-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UjGmZfzRLcfGPdHW2FFp5Rbeus+Wu8Vof0U6OjmIIMPDnZNO1+L1oM7LUz8jU3ng HHJLD7e5yUklwSkg9HNxig== 0000731245-10-000006.txt : 20100513 0000731245-10-000006.hdr.sgml : 20100513 20100513093852 ACCESSION NUMBER: 0000731245-10-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20100331 FILED AS OF DATE: 20100513 DATE AS OF CHANGE: 20100513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRESIDENTIAL REALTY CORP/DE/ CENTRAL INDEX KEY: 0000731245 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 131954619 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08594 FILM NUMBER: 10826721 BUSINESS ADDRESS: STREET 1: 180 S BROADWAY CITY: WHITE PLAINS STATE: NY ZIP: 10605 BUSINESS PHONE: 9149481300 MAIL ADDRESS: STREET 1: 180 SOUTH BROADWAY CITY: WHITE PLAINS STATE: NY ZIP: 10605 10-Q 1 mar2010-10q.txt PRESIDENTIAL REALTY CORP. FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2010 ------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-8594 ------ PRESIDENTIAL REALTY CORPORATION -------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-1954619 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 180 South Broadway, White Plains, New York 10605 - ------------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code 914-948-1300 ------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ----- ----- Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No ----- ----- Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer ------- ------- Non-accelerated filer (Do not check if a smaller reporting company) ------ Smaller reporting company x ----- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No x ---- ---- The number of shares outstanding of each of the registrant's classes of common stock as of May 10, 2010 was 442,533 shares of Class A common stock and 2,960,147 shares of Class B common stock. PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES ------------------------------------------------- Index to Form 10-Q For the Quarterly Period Ended March 31, 2010 Part I Financial Information (Unaudited) Item 1. Financial Statements Consolidated Balance Sheets (Unaudited) Consolidated Statements of Operations (Unaudited) Consolidated Statement of Stockholders' Equity (Unaudited) Consolidated Statements of Cash Flows (Unaudited) Notes to Consolidated Financial Statements (Unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk Item 4. Controls and Procedures Part II Other Information Item 6. Exhibits PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, December 31, 2010 2009 ---------------- ---------------- Assets Real estate (Note 2) $15,591,255 $16,595,998 Less: accumulated depreciation 1,296,995 1,516,641 ---------------- ---------------- Net real estate 14,294,260 15,079,357 Net mortgage portfolio (of which $773,707 in 2010 and $769,037 in 2009 are due within one year) (Note 3) 2,881,886 2,880,922 Investments in joint ventures (Note 4) 2,401,005 2,595,603 Assets related to discontinued operations (Note 5) 954,432 231,813 Prepaid expenses and deposits in escrow 1,154,906 1,132,569 Other receivables (net of valuation allowance of $267,015 in 2010 and $234,316 in 2009) 343,453 804,376 Cash and cash equivalents 1,303,835 784,674 Securities available for sale (Note 6) 2,860,910 3,614,113 Other assets 549,195 518,185 ---------------- ---------------- Total Assets $26,743,882 $27,641,612 ================ ================ Liabilities and Stockholders' Equity Liabilities: Mortgage debt (of which $352,601 in 2010 and $375,916 in 2009 are due within one year) $14,836,739 $14,969,607 Liabilities related to discontinued operations (Note 5) 1,287,633 1,045,867 Contractual pension and postretirement benefits liabilities 924,705 927,882 Defined benefit plan liability 2,031,431 1,957,522 Accrued liabilities 1,998,487 1,797,502 Accounts payable 413,153 780,128 Other liabilities 470,887 464,242 ---------------- ---------------- Total Liabilities 21,963,035 21,942,750 ---------------- ---------------- Stockholders' Equity: Common stock: par value $.10 per share March 31, 2010 December 31, 2009 ----------------- -------------------- Class A 47,894 47,894 ----------- Authorized: 700,000 700,000 Issued: 478,940 478,940 Treasury: 36,407 36,407 Class B 353,055 352,755 ----------- Authorized: 10,000,000 10,000,000 Issued: 3,530,547 3,527,547 Treasury: 570,400 570,400 Additional paid-in capital 4,649,684 4,636,633 Retained earnings 5,962,354 6,855,088 Accumulated other comprehensive loss (Note 9) (2,790,920) (2,799,464) Treasury stock (at cost) (3,129,388) (3,129,388) ---------------- ---------------- Total Presidential Realty Corporation stockholders' equity 5,092,679 5,963,518 Noncontrolling interest (Note 7) (311,832) (264,656) ---------------- ---------------- Total Stockholders' Equity 4,780,847 5,698,862 ---------------- ---------------- Total Liabilities and Stockholders' Equity $26,743,882 $27,641,612 ================ ================ See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
