Real Estate, Net

9 Months Ended

Sep. 30, 2020

Real Estate, Net

Real Estate, Net

Note 3 – Real Estate, Net

As of September 30, 2020 and December 31, 2019, real estate, net, includes the following (in thousands):

	September 30,		December 31,
	2020		2019
	(unaudited)		(audited)
Real estate under development	$	197,525	$	225,673
Building and building improvements		41,358		41,358
Tenant improvements		127		125
Furniture and fixtures		720		708
Land and land improvements		27,939		27,939
		267,669		295,803
Less: accumulated depreciation		3,786		2,577
	$	263,883	$	293,226

Real estate under development as of September 30, 2020 and December 31, 2019 included 77 Greenwich and the Paramus, New Jersey property. The decrease in real estate under development mainly relates to the sale of the school condominium to the New York City School Construction Authority (the “SCA”) in April, 2020 (see 77 Greenwich and the New York City School Construction Authority below). Building and building improvements, tenant improvements, furniture and fixtures and land and land improvements included the 237 11^th property as of September 30, 2020 and December 31, 2019.

Depreciation expense amounted to approximately $403,000 and $402,000 for the three months ended September 30, 2020 and 2019, respectively, and $1.2 million and $1.3 million for the nine months ended September 30, 2020 and 2019, respectively.

Real Estate

In May 2018, we closed on the acquisition of 237 11^th, a newly built 105-unit, 12-story multi-family apartment building located at 237 11^th 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 submitted a property and casualty claim in September 2019 for business interruption (lost revenue), property damage and the related remediation costs. We 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 claims submitted to the insurance carrier, although the amount of damages that may be recoverable in litigation and/or potential settlement negotiations, as well as the amounts payable by our insurance carrier, are uncertain at this time, as is the timing of receipt of any such payments, which has been impacted by the COVID-19 pandemic, including the temporary closure of the court system. With the court system starting to reopen, we have been in discussions with defendants and third-party defendants about engaging in mediation to potentially settle the case. There is no assurance that such mediation will occur or the timing of such mediation. Until the litigation and potential litigation and/or settlement negotiations are resolved, there will be significant cash outflows for costs associated with these repairs and remediation, which commenced in September 2019.  The decrease in occupancy, which currently stands at 20.0%, was due to the clearing of certain lower level floors to prepare for and carry out the remediation work. Remediation and restoration work was delayed for two months due to the temporary shutdown of non-essential construction projects in New York from April to June, which resulted in a delay in commencement of our leasing up of the property.  Prior to the COVID-19 related shutdown of all non-essential construction by New York State, we expected the building to be approximately 75% remediated by the summer 2020 and to re-introduce the building into the leasing market on or around the same time. As of September 30, 2020, work on floors 7-12 are completed. We recently completed the restoration of 34 units, many of which are occupied.  We also began leasing efforts for the available but vacant units, although the pace of re-leasing in the current environment remains uncertain. Additional units will be introduced back into the market as they become available.

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 11^th. 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 September 30, 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 it related accumulated amortization of approximately $1.7 million and $1.2 million, respectively. For each of the three months ended September 30, 2020 and 2019, amortization expense amounted to $185,000, respectively, and for each of the nine months ended September 30, 2020 and 2019, amortization expense amounted to $555,000, respectively.

77 Greenwich and the New York City School Construction Authority

Through a wholly-owned subsidiary, we entered into an agreement with the SCA, whereby 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 their condominium unit and reimburse us for the costs associated with constructing the school, including a construction supervision fee of approximately $5.0 million.  Payments for construction are made by the SCA to the general contractor in installments as construction on their school 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 $45.9 million having been paid to us as of September 30, 2020 from the SCA.  We have also received an aggregate of $47.6 million in reimbursable construction costs from the SCA through September 30, 2020. Payments and reimbursements from the SCA received prior to April 2020 were recorded as deferred real estate deposits on our condensed consolidated balance sheets until sales criteria were satisfied in April 2020.  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.  Following the conveyance of the school condominium unit to the SCA, the SCA is proceeding to complete the buildout of the interior space, which is planned to become an approximately 476 seat public elementary school. Upon  conveyance, we recognized a gain on the sale of approximately $20.0 million and an additional gain of $4.2 million related to the recognition of our construction supervision fee, and our liquidity requirement on the 77 Greenwich Construction Facility was decreased from $15.0 million to $10.0 million.  We have also guaranteed certain obligations with respect to the construction of the school.