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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

Annual Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

 

For the fiscal year ended December 31, 2022

 

Commission File Number: 000-53650

 

Lightstone Value Plus REIT V, Inc.

(Exact name of registrant as specified in its charter)

 

Maryland   20-8198863
(State or other jurisdiction of
incorporation or organization)		   (I.R.S. Employer
Identification No.)
     

1985 Cedar Bridge Avenue, Suite 1, Lakewood, New Jersey

   08701
(Address of principal executive offices)   (Zip Code)

 

(888) 808-7348

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to section 12(b) of the Act:

None

 

Securities registered pursuant to section 12(g) of the Act:

 

Common Stock, $.0001 par value per share

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act). Yes ☐   No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐   No ☒

 

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 ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 ☒   No ☐

 

 

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
   

Emerging growth company

☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☒

 

There is no established market for the Registrant’s common stock. The Registrant has adopted a Policy for Estimation of Common Stock Value (the “Estimated Valuation Policy”) pursuant to which it has estimated the net asset value per share of its common stock (“NAV per Share”). As of September 30, 2022, the estimated NAV per Share was $14.75. For a full description of the methodologies used to estimate the NAV per Share of the Registrant’s common stock, see Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities-Market Information” included in this Annual Report on Form 10-K. There were 20.1 million shares of common stock outstanding as of June 30, 2022, the last business day of the Registrant’s most recently completed second fiscal quarter. As of March 15, 2023, the registrant had 20.0 million shares of common stock outstanding.

 

 

 

 

 

 

LIGHTSTONE VALUE PLUS REIT V, INC.

FORM 10-K

Year Ended December 31, 2022

 

    Page
  PART I    
       
Item 1. Business.   1
       
Item 2. Properties.   4
       
Item 3. Legal Proceedings.   4
       
Item 4. Mine Safety Disclosures   4
       
  PART II    
       
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.   5
       
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.   12
       
Item 8. Financial Statements and Supplementary Data.   23
       
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.   23
       
Item 9A. Controls and Procedures.   23
       
Item 9B. Other Information.   23
       
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.   23
       
  PART III    
       
Item 10. Directors, Executive Officers and Corporate Governance.   24
       
Item 11. Executive Compensation.   28
       
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.   29
       
Item 13. Certain Relationships and Related Transactions, and Director Independence.   29
       
Item 14. Principal Accounting Fees and Services.   32
       
  PART IV    
       
Item 15. Exhibits, Financial Statement Schedules.   34
       
Item 16. Form 10-K Summary.   34
       
Signatures.     35

 

i

 

 

 

Forward-Looking Statements

 

Certain statements in this Annual Report on Form 10-K constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements include discussion and analysis of the financial condition of Lightstone Value Plus REIT V, Inc. and our subsidiaries (which may be referred to herein as the “Company,” “we,” “us” or “our”), including our ability to make accretive real estate or real estate-related investments, rent space on favorable terms, to address our debt maturities and to fund our liquidity requirements, to sell our assets when we believe advantageous to achieve our investment objectives, our anticipated capital expenditures, the amount and timing of anticipated future cash distributions to our stockholders, the estimated net asset value per share of our common stock (“NAV per Share”), and other matters. Words such as “may,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should” and variations of these words and similar expressions are intended to identify forward-looking statements.

 

These forward-looking statements are not historical facts but reflect the intent, belief or current expectations of our management based on their knowledge and understanding of the business and industry, the economy and other future conditions. These statements are not guarantees of future performance, and we caution stockholders not to place undue reliance on forward-looking statements. Actual results may differ materially from those expressed or forecasted in the forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to the factors described below:

 

● market and economic challenges experienced by the U.S. and global economies or real estate industry as a whole and the local economic conditions in the markets in which our investments are located. Additionally, our business and financial performance may be adversely affected by current and future economic and other conditions; such as inflation, recession, political upheaval or uncertainty, terrorism and acts of war, natural and man-made disasters, cybercrime, and outbreaks of contagious diseases;

 

● the availability of cash flow from operating activities for distributions, if required to maintain our status as a real estate investment trust, or REIT;

 

● conflicts of interest arising out of our relationships with our advisor and its affiliates;

 

● our ability to retain our executive officers and other key individuals who provide advisory and property management services to us;

 

● our level of debt and the terms and limitations imposed on us by our debt agreements;

 

● the availability of credit generally, and any failure to obtain debt financing at favorable terms or a failure to satisfy the conditions and requirements of that debt;

 

● our ability to make accretive investments;

 

● our ability to diversify our portfolio of assets;

 

● changes in market factors that could impact our rental rates and operating costs;

 

● our ability to secure leases at favorable rental rates;

 

● our ability to sell our assets at a price and on a timeline consistent with our investment objectives;

 

ii

 

 

● impairment charges;

 

● unfavorable changes in laws or regulations impacting our business, our assets or our key relationships; and

 

● factors that could affect our ability to qualify as a real estate investment trust.

 

Forward-looking statements in this Annual Report on Form 10-K reflect our management’s view only as of the date of this Report, and may ultimately prove to be incorrect. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results, except as required by applicable law. We intend for these forward-looking statements to be covered by the applicable safe harbor provisions created by Section 27A of the Securities Act and Section 21E of the Exchange Act.

 

Cautionary Note

 

The representations, warranties, and covenants made by us in any agreement filed as an exhibit to this Annual Report on Form 10-K are made solely for the benefit of the parties to the agreement, including, in some cases, for the purpose of allocating risk among the parties to the agreement, and should not be deemed to be representations, warranties, or covenants to or with any other parties. Moreover, these representations, warranties, or covenants should not be relied upon as accurately describing or reflecting the current state of our affairs.

 

iii

 

 

PART I

 

Item 1. Business.

 

Organization

 

Lightstone Value Plus REIT V, Inc. (“Lightstone REIT V”) which was formerly known as Lightstone Value Plus Real Estate Investment Trust V, Inc. before August 31, 2021, (which may be referred to as the “Company,” “we,” “us,” or “our”) was organized as a Maryland corporation on January 9, 2007 and has elected to be taxed, and currently qualifies, as a real estate investment trust (“REIT”) for federal income tax purposes.

 

We were formed primarily to acquire and operate commercial real estate and real estate-related assets on an opportunistic and value-add basis. In particular, we have focused generally on acquiring commercial properties with significant possibilities for capital appreciation, such as those requiring development, redevelopment or repositioning, those located in markets and submarkets with high growth potential, and those available from sellers who were distressed or faced time-sensitive deadlines. In addition, our opportunistic and value-add investment strategy has included investments in real estate-related assets that present opportunities for higher current income. Since inception, we have acquired a wide variety of commercial properties, including office, industrial, retail, hospitality, multifamily and student housing. We have purchased existing, income-producing properties and newly constructed properties. We have also invested in mortgage and mezzanine loans. We have made our investments in or in respect of real estate assets located in the United States and other countries based on our view of existing market conditions. All of our current investments are located in the United States. We currently intend to hold our various real properties until such time as our board of directors determines that a sale or other disposition appears to be advantageous to achieve our investment objectives or until it appears that the objectives will not be met. We currently have one operating segment. As of December 31, 2022, we had eight wholly owned real estate investments (multifamily properties) and one real estate-related investment (mezzanine loan). For information regarding our consolidated real estate properties, see Item 2.

 

Substantially all of our business is conducted through Lightstone REIT V OP LP, a limited partnership organized in Delaware (the “Operating Partnership”). As of December 31, 2022, our wholly-owned subsidiary, BHO II, Inc., a Delaware corporation, owned a 0.1% partnership interest in the Operating Partnership as its sole general partner. As of December 31, 2022, our wholly-owned subsidiary, BHO Business Trust II, a Maryland business trust, was the sole limited partner of the Operating Partnership and owned the remaining 99.9% interest in the Operating Partnership.

 

Our business is externally managed by LSG Development Advisor LLC (the “Advisor”), an affiliate of the Lightstone Group LLC (“Lightstone”), which provides advisory services to us and we have no employees. Lightstone is majority owned by the chairman emeritus of our board of directors, David Lichtenstein. Pursuant to the terms of an advisory agreement and subject to the oversight of our board of directors, the Advisor is responsible for managing our day-to-day affairs and for services related to the management of our assets.

 

Our office is located at 1985 Cedar Bridge Avenue, Suite 1, Lakewood, New Jersey 08701 and our toll-free telephone number is (888) 808-7348.

 

In connection with our initial capitalization, we issued 22,500 shares of our common stock and 1,000 shares of our convertible stock to our previous advisor on January 19, 2007. The 1,000 shares of convertible stock were transferred to an affiliate of Lightstone on February 10, 2017 and remain outstanding. As of December 31, 2022, we had 20.0 million shares of common stock outstanding.

 

Our common stock is not currently listed on a national securities exchange. The timing of a liquidity event for our stockholders will depend upon then prevailing market conditions and our board of directors’ assessment of our investment objectives and liquidity options for our stockholders. Currently, our board of directors has targeted June 30, 2028 for the commencement of a liquidity event. However, we can provide no assurances as to the actual timing of the commencement of a liquidity event for our stockholders or our ultimate liquidation. Furthermore, we will seek stockholder approval prior to liquidating our entire portfolio.

 

Investment Objectives

 

Our primary investment objectives are:

 

● to realize growth in the value of our investments; and

 

● generate income without subjecting our investors’ capital contribution to undue risk.

 

1

 

 

Investment Policies

 

We have and expect to continue to invest in commercial properties, such as office, industrial, retail, hospitality, multifamily, and student housing, and other real estate-related investments such as mortgage loans and mezzanine loans. Our investments may be in existing income-producing properties and newly-constructed properties that are initially identified as opportunistic and value-add investments with significant possibilities for capital appreciation due to their property-specific characteristics or their market characteristics.

 

We have and expect to continue to generally make our real estate investments in fee title or a long-term leasehold estate through the Operating Partnership or indirectly through special purpose limited liability companies or through investments in joint ventures, partnerships, co-tenancies, or other co-ownership arrangements with the developers of the properties or other persons.

 

Borrowing Policies

 

There is no limitation on the amount we may invest in or borrow related to any single property or other investment. Under our charter, the maximum amount of our indebtedness cannot exceed 300% of our “net assets” (as defined by the Statement of Policy Regarding Real Estate Investment Trusts adopted by the North American Securities Administrators Association on May 7, 2007) as of the date of any borrowing; however, we may exceed that limit if approved by a majority of our independent directors. In addition to our charter limitation, our board of directors has adopted a policy to generally limit our aggregate borrowings to approximately 75% of the aggregate value of our assets unless substantial justification exists that borrowing a greater amount is in our best interests. Our board of directors reviews our aggregate borrowings at least quarterly. As of December 31, 2022, we had an aggregate debt leverage ratio of approximately 66.8% of the aggregate value of our assets.

 

Disposition Policies

 

As each of our investments reaches what we believe to be the asset’s optimum value, we will consider disposing of the investment and may do so for the purpose of reinvesting the net sales proceeds into real estate and real estate-related investments, distributing the net sale proceeds to our stockholders or satisfying our obligations. A property may be sold at any time if, in the judgment of our Advisor and our independent board members, the sale of the property is determined to be in our best interests.

 

Tax Status

 

We elected to qualify and be taxed as a REIT commencing with the taxable year ended December 31, 2008. As a REIT, we generally will not be subject to U.S. federal income tax on our net taxable income that we distribute currently to our stockholders. To maintain our REIT qualification under the Internal Revenue Code of 1986, as amended, (the “Code”), we must meet a number of organizational and operational requirements, including a requirement that we annually distribute to our stockholders at least 90% of our REIT taxable income (which does not equal net income, as calculated in accordance with generally accepted accounting principles in the United States of America (“GAAP”)), determined without regard to the deduction for dividends paid and excluding any net capital gain. If we fail to remain qualified for taxation as a REIT in any subsequent year and do not qualify for certain statutory relief provisions, our income for that year will be taxed at the regular corporate rate, and we may be precluded from qualifying for treatment as a REIT for the four-year period following our failure to qualify as a REIT. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders. Additionally, even if we continue to qualify as a REIT for U.S. federal income tax purposes, we may still be subject to some U.S. federal, state and local taxes on our income and property and to U.S. federal income taxes and excise taxes on our undistributed income, if any.

 

To maintain our qualification as a REIT, we may engage in certain activities through taxable REIT subsidiaries (“TRSs”). As such, we may be subject to U.S. federal and state income and franchise taxes from these activities.

 

As of December 31, 2022 and 2021, we had no material uncertain income tax positions.

 

2

 

 

Current Environment

 

Our operating results are substantially impacted by the overall health of local, U.S. national and global economies and may be influenced by market and other challenges. Additionally, our business and financial performance may be adversely affected by current and future economic and other conditions; including, but not limited to, availability or terms of financings, financial markets volatility, political upheaval or uncertainty, natural and man-made disasters, terrorism and acts of war, unfavorable changes in laws and regulations, outbreaks of contagious diseases, cybercrime, loss of key relationships, inflation and recession.

 

Our overall performance depends in part on worldwide economic and geopolitical conditions and their impacts on consumer behavior. Worsening economic conditions, increases in costs due to inflation, higher interest rates, certain labor and supply chain challenges, and developments related to the COVID-19 pandemic, and other changes in economic conditions, may adversely affect our results of operations and financial performance.

 

Competition

 

We are subject to significant competition in seeking tenants for the leasing of our properties and buyers for the potential sale of our properties. The competition for creditworthy tenants is intense, and we have been required to provide rent concessions, incur charges for tenant improvements, and provide other inducements in order to lease vacant space at our properties. Without these inducements, we may not be able to continue to lease vacant space timely, or at all, which would adversely impact our results of operations. We also compete with sellers of similar properties when we sell properties, which may result in our receiving lower proceeds from the sale of our properties or not being able to sell our properties at prices that will achieve our return objectives. We compete for buyers and tenants with many third parties engaged in real estate investment activities, including other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, lenders, hedge funds, governmental bodies, and other entities. Many of our competitors, including larger REITs, have greater financial resources than we have and generally may be able to accept more risk. They also may enjoy competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies.

 

Regulations

 

Our investments are subject to various federal, state and local laws, ordinances, and regulations, including, among other things, zoning regulations, land use controls, and environmental. We believe that we have all permits and approvals necessary under current law to operate our investments.

 

Environmental

 

As an owner of real estate, we are subject to various environmental laws of federal, state, and local governments. Compliance with existing laws has not had a material adverse effect on our financial condition or results of operations, and management does not believe it will have such an impact in the future. However, we cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on properties in which we hold an interest.

 

Employees

 

We have no employees. Our Advisor and its affiliates perform a full range of real estate services for us, including asset management, accounting, legal, and property management, as well as investor relations services.

 

We are dependent on the Advisor and its affiliates for services that are essential to us, including asset management and acquisition, disposition and financing activities, and other general administrative responsibilities. If the Advisor and its affiliates are unable to provide these services to us, we would be required to provide the services ourselves or obtain the services from other sources.

 

Available Information

 

We electronically submit various filings to the United States Securities and Exchange Commission (the “SEC”) including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports. Copies of our filings with the SEC may be obtained from our website at www.lightstonecapitalmarkets.com or at the SEC’s website at www.sec.gov. Access to these filings is free of charge. We are not incorporating our website or any information from the website into this Annual Report on Form 10-K.

 

3

 

 

Item 1B. Unresolved Staff Comments.

 

None applicable.

 

Item 2. Properties.

 

General

 

The following table presents certain additional information about our wholly owned and consolidated investments in real estate properties as of December 31, 2022:

 

Property Name   Location   Date Acquired   Number of Units   Description   Encumbrances (dollars in thousands)   Occupancy
as of the end
of 2022		   Occupancy
as of the end
of 2021		   Effective
Monthly
Rent per
Unit
for 2022 (1)		   Effective
Monthly
Rent per
Unit
for 2021 (1)		  
Arbors Harbor Town   Memphis, Tennessee   December 20, 2011   345 units   Multifamily   $ 34,732   90%   94%   $ 1,697   $ 1,523  
Parkside Apartments   Sugar Land, Texas   August 8, 2013   240 units   Multifamily   $ 16,644   94%   98%   $ 1,411   $ 1,282  
Flats at Fishers   Fishers, Indiana   November 30, 2017   306 units   Multifamily   $ 37,059   94%   96%   $ 1,519   $ 1,377  
Axis at Westmont   Westmont, Illinois   November 27, 2018   400 units   Multifamily   $ 36,483   96%   93%   $ 1,453   $ 1,310  
Valley Ranch Apartments   Ann Arbor, Michigan   February 14, 2019   384 units   Multifamily   $ 43,414   95%   90%   $ 1,715   $ 1,603  
Autumn Breeze Apartments   Noblesville, Indiana   March 17, 2020   280 units   Multifamily   $ 29,920   93%   91%   $ 1,380   $ 1,232  
BayVue Apartments   Tampa, Florida   July 7, 2021   368 units   Multifamily   $ 46,443   92%   95%   $ 1,424   $ 1,155  
Citadel Apartments   Houston, Texas   October 6, 2021   293 units   Multifamily   $ 49,000   91%   96%   $ 1,676   $ 1,563  

 

 
(1) Effective monthly rent is calculated using leases in place as of December 31 of the indicated year and takes into account any rent concessions.

 

The following information generally applies to our investments in our real estate properties:

 

● we believe our real estate properties are adequately covered by insurance and suitable for their intended purpose;

 

● our real estate properties are located in markets where we are subject to competition in attracting and retaining tenants; and

 

● depreciation is provided on a straight-line basis over the estimated useful life of the applicable improvements.

 

Item 3. Legal Proceedings.

 

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

 

As of the date hereof, we are not a party to any material pending legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on our results of operations or financial condition, which would require accrual or disclosure of the contingency and possible range of loss. Additionally, we have not recorded any loss contingencies related to legal proceedings in which the potential loss is deemed to be remote.

 

Item 4. Mine Safety Disclosure.

 

None

 

4

 

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Market Information

 

There currently is no established public trading market for our shares of common stock. Therefore, there is a risk that a stockholder may not be able to sell their shares of common stock at a time or price acceptable to them. Unless and until our shares of common stock are listed on a national securities exchange, it is not expected that a public market for them will develop.

 

Estimated Net Asset Value (“NAV”) and NAV per Share of Common Stock (“NAV per Share”)

 

On November 10, 2022, pursuant to the Policy for Estimation of Common Stock Value (the “Estimated Valuation Policy”), the board of directors of Lightstone Value Plus REIT V, Inc. (the “Company,” “we,” “us,” or “our”) determined and approved our estimated NAV of approximately $295.9 million and resulting estimated NAV per Share of $14.75 both as of September 30, 2022. Our estimated NAV and resulting NAV per Share are based upon the estimated fair values of our assets and liabilities as of September 30, 2022 and are effective as of November 10, 2022.

 

The estimated NAV of our shares was calculated as of a particular point in time. The estimated NAV of our shares will fluctuate over time in response to developments related to individual assets in the portfolio and the management of those assets and in response to the real estate and finance markets. There is no assurance of the extent to which the current estimated valuation should be relied upon for any purpose after its effective date regardless that it may be published on any statement issued by us or otherwise.

 

Process and Methodology

 

Our business is externally managed by LSG Development Advisor LLC (the “Advisor”), an affiliate of The Lightstone Group LLC (“Lightstone”) which provides advisory services to us and we have no employees. Our Advisor, along with any necessary material assistance or confirmation of a third-party valuation expert or service, is responsible for calculating our estimated NAV and resulting NAV per Share, which we currently expect will be done on at least an annual basis unless and until our shares of common stock are approved for listing on a national securities exchange. Our board of directors will review and approve each estimate of NAV and resulting NAV per Share.

 

Our estimated NAV and resulting NAV per Share as of September 30, 2022 were calculated with both the assistance of our Advisor and Capright Property Advisors, LLC (“Capright”), an independent third-party valuation firm engaged to assist with the valuation of our assets and liabilities. Our Advisor recommended and our board of directors established the estimated NAV per Share based upon the analyses and reports provided by our Advisor and Capright. The process of estimating the value of our assets and liabilities is performed in accordance with our Estimated Valuation Policy and the provisions of the Investment Program Association Practice Guideline 2013-01, “Valuation of Publicly Registered Non-Listed REITs.” We believe our valuations were developed in a manner reasonably designed to ensure their reliability.

 

In arriving at an estimated NAV and resulting NAV per Share, our board of directors reviewed and considered the valuation analyses prepared by our Advisor and Capright. Our Advisor presented a report to the board of directors with an estimated NAV and resulting NAV per Share. Capright provided our board of directors an opinion that the resulting “as-is” market value for the Company’s properties, as calculated by our Advisor, and the other assets and liabilities as valued by our Advisor, along with the corresponding NAV valuation methodologies and assumptions used by our Advisor to arrive at a recommended NAV per Share of $14.75 as of September 30, 2022 were appropriate and reasonable. Our board of directors conferred with our Advisor and a representative from Capright regarding the methodologies and assumptions used to reach their respective conclusions. Our board of directors, which is responsible for determining our estimated per share value, considered all information provided in light of its own familiarity with our assets and liabilities and unanimously approved a NAV per Share of $14.75 as of September 30, 2022.

 

5

 

 

The engagement of Capright with respect to our estimated NAV and resulting NAV per Share as of September 30, 2022 was approved by our board of directors, including all of our independent directors. Capright has extensive experience in conducting asset valuations, including valuations of commercial real estate, debt, properties and real estate-related investments.

