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DIRECT FINANCING LEASES AND OPERATING LEASES
12 Months Ended
Dec. 31, 2023
Direct Financing Leases And Operating Leases  
DIRECT FINANCING LEASES AND OPERATING LEASES

6 – DIRECT FINANCING LEASES AND OPERATING LEASES

 

Information as Lessor Under ASC Topic 842

 

To generate positive cash flow, as a lessor, the Trust leases its facilities to tenants in exchange for payments. The Trust’s leases for its railroad, solar farms and greenhouse cultivation facilities have lease terms ranging between 5 and 99 years. Payments from the Trust’s leases are either recognized on a straight-line basis over the terms of the respective leases or on a cash basis for tenants with collectability issues. Total revenue from its leases recognized for the year ended December 31, 2023 and 2022 is approximately $2,054,000 and $8,518,000, respectively.

 

Direct Financing Leases

 

The Railroad Lease provides for a base cash rental of $915,000 per annum, payable quarterly, for the current 99-year lease period. The leased properties are maintained entirely at the lessee’s expense. Under the terms of the Railroad Lease, which became effective October 16, 1964, NSC (formerly Norfolk and Western Railway Company) leased all of P&WV’s real properties, including its railroad lines, for a term of 99 years, renewable by the lessee upon the same terms for additional 99-year terms in perpetuity.

 

The Railroad Lease may be terminated by the lessee at the expiration of the initial term or any renewal term, or by default of NSC. In the event of termination, NSC is obligated to return to P&WV all properties covered by the Railroad Lease, together with sufficient cash and other assets to permit operation of the railroad for a period of one year. In addition, NSC would be obligated upon default or termination, to the extent NSC has not previously paid indebtedness due to P&WV, to settle remaining indebtedness owed to P&WV. The existing indebtedness owed to P&WV, including the ability of P&WV to make an immediate demand for payment of such amounts, was part of the subject of a multi-year litigation which concluded in 2017. Based on the outcome of the litigation, the indebtedness that has accrued on Power REIT’s tax books is deemed uncollectable and was written off for tax purposes in 2017. The amount of this indebtedness has not been reflected on P&WV’s financial statements which are consolidated into Power REIT’s financial statements and therefore for financial reporting purposes there was no change related thereto.

 

P&WV has determined that the lease term is perpetual (for GAAP accounting purposes only) because it is perceived that it would be un-economic for the lessee to terminate and the Lessee has control over its actions with respect to default and has unlimited renewal options. Accordingly, as of January 1, 1983, the rentals receivable of $915,000 per annum, recognizing renewal options by the lessee in perpetuity, were estimated to have a present value of $9,150,000, assuming an implicit interest rate of 10%. The Trust has evaluated their long-lived assets for impairment and concluded there are no impairment indicators as of December 31, 2023.

 

Operating Leases

 

Lease revenue from solar land and CEA properties are accounted for as operating leases. Any such leases with rent escalation provisions are recorded on a straight-line basis when the amount of escalation in lease payments is known at the time Power REIT enters into the lease agreement, or known at the time Power REIT assumes an existing lease agreement as part of an acquisition (e.g., an annual fixed percentage escalation) over the initial lease term, subject to a collectability assessment, with the difference between the contractual rent receipts and the straight-line amounts recorded as “deferred rent receivable” or “deferred rent liability”. Collectability of contractual rent is assessed at quarter-end for each tenant receivable using various criteria including past collection issues, the current economic and business environment affecting the tenant and guarantees. If collectability of the contractual rent stream is not deemed probable, revenue will only be recognized upon receipt of cash from the tenant. During the year ended December 31, 2023, the trust incurred rental income of approximately $315,000 due to the unwinding of straight-lining certain leases compared to 2022, when the Trust wrote off a net amount of approximately $1,177,000 in straight-line rent receivable against rental income. These tenants rent payments will be recorded as rental revenue on a cash basis. Expenses for which tenants are contractually obligated to pay, such as maintenance, property taxes and insurance expenses are not reflected in the Trust’s consolidated financial statements unless paid by the Trust.

 

 

Due to significant price compression in the wholesale cannabis market, many of our cannabis related tenants are currently experiencing severe financial distress. Unfortunately, starting in 2022, collections from the CEA portfolio has diminished to a nominal amount. The Trust is exploring strategic alternatives in respect to the CEA portfolio and has listed some of the assets for sale and may list additional assets.

 

Below is a chart of operating leases for Power REIT as of December 31, 2023:

 

Property Type/Name  Lease Start  Term (yrs)   Renewal Options  Triple Net Lease  Rent Recorded 2023 ($)   Rent Recorded 2022 ($) 
Solar Farm Lease                        
Massachusetts                        
PWSS  Dec-11   22   2 x 5-years  Y   89,494    89,494 
California                        
PWRS  Apr-14   20   2 x 5-years  Y   803,117    803,117 
                         
Greenhouse - Cannabis Lease                        
Ordway, Colorado                        
Maverick 11,3,                 11,976    686,837 
Tamarack 181,3                 -    469,948 
Maverick 141,3                 -    639,816 
Sherman 6 - Green Street/Chronic3  Feb-20   20   2 x 5-years  Y   50,000    523,015 
Tamarack 71,3                 -    411,084 
Tamarack 7 (MIP)  Jan-22   10   2 x 5-years  Y   15,000    17,511 
Tamarack 191                 -    182,464 
Tamarack 8 - Apotheke  Jan-21   20   2 x 5-years  Y   -    88,191 
Tamarack 141                 -    - 
Tamarack 131                 -    - 
Tamarack 31,3                 -    300,305 
Tamarack 27 and 281,2                 -    - 
Sherman 21 and 22 1,2,3                 -    (99,209)
Maverick 5 - Jacksons Farms 3  Nov-21   20   2 x 5-years  Y   4,790    14,847 
Tamarack 4 and 51                 -    - 
                         
Walsenburg, Colorado 1,3                 -    242,779 
Desert Hot Springs, California3  Feb-21   5      Y   18,746    916,272 
Vinita, Oklahoma1,3                 -    125,695 
Marengo Township, Michigan1                 -    - 
                         
Greenhouse - Food Crop                        
O’Neill, Nebraska1,3                 -    193,000 
                  993,123    5,605,166 
                  1      

 

1Property is vacant
2In litigation
3Recognized security deposit as rent during 2022

 

 

The following is a schedule by years of minimum future rentals on non-cancelable operating leases as of December 31, 2023 for assets and assets held for sale where revenue recognition is considered on a straight-line basis:

 

   Assets   Assets Held for Sale 
2024   803,941    90,371 
2025   811,802    91,275 
2026   820,004    92,188 
2027   828,155    93,110 
2028   836,388    94,041 
Thereafter   5,155,262    459,605 
Total  $9,255,552   $920,590