This investment is recorded under the equity method of accounting. For the years ended December 31, 2020 and 2019, (loss) income from investment in affiliate amounted to approximately ($15,000) and $25,000, respectively and is included in income from other investments in HMG’s consolidated statements of income. In 2020 and 2019 TGIF declared and paid a cash dividend of $.08 per share each year. CII’s dividend amount received in 2020 and 2019 was approximately $221,000. This dividend is recorded as a reduction in the carrying amount of CII investment in T.G.I.F. as required under the equity method of accounting.

In October 2019, the Company entered into a loan participation agreement for $200,000 earning 10% interest payable monthly and maturing June 30, 2022. In January 2020, the loan was repaid, and we received our principal and all interest due under the loan participation.

8.   INVESTMENT IN RESIDENTIAL REAL ESTATE PARTNERSHIP

As previously reported on Form 8-K dated July 19, 2019, pursuant to the terms of a Construction and Mini Perm Loan Agreement ("Loan Agreement"), between Murano At Three Oaks Associates LLC, a Florida limited liability company formed in September 2018 (the “Borrower” or “Murano”) which is 25% owned by HMG, and PNC Bank, National Association ("Lender"), Lender provided a construction loan to the Borrower for the principal sum of approximately $41.59 million (“Loan”). The proceeds of the Loan shall be used to finance the construction of multi-family residential apartments containing 318 units totaling approximately 312,000 net rentable square feet on a 17.5-acre site located in Fort Myers, Florida ("Project"). The Project site was purchased by the Borrower concurrently with the closing of the Loan. Total development costs for the Project are estimated at approximately $56.08 million and the Borrower’s equity totals approximately $14.49 million. HMG’s share of the equity is 25%, or approximately $3.62 million. As of December 31, 2020, the outstanding balance on the Loan was approximately $32.30 million. The Project has been completed and is approximately 21% leased. For the year ended December 31, 2020 Murano reported a net loss of $299,000 including $34,000 loss from operations (due to rent concessions), depreciation expense of $188,000 and $77,000 of interest expense. HMG’s portion of the 2020 loss was approximately $75,000.

HMG and the other members (or affiliates thereof) of the Borrower ("Guarantors") entered into a Completion Guaranty ("Completion Guaranty") and a Guaranty and Suretyship Agreement ("Repayment Guaranty") (collectively, the “Guaranties”). Under the Completion Guaranty, each Guarantor shall unconditionally guaranty, as a primary obligor, and become surety for the prompt payment and performance by Borrower of the “Guaranteed Obligations” (as defined). Under the Repayment Guaranty, Guarantor unconditionally guarantees, as a primary obligor, and becomes surety for the prompt payment and performance of, as defined (i) all Interest Obligations, (ii) all Loan Document Obligations, (iii) all Expense Obligations, (iv) the Carrying Cost Obligations, (v) the Principal Amount, (vi) interest on each of the foregoing including, if applicable, interest at the Default Rate (as defined). At all times prior to the First Reduction Date (as defined below), the Guarantors are collectively responsible for 30% of the Principal Obligations, (ii) at all times after the First Reduction Date, the Guarantors are collectively responsible for 15% of the Principal Obligations, and (iii) at all times after the Second Reduction Date, 0% of the Principal Obligations. First Reduction Conditions" means satisfaction of the following conditions: (i) no Event of Default has occurred and is continuing; (ii) Completion of Construction has occurred; and (iii)   the Project has achieved a DSCR of not less than 1.25 to 1.00 for two (2) consecutive fiscal quarters.

Each Guarantor is required to maintain compliance with the following financial covenants, as defined: (1) liquidity shall not be less than $2.5 million. Liquidity is defined as the sum of unencumbered, unrestricted cash and cash equivalents and marketable securities, and (2) net worth shall not be less than $10 million. As of December 31, 2020, HMG was in compliance with all covenants required by Guarantors in the Loan Agreement.

This investment is accounted for under the equity method.

9.  NOTES AND ADVANCES DUE FROM AND TRANSACTIONS WITH RELATED PARTIES

The Company has an agreement (the “Agreement”) with HMGA, Inc. (the “Adviser”) for its services as investment adviser and administrator of the Company’s affairs. All officers of the Company who are officers of the Adviser are compensated solely by the Adviser for their services.

The Adviser is majority owned by Mr. Wiener, the Company’s Chairman, CEO and President. Mr. Wiener is the Chairman of the Board, President and Chief Executive Officer of HMGA; and Carlos Camarotti is its Vice President - Finance and Assistant Secretary.