 

Capright’s opinion was subject to various limitations. In forming its opinion, Capright relied on certain information provided by our Advisor and third parties without independent verification. Our Advisor provided Capright with certain information regarding lease terms and the physical condition and capital expenditure requirements of each property. Capright did not perform engineering or structural studies or environmental studies of any of the properties, nor did they perform an independent appraisal of the other assets and liabilities included in our estimated NAV and resulting NAV per Share.

 

In forming their conclusion as to the “as-is” value of the real estate investments held by us as of September 30, 2022, Capright’s opinion was subject to various limitations. In connection with their engagement, Capright completed appraisals of all eight of our wholly owned multifamily properties. With respect to the eight appraisals performed by Capright, the scope of their work included:

 

● Review of all property level information provided by our Advisor;

 

● Physical inspection of four of our wholly owned multifamily properties to determine their physical condition and location attributes;

 

● Review of the historical performance of our real estate investments and business plans related to operations of the investments;

 

● Review of the data models prepared by the Advisor supporting the valuation for each investment; and

 

● Review of the applicable markets by means of publications and other resources to measure current market conditions, supply and demand factors, and growth patterns.

 

In addition to their appraisals of our eight wholly owned multifamily properties, Capright also evaluated the following information to arrive at their opinion of our other assets and liabilities:

 

● Review of key market assumptions for our notes payable, which consist of mortgage loans on our properties, including but not limited to interest rates and collateral;

 

● Review of our Advisor’s valuation of our note receivable, net; and

 

● Review of valuation methodology used by our Advisor for all our other assets and liabilities.

 

Capright has acted as a valuation advisor to us in connection with this assignment. The compensation paid to Capright in connection with this assignment was not contingent upon the successful completion of any transaction or conclusion reached by Capright. Capright may be engaged to provide financial advisory services to us, our Advisor, or other Lightstone-sponsored investment programs or their affiliates in the future.

 

The following is a summary of the valuation methodologies used for each type of asset:

 

Investments in real estate. We have generally focused on acquiring commercial real estate properties in various asset classes. Accordingly, Capright and our Advisor utilized a variety of valuation methodologies, each deemed appropriate for the asset type under consideration to assign an estimated value to each asset.

 

6

 

 

The value of our investments in real estate were estimated utilizing multiple valuation methods, as appropriate for each asset, including an income approach using discounted cash flow analysis and a sales comparable analysis. The key assumptions used in the discounted cash flow approach were specific to each property type, market location, and quality of each property and were based on similar investors’ return expectations and market assessments. The key assumptions are reflected in the table included under “Allocation of Estimated NAV per Share” below. In calculating values for our assets, both balance sheet and estimates of cash flow as of September 30, 2022 were used.

 

In forming its opinion, Capright prepared appraisals on our eight wholly owned multifamily properties in connection with the valuation. The appraisals estimated values by using discounted cash flow, comparable sales, or a weighting of these approaches in determining each property’s value. The appraisals employed a range of terminal capitalization rates, discount rates, growth rates, and other variables that fell within ranges that Capright and our Advisor believed would be used by similar investors to value the properties we own. The assumptions used in developing these estimates were specific to each property (including holding periods) and were determined based upon a number of factors including the market in which the property is located, the specific location of the property within the market, property and market vacancy, tenant demand for space, and investor demand and return requirements.

 

While we and our Advisor believe that the approaches used by appraisers in valuing our real estate assets, including an income approach using discounted cash flow analysis and sales comparable analysis, are standard in the real estate industry, the estimated values for our investments in real estate may or may not represent current market values or fair values determined in accordance with generally accepted accounting principles in the United States (“GAAP”). Real estate is currently carried at its amortized cost basis in our financial statements, subject to any adjustments applicable under GAAP.

 

Cash and cash equivalents. The estimated value of our cash and cash equivalents approximate their carrying value due to their short term maturities.

 

Marketable securities, available for sale. The estimated values of our marketable securities are based on Level 2 inputs. Level 2 inputs are inputs that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. All of our marketable securities measured using Level 2 inputs were valued based on a market approach using readily available quoted market prices for similar assets.

 

Restricted cash. The estimated value of our restricted cash approximate their carrying value due to their short term maturities.

 

Note receivable, net. The estimated value of our note receivable, net approximates its carrying value as of September 30, 2022 based on current market rates for similar instruments.

 

Notes payable. We have notes payable, which consist of mortgage loans, that bear interest at both variable and fixed rates. The estimated values of our variable-rate mortgage loans were deemed to approximate their carrying values because their interest rates move in conjunction with changes to market interest rates. The estimated values of our fixed-rate notes payable were estimated by the Advisor and reviewed by Capright using a discounted cash flow analysis, which used inputs based on the remaining loan terms and estimated current market interest rates for mortgage loans with similar characteristics, including remaining loan term and loan-to-value ratios. The current market interest rates for our fixed-rate notes payable were generally determined based on market rates for available comparable debt. The estimated current market interest rates for our fixed-rate mortgage loans ranged from 4.15% to 4.43%.

 

Other assets and liabilities, net. Our other assets and liabilities, net consist of prepaid expenses and other assets, and accounts payable and accrued and other liabilities. For a majority of our other assets and liabilities, the carrying values as of September 30, 2022 were considered equal to fair value by our Advisor because they are already carried at their fair value in the consolidated balance sheet or due to their cost-based characteristics or short maturities. Certain other items, primarily straight-line rent receivable, intangibles and deferred costs, have been eliminated for the purpose of the valuation because those items are already considered in our valuation of the respective investments in real estate operating properties or financial instruments (i.e., notes payable).

 

7

 

 

Common stock outstanding. In deriving an estimated NAV per Share, the total estimated NAV was divided by approximately 20.1 million, the total number of common shares outstanding as of September 30, 2022, on a fully diluted basis, which includes financial instruments that can be converted into a known or determinable number of common shares. As of the valuation date, none of our financial instruments that could be converted into common shares are currently convertible into a known or determinable number of common shares. The determination of the number of common shares outstanding used in the estimated NAV per Share is the same as used in GAAP computations for per share amounts.

 

Our estimated NAV per Share was calculated by aggregating the value of our assets, subtracting the value of our liabilities, and dividing the net amount by the fully-diluted shares of common stock outstanding, all as of September 30, 2022.

 

Allocation of Estimated NAV per Share

 

The table below sets forth the calculation of our estimated NAV per Share as of September 30, 2022, as well as the calculation of our prior estimated NAV per Share as of September 30, 2021. The estimated NAV per Share of $14.75 as of September 30, 2022, reflects an increase of $1.84, or 14.3%, from the estimated NAV per Share of $12.91 as of September 30, 2021.

 

    As of     As of  
    September 30,
2022		     September 30,
2021		  
Investments in real estate(1)   $ 25.73     $ 24.52  
Cash and cash equivalents     2.95       1.89  
Restricted cash     0.25       0.35  
Marketable securities     0.17       0.18  
Note receivable     0.28       0.68  
Notes payable     (14.34 )     (13.73 )
Other assets and liabilities, net     (0.29 )     (0.32 )
Noncontrolling interests     -       (0.66 )
Estimated NAV per Share(2)   $ 14.75     $ 12.91  

 

 

Notes:

 

(1) The following are the key assumptions (shown on a weighted average basis) used in the discounted cash flow models to estimate the value of our eight wholly owned multifamily properties.

 

Exit capitalization rate     5.98 %
Discount rate     7.14 %
Annual market rent growth     3.00 %
Average holding period (in years)     10.0  

 

(2) As of September 30, 2022, we had 20,056,618 shares of common stock outstanding. The potential dilutive effect of our common stock equivalents does not affect our estimated NAV per Share as there were no potentially dilutive securities outstanding as of the valuation date.

 

As of September 30, 2022, the aggregate estimated value of our investments in real estate was $516.0 million and the aggregate carrying value of our investments in real estate was $360.5 million, which equates to an overall increase in value of 43.1%.

 

While we believe that our assumptions utilized are reasonable, a change in these assumptions would affect the calculation of the value of our real estate assets. The table below presents the estimated increase or decrease to our estimated NAV per Share resulting from a 25 basis point increase and decrease in the discount rates and capitalization rates for our eight wholly owned multifamily properties. The table is presented to provide a hypothetical illustration of possible results if only one change in assumptions was made, with all other factors remaining constant. Further, each of these assumptions could change by more or less than 25 basis points or not at all.

 

8

 

 

    Change in NAV per Share  
    Increase of     Decrease of  
    25 basis points     25 basis points  
Capitalization rate   $ (1.19 )   $ 1.32  
Discount rate   $ (0.48 )   $ 0.48  

 

Historical Estimated NAV per Share

 

The historical reported estimated NAV per Share of our common stock as approved by our board of directors for the preceding year is set forth below:

 

$12.91   September 30, 2021   Current Report on Form 8-K filed November 12, 2021

 

Limitations and Risks

 

As with any valuation methodology, the methodology used to determine our estimated NAV and resulting NAV per Share is based upon a number of estimates and assumptions that may prove later not to be accurate or complete. Further, different participants with different property-specific and general real estate and capital market assumptions, estimates, judgments and standards could derive a different estimated NAV per Share, which could be significantly different from the estimated NAV per Share approved by our board of directors. The estimated NAV per Share approved by our board of directors does not represents the fair value of our assets and liabilities in accordance with GAAP, and such estimated NAV per Share is not a representation, warranty or guarantee that:

 

● A stockholder would be able to resell his or her shares at the estimated NAV per Share;

 

● A stockholder would ultimately realize distributions per share of common stock equal to the estimated NAV per Share upon liquidation of our assets and settlement of our liabilities or a sale of the Company;

 

● Our shares of common stock would trade at the estimated NAV per Share on a national securities exchange,

 

● An independent third-party appraiser or other third-party valuation firm would agree with the estimated NAV per Share; or

 

● The methodology used to estimate our NAV per Share would be acceptable to FINRA or under the Employee Retirement Income Security Act with respect to their respective requirements.

 

The Internal Revenue Service and the Department of Labor do not provide any guidance on the methodology an issuer must use to determine its estimated NAV per share. FINRA guidance provides that NAV valuations be derived from a methodology that conforms to standard industry practice.

 

As with any valuation methodology, our methodology is based upon a number of estimates and assumptions that may not be accurate or complete. Different parties with different assumptions and estimates could derive different estimated NAVs and resulting NAVs per share, and these differences could be significant. The estimated NAV per Share is not audited and does not represent the fair value of our assets less our liabilities in accordance GAAP, nor do they represent an actual liquidation value of our assets and liabilities or the amount shares of our common stock would trade at on a national securities exchange. Our estimated NAV per Share is based on the estimated value of our assets less the estimated value of our liabilities and other non-controlling interests divided by the number of our diluted shares of common stock outstanding, all as of the date indicated. Our estimated NAV per Share does not reflect a discount for the fact we are externally managed, nor does it reflect a real estate portfolio premium/discount versus the sum of the individual property values. Our estimated NAV per Share does not take into account estimated disposition costs or fees or penalties, if any, that may apply upon the prepayment of certain of our debt obligations or the impact of restrictions on the assumption of certain debt. Our estimated NAV per Share will fluctuate over time as a result of, among other things, future acquisitions or dispositions of assets, developments related to individual assets and the management of those assets and changes in the real estate and capital markets. Different parties using different assumptions and estimates could derive different NAVs and resulting estimated NAVs per share, and these differences could be significant. Markets for real estate and real estate-related investments can fluctuate and values are expected to change in the future. Our Estimated Valuation Policy requires us to update our estimated NAV per Share value on an annual basis. Our board of directors will review and approve each estimate of NAV and resulting estimated NAV per Share.

 

9

 

 

The following factors may cause a stockholder not to ultimately realize distributions per share of common stock equal to the estimated NAV per Share upon liquidation:

 

● The methodology used to determine estimated NAV per Share includes a number of estimates and assumptions that may not prove to be accurate or complete as compared to the actual amounts received in the liquidation.

 

● In a liquidation, certain assets may not be liquidated at their estimated values because of transfer fees and disposition fees, which are not reflected in the estimated NAV calculation.

 

● In a liquidation debt obligations may have to be prepaid and the costs of any prepayment penalties may reduce the liquidation amounts. Prepayment penalties are not included in determining the estimated value of liabilities in determining estimated NAV.

 

● In a liquidation, the real estate assets may derive a portfolio premium which premium is not considered in determining estimated NAV.

 

● In a liquidation, the potential buyers of the assets may use different estimates and assumptions than those used in determining estimated NAV.

 

● If the liquidation occurs through a listing of the common stock on a national securities exchange, the capital markets may value the Company’s net assets at a different amount than the estimated NAV. Such valuation would likely be based upon customary REIT valuation methodology including funds from operation (FFO) multiples of other comparable REITs, FFO coverage of dividends and adjusted FFO payout of the Company’s anticipated dividend.

 

● If the liquidation occurs through a merger of the Company with another REIT, the amount realized for the common stock may not equal the estimated NAV per Share because of many factors including the aggregate consideration received, the make-up of the consideration (e.g., cash, stock or both), the performance of any stock received as part of the consideration during the merger process and thereafter, the reception of the merger in the market and whether the market believes the pricing of the merger was fair to both parties.

 

Holders

 

As of March 15, 2023, we had 20.0 million shares of common stock outstanding held by 9,984 stockholders.

 

Distributions

 

Prior to 2012, our board of directors declared distributions on a regular quarterly basis based on daily record dates, portions of which were paid on a monthly basis. During the first quarter of 2012, our board of directors determined to cease regular distributions.

 

During 2014 and 2015, our board of directors declared a total of $77.1 million, or $3.00 per share of common stock, in special cash distributions, all of which were paid to stockholders during 2014, 2015, and 2016. These special cash distributions were paid with a portion of proceeds from asset sales. No further distributions were declared or paid from 2016 through 2022.

 

Future distributions, if any, declared will be at the discretion of the board of directors based on their analysis of our performance over the previous periods and expectations of performance for future periods. The board of directors will consider various factors in its determination, including but not limited to, the sources and availability of capital, operating and interest expenses, our ability to refinance near-term debt, as well as the IRS’s annual distribution requirement that REITs distribute no less than 90% of their taxable income. We cannot assure that any future distributions will be made or that we will maintain any particular level of distributions that we have previously established or may establish.

 

10

 

 

Recent Sales of Unregistered Securities

 

During the year ended December 31, 2022 and 2021, we did not sell any equity securities that were not registered under the Securities Act of 1933.

 

Share Redemption Program

 

Our board of directors has adopted a share redemption program (the “SRP”) that permits stockholders to sell their shares back to us, subject to the significant conditions and limitations of the program. Our board of directors can amend the provisions of the SRP at any time without the approval of stockholders.

 

Effective March 25, 2021, our Board of Directors reopened the SRP, which had been suspended since December 13, 2019, solely for redemptions submitted in connection with a stockholder’s death and set the price for all such purchases to our current NAV per Share, as determined by our board of directors and reported by us from time to time.

 

On November 10, 2022, our board of directors adopted a Seventh Amended and Restated Share Redemption Program (the “Amended SRP”), which became effective on January 1, 2023. Under the terms of the Amended SRP, any stockholder may request redemption of their shares, subject to the significant conditions and limitations of the program. Redemption requests will no longer be limited to requests upon the death of a qualifying stockholder, as had been the case under the SRP through December 31, 2022. Additionally, under the terms of the Amended SRP, we will redeem shares at 85% of the NAV per Share as of the date the request for redemption is approved.

 

Pursuant to the terms of the Amended SRP, any shares approved for redemption are redeemed on a periodic basis as determined by our board of directors, generally expected to be at the end of each quarterly period. However, we will not redeem, during any calendar year, more than 5% of the number of shares outstanding on last day of the previous calendar year (the “5% Limitation”). Our board of directors will set the cash available for redemption of shares not less often than annually (the “Funding Limitation” and, together with the 5% Limitation, the “Redemption Limitations”). Our board of directors has set the amount of cash available for redemption of shares for the year ended December 31, 2023 at $8.0 million, which is generally to be allocated $2.0 million for each quarterly period. We may change the amount of the Redemption Limitations upon 10 business days’ notice to our stockholders and will provide notice of any change to the Redemption Limitations by including such information in (a) a Current Report on Form 8-K or in our annual or quarterly reports, all publicly filed with the United States Securities and Exchange Commission or (b) a separate mailing to our stockholders.

 

Redemption requests will be honored pro rata among all requests received subject to the Redemption Limitations and will not be honored on a first come, first served basis.

 

Our board of directors reserves the right in its sole discretion at any time and from time to time, subject to any notice requirements described in our SRP, to (1) reject any request for redemption of shares, (2) change the purchase price for redemption of shares, (3) limit the funds to be used for redemption of shares under the SRP or otherwise change the Redemption Limitations, or (4) amend, suspend (in whole or in part) or terminate the SRP.

 

Our board of directors will continue to consider the liquidity available to stockholders going forward, balanced with other long-term interests of the stockholders and us. It is possible that in the future additional liquidity will be made available by us through the SRP, issuer tender offers or other methods, though we can make no assurances as to whether that will happen, or the timing or terms of any such liquidity.

 

During the year ended December 31, 2022 we redeemed 83,876 shares of common stock, pursuant to the SRP at an average price per share of $12.91 per share. During the year ended December 31, 2021 we redeemed 65,029 shares of common stock, pursuant to the SRP at an average price per share of $9.42 per share.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and the notes thereto.

 

Executive Overview

 

We were formed primarily to acquire and operate commercial real estate and real estate-related assets on an opportunistic and value-add basis. In particular, we have focused generally on acquiring commercial properties with significant possibilities for capital appreciation, such as those requiring development, redevelopment or repositioning, those located in markets and submarkets with high growth potential, and those available from sellers who were distressed or faced time-sensitive deadlines. In addition, our opportunistic and value-add investment strategy has included investments in real estate-related assets that present opportunities for higher current income. Since inception, we have acquired a wide variety of commercial properties, including office, industrial, retail, hospitality, multifamily and student housing. We have purchased existing, income-producing properties and newly constructed properties. We have also invested in mortgage and mezzanine loans. We have made our investments in or in respect of real estate assets located in the United States and other countries based on our view of existing market conditions. As of December 31, 2022, our investments included multifamily properties and a note receivable. All of our current investments are located in the United States. We currently intend to hold our various real properties until such time as our board of directors determines that a sale or other disposition appears to be advantageous to achieve our investment objectives or until it appears that the objectives will not be met.

 

Current Environment

 

Our operating results are substantially impacted by the overall health of local, U.S. national and global economies and may be influenced by market and other challenges. Additionally, our business and financial performance may be adversely affected by current and future economic and other conditions; including, but not limited to, availability or terms of financings, financial markets volatility, political upheaval or uncertainty, natural and man-made disasters, terrorism and acts of war, unfavorable changes in laws and regulations, outbreaks of contagious diseases, cybercrime, loss of key relationships, inflation and recession.

 

Our overall performance depends in part on worldwide economic and geopolitical conditions and their impacts on consumer behavior. Worsening economic conditions, increases in costs due to inflation, higher interest rates, certain labor and supply chain challenges, and developments related to the COVID-19 pandemic, and other changes in economic conditions, may adversely affect our results of operations and financial performance.

 

Liquidity and Capital Resources

 

We had cash and cash equivalents of $59.6 million, marketable securities, available for sale of $3.5 million and restricted cash of $5.1 million as of December 31, 2022. Our principal demands for funds going forward are expected to be for the payment of (a) operating expenses, including capital expenditures, and (b) scheduled debt service on our outstanding indebtedness, including any required interest rate cap agreements. We also may, at our discretion, use funds for (a) tender offers and/or redemptions of shares of our common stock, (b) distributions, if any, to our shareholders, and (c) selective acquisitions and/or real estate-related investments. Generally, we expect to meet our cash needs with our cash and cash equivalents on hand along with our cash flow from operations, the release of certain funds held in restricted cash, the remaining availability on certain of our mortgage loans and the repayment of our outstanding note receivable. However, to the extent that these sources are not sufficient to cover our cash needs for at least twelve months from the date of filing this report, we may also use proceeds from additional borrowings and/or selective asset sales to fund such needs.

 

We have borrowed money to acquire properties and make other investments. Under our charter, the maximum amount of our indebtedness is limited to 300% of our “net assets” (as defined by our charter) as of the date of any borrowing; however, we may exceed that limit if approved by a majority of our independent directors. In addition to our charter limitation, our board of directors has adopted a policy to generally limit our aggregate borrowings to 75% of the aggregate value of our assets unless substantial justification exists that borrowing a greater amount is in our best interests. Our policy limitation, however, does not apply to individual real estate assets.

 

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Recent Acquisition and Disposition Activities

 

Disposition of the Lakes of Margate

 

On March 17, 2021, we completed the disposition of a 280-unit multifamily property located in Margate, Florida (the “Lakes of Margate”) for a contractual sales price of $50.8 million to an unrelated third party (the “Lakes of Margate Buyer”). At closing, the Lakes of Margate Buyer paid $15.1 million and assumed the existing mortgage loan secured by the Lakes of Margate with an outstanding principal balance of $35.7 million (see “Debt Financings – Lakes of Margate Loan”). Additionally, on March 17, 2021, we paid approximately $1.1 million for the 7.5% membership interest held in the Lakes of Margate by a minority owner and as a result, at the time of the completion of the sale of the Lakes of Margate it was wholly owned by us. In connection with the disposition of the Lakes of Margate, we recognized a gain on the sale of investment property of $27.8 million during the first quarter of 2021.

