REAL ESTATE, NET

12 Months Ended

Dec. 31, 2018

Real Estate [Abstract]

REAL ESTATE, NET

NOTE 3 – REAL ESTATE, NET

As of December 31, 2018 and 2017, real estate, net consisted of the following (dollars in thousands):

	December 31, 2018		December 31, 2017
Real estate under development	$	137,666	$	69,783
Building and building improvements		47,190		5,817
Tenant improvements		731		606
Furniture and fixtures		694		-
Land and land improvements		30,391		2,452
		216,672		78,658
Less:  accumulated depreciation		3,608		2,389
	$	213,064	$	76,269

Real estate under development as of December 31, 2018 and 2017 included 77 Greenwich and the Paramus, New Jersey property. Building and building improvements, tenant improvements and land and land improvements included the West Palm Beach, Florida property, and, as of May 24, 2018, the 237 11th property, and furniture and fixtures included the 237 11th property.

Depreciation expense amounted to $1.2 million and $246,000 for the years ended December 31, 2018 and December 31, 2017, respectively. The increase in depreciation expense primarily relates to the 237 11th property acquisition.

On May 24, 2018, we closed on the acquisition of 237 11th, a newly built 105-unit, 12-story 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. Currently, 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. Management expects to recover the cost to repair the property (or some portion thereof) through the litigation and insurance claim, although the insurance provider has not yet made the claim determination and the damages that may be recoverable in litigation are uncertain at this early stage in the litigation. Until the litigation and insurance claims are resolved, there may be significant cash outflows for repairs and remediation costs. Management continues to pro-actively manage the leasing at the property. The residential portion of the property remains approximately 78% leased at February 28, 2019 and there are limited near term lease expirations.

We allocate the purchase price of real estate to land and land improvements and building and building improvements (inclusive of tenant improvements) and, if determined to be material, intangibles, such as the value of above-market and below-market leases, real estate tax abatement and origination costs associated with the in-place leases. We depreciate the amount allocated to building and building improvements (inclusive of tenant 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 income. 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 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. The following table presents our purchase price allocation, including transaction costs of approximately $0.7 million, for 237 11th (dollars in thousands):

Purchase Price Allocation:
Land and land improvements	$	27,939
Building and building improvements		41,297
Tenant improvements		125
Furniture and fixtures		694
Real estate tax abatement		11,100
Acquired in-place leases		1,090
Assets acquired		82,245
Below-market lease value		(285	)
Liabilities assumed		(285	)
Purchase price	$	81,960

As of December 31, 2018, 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 $448,000. Amortization expense was approximately $448,000 for period from May 24, 2018, the date of acquisition, through December 31, 2018.

As of December 31, 2018, the estimated annual amortization of intangible assets for each of the five succeeding years and thereafter is as follows (dollars in thousands):

Year	Real Estate  Tax  Abatement Amortization
2019	$	740
2020		740
2021		740
2022		740
2023		740
Thereafter		6,952

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 the 77 Greenwich property. 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 will be 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 will continue through September 2019. As of December 31, 2018, we have received an aggregate of $25.7 million of payments from the SCA, including the construction supervision fee. We have also received an aggregate of $23.1 million in reimbursable construction costs from the SCA through December 31, 2018. 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, 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, 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 not be recognized until control of the asset is transferred to the buyer. This generally will include transfer of title to the school condominium. 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.

The condominium apartments and construction of a new handicapped accessible subway entrance are currently scheduled to be completed by the end of 2020.