NOTE 3 – REAL ESTATE, NET

As of December 31, 2019 and 2018, real estate, net consisted of the following (dollars in thousands):


	December 31,		December 31,
	2019		2018

Real estate under development	$	225,673	$	137,666
Building and building improvements		41,358		47,190
Tenant improvements		125		731
Furniture and fixtures		708		694
Land and land improvements		27,939		30,391
		295,803		216,672
Less: accumulated depreciation		2,577		3,608
	$	293,226	$	213,064

Real estate under development as of December 31, 2019 and December 31, 2018 included 77 Greenwich and the Paramus, New Jersey property. Building and building improvements, tenant improvements and land and land improvements included 237 11th property at December 31, 2019, and 237 11th and the West Palm Beach, Florida property at December 31, 2018. Furniture and fixtures included 237 11th at December 31, 2019 and December 31, 2018.

Depreciation expense amounted to approximately $1.6 million, $1.2 million and $246,000 for the years ended December 31, 2019, 2018 and 2017, respectively.

Acquisitions

In May 2018, we closed on the acquisition of 237 11th, a newly built 105‑unit, 12‑story multi-family apartment building located at 237 11th Street, Brooklyn, New York for a purchase price of $81.2 million, excluding transaction costs of approximately $0.7 million. The acquisition was funded through acquisition financing and cash on hand. Due to certain construction defects that resulted in water penetration into the building and damage to certain apartment units and other property, we have submitted a property and casualty claim for business interruption (lost revenue), property damage and the related remediation costs. We have also filed legal claims against the seller, its parent company, and the general contractor to recover damages arising from the defective construction. In addition, the general contractor has impleaded into that litigation several subcontractors who performed work on the property. Management expects to recover some portion of the cost to repair the property through the litigation, potential litigation, and/ or settlement negotiations with the seller, its parent company, the general contractor, the subcontractors, and the insurance carrier, although the damages that may be recoverable in litigation and/or potential settlement negotiations are uncertain at this time. Until the litigation and potential litigation and/or settlement negotiations are resolved, there will be significant cash outflows for repairs and remediation costs which work commenced in September 2019. Occupancy continues to decrease as tenants vacate due to the ongoing remediation work.

We allocate the purchase price of real estate to land and land improvements and building and building improvements (inclusive of tenant improvements), and intangibles, such as the value of above-market and below-market leases, real estate tax abatements and origination costs associated with the in-place leases. We depreciate the amount allocated to building and building improvements over their estimated useful lives, which generally range from one year to 27.5 years. We amortize the amount allocated to values associated with real estate tax abatement over the estimated period of benefit which is 15 years for 237 11th. We amortize the amount allocated to the above-market and below-market leases over the remaining term of the associated lease, which generally range from one to two years, and record it as either an increase (in the case of below-market leases) or a decrease (in the case of above-market leases) to rental revenue. We amortize the amount allocated to the values associated with in-place leases over the expected term of the associated lease, which generally range from one to two years. If a tenant vacates its space prior to the contractual termination of the lease and no rental payments are being made on the lease, any unamortized balance of the related intangible will be written off. The tenant improvements and origination costs are amortized as an expense over the shorter of their useful life or the remaining life of the lease (or charged against earnings if the lease is terminated prior to its contractual expiration date). We assess fair value of the leases based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market/economic conditions that may affect the property.

As of December 31, 2019, intangible assets, net consisted of the real estate tax abatement at its original valuation of $11.1 million offset by its related accumulated amortization of approximately $1.2 million. Amortization expense amounted to $740,000 for the year ended December 31, 2019 and $448,000 for period from May 24, 2018, the date of acquisition for 237 11th, through December 31, 2018.

As of December 31, 2019, the estimated annual amortization of intangible assets for each of the five succeeding years and thereafter is as follows (dollars in thousands):


	Real Estate
	Tax
	Abatement
Year	Amortization

2020	$	740
2021		740
2022		740
2023		740
2024		740
Thereafter		6,212

Through a wholly-owned subsidiary, we entered into an agreement with the New York City School Construction Authority (the “SCA”), whereby we will construct a school that will be sold to the SCA as part of our condominium development at 77 Greenwich. Pursuant to the agreement, the SCA will pay us $41.5 million for the purchase of their condominium unit and reimburse us for the costs associated with constructing the school (including payment of a construction supervision fee of approximately $5.0 million to us). Payments for construction are being made by the SCA to the general contractor in installments as construction on their condominium progresses. Payments to us for the land and construction supervision fee commenced in January 2018 and continued through October 2019 for the land and will continue through 2020 for the construction supervision fee, with an aggregate of $44.1 million having been paid to us as of December 31, 2019. We have also received an aggregate of $41.3 million in reimbursable construction costs from the SCA through December 31, 2019. The payments and reimbursements have been recorded as deferred real estate deposits on the consolidated balance sheets. Upon Substantial Completion, as defined in our agreement with the SCA, the SCA will close on the purchase of the school condominium unit from us, which is anticipated to occur during the spring of 2020, at which point title will transfer to the SCA. Under the agreement, we are required to substantially complete construction of the school by September 6, 2023. To secure our obligations with the SCA, the 77 Greenwich property has been ground leased to the SCA and leased back to us until title to the school is transferred to the SCA. We have also guaranteed certain obligations with respect to the construction of the school.

The ultimate sale of the school condominium unit will be recognized when control of the asset is transferred to the buyer. This generally will include transfer of title of the school condominium , which is expected to occur in the spring of 2020. As payments from the SCA are received, the amounts will be recorded on the balance sheets as deferred real estate deposits until sales criteria are satisfied.

Disposition

We disposed of the West Palm Beach, Florida property on November 23, 2019 for a sales price of $19.6 million. The balance of the West Palm Beach loan of $10.6 million was repaid simultaneously when we sold the West Palm Beach, Florida property and we recorded a gain on sale of approximately $9.5 million.