 

Acquisition of the BayVue Apartments

 

On July 7, 2021, we completed the acquisition of a 368-unit multifamily property located in Tampa, Florida (the “BayVue Apartments”) from an unrelated third party, for a contractual purchase price of $59.5 million, excluding closing and other related transaction costs. The acquisition was funded with $44.3 million of initial proceeds from a mortgage financing (see “Debt Financings – BayVue Apartments Mortgage”) and $15.2 million of cash on hand, including escrowed funds released by a qualified intermediary.

 

Acquisition of the Citadel Apartments

 

On October 6, 2021, we acquired a 293-unit multifamily property located in Houston, Texas (the “Citadel Apartments”), from an unrelated third party, for a contractual purchase price of $66.0 million, excluding closing and other acquisition related costs. The acquisition was funded with $38.0 million of initial proceeds from mortgage financings (see “Debt Financings – Citadel Apartments Mortgages”) and $28.0 million of cash on hand.

 

Disposition of the River Club Properties

 

On December 22, 2021, we completed the disposition of the River Club Apartments and the Townhomes at River Club (collectively the “River Club Properties”), two student housing complexes with a total of 1,134 beds located in Athens, Georgia, for a contractual sales price of $77.3 million to an unrelated third party. In connection with the transaction, we repaid in full the existing outstanding mortgage indebtedness of $30.4 million secured by the River Club Properties. Additionally, on December 20, 2021, we paid approximately $10.2 million for the 15.0% membership interest held in the River Club Properties by a minority owner and as a result, at the time of the completion of the sale of the River Club Properties it was wholly owned by us. In connection with the disposition of the River Club Properties, we recognized a gain on the sale of investment property of $55.0 million during the fourth quarter of 2021.

 

Acquisition of Noncontrolling Interest in Parkside Apartments

 

On December 30, 2021, we acquired the noncontrolling member’s 10.0% ownership interest in a 240-unit multifamily property located in Sugar Land, Texas (the “Parkside Apartments”) for $3.6 million and as a result, now own 100% of Parkside Apartments.

 

Debt Financings

 

From time to time, we have obtained mortgage, bridge, or mezzanine loans for acquisitions and investments, as well as property development, redevelopment and renovations. In the future, we may obtain new financings for such activities or to refinance our existing real estate assets, depending on multiple factors.

 

Our aggregate notes payable balance was $290.3 million, net of deferred financing fees of $3.4 million, and had a weighted average interest rate of 4.33% as of December 31, 2022. Our aggregate notes payable balance was $277.6 million, net of deferred financing fees of $4.8 million, and had a weighted average interest rate of 3.79% as of December 31, 2021.

 

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Recent Debt Transactions

 

BayVue Apartments Mortgage

 

On July 7, 2021, we entered into a non-recourse mortgage loan facility for up to $52.2 million (the “BayVue Apartments Mortgage”) scheduled to initially mature on July 9, 2024, with two, one-year extension options, subject to the satisfaction of certain conditions. The BayVue Apartments Mortgage requires monthly interest-only payments through its maturity date and bears interest at LIBOR plus 3.00% subject to a 3.10% floor. Additionally, the BayVue Apartments Mortgage provides for a replacement benchmark rate in connection with the phase-out of LIBOR, which is expected to be for periods after June 30, 2023. The BayVue Apartments Mortgage is collateralized by the BayVue Apartments. As of December 31, 2022, the outstanding principal balance and remaining availability under the BayVue Apartments Mortgage was $46.4 million and $5.8 million, respectively. The remaining availability may be drawn for certain capital improvements to the property pursuant to the terms of the loan agreement. Pursuant to the terms of the BayVue Apartments Mortgage, we are required to enter into one or more interest rate cap agreements in the notional amount of $52.2 million for as long as the BayVue Apartments Mortgage remains outstanding. In connection with the BayVue Apartments Mortgage, we have entered into an interest rate cap agreement with a notional amount of $52.2 million pursuant to which the LIBOR rate is capped at 2.50% through July 15, 2023.

 

Flats at Fisher Supplemental Mortgage

 

On August 16, 2021, we entered into a non-recourse subordinated mortgage loan for $9.2 million (the “Flats at Fisher Supplemental Mortgage”) scheduled to mature on July 1, 2026. The Flats at Fisher Supplemental Mortgage requires monthly payments of interest and principal of $43,083 through its maturity date and bears interest at 3.85%. The Flats at Fisher Supplemental Mortgage is collateralized with a subordinated mortgage interest in the Flats at Fisher.

 

Arbors Harbor Town Supplemental Mortgage

 

On September 30, 2021, we entered into a non-recourse subordinated mortgage loan for $5.9 million (the “Arbors Harbor Town Supplemental Mortgage”) scheduled to mature on January 1, 2026. The Arbors Harbor Town Supplemental Mortgage requires monthly payments of interest and principal of $26,379 through its maturity date and bears interest at 3.52%. The Arbors Harbor Town Supplemental Mortgage is collateralized with a subordinated mortgage interest in the Arbors Harbor Town.

 

Citadel Apartments Mortgages

 

On October 6, 2021, we entered into a non-recourse mortgage loan facility for up to $39.2 million (the “Citadel Apartments Senior Mortgage”). The Citadel Apartments Senior Mortgage requires monthly interest-only payments through its maturity date and bears interest at LIBOR plus 1.50% subject to a 1.60% floor. Simultaneously, on October 6, 2021, we also entered into a non-recourse mortgage loan facility for $9.8 million (the “Citadel Apartments Junior Mortgage” and together with the Citadel Apartments Senior Mortgage, the “Citadel Apartments Mortgages”). The Citadel Apartments Junior Mortgage requires monthly interest-only payments through its maturity date and bears interest at LIBOR plus 8.75%, subject to an 8.85% floor. Additionally, the Citadel Apartments Mortgages provide for a replacement benchmark rate in connection with the phase-out of LIBOR, which is expected to be for periods after June 30, 2023.

 

The Citadel Apartments Mortgages initially mature on October 11, 2024, with two one-year extension options, subject to the satisfaction of certain conditions, and are collateralized by the Citadel Apartments while the Citadel Apartments Junior Mortgage is subordinate to the Citadel Apartments Senior Mortgage. In connection with the acquisition of the Citadel Apartments, an aggregate $38.0 million was initially funded under the Citadel Apartments Mortgages and we paid the balance of the purchase price of $28.0 million with cash. As of December 31, 2022, the aggregate outstanding principal balance and remaining availability under the Citadel Apartment Mortgages were $49.0 million. Pursuant to the terms of the Citadel Apartments Mortgages, we are required to enter into one or more interest rate cap agreements in the notional amount of $49.0 million for as long as the Citadel Apartments Mortgages remain outstanding. In connection with the Citadel Apartments Mortgages, we have entered into an interest rate cap agreement with a notional amount of $49.0 million pursuant to which the LIBOR rate is capped at 2.00% through October 11, 2023.

 

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Contractual Obligations

 

One of our principal short-term and long-term liquidity requirements includes the repayment of maturing debt. The following table provides information with respect to the contractual maturities and scheduled debt service payments of our indebtedness as of December 31, 2022 (dollars in thousands):

 

Contractual Obligations   2023     2024     2025     2026     2027     Thereafter     Total  
Mortgage Payable   $ 2,191     $ 97,905     $ 18,138     $ 147,729     $ 654     $ 27,078     $ 293,695  
Interest Payments(1)     15,280       13,165       7,609       2,698       943       2,111       41,806  
Total Contractual Obligations   $ 17,471     $ 111,070     $ 25,747     $ 150,427     $ 1,597     $ 29,189     $ 335,501  

 

 
(1) These amounts represent future interest payments related to mortgage payable obligations based on the fixed and variable interest rates specified in the associated debt agreement. All variable rate debt agreements are based on the one-month LIBOR rate. For purposes of calculating future interest amounts on variable interest rate debt the one-month LIBOR rate as of December 31, 2022 was used.

 

Results of Operations

 

As of December 31, 2022, we had eight wholly owned real estate investments (multifamily properties) and one real estate-related investment (mezzanine loan).

 

On July 7, 2021 we acquired the BayVue Apartments and on October 6, 2021 we acquired the Citadel Apartments (collectively, the “Acquisitions”).

 

On March 17, 2021 we disposed of the Lakes of Margate and on December 22, 2021 we disposed of the River Club Properties (collectively, the “Dispositions”).

 

The Dispositions did not qualify to be reported as discontinued operations since they did not represent a strategic shift that had a major effect on our operations and financial results. Accordingly, the operating results of the Dispositions are reflected in our results from continuing operations for all periods presented through their dates of disposition.

 

Year ended December 31, 2022 as compared to the year ended December 31, 2021

 

Our results of operations for the year ended December 31, 2022 compared to the same period in 2021 reflect our acquisition and disposition activities during such periods. Properties which were owned by us during the entire periods presented are referred to as our “Same Store” properties.

 

The following table provides summary information about our results of operations for the years ended December 31, 2022 and 2021 (dollars in thousands):

 

    Year Ended
December 31,		     Increase/     Percentage     Change due to     Change due to     Change due to
Same		  
    2022     2021     (Decrease)     Change     Acquisitions(1)     Dispositions(2)     Store(3)  
Rental revenues   $ 46,970     $ 43,134     $ 3,836       9.0 %   $ 7,944     $ (7,447 )   $ 3,339  
Property operating expenses     15,253       14,498       755       5.0 %     2,801       (3,080 )     1,034  
Real estate taxes     6,815       5,865       950       16.0 %     1,645       (720 )     25  
General and administrative     7,618       6,982       636       9.0 %     112       (63 )     587  
Depreciation and amortization     17,534       14,858       2,676       18.0 %     4,012       (1,561 )     225  
Interest expense, net     13,738       10,640       3,098       29.0 %     3,637       (891 )     352  

 

 
(1) Represents the effect on our operating results for the periods indicated resulting from our acquisitions of the BayVue Apartments and the Citadel Apartments.
(2) Represents the effect on our results for the periods indicated resulting from our dispositions of the Lakes of Margate and River Club Properties.
(3) Represents the change for the year ended December 31, 2022 compared to the same period in 2021 for real estate and real estate-related investments owned by us during the entire periods presented (“Same Store”). Same Store properties for the periods ended December 31, 2022 and 2021 include Arbors Harbor Town, Parkside Apartments, Flats at Fishers, Axis at Westmont, Valley Ranch Apartments and Autumn Breeze.

 

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The following table reflects total rental revenues and total property operating expenses for the years ended December 31, 2022 and 2021 for our (i) Same Store properties, (ii) acquisitions and (iii) dispositions (dollars in thousands):

 

    Year Ended
December 31,		      
Description   2022     2021     Change  
Rental Revenues:                        
Same Store   $ 35,031     $ 31,692     $ 3,339  
Acquisitions     11,939       3,995       7,944  
Disposition     -       7,447       (7,447 )
Total rental revenues   $ 46,970     $ 43,134     $ 3,836  
                         
Property operating expenses:                        
Same Store   $ 10,891     $ 9,857     $ 1,034  
Acquisitions     4,426       1,625       2,801  
Disposition     (64 )     3,016       (3,080 )
Total property operating expenses   $ 15,253     $ 14,498     $ 755  

 

The tables below reflect occupancy and effective monthly rental rates for our Same Store properties:

 

    Occupancy     Effective Monthly Rent
per Unit(1)		  
    As of
December 31,		     As of
December 31,		  
Property   2022     2021     2022     2021  
Arbors Harbor Town     90 %     94 %   $ 1,697     $ 1,523  
Parkside Apartments     94 %     98 %   $ 1,411     $ 1,282  
Flats at Fishers     94 %     96 %   $ 1,519     $ 1,377  
Axis at Westmont     96 %     93 %   $ 1,453     $ 1,310  
Valley Ranch Apartments     95 %     90 %   $ 1,715     $ 1,603  
Autumn Breeze Apartments     93 %     91 %   $ 1,380     $ 1,232  
BayVue Apartments     92 %     95 %   $ 1,424     $ 1,155  
Citadel Apartments     91 %     96 %   $ 1,676     $ 1,563  

 

 
(1) Effective monthly rent is calculated as in-place contracted monthly rental revenue, including any premiums due for short-term or month-to-month leases, less any concessions or discounts.

 

Revenues Rental revenues for the year ended December 31, 2022 were $47.0 million, an increase of $3.9 million, compared to $43.1 million for the same period 2021. Excluding the effect of our acquisition and disposition activities, our rental revenues increased by $3.3 million for our Same Store properties primarily as a result of higher average monthly rent per unit.

 

Property Operating Expenses Property operating expenses for the year ended December 31, 2022 were $15.3 million, an increase of $0.8 million, compared to $14.5 million for the same period in 2021. Excluding the effect of our acquisition and disposition activities, our property operating expenses increased by $1.0 million for our Same Store properties primarily as a result of higher utilities and repair and maintenance costs.

 

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Real Estate Taxes Real estate taxes for the year ended December 31, 2022 were $6.8 million, an increase of $0.9 million, compared to $5.9 million for the same period in 2021. Excluding the effect of our acquisition and disposition activities, our real estate taxes were unchanged for our Same Store properties.

 

General and Administrative Expenses General and administrative expenses for the year ended December 31, 2022 were $7.6 million, an increase of $0.6 million, compared to $7.0 million for the same period in 2021. The increase is principally attributable to higher asset management fees during the 2022 period resulting from our acquisition and investment activities. General and administrative expenses primarily consist of audit fees, legal fees, board of directors’ fees, and other administrative expenses, including certain costs paid to our advisor.

 

Depreciation and Amortization Depreciation and amortization for the years ended December 31, 2022 and 2021 were $17.5 million and $14.9 million, respectively. Excluding the effect of our acquisition and disposition activities, depreciation and amortization increased by $0.2 million for our Same Store properties.

 

Interest Expense, Net Interest expense, net for the year ended December 31, 2022 was $13.7 million, an increase of $3.1 million, compared to $10.6 million for the same period in 2021. Excluding the effect of our acquisition and disposition activities, interest expense increased by $0.4 million for our Same Store properties. The increase in interest expense is primarily attributable to financings associated with our multifamily properties and reflects changes in the weighted average principal outstanding during the periods primarily associated with the Arbors Harbor Town Supplemental Mortgage and Flats at Fishers Supplemental Mortgage that were both entered into during the third quarter of 2021.

 

Gain on Sale of Investment Property Our gain on the sale of investment property for the year ended December 31, 2021 of $82.8 million consists of a gain on the sale of Lakes of Margate of $27.8 million (recognized during the first quarter of 2021) and a gain on the sale of the River Club Properties of $55.0 million (recognized during the fourth quarter of 2021).

 

Gain on Disposition of Unconsolidated Joint Venture During the second quarter of 2021 we recognized a gain of $1.5 million in connection with our receipt of the final settlement of our prior participation in the residual interests of Prospect Park.

 

Mark to Market Adjustment on Derivative Financial Instruments During the years ended December 31, 2022 and 2021, we recorded positive mark to market adjustments on our derivative financial instruments of $1.8 million and $25, respectively. These mark to market adjustments represented the change in the fair value of our interest rate cap contracts during the period.

 

Income Tax Benefit During 2015, we recorded an aggregate provision for income tax of $2.7 million representing estimated foreign income tax due as a result of the sale of two foreign investments, Alte Jakobstraße and Holstenplatz. During the first quarter of 2022, we recorded an income tax benefit of $0.8 million representing a partial refund of the foreign income tax paid.

 

Interest Income Interest income for the year ended December 31, 2022 was $1.9 million, a slight decrease of $0.1 million, compared to $2.0 million for the same period in 2021. Our interest income is primarily attributable to interest earned on our note receivable.

 

Summary of Cash Flows

 

Operating activities

 

The net cash provided by operating activities of $8.5 million for the year ended December 31, 2022 consisted primarily of our net loss of $8.7 million less the positive mark to market adjustments on derivative financial instruments of $1.8 million and non-cash interest income of $0.5 million plus the net change in operating assets and liabilities of $0.5 million, depreciation and amortization of $17.5 million and amortization of deferred financing costs of $1.4 million.

 

Investing activities

 

The net cash provided by investing activities of $0.8 million for the year ended December 31, 2022 consisted of our proceeds received from the repayment of note receivable of $10.6 million partially offset by our capital expenditures of $9.8 million.

 

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Financing activities

 

The net cash provided by financing activities of $10.2 million for the year ended December 31, 2022 consisted primarily of our net proceeds from notes payable of $13.1 million partially offset by debt principal payments of $1.7 million and redemptions and cancellation of shares of common stock of $1.1 million.

 

Funds from Operations and Modified Funds from Operations

 

The historical accounting convention used for real estate assets requires straight-line depreciation of buildings, improvements, and straight-line amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time. We believe that, because real estate values historically rise and fall with market conditions, including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using the historical accounting convention for depreciation and certain other items may be less informative.

 

Because of these factors, the National Association of Real Estate Investment Trusts (“NAREIT”), an industry trade group, has published a standardized measure of performance known as funds from operations (“FFO”), which is used in the REIT industry as a supplemental performance measure. We believe FFO, which excludes certain items such as real estate-related depreciation and amortization, is an appropriate supplemental measure of a REIT’s operating performance. FFO is not equivalent to our net income or loss as determined under GAAP.

 

We calculate FFO, a non-GAAP measure, consistent with the standards established over time by the Board of Governors of NAREIT, as restated in a White Paper approved by the Board of Governors of NAREIT effective in December 2018 (the “White Paper”). The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding depreciation and amortization related to real estate, gains and losses from the sale of certain real estate assets, gains and losses from change in control and impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. Our FFO calculation complies with NAREIT’s definition.

 

We believe that the use of FFO provides a more complete understanding of our performance to investors and to management, and reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income.

 

Changes in the accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT’s definition of FFO, such as the change to expense as incurred rather than capitalize and depreciate acquisition fees and expenses incurred for business combinations, have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed under GAAP across all industries. These changes had a particularly significant impact on publicly registered, non-listed REITs, which typically have a significant amount of acquisition activity in the early part of their existence, particularly during the period when they are raising capital through ongoing initial public offerings.

 

Because of these factors, the Investment Program Association (the “IPA”), an industry trade group, published a standardized measure of performance known as modified funds from operations (“MFFO”), which the IPA has recommended as a supplemental measure for publicly registered, non-listed REITs. MFFO is designed to be reflective of the ongoing operating performance of publicly registered, non-listed REITs by adjusting for those costs that are more reflective of acquisitions and investment activity, along with other items the IPA believes are not indicative of the ongoing operating performance of a publicly registered, non-listed REIT, such as straight-lining of rents as required by GAAP. We believe it is appropriate to use MFFO as a supplemental measure of operating performance because we believe that both before and after we have deployed all of our offering proceeds and are no longer incurring a significant amount of acquisition fees or other related costs, it reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. MFFO is not equivalent to our net income or loss as determined under GAAP.

 

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We define MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the “Practice Guideline”) issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for acquisition and transaction-related fees and expenses and other items. In calculating MFFO, we follow the Practice Guideline and exclude acquisition and transaction-related fees and expenses (which includes costs incurred in connection with strategic alternatives), amounts relating to deferred rent receivables and amortization of market lease and other intangibles, net (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), accretion of discounts and amortization of premiums on debt investments and borrowings, mark-to-market adjustments included in net income (including gains or losses incurred on assets held for sale), gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. Certain of the above adjustments are also made to reconcile net income (loss) to net cash provided by (used in) operating activities, such as for the amortization of a premium and accretion of a discount on debt and securities investments, amortization of fees, any unrealized gains (losses) on derivatives, securities or other investments, as well as other adjustments.

 

MFFO excludes non-recurring impairment of real estate-related investments. We assess the credit quality of our investments and adequacy of reserves on a quarterly basis, or more frequently as necessary. Significant judgment is required in this analysis. We consider the estimated net recoverable value of a loan as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the prospects for the borrower and the competitive situation of the region where the borrower does business.

 

We believe that, because MFFO excludes costs that we consider more reflective of acquisition activities and other non-operating items, MFFO can provide, on a going-forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring properties and once our portfolio is stabilized. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry and allows for an evaluation of our performance against other publicly registered, non-listed REITs.

 

Not all REITs, including publicly registered, non-listed REITs, calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs, including publicly registered, non-listed REITs, may not be meaningful. Furthermore, FFO and MFFO are not indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as determined under GAAP as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance. FFO and MFFO should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The methods utilized to evaluate the performance of a publicly registered, non-listed REIT under GAAP should be construed as more relevant measures of operational performance and considered more prominently than the non-GAAP measures, FFO and MFFO, and the adjustments to GAAP in calculating FFO and MFFO.

 

Neither the SEC, NAREIT, the IPA nor any other regulatory body or industry trade group has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, NAREIT, the IPA or another industry trade group may publish updates to the White Paper or the Practice Guidelines or the SEC or another regulatory body could standardize the allowable adjustments across the publicly registered, non-listed REIT industry, and we would have to adjust our calculation and characterization of FFO or MFFO accordingly.

 

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Our calculations of FFO and MFFO are presented below (dollars and shares in thousands, except per share amounts):

 

    For the Year Ended
December 31,		  
Description   2022     2021  
Net (loss)/income   $ (8,650 )   $ 77,494  
FFO adjustments:                
Depreciation and amortization of real estate assets     17,534       14,858  
Gain on disposition of unconsolidated joint venture     -       (1,457 )
Gain on sale of investment property     -       (82,819 )
FFO     8,884       8,076  
MFFO adjustments:                
Noncash adjustments:                
Gain on forgiveness of debt(2)     -       (128 )
Mark-to-market adjustments(1)     (1,762 )     (26 )
Gain on sale of marketable securities(2)     -       (14 )
MFFO before straight-line rent     7,122       7,908  
Straight-line rent(3)     -       -  
MFFO - IPA recommended format   $ 7,122     $ 7,908  
                 
Net (loss)/income   $ (8,650 )   $ 77,494  
Less: income attributable to noncontrolling interests     -       (199 )
Net income/(loss) applicable to Company's common shares   $ (8,650 )   $ 77,295  
Net income/(loss) per common share, basic and diluted   $ (0.43 )   $ 3.83  
                 
FFO   $ 8,884     $ 8,076  
Less: FFO attributable to noncontrolling interests     -       (509 )
FFO attributable to Company's common shares   $ 8,884     $ 7,567  
FFO per common share, basic and diluted   $ 0.44     $ 0.38  
                 
MFFO - IPA recommended format   $ 7,122     $ 7,908  
Less: MFFO attributable to noncontrolling interests     -       (509 )
MFFO attributable to Company's common shares   $ 7,122     $ 7,399  
                 
Weighted average number of common shares outstanding, basic and diluted     20,077       20,169  

 

 
(1) Management believes that adjusting for mark-to-market adjustments is appropriate because they are nonrecurring items that may not be reflective of ongoing operations and reflects unrealized impacts on value based only on then current market conditions, although they may be based upon current operational issues related to an individual property or industry or general market conditions. Mark-to-market adjustments are made for items such as ineffective derivative instruments, certain marketable equity securities and any other items that GAAP requires we make a mark-to-market adjustment for. The need to reflect mark-to-market adjustments is a continuous process and is analyzed on a quarterly and/or annual basis in accordance with GAAP.
(2) Management believes that adjusting for gains or losses related to extinguishment/sale of debt, derivatives or securities holdings is appropriate because they are items that may not be reflective of ongoing operations. By excluding these items, management believes that MFFO provides supplemental information related to sustainable operations that will be more comparable between other reporting periods.
(3) Under GAAP, rental receipts are allocated to periods using various methodologies. This may result in income recognition that is significantly different than underlying contract terms. By adjusting for these items (to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments, providing insight on the contractual cash flows of such lease terms and debt investments, and aligns results with management’s analysis of operating performance.

 

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Distributions

 

Prior to 2012, our board of directors declared distributions on a regular quarterly basis based on daily record dates, portions of which were paid on a monthly basis. During the first quarter of 2012, our board of directors determined to cease regular distributions.

 

During 2014 and 2015, our board of directors declared a total of $77.1 million, or $3.00 per share of common stock, in special cash distributions, all of which were paid to stockholders during 2014, 2015, and 2016. These special cash distributions were paid with a portion of proceeds from asset sales. No further distributions were declared or paid from 2016 through 2022.

 

Future distributions, if any, declared will be at the discretion of the board of directors based on their analysis of our performance over the previous periods and expectations of performance for future periods. The board of directors will consider various factors in its determination, including but not limited to, the sources and availability of capital, operating and interest expenses, our ability to refinance near-term debt, as well as the IRS’s annual distribution requirement that REITs distribute no less than 90% of their taxable income. We cannot assure that any future distributions will be made or that we will maintain any particular level of distributions that we have previously established or may establish.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates include such items as purchase price allocation for real estate acquisitions, impairment of long-lived assets, depreciation and amortization, and allowance for doubtful accounts. Actual results could differ from those estimates.

 

Below is a discussion of the accounting policies that we consider to be critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain.

 

Principles of Consolidation and Basis of Presentation

 

Our consolidated financial statements include our accounts and the accounts of other subsidiaries over which we have control. All inter-company transactions, balances, and profits have been eliminated in consolidation.

 

Accounting for Acquisitions of Investment Property

 

The cost of the real estate assets acquired in an asset acquisition is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases for acquired in-place leases and the value of tenant relationships, based in each case on their relative fair values. Fees incurred related to asset acquisitions are capitalized as part of the cost of the investment.

 

Upon the acquisition of real estate properties that qualify as a business, we recognize the assets acquired, the liabilities assumed, and any noncontrolling interest as of the acquisition date, measured at their fair values. The acquisition date is the date on which we obtain control of the real estate property. The assets acquired and liabilities assumed may consist of land, inclusive of associated rights, buildings, assumed debt and identified intangible assets and liabilities. Identified intangible assets generally consist of above-market leases, in-place leases, in-place tenant improvements, in-place leasing commissions, and tenant relationships. Identified intangible liabilities generally consist of below-market leases. Goodwill is recognized as of the acquisition date and measured as the aggregate fair value of consideration transferred and any noncontrolling interests in the acquiree over the fair value of the identifiable net assets acquired. Likewise, a bargain purchase gain is recognized in current earnings when the aggregate fair value of consideration transferred and any noncontrolling interests in the acquiree is less than the fair value of the identifiable net assets acquired. Acquisition-related costs are expensed in the period incurred. Initial valuations are subject to change until our information is finalized, which is no later than twelve months from the acquisition date.

 

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The fair value of the tangible assets acquired, consisting of land and buildings, is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land and buildings. Land values are derived from appraisals, and building values are calculated as replacement cost less depreciation or management’s estimates of the fair value of these assets using discounted cash flow analyses or similar methods believed to be used by market participants. Buildings are depreciated over the estimated useful lives of 39 years and 25 years, respectively, using the straight-line method.

 

We determine the fair value of assumed debt by calculating the net present value of the scheduled mortgage payments using interest rates for debt with similar terms and remaining maturities that management believes we could obtain at the date of the debt assumption. Any difference between the fair value and stated value of the assumed debt is recorded as a discount or premium and amortized over the remaining life of the loan using the effective interest method.

 

We record assets and groups of assets and liabilities which comprise disposal groups as “held for sale” when all of the following criteria are met: a decision has been made to sell, the assets are available for sale immediately, the assets are being actively marketed at a reasonable price in relation to the current fair value, a sale has been or is expected to be concluded within twelve months of the balance sheet date, and significant changes to the plan to sell are not expected. The assets and disposal groups held for sale are valued at the lower of book value or fair value less disposal costs. For sales of real estate or assets classified as held for sale, we evaluate whether a disposal transaction meets the criteria of a strategic shift and will have a major effect on our operations and financial results to determine if the results of operations and gains on sale of real estate will be presented as part of our continuing operations or as discontinued operations in our consolidated statements of operations. If the disposal represents a strategic shift, it will be classified as discontinued operations for all periods presented; if not, it will be presented in continuing operations.

 

Investment Impairment

 

For all of our real estate and real estate-related investments, we monitor events and changes in circumstances indicating that the carrying amounts of the real estate assets may not be recoverable. Examples of the types of events and circumstances that would cause management to assess our assets for potential impairment include, but are not limited to: a significant decrease in the market price of an asset; a significant adverse change in the manner in which the asset is being used; major vacancies and the resulting loss of revenues; natural disasters; a change in the projected holding period; legitimate purchase offers; and changes in the global and local markets or economic conditions. To the extent that our portfolio is concentrated in limited geographic locations, downturns specifically related to such regions may result in tenants defaulting on their lease obligations at those properties within a short time period, which may result in asset impairments. When such events or changes in circumstances are present, we assess potential impairment by comparing estimated future undiscounted operating cash flows expected to be generated over the life of the asset and from its eventual disposition to the carrying amount of the asset. These projected cash flows are prepared internally by the Advisor and reflect in-place and projected leasing activity, market revenue and expense growth rates, market capitalization rates, discount rates, and changes in economic and other relevant conditions. Our management reviews these projected cash flows to assure that the valuation is prepared using reasonable inputs and assumptions that are consistent with market data or with assumptions that would be used by a third-party market participant and assume the highest and best use of the investment. We consider trends, strategic decisions regarding future development plans, and other factors in our assessment of whether impairment conditions exist. In the event that the carrying amount exceeds the estimated future undiscounted operating cash flows, we recognize an impairment loss to adjust the carrying amount of the asset to estimated fair value. While we believe our estimates of future cash flows are reasonable, different assumptions regarding factors such as market rents, economic conditions, and occupancy rates could significantly affect these estimates.

 

In evaluating our investments for impairment, management may use appraisals and make estimates and assumptions, including, but not limited to, the projected date of disposition of the properties, the estimated future cash flows of the properties during our ownership, and the projected sales price of each of the properties. A future change in these estimates and assumptions could result in understating or overstating the carrying value of our investments, which could be material to our financial statements. In addition, we may incur impairment charges on assets classified as held for sale in the future if the carrying amount of the asset upon classification as held for sale exceeds the estimated fair value, less costs to sell.

 

New Accounting Pronouncements

 

See Note 3 of the Notes to Consolidated Financial Statements for further information.

 

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Item 8. Financial Statements and Supplementary Data.

 

The information required by this Item 8 is included in our Consolidated Financial Statements beginning on page F-1 of this Annual Report on Form 10-K.

 

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

 

None.

 

Item 9A. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

As required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act, our management, including our principal executive officer and principal financial officer, evaluated, as of December 31, 2022, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective, as of December 31, 2022, to provide reasonable assurance that information required to be disclosed by us in this report is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

 

We believe, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a Company has been detected.

 

Management’s Annual Report on Internal Control over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Our management, including our principal executive officer and principal financial officer, evaluated, as of December 31, 2022, the effectiveness of our internal control over financial reporting using the criteria established in Internal Control—New Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our principal executive officer and principal financial officer concluded that our internal controls over financial reporting, as of December 31, 2022, were effective.

 

Changes in Internal Control over Financial Reporting

 

There has been no change in internal control over financial reporting that occurred during the quarter ended December 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information.

 

None.

 

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

 

None.

 

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PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

 

Directors

 

Because our directors take a critical role in guiding our strategic direction and overseeing our management, they must demonstrate broad-based business and professional skills and experiences, concern for the long-term interests of our stockholders, and personal integrity and judgment. In addition, our directors must have time available to devote to board activities and to enhance their knowledge of our industry. As described further below, we believe our directors have the appropriate mix of experiences, qualifications, attributes, and skills required of our board members in the context of the current needs of our company.

 

Andreas K. Bremer, 66, has served as one of our independent directors since November 2007 and as Lead Director since June 2017 Mr. Bremer currently serves as President and Chief Executive Officer of International Capital, LLC, a position he has held since 2018. Mr. Bremer joined International Capital as its Chief Financial Officer in October 2002 and became its Executive Vice President in 2005. International Capital specializes in acquisition, disposition, management and administration of commercial investment properties, and Mr. Bremer is responsible for all financial aspects of the company’s operations. Before joining International Capital, Mr. Bremer was the Chief Financial Officer of ATLASwerks®, a leading communication software company in Dallas. He acted as a corporate finance consultant for two years at McKinsey & Co. in both the Dallas and New York offices and served as Vice President of Finance and Treasurer at Paging Network, Inc. Mr. Bremer started his career at COMMERZBANK AG in Germany and spent seven of his 13-year tenure at the company’s New York and Atlanta offices. Mr. Bremer has over 25 years of financial and general management experience with extensive knowledge of corporate finance and commercial lending both in the United States and other countries, particularly Germany and holds a degree as CCIM. Mr. Bremer has served as Chairman of the German International School in Dallas since 2009. He was the Director of the Texas Warburg Chapter of the American Council on Germany in Dallas and, as Knight of Justice, is a member of the Order of St. John. . In 2018, Mr. Bremer was appointed Honorary Counsel of the Federal Republic of Germany in Dallas 2018 and continues to serve in that capacity. Mr. Bremer received a law degree from the Johannes-Gutenberg University in Mainz, Germany.

 

Our board of directors has concluded that Mr. Bremer is qualified to serve as one of our directors for reasons including his more than 25 years of financial and general management experience, including international corporate finance and commercial lending. Mr. Bremer has served in various financial management positions and has significant experience in acquisition, disposition, management, and administration of commercial real estate investments. In addition, Mr. Bremer’s international background brings a unique perspective to our board.

 

Diane S. Detering-Paddison, 63, has served as one of our independent directors since June 2009. Ms. Detering-Paddison serves as President of 4word, www.4wordwomen.org, a not-for-profit organization she founded that connects, leads and supports professional Christian women and enables them to reach their potential. From February 2010 until June 2014, Ms. Detering-Paddison served as Chief Strategy Officer of Cassidy Turley, one of the nation’s largest commercial real estate service providers. Prior to joining Cassidy Turley, Ms. Detering-Paddison served as the Chief Operating Officer of ProLogis, an owner, manager, and developer of distribution facilities, from June 2008 until January 2009. Prior to that, Ms. Detering-Paddison was with CB Richard Ellis and Trammell Crow Company for over 20 years. During her time there, she served as Senior Vice President, Corporate and Investor Client Accounts from April 2001 until December 2004, Chief Operating Officer, Global Services from January 2005 until December 2006, and President, Global Corporate Services - Client Accounts from December 2006 until May 2008. Ms. Detering-Paddison was part of a ten member executive team that managed the merger between Trammell Crow Company and CB Richard Ellis in December 2006. Ms. Detering-Paddison serves on the Salvation Army’s National Advisory Board. Ms. Detering-Paddison is the author of “Work, Love, Pray.” Ms. Detering-Paddison holds a Master of Business Administration degree from the Harvard Graduate School of Business and a Bachelor of Science degree from Oregon State University where she graduated as Valedictorian.

 

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Our board of directors has concluded that Ms. Detering-Paddison is qualified to serve as one of our directors for reasons including her more than 30 years of management experience with large commercial real estate companies, including Trammell Crow Company, CB Richard Ellis, ProLogis, and Cassidy Turley. With her background, Ms. Detering-Paddison brings substantial insight and experience with respect to the commercial real estate industry.

 

Mitchell Hochberg, 70, was appointed Chairman of our Board of Directors on August 31, 2021 and has been our Chief Executive Officer since September 28, 2017. Mr. Hochberg also serves as President and Chief Operating Officer of Lightstone Value Plus REIT I, Inc. (“Lightstone I”), Lightstone Value Plus REIT II, Inc. (“Lightstone II”), Lightstone Value Plus REIT III, Inc. (“Lightstone III”), Lightstone Value Plus REIT IV, Inc. (“Lightstone IV”) and their respective advisors. From October 2014 to the present, Mr. Hochberg has served as President of Lightstone Enterprises. Mr. Hochberg was appointed Chief Executive Officer of Behringer Harvard Opportunity REIT I, Inc. (“BH OPP I”) effective as of September 28, 2017. Prior to joining The Lightstone Group in August 2012, Mr. Hochberg served as principal of Madden Real Estate Ventures from 2007 to August 2012 when it combined with our sponsor. Mr. Hochberg held the position of President and Chief Operating Officer of Ian Schrager Company, a developer and manager of innovative luxury hotels and residential projects in the United States from early 2006 to early 2007 and prior to that Mr. Hochberg founded Spectrum Communities, a developer of luxury neighborhoods in the northeast of the United States, in 1985 where for 20 years he served as its President and Chief Executive Officer. Mr. Hochberg served on the board of directors of Belmond Ltd from 2009 to April 2019. Additionally, through October 2014 Mr. Hochberg served on the board of directors and as Chairman of the board of directors of Orleans Homebuilders, Inc Mr. Hochberg received his law degree as a Harlan Fiske Stone Scholar from Columbia University School of Law and graduated magna cum laude from New York University College of Business and Public Administration with a Bachelor of Science degree in accounting and finance.

 

Jeffrey F. Joseph, 81, has served as one of our independent directors since September 2017. Mr. Joseph served as President, Chief Executive Officer and director of Presidential Realty Corporation, a publicly held company focused on the development and ownership of multi-family residential properties, from 1991 until his retirement in 2011. From 1979 to 1991, Mr. Joseph served as a principal of Ivy Properties Ltd. and as General Counsel of Presidential Realty Corporation from 1973 to 1979. Mr. Joseph is Chairman of the Board of Takoda Service Dogs Inc., a charitable organization that provides service dogs to Veterans suffering from PTSD. Mr. Joseph began his career 1967 as an associate with Hughes Hubbard Blair & Reed. Mr. Joseph holds a Bachelor of Arts degree from Cornell University with a major in Economics and a Juris Doctorate degree from Cornell Law School, where he graduated Summa Cum Laude.

 

Our board of directors has concluded that Mr. Joseph is qualified to serve as one of our directors for reasons including his more than 40 years of real estate industry experience.

 

David Lichtenstein, 61, was appointed Chairman Emeritus on August 31, 2021 and previously served as one of our directors and Chairman of the Board of Directors from September 2017 through August 31, 2021. Mr. Lichtenstein is Chairman and Chief Executive Officer of our Advisor. Mr. Lichtenstein founded both American Shelter Corporation and Lightstone. From 1988 to the present, Mr. Lichtenstein has served as Chairman of the Board of Directors and Chief Executive Officer of Lightstone, directing all aspects of the acquisition, financing and management of a diverse portfolio of multi-family, lodging, retail and industrial properties located in 20 states and Puerto Rico. From June 2004 to the present, Mr. Lichtenstein has served as the Chairman of the Board of Directors and Chief Executive Officer of Lightstone I and Chief Executive Officer of Lightstone Value Plus REIT LLC, its advisor. From April 2008 to the present, Mr. Lichtenstein has served as the Chairman of the Board of Directors and Chief Executive Offer of Lightstone II and Lightstone Value Plus REIT II LLC, its advisor. From September 2014 to the present, Mr. Lichtenstein has served as Chairman of the Board of Directors and Chief Executive Officer of Lightstone III, and as Chief Executive Officer of Lightstone Value Plus REIT III LLC, its advisor. From September 2014 to the present, Mr. Lichtenstein has served as Chairman of the Board of Directors and Chief Executive Officer of Lightstone IV, and as Chief Executive Officer of Lightstone Real Estate Income LLC, its advisor. From October 2014 to the present, Mr. Lichtenstein has served as Chairman of the Board of Directors and Chief Executive Officer of Lightstone Enterprises Limited (“Lightstone Enterprises”). From July 2015 to the present, Mr. Lichtenstein has served as a member of the Board of Directors of the New York City Economic Development Corporation, New York City’s primary economic development vehicle. Mr. Lichtenstein is on the Board of Governors of the Real Estate Board of New York, a Trustee of the Citizens Budget Commission, and is a Member of The Economic Club of New York and the Real Estate Roundtable, and Co-Chair of the Real Estate Capital Policy Advisory Committee. He is also a member of the Brookings Institution’s Economic Studies Council and a trustee of The Touro College and University System and sits on the Board Supervisory Committee for The New York Medical College. Mr. Lichtenstein is a founder of the Friendship House, an organization that provides housing for families of sick children and adults in the Greater New York City area. Mr. Lichtenstein is also a member of the International Council of Shopping Centers and the National Association of Real Estate Investment Trusts, Inc., or NAREIT, an industry trade group, as well as a member of the Board of Directors of Touro College and New York Medical College.

 

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Jeffrey P. Mayer, 66, has served as one of our independent directors since November 2007 and is chairman of our audit committee. Mr. Mayer previously served as a consultant serving the real estate industry and is the owner of Mayer Financial Consulting, LLC and is the firm’s sole employee. This firm was started in 2011 to provide consulting services to individuals and businesses primarily dealing with financial investments and real estate. From 2000 until 2007, Mr. Mayer was the Chief Financial Officer of ClubCorp, Inc., a holding company that owns and operates premier golf and business clubs and destination golf resorts. He previously served as Chief Financial Officer of Bristol Hotels & Resorts in Dallas, a position he held from 1996 until the company’s acquisition by Bass PLC in early 2000. Prior to joining Bristol, he was Corporate Controller at Host Marriott Corporation (formerly Marriott Corporation) and, prior to that, held various senior financial positions at Marriott Corporation. He also serves as treasurer and board member of the Georgia Chapter of The American Foundation for Suicide Prevention. In addition, he serves or has previously served as the Audit Committee chairman for three other organizations including both profit and not-for-profit entities. He was a board member of the Dallas Children’s Advocacy Center and chairman of its audit committee. A graduate of the College of William & Mary, he began his career as an accountant with Arthur Andersen LLP.

 

Our board of directors has concluded that Mr. Mayer is qualified to serve as one of our directors and as Chairman of our Audit Committee for reasons including his more than 30 years of accounting and finance experience in the commercial real estate industry. In particular, Mr. Mayer has served as Chief Financial Officer for two commercial real estate companies and has significant management experience relating to preparing and reviewing financial statements and coordinating with external auditors. Mr. Mayer continues to provide consulting services to the commercial real estate industry and is in tune with current industry trends and issues.

 

Cynthia Pharr Lee, 74, has served as one of our independent directors since November 2007. Ms. Lee serves as Chairman of Dala Communications and she was CEO of its predecessor firm, C. Pharr & Company, which provides strategic brand, marketing and public relations services to many real estate, construction, design and other B2B clients. Ms. Pharr Lee also serves as an independent board member of AAA Auto Club of Southern California. From 2016 through 2020, Ms. Pharr Lee served as a member of the board of directors of Darling Ingredients Inc. (DAR-NYSE) and its audit and compensation committees. From 1994 through February 2014, Ms. Pharr Lee served as a member of the board of directors of CEC Entertainment, Inc. (CEC-NYSE) and its audit and compensation committees. A co-founder of Texas Women Ventures Fund, Ms. Pharr Lee serves on the Fund’s Investment Advisory Committee. Ms. Pharr Lee is a former president of Executive Women of Dallas and former national chairman of the Counselor’s Academy of the Public Relations Society of America. From May 1989 through February 1993, Ms. Lee was President and Chief Executive Officer of Tracy Locke/Pharr Public Relations, a division of Omnicom (NYSE). Ms. Lee has earned designation as a Board Leadership Fellow of the National Association of Corporate Directors (NACD) and has also earned the CERT Certificate in Cybersecurity Oversight through a program sponsored by NACD and Carnegie Mellon University. She received her Bachelor of Science degree in English (summa cum laude) and her Master of Arts degree in English from Mississippi State University.

 

Our board of directors has concluded that Ms. Lee is qualified to serve as one of our directors for reasons including her more than 30 years of management experience in the public relations and marketing communications industry, with significant experience working with commercial real estate and construction firms. Ms. Lee has also served on the boards of directors and audit committees of New York Stock Exchange listed companies, which allows her to provide valuable knowledge and insight into management issues. In addition, Ms. Lee’s background complements that of our other board members and brings a unique perspective to our board.

 

Steven Spinola, 73, has served as one of our independent directors since September 2017. Mr. Spinola served as President of the Real Estate Board of New York (“REBNY”) from 1986 and since July 2015 as its President Emeritus. Mr. Spinola is a recipient of the Harry B. Helmsley Distinguished New Yorker Award for a lifetime of achievement in the profession. Before becoming REBNY’s President, Mr. Spinola served as President of the New York City Public Development Corporation (now known as the New York City Economic Development Corporation) from 1983 to 1986. Mr. Spinola currently serves as an independent director on the Board of Directors of Lightstone IV. Mr. Spinola holds a Bachelor of Arts degree from the City College of New York with a concentration in political science and government. He attended the Harvard Business School/Kennedy School of Government Summer Program for Senior Managers in Government.

 

Our board of directors has concluded that Mr. Spinola is qualified to serve as one of our directors for reasons including his extensive experience in the real estate industry.

 

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Executive Officers

 

In addition, the following individuals serve as our executive officers:

 

Mitchell Hochberg for biographical information about Mr. Hochberg, see “Item 10 - Directors.”

 

Seth Molod, 59, was appointed our Chief Financial Officer and Treasurer August 27, 2018. Mr. Molod also serves as Chief Financial Officer and Treasurer of Lightstone I, Lightstone II, Lightstone III and Lightstone IV. Mr. Molod also serves as the Executive Vice President and Chief Financial Officer of our Sponsor and as the Chief Financial Officer of our Advisor and the advisors of Lightstone I, Lightstone II, Lightstone III and Lightstone IV. Prior to joining The Lightstone Group in August of 2018, Mr. Molod served as an Audit Partner, Chair of Real Estate Services and on the Executive Committee of Berdon LLP, a full service accounting, tax, financial and management advisory firm (“Berdon”). Mr. Molod joined Berdon in 1989. He has extensive experience advising some of the nation’s most prominent real estate owners, developers, managers, and investors in both commercial and residential projects. Mr. Molod has worked with many privately held real estate companies as well as institutional investors, REITs, and other public companies. Mr. Molod is a licensed certified public accountant in New Jersey and New York and a member of the American Institute of Certified Public Accountants. Mr. Molod holds a Bachelor of Business Administration degree in Accounting from Muhlenberg College.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires each director, officer, and individual beneficially owning more than 10% of a registered security of the Company to file with the SEC, within specified time frames, initial statements of beneficial ownership (Form 3) and statements of changes in beneficial ownership (Forms 4 and 5) of common stock of the Company. These specified time frames require the reporting of changes in ownership within two business days of the transaction giving rise to the reporting obligation. Reporting persons are required to furnish us with copies of all Section 16(a) forms filed with the SEC. Based solely on a review of the copies of such forms furnished to the Company during and with respect to the fiscal year ended December 31, 2022 or written representations that no additional forms were required, to the best of our knowledge, all required Section 16(a) filings were timely and correctly made by reporting persons during 2021.

 

Code of Ethics

 

Our board of directors has adopted a Code of Business Conduct Policy that is applicable to all members of our board of directors, our executive officers and employees of our Advisor and its affiliates. We have posted the policy on the website maintained for us at www.lightstonecapitalmarkets.com. If, in the future, we amend, modify or waive a provision in the Code of Business Conduct Policy, we may, rather than filing a Current Report on Form 8-K, satisfy the disclosure requirement by promptly posting such information on the website maintained for us as necessary.

 

Audit Committee Financial Expert

 

The Audit Committee consists of independent directors Jeffrey P. Mayer, the chairman, Andreas K. Bremer, Diane S. Detering-Paddison, Jeffrey F. Joseph, Steven Spinola and Cynthia Pharr Lee. Our board of directors has determined that Mr. Mayer is an “audit committee financial expert,” as defined by the rules of the SEC. The biography of Mr. Mayer, including his relevant qualifications, is previously described in this Item 10.

 

27

 

 

Item 11. Executive Compensation.

 

Executive Compensation

 

We do not directly compensate our named executive officers, nor do we reimburse the Advisor for compensation paid to our named executive officers, for services rendered to us. We pay certain management fees to the Advisor to compensate the Advisor for the services it prov]ides in our day-to-day management. In addition, we reimburse certain expenses of the Advisor, including reimbursement for the costs of salaries and benefits of certain of their employees.

 

Reimbursement for the costs of salaries and benefits of the Advisor’s employees relate to compensation paid to the Advisor’s employees that provide services to us such as accounting, administrative or legal, for which the Advisor or its affiliates are not entitled to compensation in the form of a separate fee. A description of the fees that we pay to the Advisor and other affiliates is found in Item 13 below. Therefore, we do not have, nor has our board of directors or compensation committee considered, a compensation policy or program for our executive officers, and thus we have not included a Compensation Discussion and Analysis in this Annual Report on Form 10-K.

 

Directors’ Compensation

 

For the years ended December 31, 2022 and 2021, we paid each of our directors who are Independent Directors as defined in our charter an annual retainer of $60,000. In addition, we paid the chairperson of the audit committee and our lead independent director an annual retainer of $10,000 and the chairpersons of our nominating and compensation committees annual retainers of $5,000 each. These retainers were payable quarterly in arrears. In addition, we paid each of our directors who are Independent Directors as defined in our charter (a) $1,500 for each board of directors or permanent committee meeting attended, (c) $1,000 for each special committee meeting attended, and (c) $500 for each written consent considered by the director.

 

All directors receive reimbursement of reasonable out-of-pocket expenses incurred in connection with attendance at meetings of our board of directors. If a director is also an affiliate director, we do not pay compensation for services rendered as a director.

 

Effective January 1, 2023, we pay each of our directors who are Independent Directors as defined in our charter an annual retainer of $66,000. In addition, we pay the chairperson of the audit committee and our lead independent director an annual retainer of $11,000 and the chairpersons of our nominating and compensation committees annual retainers of $5,500 each. These retainers are payable quarterly in arrears. In addition, we pay each of our directors who are Independent Directors as defined in our charter (a) $1,500 for each board of directors or permanent committee meeting attended, (c) $1,000 for each special committee meeting attended, and (c) $500 for each written consent considered by the director.

 

Director Compensation Table

 

The following table sets forth certain information with respect to our director compensation during the fiscal year ended December 31, 2022:

 

Name   Fees Earned(1)  
Andreas K. Bremer   $ 98,000  
Diane S. Detering-Paddison   $ 78,000  
Jeffrey F. Joseph   $ 78,000  
Steven Spinola   $ 78,000  
Jeffrey P. Mayer   $ 88,000  
Cynthia Pharr Lee   $ 83,000  

 

 
(1) Includes fees earned for services rendered in 2021, regardless of when paid.

 

Compensation Committee Interlocks and Insider Participation

 

No member of our compensation committee served as an officer or employee of the Company or any of our subsidiaries during the fiscal year ended December 31, 2022 or formerly served as an officer of the Company or any of our subsidiaries. In addition, during the fiscal year ended December 31, 2022, none of our executive officers served as a director or member of a compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of any entity that has one or more executive officers or directors serving as a member of our board of directors or compensation committee.

 

28

 

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

Security Ownership of Certain Beneficial Owners

 

The following table sets forth information as of March 15, 2023 regarding the beneficial ownership of our common stock by each person known by us to own 5% or more of the outstanding shares of common stock, each of our directors, each of our executive officers, and our directors and executive officers as a group:

 

Name of Beneficial Owner(2)  

Amount and Nature

of Beneficial

Ownership(1)

    

Percentage of
Class

  
David Lichtenstein     -       -  
Andreas K. Bremer     -       -  
Diane S. Detering-Paddison     -       -  
Jeffrey P. Mayer     -       -  
Cynthia Pharr Lee     -       -  
Steven Spinola     -       -  
Jeffrey F. Joseph     -       -  
Mitchell Hochberg     -       -  
Seth Molod     -       -  
All directors and executive officers as a group (nine persons)     -       -  

 

 
(1) Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities and shares issuable pursuant to options, warrants and similar rights held by the respective person or group that may be exercised within 60 days following March 15, 2023. Except as otherwise indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.
(2) The address of our directors and officers is c/o Lightstone Value Plus REIT V, Inc., 1985 Cedar Bridge Avenue, Suite 1, Lakewood, New Jersey 08701.

 

Item 13. Certain Relationships and Related Transactions and Director Independence.

 

Policies and Procedures for Transactions with Related Persons

 

We do not currently have written formal policies and procedures for the review, approval or ratification of transactions with related persons, as defined by Item 404 of Regulation S-K of the Exchange Act. Under that definition, transactions with related persons are transactions in which we were or are a participant and the amount involved exceeds $120,000 and in which any related person had or will have a direct or indirect material interest. Related parties include any executive officers, directors, director nominees, beneficial owners of more than 5% of our voting securities, immediate family members of any of the foregoing persons, and any firm, corporation or other entity in which any of the foregoing persons is employed and in which such person has 10% or greater beneficial ownership interest.

 

However, in order to reduce or eliminate certain potential conflicts of interest, our charter contains a number of restrictions relating to (1) transactions we enter into with our Advisor and its affiliates, (2) certain future offerings, and (3) allocation of investment opportunities among affiliated entities. As a general rule, any related party transactions must be approved by a majority of the directors (including a majority of independent directors) not otherwise interested in the transaction. In determining whether to approve or authorize a particular related party transaction, these persons will consider whether the transaction between us and the related party is fair and reasonable to us.

 

29

 

 

Related Party Transactions

 

Advisor and Affiliates

 

Our business is externally managed by LSG Development Advisor LLC (the “Advisor”), an affiliate of the Lightstone Group LLC (“Lightstone”) which provides advisory services to us and we have no employees. Lightstone is majority owned by the chairman emeritus of our board of directors, David Lichtenstein. Pursuant to the terms of an advisory agreement and subject to the oversight of our board of directors, the Advisor is responsible for managing our day-to-day affairs and for services related to the management of our assets.

 

We have agreements with the Advisor and its affiliates to pay certain fees and reimburse certain expenses in connection with services performed and costs incurred by these entities and other related parties. We are dependent on the Advisor and its affiliates for certain services that are essential to us, including investment decisions, asset disposition decisions, property management and leasing services, and other general administrative responsibilities. In the event that these companies were unable to provide us with their respective services, we would be required to obtain such services from other sources.

 

The advisory agreement has a one-year term and is renewable annually upon the mutual consent of our Advisor and our independent directors.

 

The following discussion describes the fees and expenses payable to the Advisor and its affiliates under various agreements.

 

Fees   Amount
Acquisition -  

We pay the Advisor acquisition and advisory fees of 1.5% of the amount paid in respect of the purchase, development, construction, or improvement of each asset we acquire, including any debt attributable to those assets.

 

In addition, we pay acquisition and advisory fees of 1.5% of the funds advanced in respect of a loan investment.

 

We pay the Advisor an acquisition expense reimbursement in the amount of (i) 0.25% of the funds paid for purchasing an asset, including any debt attributable to the asset, plus 0.25% of the funds budgeted for development, construction, or improvement in the case of assets that we acquire and intend to develop, construct, or improve or (ii) 0.25% of the funds advanced in respect of a loan investment.

 

We pay third parties, or reimburses the Advisor or its affiliates, for any investment-related expenses due to third parties in the case of a completed investment, including, but not limited to, legal fees and expenses, travel and communication expenses, costs of appraisals, accounting fees and expenses, third-party brokerage or finder’s fees, title insurance, premium expenses, and other closing costs.

 

The Advisor and its affiliates are also responsible for paying all of the investment-related expenses that we pay or the Advisor or its affiliates incur that are due to third parties or related to the additional services provided by the Advisor as described above with respect to investments we do not make, other than certain non-refundable payments made in connection with any acquisition.

     

Debt Financing -

   We pay the Advisor a debt financing fee of 1.0% of the amount available under any loan or line of credit made available to us and pay directly all third-party costs associated with obtaining the debt financing. Generally, these fees are capitalized as a direct reduction to the applicable financing and amortized over its term.

 

30

 

 

Property Management -

   We pay our property manager and affiliate of the Advisor, fees for the management, leasing, and construction supervision of our properties which is 4.0% of gross revenues of the properties managed by our property manager. We pay our property manager an oversight fee equal to 0.5% of the gross revenues of the property managed for any property for which we contract directly with a third-party property manager. In no event will our property manager or its affiliates receive both a property management fee and an oversight fee with respect to any particular property. In the event we own a property through a joint venture that does not pay our property manager directly for its services, we will pay our property manager a management fee or oversight fee, as applicable, based only on our economic interest in the property.
     
Construction Management -  

We pay our property manager a construction management fee in an amount not to exceed 5% of all hard construction costs incurred in connection with, but not limited to capital repairs and improvements, major building reconstruction and tenant improvements, if such affiliate supervises construction performed by or on behalf of us or our affiliates. We were not charged any construction management fees for the years ended December 31, 2022 and 2021.

     
Asset Management -  

We pay the Advisor a monthly asset management fee of one-twelfth of 0.7% of the value of each asset. The value of our assets is the value as determined in connection with the establishment and publication of an estimated net asset value (“NAV”) per share unless the asset was acquired after our publication of a NAV per share (in which case the value of the asset will be the contractual purchase price of the asset).

     
Administrative Services Reimbursement  

The Advisor is responsible for paying all of the expenses it incurs associated with persons employed by the Advisor to the extent that they provide services to us for which the Advisor receives an acquisition, asset management, or debt financing fee, including wages and benefits of the applicable personnel. Instead of reimbursing the Advisor for specific expenses paid or incurred in connection with providing services to us, we pay the Advisor an administrative services fee, which is an allocation of a portion of the actual costs that the Advisor paid or incurred providing these services to us (the “Administrative Services Reimbursement”). The Administrative Services Reimbursement is intended to reimburse the Advisor for all its costs associated with providing services to us.

 

The Administrative Services Reimbursement is limited to the actual costs incurred or an annual cap (the “Cap”) as set forth in the agreement. For the twelve-month periods ended June 10, 2021 and June 10, 2022, the Cap was $1.33 million and $1.39 million, respectively. For the period from June 11, 2022 through June 30, 2022, the previous annual cap was pro-rated. For the twelve months ended June 30, 2023, the Cap is $1.5 million.

 

The Administrative Services Reimbursement is payable in four equal quarterly installments within 45 days of the end of each calendar quarter. In addition, under the various advisory management agreements, we reimburse the Advisor for certain due diligence services provided in connection with asset acquisitions and dispositions and debt financings separately from the Administrative Services Reimbursement.

 

Notwithstanding the fees and cost reimbursements payable to the Advisor pursuant to our advisory management agreement, under our charter we may not reimburse the Advisor for any amount by which our operating expenses (including the asset management fee) at the end of the four preceding fiscal quarters exceeds the greater of: (i) 2% of our average invested assets, or (ii) 25% of our net income determined without reduction for any additions to reserves for depreciation, bad debts, or other similar non-cash reserves and excluding any gain from the sale of our assets for that period unless a majority of our independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. For the four fiscal quarters ended December 31, 2022 and 2021, our total operating expenses (including the asset management fee) did not exceed the limit on total operating expenses.

 

31

 

 

The following table represents the fees incurred associated with the payments to our Advisor for the periods indicated (amounts in thousands):

 

  For the Years Ended
December 31,		  
    2022     2021  
Acquisition fees and acquisition expense reimbursement(1)   $ -     $ 2,196  
Debt financing fees(2)     -       938  
Property management fees (property operating expenses)     514       465  
Administrative services reimbursement (general and administrative costs)     1,445       1,358  
Asset management fees (general and administrative costs)     3,489       3,006  
Total   $ 5,448     $ 7,963  

 

 
(1) Capitalized to the corresponding asset and amortized over its estimated useful life.
(2) Capitalized upon the execution of the loan, presented in the consolidated balance sheets as a direct deduction from the carrying value of the corresponding loan and amortized over the initial term of the corresponding loan.

 

As of December 31, 2022, we had no amounts payable to the Advisor and its affiliates. As of December 31, 2021, we had a payable to the Advisor and its affiliates of approximately $3,000.

 

Independence

 

Although our shares are not listed for trading on any national securities exchange and therefore our board of directors is not subject to the independence requirements of the NYSE or any other national securities exchange, our board has evaluated whether our directors are “independent” as defined by the NYSE. The NYSE standards provide that to qualify as an independent director, in addition to satisfying certain bright-line criteria, the board of directors must affirmatively determine that a director has no material relationship with us (either directly or as a partner, stockholder or officer of an organization that has a relationship with us).

 

Consistent with these considerations, after review of all relevant transactions or relationships between each director, or any of his or her family members, and the Company, our senior management and our independent registered public accounting firm, the board has determined that the majority of the members of our board, and each member of our audit committee, compensation committee and nominating committee, is “independent” as defined by the NYSE.

 

Item 14. Principal Accounting Fees and Services.

 

Independent Registered Public Accounting Firm

 

Our independent public accounting firm is EisnerAmper LLP, New York, New York, Auditor Firm ID: 274.

 

32

 

 

Audit and Non-Audit Fees

 

The following table presents the aggregate fees billed to us for the years indicated by our principal accounting firm (amounts in thousands):

 

    For the Year Ended
December 31,		  
    2022     2021  
Audit Fees(a)   $ 370     $ 356  
Tax Fees(b)     65       65  
Total Fees   $ 435     $ 421  

 

 
a) Fees for audit services consisted of the audit of our annual consolidated financial statements, interim reviews of our quarterly consolidated financial statements and services normally provided in connection with statutory and regulatory filings.
b) Fees for tax services.

 

Our audit committee considers the provision of these services to be compatible with maintaining the independence of our independent registered accounting firms.

 

Audit Committee’s Pre-Approval Policies and Procedures

 

Our audit committee must approve any fee for services to be performed by our independent registered public accounting firm in advance of the service being performed. For proposed projects using the services of our independent registered public accounting firm that are expected to cost under $100,000, our audit committee will be provided information to review and must approve each project prior to commencement of any work. For proposed projects using the services of our independent registered public accounting firm that are expected to cost $100,000 and over, our audit committee will be provided with a detailed explanation of what is being included, and asked to approve a maximum amount for specifically identified services in each of the following categories: (1) audit fees; (2) audit-related fees; (3) tax fees; and (4) all other fees for any services allowed to be performed by the independent registered public accounting firm. If additional amounts are needed, our audit committee must approve the increased amounts prior to the previously approved maximum being reached and before the work may continue. Approval by our audit committee may be made at its regularly scheduled meetings or otherwise, including by telephonic or other electronic communications. We will report the status of the various types of approved services and fees, and cumulative amounts paid and owed, to our audit committee on a regular basis. Our audit committee has considered the independent registered public accounting firm’s non-audit services provided to us and has determined that such services are compatible with maintaining its independence.

 

Our audit committee approved all of the services provided by, and fees paid to, EisnerAmper LLP during the years ended December 31, 2022 and 2021.

 

33

 

 

PART IV

 

Item 15. Exhibits, Financial Statement Schedules.

 

(a) List of Documents Filed.

 

1. Financial Statements

 

The list of the financial statements filed as part of this Annual Report on Form 10-K is set forth on page F-1 herein.

 

2. Financial Statement Schedules

 

None.

 

3. Exhibits

 

The list of exhibits filed as part of this Annual Report on Form 10-K is submitted in the Exhibit Index following the financial statements in response to Item 601 of Regulation S-K.

 

(b) Exhibits.

 

The exhibits filed in response to Item 601 of Regulation S-K are listed in the Exhibit Index attached hereto.

 

(c) Financial Statement Schedules.

 

All financial statement schedules have been omitted because the required information of such schedules is not present, is not present in amounts sufficient to require a schedule, is not required or is included in the financial statements and related notes.

 

Item 16. Form 10-K Summary

 

None.

 

34

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  Lightstone Value Plus REIT V, Inc.
   