THREE MONTHS ENDED MARCH 31, -------------------------------------- 2010 2009 ------------- -------------- Revenues: Rental $1,136,783 $1,061,943 Interest on mortgages - notes receivable 78,691 71,186 Other revenues 8,587 11,512 ------------- -------------- Total 1,224,061 1,144,641 ------------- -------------- Costs and Expenses: General and administrative 851,170 907,418 Depreciation on non-rental property 8,811 10,418 Rental property: Operating expenses 536,967 493,353 Interest on mortgage debt 362,389 361,980 Real estate taxes 111,280 67,308 Depreciation on real estate 111,920 106,396 Amortization of in-place lease values and mortgage costs 9,481 16,651 ------------- -------------- Total 1,992,018 1,963,524 ------------- -------------- Other Income (Loss): Investment income 6,620 14,647 Equity in the loss from joint ventures (Note 4) (194,598) (213,372) Gain on settlement of joint venture loans (Notes 3 and 4) - 1,700,000 ------------- -------------- Income (loss) from continuing operations (955,935) 682,392 Income from discontinued operations (Note 5) 16,025 68,968 ------------- -------------- Net income (loss) (939,910) 751,360 Add: Net loss from noncontrolling interest (Note 7) 47,176 38,103 ------------- -------------- Net Income (Loss) attributable to Presidential Realty Corporation ($892,734) $789,463 ============= ============== Earnings per Common Share (basic and diluted): Income (loss) from continuing operations attributable to Presidential Realty Corporation ($0.26) $0.21 Income from discontinued operations attributable to Presidential Realty Corporation - 0.02 ------------- -------------- Net Income (Loss) attributable to Presidential Realty Corporation per Common Share - basic ($0.26) $0.23 ============= ============== - diluted ($0.26) $0.23 ============= ============== Weighted Average Number of Shares Outstanding - basic 3,388,413 3,379,613 ============= ============== - diluted 3,388,413 3,399,413 ============= ============== Amounts attributable to Presidential Realty Corporation Common Shareholders: Income (loss) from continuing operations ($908,759) $720,495 Income from discontinued operations 16,025 68,968 ------------- -------------- Net Income (Loss) ($892,734) $789,463 ============= ============== See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
Presidential Realty Corporation Stockholders ------------------------------------------------------ Accumulated Additional Other Total Common Paid-in Retained Comprehensive Treasury Noncontrolling Comprehensive Stockholders' Stock Capital Earnings Loss Stock Interest Loss Equity -------- ---------- ---------- ----------- ---------- --------- ----------- ---------- Balance at January 1, 2010 $400,649 $4,636,633 $6,855,088 ($2,799,464)($3,129,388)($264,656) $5,698,862 Issuance and vesting of restricted stock 300 13,051 - - - - 13,351 Comprehensive loss: Net loss - - (892,734) - - (47,176) ($939,910) (939,910) Other comprehensive income (loss) - Net unrealized gain on securities available for sale - - - 16,360 - - 16,360 16,360 Adjustment for contractual postretirement benefits - - - (7,816) - - (7,816) (7,816) ----------- Comprehensive loss (931,366) Comprehensive loss attributable to noncontrolling interest 47,176 Comprehensive loss attributable to ----------- Presidential Realty Corporation ($884,190) =========== -------- ---------- ---------- ----------- ----------- ---------- ----------- Balance at March 31, 2010 $400,949 $4,649,684 $5,962,354 ($2,790,920)($3,129,388)($311,832) $4,780,847 ======== ========== ========== =========== =========== ========== =========== See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
THREE MONTHS ENDED MARCH 31, ------------------------------------------- 2010 2009 ---------------- ----------------- Cash Flows from Operating Activities: Cash received from rental properties $1,406,711 $1,486,231 Interest received 135,124 71,811 Miscellaneous income - 10,888 Interest paid on rental property mortgage debt (294,655) (332,430) Cash disbursed for rental property operations (1,239,673) (1,088,980) Cash disbursed for general and administrative costs (764,012) (509,177) ---------------- ----------------- Net cash used in operating activities (756,505) (361,657) ---------------- ----------------- Cash Flows from Investing Activities: Payments received on notes receivable 10,094 86,701 Payments received on settlement