Real Estate, Net

6 Months Ended

Jun. 30, 2019

Real Estate [Abstract]

Real Estate, Net

Note 3 – Real Estate, Net

As of June 30, 2019 and December 31, 2018, real estate, net, includes the following (in thousands):

	June 30, 2019		December 31, 2018
Real estate under development	$	185,067	$	137,666
Building and building improvements		47,187		47,190
Tenant improvements		1,063		731
Furniture and fixtures		694		694
Land and land improvements		30,391		30,391
		264,402		216,672
Less:  accumulated depreciation		4,538		3,608
	$	259,864	$	213,064

Real estate under development as of June 30, 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 the West Palm Beach, Florida property and 237 11th, and furniture and fixtures included 237 11th.

Depreciation expense amounted to approximately $465,000 and $259,000 for the three months ended June 30, 2019 and June 30, 2018, respectively, and $930,000 and $321,000 for the six months ended June 30, 2019 and June 30, 2018, respectively,

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. 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 of the litigation. Until the litigation and insurance claims are resolved, there may be significant cash outflows for repairs and remediation costs which we anticipate commencing during the second half of 2019. Management continues to pro-actively manage the leasing at the property. The residential portion of the property was approximately 69.5% leased at June 30, 2019.

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 abatements 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 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 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.

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 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 June 30, 2019, we have received an aggregate of $36.8 million of payments from the SCA, including the construction supervision fee. We have also received an aggregate of $34.6 million in reimbursable construction costs from the SCA through June 30, 2019. The payments and reimbursements have been recorded as deferred real estate deposits on the condensed 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, 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 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 in accordance with ASU No. 2017-05, “Other Income-Gains and Losses from the De-recognition of Nonfinancial Assets (Subtopic 610-20),” which added guidance for partial sales of nonfinancial assets, including partial sales of real estate, eliminated rules specifically addressing sales of real estate, removed exceptions to the financial asset derecognition model, and clarified the accounting for contributions of non-financial assets to joint ventures.

The residential condominium units and construction of a new handicapped accessible subway entrance at 77 Greenwich are currently scheduled to be completed by the end of 2020.