Dated: March 28, 2023 By: /s/ MITCHELL HOCHBERG
   

Mitchell Hochberg

Chief Executive Officer and

Chairman of the Board of Directors

(Principal Executive Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

March 28, 2023 /s/ MITCHELL HOCHBERG
 

Mitchell Hochberg

Chief Executive Officer and

Chairman of the Board of Directors

(Principal Executive Officer)

   
March 28, 2023

/s/ SETH MOLOD

 

Seth Molod

Chief Financial Officer

(Principal Financial Officer)

   
March 28, 2023

/s/ JEFFREY F. JOSEPH

 

Jeffrey F. Joseph

Director

   
March 28, 2023

/s/ ANDREAS K. BREMER

 

Andreas K. Bremer

Director

   
March 28, 2023 /s/ STEVEN SPINOLA
 

Steven Spinola

Director

   
March 28, 2023 /s/ JEFFREY P. MAYER
 

Jeffrey P. Mayer

Director

   
March 28, 2023 /s/ CYNTHIA PHARR LEE
 

Cynthia Pharr Lee

Director

   
March 28, 2023

/s/ DIANE S. DETERING-PADDISON

 

Diane S. Detering-Paddison

Director

 

35

 

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

    Page
Financial Statements    
Report of Independent Registered Public Accounting Firm   F-2
Consolidated Balance Sheets as of December 31, 2022 and 2021   F-4
Consolidated Statements of Operations and Comprehensive Income for the Years Ended December 31, 2022 and 2021   F-5
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2022 and 2021   F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2022 and 2021   F-7
Notes to Consolidated Financial Statements   F-8

 

F-1

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

Lightstone Value Plus REIT V, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Lightstone Value Plus REIT V, Inc. (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations and comprehensive income, stockholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2022 and 2021, and the consolidated results of their operations and their cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matter

 

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

 

Investment Property – Indicators of Impairment

 

As of December 31, 2022, the Company had investment property, net of accumulated depreciation, of approximately $359.5 million. As more fully described in Note 2 to the financial statements, the Company monitors events and changes in circumstances representing triggering events that could indicate that the carrying amounts of the investment property may not be recoverable. Examples of the types of events and circumstances that would cause management to assess the Company’s investment property for potential impairment include, but are not limited to: a significant decrease in the market price of an asset; a significant adverse change in the manner in which the asset is being used; major vacancies and the resulting loss of revenues; natural disasters; a change in the projected holding period; legitimate purchase offers; and changes in the global and local markets or economic conditions. When such events or changes in circumstances are present, the Company assesses potential impairment by comparing estimated future undiscounted operating cash flows expected to be generated over the life of the asset and from its eventual disposition to the carrying amount of the asset. These projected cash flows reflect in-place and projected leasing activity, market revenue and expense growth rates, market capitalization rates, discount rates, and changes in economic and other relevant conditions. In evaluating the Company’s investment property for impairment, management may use appraisals and make estimates and assumptions, including, but not limited to, the projected date of disposition of the properties, the estimated future cash flows of the properties during the Company’s ownership, and the projected sales price of each of the properties.

 

F-2

 

 

We identified the evaluation of indicators of impairment as a critical audit matter due to significant judgment made by management in identifying indicators of impairment. This in turn led to a high degree of auditor judgment, subjectivity, and audit effort in performing procedures to evaluate the reasonableness of management’s significant estimates and assumptions related to the impairment evaluation including identifying events and circumstances that exist that would indicate the carrying amounts of the investment property may not be recoverable.

 

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. We obtained an understanding and evaluated the design of controls over the Company’s impairment evaluation. Our procedures included, among others, assessing the methodologies applied and identifying the existence of any triggering events, including comparing budget to actual operating income, comparing actual operating income to projected future operating income, and comparing actual, budgeted and projected occupancy percentages, and considering if the determination was reasonable considering the past and current performance of the property and if consistent with evidence obtained in other areas of the audit. We tested the completeness and accuracy of the underlying data used by management in its evaluation. We held discussions with management about the current status of certain properties to understand how management’s significant estimates and assumptions are developed considering potential future market conditions.

 

/s/ EisnerAmper LLP

 

We have served as the Company’s auditor since 2017.

 

EISNERAMPER LLP

New York, New York

March 28, 2023

 

F-3

 

 

Lightstone Value Plus REIT V, Inc.

Consolidated Balance Sheets

(dollars in thousands, except per share amounts)

 

                 
    December 31,
2022		     December 31,
2021		  
Assets                
Investment property:                
Land and improvements   $ 84,439     $ 83,599  
Building and improvements     324,335       316,370  
Furniture, fixtures and equipment     9,975       8,952  
Gross investment property     418,749       408,921  
Less accumulated depreciation     (59,274 )     (45,915 )
Net investment property     359,475       363,006  
                 
Cash and cash equivalents     59,625       24,360  
Marketable securities, available for sale     3,455       3,645  
Restricted cash     5,126       20,879  
Note receivable, net     3,771       13,919  
Prepaid expenses and other assets     3,256       5,690  
Total Assets   $ 434,708     $ 431,499  
                 
Liabilities and Stockholders’ Equity                
Notes payable, net   $ 290,289     $ 277,598  
Accounts payable and accrued and other liabilities     8,515       8,031  
Total liabilities     298,804       285,629  
                 
Commitments and Contingencies                
                 
Stockholders’ Equity:                
                 
Company’s stockholders’ equity:                
Preferred stock, $.0001 par value per share; 50.0 million shares authorized, none issued and outstanding     -       -  
Convertible stock, $.0001 par value per share; 1,000 shares authorized, issued and outstanding     -       -  
Common stock, $.0001 par value per share; 350.0 million shares authorized, 20.0 and 20.1 million shares issued and outstanding, respectively     2       2  
Additional paid-in-capital     169,996       171,079  
Accumulated other comprehensive (loss)/income     (220 )     13  
Accumulated deficit     (33,874 )     (25,224 )
Total Stockholders’ Equity     135,904       145,870  
                 
Total Liabilities and Stockholders’ Equity   $ 434,708     $ 431,499  

 

See Notes to Consolidated Financial Statements.

 

F-4

 

 

Lightstone Value Plus REIT V, Inc.

Consolidated Statements of Operations and Comprehensive Income

(dollars and shares in thousands, except per share amounts)

 

                 
    For the Years Ended
December 31,		  
    2022     2021  
Rental revenues   $ 46,970     $ 43,134  
                 
Expenses                
Property operating expenses     15,253       14,498  
Real estate taxes     6,815       5,865  
General and administrative     7,618       6,982  
Depreciation and amortization     17,534       14,858  
Total expenses     47,220       42,203  
                 
Interest expense, net     (13,738 )     (10,640 )
Interest income     1,868       2,025  
Gain on sale of investment property     -       82,819  
Gain on disposition of unconsolidated joint venture     -       1,457  
Income tax benefit     776       -  
Mark to market adjustment on derivative financial instruments     1,762       -  
Other income, net     932       902  
Net (loss)/income     (8,650 )     77,494  
Net income attributable to noncontrolling interests     -       (199 )
Net(loss)/income attributable to the Company’s shares   $ (8,650 )   $ 77,295  
Weighted average shares outstanding:                
Basic and diluted     20,077       20,169  
Basic and diluted (loss)/income per share   $ (0.43 )   $ 3.83  
Comprehensive (loss)/income:                
Net (loss)/income   $ (8,650 )   $ 77,494  
Other comprehensive loss:                
Holding loss on marketable securities, available for sale     (233 )     (113 )
Reclassification adjustment for gain on sale of marketable securities included in net income     -       (14 )
Total other comprehensive loss     (233 )     (127 )
Comprehensive (loss)/income     (8,883 )     77,367  
Comprehensive income attributable to noncontrolling interest     -       (199 )
Comprehensive(loss)/income attributable to the Company’s shares   $ (8,883 )   $ 77,168  

 

See Notes to Consolidated Financial Statements.

 

F-5

 

 

Lightstone Value Plus REIT V, Inc.

Consolidated Statements of Stockholders’ Equity

For the Years Ended December 31, 2022 and 2021

(dollars and shares in thousands)

 

                                                                         
    Convertible Stock     Common Stock     Additional
Paid-In		     Accumulated     Accumulated
Other
Comprehensive		     Noncontrolling     Total  
    Shares     Amount     Shares     Amount     Capital     Deficit     Income/(Loss)     Interests     Equity  
BALANCE, December 31, 2020     1     $ -       20,193     $ 2     $ 189,216     $ (102,519 )   $ 140     $ (2,199 )   $ 84,640  
                                                                         
Net income     -       -       -       -       -       77,295       -       199       77,494  
Distributions paid to noncontrolling interests     -       -       -       -       -       -       -       (610 )     (610 )
Acquisition of noncontrolling interests in subsidiaries                                     (17,524 )                     2,610       (14,914 )
Tender, redemption and cancellation of common stock     -       -       (65 )     -       (613 )     -       -       -       (613 )
Other comprehensive income:                                                                        
Holding loss on marketable securities, available for sale     -       -       -       -       -       -       (113 )     -       (113 )
Reclassification adjustment for gain on sale of marketable securities included in net income     -       -       -       -       -       -       (14 )     -       (14 )
                                                                         
BALANCE, December 31, 2021     1     $ -       20,128     $ 2     $ 171,079     $ (25,224 )   $ 13     $ -     $ 145,870  
                                                                         
Net loss     -       -       -       -       -       (8,650 )     -               (8,650 )
Redemption and cancellation of common stock     -       -       (84 )     -       (1,083 )     -       -       -       (1,083 )
Other comprehensive income:                                                                        
Holding loss on marketable securities, available for sale     -       -       -       -       -       -       (233 )     -       (233 )
                                                                         
BALANCE, December 31, 2022     1     $ -       20,044     $ 2     $ 169,996     $ (33,874 )   $ (220 )   $ -     $ 135,904  

 

See Notes to Consolidated Financial Statements.

 

F-6

 

 

Lightstone Value Plus REIT V, Inc.

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2022 and 2021

(dollars in thousands)

 


                 
    For the Year Ended
December 31,		  
    2022     2021  
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net (loss)/income   $ (8,650 )   $ 77,494  
Adjustments to reconcile net (loss)/income to net cash provided by operating activities:                
Depreciation and amortization     17,534       14,858  
Amortization of deferred financing costs     1,426       1,016  
Gain on sale of unconsolidated joint venture     -       (1,457 )
Gain on sale of investment property     -       (82,819 )
Mark to market adjustment on derivative financial instruments     (1,762 )     -  
Non-cash interest income     (477 )     (1,170 )
Other non-cash adjustments, net     (111 )     13  
Changes in operating assets and liabilities:                
Increase in prepaid expenses and other assets     89       2,800  
Increase/(decrease) in accounts payable and accrued and other liabilities     408       (556 )
Net cash provided by operating activities     8,457       10,179  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Purchase of investment property     (9,752 )     (134,857 )
Purchase of marketable securities     (1,135 )     (1,267 )
Proceeds from sale of marketable securities     1,092       1,162  
Proceeds from repayment of note receivable     10,625       -  
Proceeds from sale of unconsolidated joint venture     -       1,457  
Acquisition of noncontrolling interests in subsidiaries     -       (14,914 )
Proceeds from sale of investment property, net of closing costs     -       90,252  
Net cash provided by/(used in) investing activities     830       (58,167 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Proceeds from notes payable     13,061       97,433  
Payments on notes payable     (1,740 )     (31,440 )
Payment of loan fees and expenses     (13 )     (2,994 )
Tender, redemption and cancellation of common stock     (1,083 )     (613 )
Distributions paid to noncontrolling interests     -       (610 )
Net cash provided by financing activities     10,225       61,776  
                 
Net change in cash, cash equivalents and restricted cash     19,512       13,788  
Cash, cash equivalents and restricted cash, beginning of year     45,239       31,451  
Cash, cash equivalents and restricted cash, end of year   $ 64,751     $ 45,239  
                 
Supplemental cash flow information for the years indicated is as follows:                
                 
Cash paid for interest, net of amounts capitalized   $ 13,353     $ 9,565  
Holding loss/gain on marketable securities, available for sale   $ 233     $ 127  
Capital expenditures for real estate in accrued liabilities and accounts payable   $ 161     $ 85  
Debt assumed by buyer in connection with disposition of investment property   $ -     $ 35,700  

 

See Notes to Consolidated Financial Statements.

 

F-7

 

 

Lightstone Value Plus REIT V, Inc.
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)

 

1. Business and Organization

 

Business

 

Lightstone Value Plus REIT V, Inc. which was formerly known as Lightstone Value Plus Real Estate Investment Trust V, Inc. before August 31, 2021 (which may be referred to as the “Company,” “we,” “us,” or “our”), was organized as a Maryland corporation on January 9, 2007 and has elected to be taxed, and currently qualifies, as a real estate investment trust (“REIT”) for federal income tax purposes.

 

The Company was formed primarily to acquire and operate commercial real estate and real estate-related assets on an opportunistic and value-add basis. In particular, the Company has focused generally on acquiring commercial properties with significant possibilities for capital appreciation, such as those requiring development, redevelopment, or repositioning, those located in markets and submarkets with high growth potential, and those available from sellers who are distressed or face time-sensitive deadlines. The Company has acquired a wide variety of commercial properties, including office, industrial, retail, hospitality, multifamily and student housing. The Company has purchased existing, income-producing properties, and newly-constructed properties. The Company has also invested in other real estate-related investments such as mortgage and mezzanine loans. The Company intends to hold the various real properties in which it has invested until such time as its board of directors determines that a sale or other disposition appears to be advantageous to achieve the Company’s investment objectives or until it appears that the objectives will not be met. The Company currently has one operating segment. As of December 31, 2022, the Company had eight wholly owned real estate investments (multifamily properties) and one real estate-related investment (mezzanine loan).

 

Substantially all of the Company’s business is conducted through Lightstone REIT V OP LP, a limited partnership organized in Delaware (the “Operating Partnership”). As of December 31, 2022, the Company’s wholly-owned subsidiary, BHO II, Inc., a Delaware corporation, owned a 0.1% partnership interest in the Operating Partnership as its sole general partner. As of December 31, 2022, the Company’s wholly-owned subsidiary, BHO Business Trust II, a Maryland business trust, was the sole limited partner of the Operating Partnership and owned the remaining 99.9% interest in the Operating Partnership.

 

The Company’s business is externally managed by LSG Development Advisor LLC (the “Advisor”), an affiliate of the Lightstone Group LLC (“Lightstone”) which provides advisory services to the Company and the Company has no employees. Lightstone is majority owned by the chairman emeritus of the Company’s board of directors, David Lichtenstein. Pursuant to the terms of an advisory agreement and subject to the oversight of the Company’s board of directors, the Advisor is responsible for managing the Company’s day-to-day affairs and for services related to the management of the Company’s assets.

 

Organization

 

In connection with the Company’s initial capitalization, the Company issued 22,500 shares of its common stock and 1,000 shares of its convertible stock to the Company’s previous advisor on January 19, 2007. The 1,000 shares of convertible stock were transferred to an affiliate of Lightstone on February 10, 2017 and remain outstanding. As of December 31, 2022, the Company had 20.0 million shares of common stock outstanding.

 

The Company’s common stock is not currently listed on a national securities exchange. The timing of a liquidity event for the Company’s stockholders will depend upon then prevailing market conditions and the Company’s board of directors’ assessment of the Company’s investment objectives and liquidity options for the Company’s stockholders. Currently, the Company’s board of directors has targeted June 30, 2028 for the commencement of a liquidity event. However, the Company can provide no assurances as to the actual timing of the commencement of a liquidity event for its stockholders or the ultimate liquidation of the Company. Furthermore, the Company will seek stockholder approval prior to liquidating its entire portfolio.

 

F-8

 

 

Lightstone Value Plus REIT V, Inc.
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)

 

2. Summary of Significant Accounting Policies

 

Use of Estimates in the Preparation of Financial Statements

 

The preparation of financial statements in conformity with generally accepted accounting principles in the U.S. (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant assumptions and estimates relate to the valuation of real estate including impairment and depreciable lives. Application of these assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates.

 

Principles of Consolidation and Basis of Presentation

 

The Company’s consolidated financial statements include the Company’s accounts and the accounts of other subsidiaries over which it has control. All inter-company transactions, balances, and profits have been eliminated in consolidation.

 

Accounting for Acquisitions of Investment Property

 

The cost of the real estate assets acquired in an asset acquisition is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases for acquired in-place leases and the value of tenant relationships, based in each case on their relative fair values. Fees incurred related to asset acquisitions are capitalized as part of the cost of the investment.

 

Upon the acquisition of real estate property that meets the definition of a business, the Company recognizes the assets acquired, the liabilities assumed and any noncontrolling interest as of the acquisition date, measured at their fair values. The acquisition date is the date on which the Company obtains control of the real estate property. The assets acquired and liabilities assumed may consist of land, inclusive of associated rights, buildings, assumed debt, identified intangible assets and liabilities, and asset retirement obligations. Identified intangible assets generally consist of above-market leases, in-place leases, in-place tenant improvements, in-place leasing commissions, and tenant relationships. Identified intangible liabilities generally consist of below-market leases. Goodwill is recognized as of the acquisition date and measured as the aggregate fair value of the consideration transferred and any noncontrolling interests in the acquiree over the fair value of the identifiable net assets acquired. Likewise, a bargain purchase gain is recognized in current earnings when the aggregate fair value of the consideration transferred and any noncontrolling interests in the acquiree is less than the fair value of the identifiable net assets acquired. Acquisition-related costs are expensed in the period incurred. Initial valuations are subject to change until the Company’s information is finalized, which is no later than 12 months from the acquisition date.

 

The fair value of the tangible assets acquired, consisting of land and buildings, is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land and buildings. Land values are derived from appraisals, and building values are calculated as replacement cost less depreciation or management’s estimates of the fair value of these assets using discounted cash flow analyses or similar methods believed to be used by market participants. The value of buildings are generally depreciated over estimated useful lives ranging up to 39 years using the straight-line method.

 

The Company determines the fair value of assumed debt by calculating the net present value of the scheduled mortgage payments using interest rates for debt with similar terms and remaining maturities that management believes the Company could obtain at the date of the debt assumption. Any difference between the fair value and stated value of the assumed debt is recorded as a discount or premium and amortized over the remaining life of the loan using the effective interest method.

 

F-9

 

 

Lightstone Value Plus REIT V, Inc.
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)

 

Cash and Cash Equivalents

 

The Company considers investments in highly liquid money market funds or investments with original maturities of three months or less to be cash equivalents.

 

Restricted Cash

 

As required by the Company’s lenders, restricted cash is held in escrow accounts for anticipated capital expenditures, real estate taxes, and other reserves for certain of the Company’s consolidated properties. Capital reserves are typically utilized for non-operating expenses such as tenant improvements, leasing commissions, and major capital expenditures. Alternatively, a lender may require its own formula for an escrow of capital reserves. Restricted cash may also include certain funds temporarily placed in escrow with qualified intermediaries to facilitate potential like-kind exchange transactions in accordance with Section 1031 of the Internal Revenue Code.

 

The following is a summary of the Company’s cash, cash equivalents, and restricted cash total as presented in its consolidated statements of cash flows:

 

               
    December 31,  
    2022     2021  
Cash and cash equivalents   $ 59,625     $ 24,360  
Restricted cash     5,126       20,879  
Total cash, cash equivalents and restricted cash   $ 64,751     $ 45,239  

 

Marketable Securities

 

Marketable securities currently consist of debt securities that are designated as available-for-sale and are recorded at fair value. Unrealized holding gains or losses for debt securities are reported as a component of accumulated other comprehensive income/(loss). Realized gains or losses resulting from the sale of these securities are determined based on the specific identification of the securities sold.

 

An impairment charge is recognized when the decline in the fair value of a security below the amortized cost basis is determined to be other-than-temporary. The Company considers various factors in determining whether to recognize an impairment charge, including the duration and severity of any decline in fair value below the Company’s amortized cost basis, any adverse changes in the financial condition of the issuers’ and its intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.

 

Investment Impairment

 

For all of the Company’s real estate and real estate related investments, the Company monitors events and changes in circumstances indicating that the carrying amounts of the real estate assets may not be recoverable. Examples of the types of events and circumstances that would cause management to assess the Company’s assets for potential impairment include, but are not limited to: a significant decrease in the market price of an asset; a significant adverse change in the manner in which the asset is being used; major vacancies and the resulting loss of revenues; natural disasters; a change in the projected holding period; legitimate purchase offers; and changes in the global and local markets or economic conditions. To the extent that the Company’s portfolio is concentrated in limited geographic locations, downturns specifically related to such regions may result in tenants defaulting on their lease obligations at those properties within a short time period, which may result in asset impairments. When such events or changes in circumstances are present, the Company assesses potential impairment by comparing estimated future undiscounted operating cash flows expected to be generated over the life of the asset and from its eventual disposition to the carrying amount of the asset. These projected cash flows are prepared internally by the Advisor and reflect in-place and projected leasing activity, market revenue and expense growth rates, market capitalization rates, discount rates, and changes in economic and other relevant conditions. The Company’s management reviews these projected cash flows to assure that the valuation is prepared using reasonable inputs and assumptions that are consistent with market data or with assumptions that would be used by a third-party market participant and assume the highest and best use of the investment. The Company considers trends, strategic decisions regarding future development plans, and other factors in its assessment of whether impairment conditions exist. In the event that the carrying amount exceeds the estimated future undiscounted operating cash flows, the Company recognizes an impairment loss to adjust the carrying amount of the asset to estimated fair value. While the Company believes its estimates of future cash flows are reasonable, different assumptions regarding factors such as market rents, economic conditions, and occupancy rates could significantly affect these estimates.