Under the terms of the Agreement, the Adviser serves as the Company’s investment adviser and, under the supervision of the directors of the Company, administers the day-to-day operations of the Company. All officers of the Company, who are officers of the Adviser, are compensated solely by the Adviser for their services. The Agreement is renewable annually upon the approval of a majority of the directors of the Company who are not affiliated with the Adviser and a majority of the Company’s shareholders. The contract may be terminated at any time on 120 days written notice by the Adviser or upon 60 days written notice by a majority of the unaffiliated directors of the Company or the holders of a majority of the Company’s outstanding shares.

On August 27, 2020, the shareholders of the Company approved the renewal of the Advisory Agreement between the Company and the Adviser for a term commencing January 1, 2021 and expiring December 31, 2021.

For the years ended December 31, 2020 and 2019, the Company and its subsidiaries incurred Adviser fees of approximately $660,000 and $741,000, respectively. This consisted of $660,000 in regular compensation for 2020 and 2019, and $81,000 in incentive fee compensation for 2019. There was no incentive fee in 2020.

The Adviser leases its executive offices from CII pursuant to a lease agreement. This lease agreement calls for base rent of $64,324 per year payable in equal monthly installments. Additionally, the Adviser is responsible for all utilities, certain maintenance, and security expenses relating to the leased premises. In December 2020, the lease was renewed for one year with an increase in rent of 5% per year.

Mr. Wiener is a 19% shareholder and the chairman and director of T.G.I.F. Texas, Inc., a 49% owned affiliate of CII. As of December 31, 2020, and 2019, T.G.I.F. had amounts due from CII in the amount of approximately $650,000 and $1,000,000, respectively. These amounts are due on demand and bear interest at the prime rate (3.25 % at December 31, 2020). All interest due has been paid.

As of December 31, 2020, and 2019, T.G.I.F. owns 10,200 shares of the Company’s common stock.

As of December 31, 2020, and 2019, T.G.I.F. had amounts due from Mr. Wiener in the amount of approximately $707,000. These amounts bear interest at the prime rate (3.25% at December 31, 2020) and principal and interest are due on demand. All interest due has been paid.

Mr. Wiener received consulting and director’s fees from T.G.I.F totaling approximately $29,000 and $23,000 for the years ended December 31, 2020 and 2019, respectively.

10. INCOME TAXES

The Company as a qualifying REIT distributes its taxable ordinary income to stockholders in conformity with requirements of the Internal Revenue Code and is not required to report deferred items due to its ability to distribute all taxable income. In addition, net operating losses can be carried forward to reduce future taxable income but cannot be carried back.

Distributed capital gains on sales of real estate as they relate to REIT activities are not subject to taxes; however, undistributed capital gains may be subject to corporate tax.

On December 11, 2020 the Company declared a dividend of $0.50 per share which was payable on January 12, 2021 to all shareholders of record as of December 29, 2020. The dividend was 100% return of capital.

On December 13, 2019 the Company declared a dividend of $0.50 per share which was payable on January 13, 2020 to all shareholders of record as of December 30, 2019. The dividend was 100% return of capital.

On December 14, 2018 the Company declared a capital gain dividend of $0.50 per share which was payable on January 9, 2019 to all shareholders of record as of December 28, 2018.

As of December 31, 2019, the Company, excluding CII (its taxable REIT subsidiary), had an estimated tax net operating loss carryover (NOL) of approximately $470,000 which was carried forward to 2020.

The Company’s 95%-owned taxable REIT subsidiary, CII, files a separate income tax return and its operations are not included in the REIT’s income tax return.

The Company accounts for income taxes in accordance with ASC Topic 740, “Accounting for Income Taxes”. ASC Topic 740 requires a Company to use the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred taxes only pertain to CII. As of December 31, 2020, and 2019, the Company has a net deferred tax liability of approximately $107,000 and $77,000, respectively, as a result of timing differences associated with the carrying value of the investment in affiliate (TGIF) and other investments. CII’s NOL carryover to 2020 is estimated at $1.16 million and is fully reserved due to due to CII historically having tax losses.

The components of income before income taxes and the effect of adjustments to tax computed at the federal statutory rate for the years ended December 31, 2020 and 2019 were as follows:

The REIT related adjustments represent the difference between estimated taxes on undistributed income and/or capital gains and book taxes computed on the REIT’s income before income taxes, including tax on prohibited REIT income.

The provision for income taxes in the consolidated statements of income consists of the following:

As of December 31, 2020, and 2019, the components of the deferred tax assets and liabilities are as follows: