Note 3 – Real Estate, Net

As of March 31, 2020 and December 31, 2019, real estate, net, includes the following (in thousands):


	March 31,		December 31,
	2020		2019
	(unaudited)		(audited)
Real estate under development	$	241,175	$	225,673
Building and building improvements		41,358		41,358
Tenant improvements		125		125
Furniture and fixtures		711		708
Land and land improvements		27,939		27,939
		311,308		295,803
Less: accumulated depreciation		2,980		2,577
	$	308,328	$	293,226

Real estate under development as of March 31, 2020 and December 31, 2019 included 77 Greenwich and the Paramus, New Jersey property. Building and building improvements, tenant improvements, land and land improvements and furniture and fixtures included the 237 11th property as of March 31, 2020 and December 31, 2019.

Depreciation expense amounted to approximately $403,000 and $465,000 for the three months ended March 31, 2020 and 2019, respectively.

Real Estate

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 and the courts are currently closed, which, together with the general impact of the COVID-19 outbreak, will have an impact on the timing of the foregoing. 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. In April 2020, New York State required all non-essential construction projects be shut down due to the impact of the COVID-19 pandemic. As a result, the remediation and restoration processes have been delayed. This will result in a delay in our ability to restart the lease up of the property.

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 March 31, 2020 and December 31, 2019, intangible assets net consisted of real estate tax abatement at its original valuation of $11.1 million, respectively, partially offset by its related accumulated amortization of approximately $1.4 million and $1.2 million, respectively. For each of the three months ended March 31, 2020 and 2019, amortization expense amounted to $185,000, respectively.

77 Greenwich and the New York City School Construction Authority

Through a wholly-owned subsidiary, we entered into an agreement with the New York City School Construction Authority (the "SCA"), in which we agreed to construct a school to be sold to the SCA as part of our condominium development at 77 Greenwich. Pursuant to the agreement, the SCA agreed to pay us $41.5 million for the purchase of its condominium unit and reimburse us for the costs associated with constructing the school (including 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 its condominium unit 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 $44.2 million having been paid to us as of March 31, 2020 from the SCA. We have also received an aggregate of $43.3 million in reimbursable construction costs from the SCA through March 31, 2020. The payments and reimbursements have been recorded as deferred real estate deposits on our condensed consolidated balance sheets. Upon Substantial Completion, as defined in our agreement with the SCA, which occurred in April 2020, the SCA closed on the purchase of the school condominium unit with us, at which point title transferred to the SCA. To secure our obligations with the SCA, the 77 Greenwich property was ground leased to the SCA and leased back to us until title to the school is transferred to the SCA, which occurred in April 2020. We have also guaranteed certain obligations with respect to the construction of the school.

The sale of the school condominium unit was recognized when control of the asset was transferred to the SCA, which occurred in April 2020. As payments from the SCA were received, the amounts were recorded on the balance sheets as deferred real estate deposits until sales criteria were satisfied (see Note 13 – Subsequent Events for further discussion).