 

F-10

 

 

Lightstone Value Plus REIT V, Inc.
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)

 

In evaluating the Company’s investments for impairment, management may use appraisals and make estimates and assumptions, including, but not limited to, the projected date of disposition of the properties, the estimated future cash flows of the properties during the Company’s ownership, and the projected sales price of each of the properties. A future change in these estimates and assumptions could result in understating or overstating the carrying value of the Company’s investments, which could be material to its financial statements. In addition, the Company may incur impairment charges on assets classified as held for sale in the future if the carrying amount of the asset upon classification as held for sale exceeds the estimated fair value, less costs to sell.

 

Revenue Recognition

 

The Company recognizes rental income generated from leases of its operating properties on a straight-line basis over the terms of the respective leases, including the effect of rent holidays, if any. Leases associated with the Company’s multifamily residential properties are generally short-term in nature, and thus have no straight-line rent.

 

Interest Rate Cap Contracts

 

The Company utilizes derivative financial instruments to reduce interest rate risk. The Company does not hold or issue derivative financial instruments for trading purposes. The Company recognizes all derivatives as either assets or liabilities in the consolidated balance sheets and measures those instruments at fair value. Changes in fair value of those instruments are recorded in the consolidated statements of operations.

 

Deferred Financing Costs

 

Deferred financing costs are recorded at cost and consist of loan fees and other costs incurred in issuing debt. Amortization of deferred financing costs is computed using a method that approximates the effective interest method over the term of the related debt and is included in interest expense in the consolidated statements of operations. Unamortized deferred financing costs are included as a direct deduction from the related debt in the consolidated balance sheets.

 

Income Taxes

 

The Company has elected to be taxed as a REIT commencing with the taxable year ended December 31, 2008. If the Company qualifies as a REIT, it generally will not be subject to U.S. federal income tax on its taxable income or capital gain that it distributes to its stockholders. To maintain its REIT qualification, the Company must meet a number of organizational and operational requirements, including a requirement that it annually distribute to its stockholders at least 90% of its REIT taxable income (which does not equal net income, as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. If the Company fails to remain qualified for taxation as a REIT in any subsequent year and does not qualify for certain statutory relief provisions, its income for that year will be taxed at the regular corporate rate, and it may be precluded from qualifying for treatment as a REIT for the four-year period following its failure to qualify as a REIT. Such an event could materially adversely affect the Company’s net income and net cash available for distribution to stockholders. Additionally, even if the Company continues to qualify as a REIT, it may still be subject to some U.S. federal, state and local taxes on its income and property and to U.S. federal income taxes and excise taxes on its undistributed income, if any.

 

To maintain its qualification as a REIT, the Company may engage in certain activities through wholly-owned taxable REIT subsidiaries (“TRSs”). As such, the Company may be subject to U.S. federal and state income and franchise taxes from these activities.

 

As of December 31, 2022 and 2021, the Company had no material uncertain income tax positions.

 

During 2015, the Company recorded an aggregate provision for income tax of $2.7 million representing estimated foreign income tax due as a result of the sale of two foreign investments, Alte Jakobstraße and Holstenplatz. During the first quarter of 2022, the Company recorded an income tax benefit of $0.8 million representing a partial refund of the foreign income tax paid.

 

F-11

 

 

Lightstone Value Plus REIT V, Inc.
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)

 

Concentration of Credit Risk

 

At December 31, 2022 and 2021, the Company had cash deposited in certain financial institutions in excess of federally insured levels. The Company regularly monitors the financial stability of these financial institutions and believes that it is not exposed to any significant credit risk in cash and cash equivalents or restricted cash.

 

Noncontrolling Interest

 

Effective as of December 30, 2021, the Company wholly-owns all of its real estate investments and does not have any remaining noncontrolling interests. Prior to December 30, 2021, noncontrolling interests represented the noncontrolling ownership interest’s proportionate share of the equity in the Company’s consolidated real estate investments. Income and losses were allocated to noncontrolling interest holders based generally on their ownership percentage but in certain instances, if a property reached a defined return threshold, then it may have resulted in distributions to noncontrolling interests which were different from the standard pro-rata allocation percentage. Additionally, in certain instances, the joint venture agreements may have provided for liquidating distributions based on achieving certain return metrics.

 

Acquisitions of Noncontrolling Members’ Ownership Interests in Consolidated Real Estate Investments

 

On March 17, 2021, the Company acquired the noncontrolling member’s 7.5% ownership interest in a 280-unit multifamily property located in Margate, Florida (the “Lakes of Margate”) for $1.1 million and as a result, owned 100% of the Lakes of Margate, which was subsequently sold (see Note 6).

 

On December 20, 2021, the Company acquired the noncontrolling member’s 15.0% membership interest in the River Club Apartments and the Townhomes at River Club (collectively, the “River Club Properties”), two student housing complexes with a total of 1,134 beds located in Athens, Georgia, for $10.2 million and as a result, owned 100% of the River Club Properties, which were subsequently sold (see Note 6).

 

On December 30, 2021, the Company acquired the noncontrolling member’s 10.0% ownership interest in the Parkside Apartments for $3.6 million and recorded the $3.7 million difference between the contractual purchase price and the carrying value of the noncontrolling member’s interest to additional paid in capital. As a result, the Company now owns 100% of Parkside Apartments (see Note 6).

 

Earnings per Share

 

The Company had no potentially dilutive securities outstanding during the periods presented. Accordingly, net (loss) income per share is calculated by dividing net (loss) income by the weighted-average number of shares of common stock outstanding during the applicable period.

 

Current Environment

 

The Company’s operating results are substantially impacted by the overall health of local, U.S. national and global economies and may be influenced by market and other challenges. Additionally, the Company’s business and financial performance may be adversely affected by current and future economic and other conditions; including, but not limited to, availability or terms of financings, financial markets volatility, political upheaval or uncertainty, natural and man-made disasters, terrorism and acts of war, unfavorable changes in laws and regulations, outbreaks of contagious diseases, cybercrime, loss of key relationships, inflation and recession.

 

The Company’s overall performance depends in part on worldwide economic and geopolitical conditions and their impacts on consumer behavior. Worsening economic conditions, increases in costs due to inflation, higher interest rates, certain labor and supply chain challenges, and developments related to the COVID-19 pandemic, and other changes in economic conditions, may adversely affect the Company’s results of operations and financial performance.

 

F-12

 

 

Lightstone Value Plus REIT V, Inc.
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)

 

Reclassifications

 

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

 

3. New Accounting Pronouncements

 

In June 2016, the FASB issued new guidance which replaces the incurred loss impairment methodology currently in use with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The adoption of this standard will not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

 

4. Marketable Securities and Fair Value Measurements

 

Marketable Securities, Derivative Financial Instruments and Fair Value Measurements

 

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

 

                       
    As of December 31, 2022  
Debt securities:   Adjusted Cost     Gross Unrealized Gains     Gross Unrealized Losses     Fair Value  
Corporate and Government Bonds   $ 3,675     $ -     $ (220 )   $ 3,455  

 

    As of December 31, 2021  
Debt securities:   Adjusted Cost     Gross Unrealized Gains     Gross Unrealized Losses     Fair Value  
Corporate and Government Bonds   $ 3,632     $ 49     $ (36 )   $ 3,645  

 

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. As of December 31, 2022, the Company did not recognize any impairment charges.

 

The following table summarizes the estimated fair value of the Company’s investments in marketable debt securities with stated contractual maturity dates, accounted for as available-for-sale securities and classified by the contractual maturity date of the securities:

 

       
    As of
December 31,
2022		  
Due in 1 year   $ 791  
Due in 1 year through 5 years     2,590  
Due in 5 years through 10 years     74  
Due after 10 years     -  
Total   $ 3,455  

 

F-13

 

 

Lightstone Value Plus REIT V, Inc.
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)

 

Derivative Financial Instruments

 

The Company has entered into two interest rate cap contracts with unrelated financial institutions in order to reduce the effect of interest rate fluctuations or risk of certain real estate investment’s interest expense on its variable rate debt. The Company is exposed to credit risk in the event of non-performance by the counterparty to these financial instruments. Management believes the risk of loss due to non-performance to be minimal.

 

The Company is accounting for the interest rate cap contracts as economic hedges, marking these contracts to market, taking into account present interest rates compared to the contracted fixed rate over the life of the contract and recording the unrealized gain or loss on the interest rate cap contracts in the consolidated statements of operations.

 

For the year ended December 31, 2022 and 2021, the Company recorded unrealized gains of $1.8 million and $25, respectively, in the consolidated statements of operations representing the change in the fair value of these economic hedges during such periods.

 

The interest rate cap contracts have notional amounts of $52.2 million and $49.0 million, respectively, mature on July 15, 2023 and October 11, 2023, respectively, and effectively cap LIBOR at 2.50% and 2.00%, respectively. The aggregate fair value of the interest rate cap contracts was $1.8 million and $25 as of December 31, 2022 and 2021, respectively, and is included in prepaid expenses and other assets on the consolidated balance sheets. During the year ended December 31, 2022, the Company earned $0.4 million from the interest rate cap contracts which are recorded in interest expense, net on the consolidated statements of operations. See Note 9 for additional information.

 

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:

 

  ● Level 1 – Quoted prices in active markets for identical assets or liabilities.
     
  ● Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
     
  ● Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The fair value of the Company’s investments in debt securities are measured using quoted prices for these investments; however, the markets for these assets are not active. The fair values of the Company’s interest rate cap contracts are measured using other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. As of December 31, 2022 and 2021, all of the Company’s debt securities and interest rate cap contracts were classified as Level 2 assets and there were no transfers between the level classifications during the years ended December 31, 2022 and 2021.

 

F-14

 

 

Lightstone Value Plus REIT V, Inc.
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)

 

5. Financial Instruments not Reported at Fair Value

 

The Company determined the following disclosure of estimated fair values using available market information and appropriate valuation methodologies. However, considerable judgment is necessary to interpret market data and develop the related estimates of fair value. The use of different market assumptions or only estimation methodologies may have a material effect on the estimated fair value amounts.

 

As of December 31, 2022 and 2021, management estimated that the carrying value of cash and cash equivalents, restricted cash, note receivable, prepaid expenses and other assets (exclusive of interest rate cap contracts - see Note 4) and accounts payable and accrued and other liabilities were at amounts that reasonably approximated their fair value based on their highly-liquid nature and/or short-term maturities.

 

The fair value of the notes payable is categorized as a Level 2 in the fair value hierarchy. The fair value was estimated using a discounted cash flow analysis valuation on the estimated borrowing rates currently available for loans with similar terms and maturities. The fair value of the notes payable was determined by discounting the future contractual interest and principal payments by a market rate. Disclosure about fair value of financial instruments is based on pertinent information available to management as of December 31, 2022 and 2021.

 

Carrying amounts of the Company’s notes payable and the related estimated fair value are as follows:

 

                       
    As of
December 31,
2022		     As of
December 31,
2021		  
    Carrying Amount     Estimated Fair Value     Carrying Amount     Estimated Fair Value  
Notes payable   $ 293,695     $ 288,222     $ 282,375     $ 287,194  

 

6. Real Estate Properties

 

The following table presents certain information about the Company’s wholly owned and consolidated real estate properties as of December 31, 2022:

 

                       
Property Name   Description     Location     Date Acquired  

Ownership
Interest

  
Arbors Harbor Town   Multifamily     Memphis, Tennessee     December 20, 2011     100 %
Parkside Apartments   Multifamily     Sugar Land, Texas     August 8, 2013     100 %
Flats at Fishers   Multifamily     Fishers, Indiana     November 30, 2017     100 %
Axis at Westmont   Multifamily     Westmont, Illinois     November 27, 2018     100 %
Valley Ranch Apartments   Multifamily     Ann Arbor, Michigan     February 14, 2019     100 %
Autumn Breeze Apartments   Multifamily     Noblesville, Indiana     March 17, 2020     100 %
BayVue Apartments   Multifamily     Tampa, Florida     July 7, 2021     100 %
Citadel Apartments   Multifamily     Houston, Texas     October 6, 2021     100 %

 

F-15

 

 

Lightstone Value Plus REIT V, Inc.
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)

 

Acquisition Activities

 

Year Ended December 31, 2021

 

Acquisition of BayVue Apartments

 

On July 7, 2021, the Company completed the acquisition of a 368-unit multifamily property located in Tampa, Florida (the “BayVue Apartments”), from an unrelated third party for a contractual purchase price of $59.5 million, excluding closing and other acquisition related costs. The acquisition was funded with $44.3 million of initial proceeds from a mortgage financing (see Note 9 for additional information) and $15.2 million of cash on hand, including escrowed funds released by a qualified intermediary.

 

The Company determined this acquisition was an asset acquisition and allocated the total purchase price, including closing and other acquisition related costs, to the assets acquired based on their relative fair value. Approximately $12.7 million was allocated to land and improvements, $43.5 million was allocated to building and improvements, $1.3 million was allocated to furniture and fixtures and $3.0 million was allocated to in-place lease intangibles.

 

Acquisition of Citadel Apartments

 

On October 6, 2021, the Company acquired a 293-unit multifamily property located in Houston, Texas (the “Citadel Apartments”), from an unrelated third party for a contractual purchase price of $66.0 million, excluding closing and other acquisition related costs. The acquisition was funded with $38.0 million of initial proceeds from mortgage financings (see Note 9 for additional information) and $28.0 million of cash on hand.

 

The Company determined this acquisition was an asset acquisition and allocated the total purchase price, including closing and other acquisition related costs, to the assets acquired based on their relative fair value. Approximately $13.6 million was allocated to land and improvements, $48.3 million was allocated to building and improvements, $2.6 million was allocated to furniture and fixtures and $3.5 million was allocated to in-place lease intangibles.

 

Acquisition of Noncontrolling Interest in Parkside Apartments

 

On December 30, 2021, the Company acquired the noncontrolling member’s 10.0% ownership interest in a 240-unit multifamily located in Sugar Land, Texas (the “Parkside Apartments”) for $3.6 million and recorded the $3.7 million difference between the contractual purchase price and the carrying value of the noncontrolling member’s interest to additional paid in capital. As a result, the Company now owns 100% of Parkside Apartments.

 

Disposition Activities

 

The following dispositions did not represent a strategic shift that had a major effect on the Company’s operations and financial results and therefore did not qualify to be reported as discontinued operations and their operating results are reflected in the Company’s results from continuing operations in the consolidated statements of operations for all periods presented through their respective dates of disposition:

 

Disposition of Lakes of Margate

 

On March 17, 2021, the Company completed the disposition of the Lakes of Margate for a contractual sales price of $50.8 million to an unrelated third party (the “Lakes of Margate Buyer”). At closing, the Lakes of Margate Buyer paid $15.1 million and assumed the existing mortgage loan secured by the Lakes of Margate Loan with an outstanding principal balance of $35.7 million (see Note 9). Additionally, on March 17, 2021, the Company paid $1.1 million for the 7.5% membership interest held in the Lakes of Margate by the minority owner and recorded the $2.1 million difference between the contractual purchase price and the carrying value of the noncontrolling member’s interest to additional paid in capital. As a result, at the time of the completion of the sale of the Lakes at Margate it was wholly owned by the Company. In connection with the disposition of the Lakes of Margate, the Company recognized a gain on sale of investment property of $27.8 million during the first quarter of 2021.

 

F-16

 

 

Lightstone Value Plus REIT V, Inc.
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)

 

Disposition of the River Club Properties

 

On December 22, 2021, the Company completed the disposition of River Club Properties for a contractual sales price of $77.3 million to an unrelated third party. In connection with the transaction, the Company repaid in full the existing outstanding mortgage indebtedness of $30.4 million secured by the River Club Properties. Additionally, on December 20, 2021, the Company paid $10.2 million for the 15.0% membership interest held in the River Club Properties by the minority owner and recorded the $11.7 million difference between the contractual purchase price and the carrying value of the noncontrolling member’s interest to additional paid in capital. As a result, at the time of the completion of the sale of the River Club Properties it was wholly owned by the Company. In connection with the disposition of the River Club Properties, the Company recognized a gain on the sale of investment property of $55.0 million during the fourth quarter of 2021.

 

7. Note Receivable

 

On February 28, 2019, the Company, as the lender, and an unrelated third party (the “Mezzanine Loan Borrower”), as the borrower, entered into a loan promissory note (the “Mezzanine Loan”), pursuant to which the Company funded an aggregate $12.0 million of mezzanine financing.

 

The Mezzanine Loan bore interest at a rate of LIBOR plus 11.0% per annum with a floor of 13.493% (17.885% as of December 31, 2022) and had a maturity date of March 1, 2023, and was collateralized by the ownership interests of the Mezzanine Loan Borrower in a condominium project (the “Park House”) located at 500 West 22nd Street in the West Chelsea neighborhood of New York City. The Mezzanine Loan provided for monthly interest-only payments at a rate of 8% with the additional interest above the 8% threshold added to the outstanding principal balance and due at maturity.

 

The Mezzanine Loan Borrower has developed and constructed Park House, which contains ten residential units and ground floor retail space. The Park House was substantially completed in July 2022, and during the year ended December 31, 2022, the Mezzanine Loan Borrower repaid $10.6 million of the Mezzanine Loan with proceeds from the sale of condominium units.

 

As of December 31, 2022, the remaining outstanding principal balance of the Mezzanine Loan was $3.8 million, including $2.4 million of additional interest due at maturity. The Mezzanine Loan is classified as note receivable, net on the consolidated balance sheets. During the years ended December 31, 2022 and 2021, the Company recorded approximately $1.3 million and $1.7 million, respectively, of interest income related to the note receivable.

 

During the first quarter of 2023, the Company and Mezzanine Loan Borrower refinanced the Mezzanine Loan resulting in a $5.0 million senior loan (the “Senior Loan”) secured by three of Park House’s unsold condominium units and the equity interests of the Mezzanine Loan Borrower in Park House. The Senior Loan bears interest at a rate of SOFR plus 5.50% per annum with a floor of 10.0% and has a term of twelve-months with one six-month extension option.

 

8. Investment in Unconsolidated Joint Venture

 

The Company previously participated in the residual interests of a mezzanine financing made to an unrelated third-party entity, which it accounted for in accordance with the equity method of accounting. The third-party entity owned an apartment complex located in Denver, Colorado (“Prospect Park”) which was sold to a third-party buyer in December 2017 and the carrying value of the Company’s unconsolidated investment was subsequently reduced to zero during the first quarter of 2018. On May 10, 2021, the Company received an additional payment of $1.5 million in full settlement related to its prior participation in the residual interests of Prospect Park and recognized a gain on sale of unconsolidated joint venture of $1.5 million during the second quarter of 2021.

 

F-17

 

 

Lightstone Value Plus REIT V, Inc.
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)

 

9. Notes Payable

 

The following table sets forth information as of the date indicated for the Company’s notes payable:

 

                                       
Property   Interest Rate     Weighted Average
Interest Rate as of
December 31,
2022		     Maturity Date   Amount Due at Maturity     As of
December 31,
2022		     As of
December 31,
2021		  
Arbors Harbor Town   4.53%     4.53%     January 1, 2026   $ 29,000     $ 29,000     $ 29,000  
                                         
Arbors Harbor Town Supplemental   3.52%     3.52%     January 1, 2026     5,379       5,732       5,842  
                                         
Parkside Apartments   4.45%     4.45%     June 1, 2025     15,782       16,644       16,974  
                                         
Axis at Westmont   4.39%     4.39%     February 1, 2026     34,343       36,483       37,100  
                                         
Valley Ranch Apartments   4.16%     4.16%     March 1, 2026     43,414       43,414       43,414  
                                         
Flats at Fishers   3.78%     3.78%     July 1, 2026     26,090       28,072       28,592  
                                         
Flats at Fishers Supplemental   3.85%     3.85%     July 1, 2026     8,366       8,987       9,150  
                                         
Autumn Breeze Apartments   3.39%     3.39%     April 1, 2030     25,518       29,920       29,920  
                                         
BayVue Apartments   LIBOR + 3.00%
(floor 3.10%)		     4.81%     July 9, 2024     46,443       46,443       44,383  
                                         
Citadel Apartments Senior   LIBOR + 1.50%
(floor 1.60%)		     3.42%     October 11, 2024     39,200       39,200       30,400  
                                         
Citadel Apartments Junior   LIBOR + 8.75%
(floor 8.85%)		     10.87%     October 11, 2024     9,800       9,800       7,600  
                                         
Total notes payable         4.33%         $ 283,335       293,695       282,375  
                                         
Less: Deferred financing costs                             (3,406 )     (4,777 )
                                         
Total notes payable, net                           $ 290,289     $ 277,598  

 

F-18

 

 

Lightstone Value Plus REIT V, Inc.
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)

 

Citadel Apartments

 

On October 6, 2021, the Company entered into a non-recourse mortgage loan facility for up to $39.2 million (the “Citadel Apartments Senior Mortgage”). The Citadel Apartments Senior Mortgage requires monthly interest-only payments through its maturity date and bears interest at LIBOR plus 1.50% subject to a 1.60% floor. Simultaneously, on October 6, 2021, the Company also entered into a non-recourse mortgage loan facility for up to $9.8 million (the “Citadel Apartments Junior Mortgage” and together with the Citadel Apartments Senior Mortgage, the “Citadel Apartments Mortgages”). The Citadel Apartments Junior Mortgage requires monthly interest-only payments through its maturity date and bears interest at LIBOR plus 8.75%, subject to a 8.85% floor. Additionally, the Citadel Apartments Mortgages provide for a replacement benchmark rate in connection with the phase-out of LIBOR, which is expected to be for periods after June 30, 2023.

 

The Citadel Apartments Mortgages initially mature on October 11, 2024, with two one-year extension options, subject to the satisfaction of certain conditions, and are collateralized by the Citadel Apartments, while the Citadel Apartments Junior Mortgage is subordinate to the Citadel Apartments Senior Mortgage. As of December 31, 2022, the aggregate outstanding principal balance the Citadel Apartment Mortgages were $49.0.

 

Pursuant to the terms of the Citadel Apartments Mortgages, the Company is required to enter into one or more interest rate cap agreements in the notional amount of $49.0 million for as long as the Citadel Apartments Mortgages remain outstanding. In connection with the Citadel Apartments Mortgages, the Company has entered into an interest rate cap agreement with a notional amount of $49.0 million pursuant to which the LIBOR rate is capped at 2.00% through October 11, 2023.

 

BayVue Apartments

 

On July 7, 2021, the Company entered into a non-recourse mortgage loan facility for up to $52.2 million (the “BayVue Apartments Mortgage”) scheduled to initially mature on July 9, 2024, with two, one-year extension options, subject to the satisfaction of certain conditions. The BayVue Apartments Mortgage requires monthly interest-only payments through its maturity date and bears interest at LIBOR plus 3.00% subject to a 3.10% floor. Additionally, the BayVue Apartments Mortgage provides for a replacement benchmark rate in connection with the phase-out of LIBOR, which is expected to be for periods after June 30, 2023. The BayVue Apartments Mortgage is collateralized by the BayVue Apartments. As of December 31, 2022, the outstanding principal balance and remaining availability under the BayVue Apartments Mortgage was $46.4 million and $5.8 million, respectively. The remaining availability may be drawn for certain capital improvements to the property pursuant to the loan agreement.

 

Pursuant to the terms of the BayVue Apartments Mortgage, the Company is required to enter into one or more interest rate cap agreements in the notional amount of $52.2 million for as long as the BayVue Apartments Mortgage remains outstanding. In connection with the BayVue Apartments Mortgage, the Company has entered into an interest rate cap agreement with a notional amount of $52.2 million pursuant to which the LIBOR rate is capped at 2.50% through July 15, 2023.

 

Autumn Breeze Apartments

 

On March 31, 2020, the Company entered into a ten-year $29.9 million non-recourse mortgage loan (the “Autumn Breeze Apartments Loan”) scheduled to mature on April 1, 2030. The Autumn Breeze Apartments Loan bears interest at 3.39% and requires monthly interest-only payments through June 30, 2023 and monthly principal and interest payments of approximately $0.1 million thereafter, through its stated maturity. The Autumn Breeze Apartments Loan is collateralized by a 280-unit multifamily property located in Noblesville, Indiana (the “Autumn Breeze Apartments”).

 

F-19

 

 

Lightstone Value Plus REIT V, Inc.
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)

 

Flats as Fishers

 

On June 13, 2019, the Company entered into a seven-year $28.8 million non-recourse mortgage loan (the “Flats at Fishers Mortgage”) scheduled to mature on July 1, 2026. The Flats at Fishers Mortgage bears interest at 3.78% and requires monthly interest-only payments through the first two years of the term and thereafter, monthly payments of principal and interest based upon a 30-year amortization. The Flats at Fishers Mortgage is collateralized by the Flats at Fishers.

 

On August 16, 2021, the Company entered into a non-recourse subordinated mortgage loan for $9.2 million (the “Flats at Fisher Supplemental Mortgage”) scheduled to mature on July 1, 2026. The Flats at Fisher Supplemental Mortgage requires monthly payments of interest and principal of $43 through its maturity date and bears interest at 3.85%. The Flats at Fisher Supplemental Mortgage is collateralized with a subordinated interest in the Flats at Fisher.

 

Valley Ranch Apartments

 

On February 14, 2019, the Company entered into a seven-year $43.4 million non-recourse mortgage loan (the “Valley Ranch Mortgage”) scheduled to mature on March 1, 2026. The Valley Ranch Mortgage bears interest at 4.16% and requires monthly interest-only payments through its stated maturity. The Valley Ranch Mortgage is collateralized by a 384-unit multifamily property located in Ann Arbor, Michigan (the “Valley Ranch Apartments”).

 

Arbor Harbors Town

 

On December 28, 2018, the Company entered into a seven-year $29.0 million non-recourse mortgage loan (the “Arbors Harbor Town Mortgage”) scheduled to mature on January 1, 2026. The Arbors Harbor Town Mortgage bears interest at 4.53% and requires monthly interest payments through its stated maturity with the entire unpaid balance due upon maturity. The Arbors Harbor Town Mortgage is collateralized by a 345-unit multifamily located in Memphis, Tennessee (the “Arbors Harbor Town”).

 

On September 30, 2021, the Company entered into a non-recourse subordinated mortgage loan for $5.9 million (the “Arbors Harbor Town Supplemental Mortgage”) scheduled to mature on January 1, 2026. The Arbors Harbor Town Supplemental Mortgage requires monthly payments of interest and principal of $26 through its maturity date and bears interest at 3.52%. The Arbors Harbor Town Supplemental Mortgage is collateralized with a subordinated interest in the Arbors Harbor Town.

 

Axis at Westmont

 

On November 27, 2018, the Company assumed an existing non-recourse mortgage loan (the “Axis at Westmont Mortgage”) in the amount of $37.6 million. The Axis at Westmont Mortgage is collateralized by a 400-unit multifamily property located in Westmont, Illinois (the “Axis at Westmont”), bears interest at a fixed annual rate of 4.39% and required monthly interest only payments until March 1, 2021 and monthly principal and interest payments of $0.2 million thereafter. Any unpaid principal and interest is due on the maturity date, February 1, 2026. The Company has the right to prepay the entire outstanding amount of the loan provided that if prepayment is made prior to November 1, 2025, a prepayment premium is required.

 

Parkside Apartments

 

On June 1, 2018, the Company entered into a seven-year $18.0 million non-recourse mortgage loan (the “Parkside Mortgage”) scheduled to mature on June 1, 2025. The Parkside Mortgage bears interest at 4.45% and requires monthly interest and principal payments pursuant to a 30-year amortization schedule through its stated maturity with the entire unpaid balance due upon maturity. The Parkside Mortgage is collateralized by Parkside.

 

F-20

 

 

Lightstone Value Plus REIT V, Inc.
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)

 

The following table provides information with respect to the contractual maturities and scheduled principal repayments of the Company’s indebtedness as of December 31, 2022.

 

                                                       
    2023     2024     2025     2026     2027     Thereafter     Total  
Principal maturities   $ 2,191     $ 97,905     $ 18,138     $ 147,729     $ 654     $ 27,078     $ 293,695  
Less: deferred financing costs                                                     (3,406 )
Total notes payable, net                                                   $ 290,289  

 

As of December 31, 2022, the Company was in compliance with all of its financial debt covenants.

 

10. Commitments and Contingencies

 

Legal Proceedings

 

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

 

As of the date hereof, 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. Additionally, the Company has not recorded any loss contingencies related to legal proceedings in which the potential loss is deemed to be remote.

 

11. Stockholders’ Equity

 

Capitalization

 

As of December 31, 2022, the Company’s authorized capital was 350,000,000 shares of common stock, 50,000,000 shares of preferred stock, and 1,000 shares of convertible stock. All shares of such stock have a par value of $.0001 per share.

 

As of December 31, 2022, the Company had issued 20.0 million shares of its common stock, including 2.2 million shares previously issued through its distribution reinvestment plan, which was terminated on April 3, 2012. As of December 31, 2022, the Company had 1,000 shares of convertible stock held by an affiliate of Lightstone.

 

The shares of convertible stock will be converted into shares of common stock automatically if (1) the Company has made total distributions on then outstanding shares of its common stock equal to the issue price of those shares plus a 10% cumulative, non-compounded, annual return on the issue price of those outstanding shares, or (2) the Company lists its common stock for trading on a national securities exchange if the sum of the prior distributions on then outstanding shares of the common stock plus the aggregate market value of the common stock (based on the 30-day average closing price) meets the same 10% performance threshold. In general, the convertible stock will convert into shares of common stock with a value equal to the lesser of (A) 20% of the excess of the Company’s enterprise value plus the aggregate value of distributions paid to date on then outstanding shares of its common stock over the aggregate issue price of those outstanding shares plus a 10% cumulative, non-compounded, annual return on the issue price of those outstanding shares, or (B) 15% of the excess of the Company’s enterprise value plus the aggregate value of distributions paid to date on then outstanding shares of the common stock over the aggregate issue price of those outstanding shares plus a 6% cumulative, non-compounded, annual return on the issue price of those outstanding shares. At the date of issuance of the shares of convertible stock, management determined the fair value under GAAP was less than the nominal value paid for the shares; therefore, the difference is not material.

 

F-21

 

 

Lightstone Value Plus REIT V, Inc.
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)

 

The timing of the conversion of any or all of the convertible stock may be deferred by the Company’s board of directors if it determines that full conversion may jeopardize its qualification as a REIT. Any such deferral will in no event otherwise alter the terms of the convertible stock, and such stock shall be converted at the earliest date after the Company’s board of directors determines that such conversion will not jeopardize its qualification as a REIT. The Company’s board of directors is authorized to amend the Company’s charter, without the approval of the stockholders, to increase the aggregate number of authorized shares of capital stock or the number of shares of any class or series that the Company has the authority to issue.

 

Share Redemption Program

 

The Company’s board of directors has adopted a share redemption program (the “SRP”) that permits stockholders to sell their shares back to the Company, subject to the significant conditions and limitations of the program. The Company’s board of directors can amend the provisions of the SRP at any time without the approval of its stockholders.

 

Effective March 25, 2021, the Company’s Board of Directors reopened the SRP, which had been suspended since December 13, 2019, solely for redemptions submitted in connection with a stockholder’s death and set the price for all such purchases to the Company’s current NAV per Share, as determined by its board of directors and reported by the Company from time to time.

 

On November 10, 2022, the Company’s board of directors adopted a Seventh Amended and Restated Share Redemption Program (the “Amended SRP”), which became effective on January 1, 2023. Under the terms of the Amended SRP, any stockholder may request redemption of their shares, subject to the significant conditions and limitations of the program. Redemption requests will no longer be limited to requests upon the death of a qualifying stockholder, as had been the case under the SRP through December 31, 2022. Additionally, under the terms of the Amended SRP, the Company will redeem shares at 85% of the NAV per Share as of the date the request for redemption is approved.

 

Pursuant to the terms of the Amended SRP, any shares approved for redemption are redeemed on a periodic basis as determined by the Company’s board of directors, generally expected to be at the end of each quarterly period. However, the Company will not redeem, during any calendar year, more than 5% of the number of shares outstanding on last day of the previous calendar year (the “5% Limitation”). The cash available for redemption of shares will be set by the Company’s board of directors not less often than annually (the “Funding Limitation” and, together with the 5% Limitation, the “Redemption Limitations”). The Company’s board of directors has set the amount of cash available for redemption of shares for the year ended December 31, 2023 at $8.0 million, which is generally to be allocated $2.0 million for each quarterly period. The Company may change the amount of the Redemption Limitations upon 10 business days’ notice to its stockholders and will provide notice of any change to the Redemption Limitations by including such information in (a) a Current Report on Form 8-K or in its annual or quarterly reports, all publicly filed with the United States Securities and Exchange Commission or (b) a separate mailing to its stockholders.

 

Redemption requests will be honored pro rata among all requests received subject to the Redemption Limitations and will not be honored on a first come, first served basis.

 

The Company’s board of directors reserves the right in its sole discretion at any time and from time to time, subject to any notice requirements described in our SRP, to (1) reject any request for redemption of shares, (2) change the purchase price for redemption of shares, (3) limit the funds to be used for redemption of shares under the SRP or otherwise change the Redemption Limitations, or (4) amend, suspend (in whole or in part) or terminate the SRP.

 

During the year ended December 31, 2022 the Company redeemed 83,876 shares of common stock, pursuant to the SRP at an average price per share of $12.91 per share. During the year ended December 31, 2021 the Company redeemed 65,029 shares of common stock, pursuant to the SRP at an average price per share of $9.42 per share.

 

F-22

 

 

Lightstone Value Plus REIT V, Inc.
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)

 

Distributions

 

The Company did not declare or pay any distributions to its stockholders during the years ended December 31, 2022 and 2021.

 

12. Related Party Transactions

 

Advisor and Affiliates

 

The Company’s business is externally managed by LSG Development Advisor LLC (the “Advisor”), an affiliate of the Lightstone Group LLC (“Lightstone”) which provides advisory services to the Company and the Company has no employees. Lightstone is majority owned by the chairman emeritus of the Company’s board of directors, David Lichtenstein. Pursuant to the terms of an advisory agreement and subject to the oversight of the Company’s board of directors, the Advisor is responsible for managing the Company’s day-to-day affairs and for services related to the management of the Company’s assets.

 

The Company has agreements with the Advisor and its affiliates to pay certain fees and reimburse certain expenses in connection with services performed and costs incurred by these entities and other related parties. The Company is dependent on the Advisor and its affiliates for certain services that are essential to us, including investment decisions, asset disposition decisions, property management and leasing services, and other general administrative responsibilities. In the event that these companies were unable to provide the Company with their respective services, it would be required to obtain such services from other sources.

 

The advisory agreement has a one-year term and is renewable annually upon the mutual consent of the Advisor and the Company’s independent directors.

 

The following discussion describes the fees and expenses payable to the Advisor and affiliates under various agreements.

 

Fees   Amount

Acquisition -

  

The Company pays the Advisor acquisition and advisory fees of 1.5% of the amount paid in respect of the purchase, development, construction, or improvement of each asset the Company acquires, including any debt attributable to those assets.

 

In addition, the Company pays acquisition and advisory fees of 1.5% of the funds advanced in respect of a loan investment.

 

The Company pays the Advisor an acquisition expense reimbursement in the amount of (i) 0.25% of the funds paid for purchasing an asset, including any debt attributable to the asset, plus 0.25% of the funds budgeted for development, construction, or improvement in the case of assets that the Company acquires and intends to develop, construct, or improve or (ii) 0.25% of the funds advanced in respect of a loan investment.

 

The Company pays third parties, or reimburses the Advisor or its affiliates, for any investment-related expenses due to third parties in the case of a completed investment, including, but not limited to, legal fees and expenses, travel and communication expenses, costs of appraisals, accounting fees and expenses, third-party brokerage or finder’s fees, title insurance, premium expenses, and other closing costs.

 

The Advisor and its affiliates are also responsible for paying all of the investment-related expenses that the Company pays or the Advisor or its affiliates incur that are due to third parties or related to the additional services provided by the Advisor as described above with respect to investments the Company pays does not make, other than certain non-refundable payments made in connection with any acquisition.

 

F-23

 

 

Lightstone Value Plus REIT V, Inc.
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)

 

Debt Financing -

   The Company pays the Advisor a debt financing fee of 1.0% of the amount available under any loan or line of credit made available to us and pay directly all third-party costs associated with obtaining the debt financing. Generally, these fees are capitalized as a direct reduction to the applicable financing and amortized over its term.
     

Property Management -

   The Company pays its property manager, an affiliate of the Advisor, fees for the management, leasing, and construction supervision of the Company’s properties which is 4.0% of gross revenues of the properties managed by the Company’s property manager. The Company pays its property manager an oversight fee equal to 0.5% of the gross revenues of the property managed for any property for which the Company contracts directly with a third-party property manager. In no event will the Company’s property manager or its affiliates receive both a property management fee and an oversight fee with respect to any particular property. In the event the Company owns a property through a joint venture that does not pay the Company’s property manager directly for its services, the Company will pay its property manager a management fee or oversight fee, as applicable, based only on the Company’s economic interest in the property.
     
Construction Management -  

The Company pays its property manager a construction management fee in an amount not to exceed 5% of all hard construction costs incurred in connection with, but not limited to capital repairs and improvements, major building reconstruction and tenant improvements, if such affiliate supervises construction performed by or on behalf of the Company or its affiliates. The Company was not charged any construction management fees for the years ended December 31, 2022 and 2021.
     
Asset Management -  

The Company pays the Advisor a monthly asset management fee of one-twelfth of 0.7% of the value of each asset. The value of the Company’s assets is the value as determined in connection with the establishment and publication of an estimated net asset value (“NAV”) per share unless the asset was acquired after the Company’s publication of a NAV per share (in which case the value of the asset will be the contractual purchase price of the asset).
     
Administrative Services Reimbursement -  

The Advisor is responsible for paying all of the expenses it incurs associated with persons employed by the Advisor to the extent that they provide services to the Company for which the Advisor receives an acquisition, asset management, or debt financing fee, including wages and benefits of the applicable personnel. Instead of reimbursing the Advisor for specific expenses paid or incurred in connection with providing services to the Company, the Company pays the Advisor an administrative services fee, which is an allocation of a portion of the actual costs that the Advisor paid or incurred providing these services to the Company (the “Administrative Services Reimbursement”). The Administrative Services Reimbursement is intended to reimburse the Advisor for all its costs associated with providing services to the Company.

 

The Administrative Services Reimbursement is limited to the actual costs incurred or an annual cap (the “Cap”) as set forth in the agreement. For the twelve-month periods ended June 10, 2021 and June 10, 2022, the Cap was $1.33 million and $1.39 million, respectively. For the period from June 11, 2022 through June 30, 2022, the previous annual cap was pro-rated. For the twelve months ended June 30, 2023, the Cap is $1.5 million.

 

F-24

 

 

Lightstone Value Plus REIT V, Inc.
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)

 

 

The Administrative Services Reimbursement is payable in four equal quarterly installments within 45 days of the end of each calendar quarter. In addition, under the various advisory management agreements, the Company is to reimburse the Advisor for certain due diligence services provided in connection with asset acquisitions and dispositions and debt financings separately from the Administrative Services Reimbursement.

 

Notwithstanding the fees and cost reimbursements payable to the Advisor pursuant to the Company’s advisory management agreement, under the Company’s charter the Company may not reimburse the Advisor for any amount by which the Company’s operating expenses (including the asset management fee) at the end of the four preceding fiscal quarters exceeds the greater of: (i) 2% of the Company’s average invested assets, or (ii) 25% of the Company’s net income determined without reduction for any additions to reserves for depreciation, bad debts, or other similar non-cash reserves and excluding any gain from the sale of the Company’s assets for that period unless a majority of the Company’s independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. For the four fiscal quarters ended December 31, 2022 and 2021, the Company’s total operating expenses (including the asset management fee) did not exceed the limit on total operating expenses.

 

The following table represents the fees incurred associated with the payments to the Advisor for the periods indicated:

 

               
    For the Years Ended
December 31,		  
    2022     2021  
Acquisition fees and acquisition expense reimbursement(1)   $ -     $ 2,196  
Debt financing fees(2)     -       938  
Property management fees (property operating expenses)     514       465  
Administrative services reimbursement (general and administrative costs)     1,445       1,358  
Asset management fees (general and administrative costs)     3,489       3,006  
Total   $ 5,448     $ 7,963  

 

 
(1) Capitalized to the corresponding asset and amortized over its estimated useful life.
(2) Capitalized upon the execution of the loan, presented in the consolidated balance sheets as a direct deduction from the carrying value of the corresponding loan and amortized over the initial term of the corresponding loan.

 

As of December 31, 2022, the Company had no amounts payable to the Advisor and its affiliates. As of December 31, 2021, the Company had a payable to the Advisor and its affiliates of approximately $3.

 

****

 

F-25

 

 

EXHIBIT INDEX

 

Exhibit No.   Description
3.1   Third Articles of Amendment and Restatement (incorporated by reference to Exhibit 3.1 to Form 10-Q on November 14, 2012)
3.2   Articles of Amendment to Third Articles of Amendment and Restatement (incorporated by reference to Exhibit 3.1 to Form 8-K filed on July 24, 2017)
3.3   Second Amendment to Third Articles of Amendment and Restatement (incorporated by reference to Exhibit 3.1 to Form 8-K filed on September 3, 2021)
3.4   Third Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to Form 8-K filed on July 24, 2017)
3.5   Amendment to Third Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to Form 8-K filed on September 3, 2021)
4.1   Statement regarding restrictions on transferability of shares of common stock (to appear on stock certificate or to be sent upon request and without charge to stockholders issued shares without certificates) (incorporated by reference to Exhibit 4.1 to Form 10-K filed on March 28, 2013)
4.2   Description of Registrant’s Securities (incorporated by reference to Exhibit 4.2 to Form 10-K filed on March 25, 2021)
10.1*   Advisory Agreement between the Registrant, Lightstone Value Plus REIT V OP, LLC, and LSG Development, LLC
10.2   Property Management and Leasing Agreement among the Registrant, Behringer Harvard Opportunity OP II LP, and LSG-BH II Property Manager LLC (incorporated by reference to Exhibit 10.10 to Form 10-K filed on March 16, 2017)
21.1*   List of Subsidiaries
31.1*   Rule 13a-14(a)/15d-14(a) Certification
31.2*   Rule 13a-14(a)/15d-14(a) Certification
32.1*   Section 1350 Certification**
32.2*   Section 1350 Certification**
99.1   Seventh Amended and Restated Share Redemption Program (incorporated by reference to Exhibit 99.1 to Form 8-K filed on November 21, 2022)
101*   The following financial statements from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2022, filed on March 28, 2023, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations and Comprehensive Income, (iii) Consolidated Statements of Equity, (iv) Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements.

 

 
* Filed or furnished herewith.
** In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

 

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