of joint venture loans 500,000 - Payments disbursed for additions and improvements (53,566) (174,991) Proceeds from sales of securities 750,900 - ---------------- ----------------- Net cash provided by (used in) investing activities 1,207,428 (88,290) ---------------- ----------------- Cash Flows from Financing Activities: Principal payments on mortgage debt (1,141,102) (118,966) Proceeds of mortgage refinancing 1,250,000 - Payments disbursed for mortgage costs (40,660) (1,500) ---------------- ----------------- Net cash provided by (used in) financing activities 68,238 (120,466) ---------------- ----------------- Net Increase (Decrease) in Cash and Cash Equivalents 519,161 (570,413) Cash and Cash Equivalents, Beginning of Period 784,674 5,984,550 ---------------- ----------------- Cash and Cash Equivalents, End of Period $1,303,835 $5,414,137 ================ ================= See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
THREE MONTHS ENDED MARCH 31, --------------------------------------------- 2010 2009 ---------------- ---------------- Reconciliation of Net Income (Loss) to Net Cash Used in Operating Activities Net Income (Loss) ($939,910) $751,360 ---------------- ---------------- Adjustments to reconcile net income (loss) to net cash used in operating activities: Gain on settlement of joint venture loans - (1,700,000) Equity in the loss from joint ventures 194,598 213,372 Depreciation and amortization 141,958 153,227 Net change in revenue related to acquired lease rights/obligations and deferred rent receivable (1,723) (13,506) Amortization of discounts on notes and fees (11,058) (3,289) Issuance of stock to directors and officers 11,844 12,549 Changes in assets and liabilities: Decrease (increase) in other receivables (41,070) 75,225 Increase (decrease) in accounts payable and accrued liabilities (88,077) 304,158 Decrease in other liabilities (14,070) (165,695) Decrease (increase) in prepaid expenses, deposits in escrow and deferred charges (20,830) 10,788 Other 11,833 154 ---------------- ---------------- Total adjustments 183,405 (1,113,017) ---------------- ---------------- Net cash used in operating activities ($756,505) ($361,657) ================ ================ SUPPLEMENTAL NONCASH DISCLOSURES: Estimated fair value of assets received in settlement of notes receivable due from joint ventures: 50% partnership interest in IATG Puerto Rico, LLC $1,500,000 Note receivable 200,000 ---------------- $1,700,000 ================ See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2010 (UNAUDITED) Presidential Realty Corporation ("Presidential" or the "Company"), is operated as a self-administrated, self-managed Real Estate Investment Trust ("REIT"). The Company is engaged principally in the ownership of income producing real estate and in the holding of notes and mortgages secured by real estate or interests in real estate. Presidential operates in a single business segment, investments in real estate related assets. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Principles of Consolidation - The consolidated financial statements include the accounts of Presidential Realty Corporation and its wholly owned subsidiaries. Additionally, the consolidated financial statements include 100% of the account balances of PDL, Inc. and Associates Limited Co-Partnership (the "Hato Rey Partnership"). PDL, Inc. (a wholly owned subsidiary of Presidential and the general partner of the Hato Rey Partnership) and Presidential own an aggregate 60% general and limited partnership interest in the Hato Rey Partnership (see Note 7). All significant intercompany balances and transactions have been eliminated. B. Net Income (Loss) Per Share - Basic net income (loss) per share data is computed by dividing net income (loss) by the weighted average number of shares of Class A and Class B common stock outstanding (excluding nonvested shares) during each period. Diluted net income per share is computed by dividing net income by the weighted average shares outstanding, including the dilutive effect, if any, of nonvested shares. The diluted net loss per share calculation for the three months ended March 31, 2010 does not include 10,800 of restricted shares to be vested as their inclusion would be antidilutive. The diluted net income per share calculation for the three months ended March 31, 2009 included 28,800 of restricted shares to be vested, which, however, did not change the basic net income per share amount. C. Basis of Presentation - The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. The results for such interim periods are not necessarily indicative of the results to be expected for the year. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation of the results for the respective periods have been reflected. These consolidated financial statements and accompanying notes should be read in conjunction with the Company's Form 10-K for the year ended December 31, 2009. D. Management Estimates - In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated balance sheets and the reported amounts of income and expense for the reporting period. Actual results could differ from those estimates. E. Securities Available for Sale - The Company's investments are in marketable equity and debt securities consisting primarily of notes and bonds of agencies of the federal government. Disposition of such securities may be appropriate for either liquidity management or in response to changing economic conditions, so they are classified as securities available for sale. Securities available for sale are reported at fair value in accordance with the Fair Value Measurements and Disclosures Topic of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC"). The valuation of securities available for sale was determined to be Level 1 financial assets within the valuation hierarchy in this topic, and is based on current market quotes received from financial sources that trade such securities. Unrealized gains and losses are reported as other comprehensive income in the consolidated statement of stockholders' equity until realized. The Company evaluates these investments for other-than-temporary declines in value, and, if such declines were other than temporary, the Company would record a loss on the investments. Gains and losses on sales of securities are determined using the specific identification method. F. Discontinued Operations - The Company complies with the requirements of the Presentation and Property, Plant, and Equipment Topics of the ASC, with respect to long-lived assets classified as held for sale. The ASC requires that the results of operations, including impairment, gains and losses related to the properties that have been sold or properties that are intended to be sold, be presented as discontinued operations in the statements of operations for all periods presented and the assets and liabilities of properties intended to be sold are to be separately classified on the balance sheet. Properties designated as held for sale are carried at the lower of cost or fair value less costs to sell and are not depreciated. G. Equity Method - The Company accounts for its investments in joint ventures using the equity method of accounting. H. Accounting for Uncertainty in Income Taxes - The Company complies with the requirements of the recognition of current and deferred income tax accounts, including accrued interest and penalties in accordance with ASC 740-10-25. If the Company's tax positions in relation to certain transactions were examined and were not ultimately upheld, the Company would be required to pay an income tax assessment and related interest. Alternatively, the Company could elect to pay a deficiency dividend in order to continue to qualify as a REIT and the related interest assessment to the taxing authorities. I. Recently Adopted Accounting Standards - In June, 2009, the FASB issued new provisions to the Consolidated Topic of the ASC, which modified the existing quantitative guidance used in determining the primary beneficiary of a variable interest entity ("VIE") by requiring entities to qualitatively assess whether an enterprise is a primary beneficiary, based on whether the entity has (i) power over the significant activities of the VIE, and (ii) an obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. These new provisions became effective for all new and existing VIEs on January 1, 2010. The Company's adoption of these provisions on January 1, 2010 had no impact on the Company's consolidated financial statements. In January, 2010, the FASB issued a new accounting standard for distributions to stockholders with components of stock and cash. The guidance clarifies that in calculating earnings per share, an entity should account for the stock portion of the distribution as a stock issuance and not as a stock dividend. The new standard is effective for fiscal years and interim periods ending after December 15, 2009 and should be applied on a retrospective basis. The Company's adoption of the new standard on December 31, 2009 had no impact on the Company's consolidated financial statements. 2. REAL ESTATE Real estate is comprised of the following: March 31, December 31, 2010 2009 ----------- ------------ Land $ 1,906,466 $ 1,995,982 Buildings 13,678,414 14,563,891 Furniture and equipment 6,375 36,125 ----------- ----------- Total real estate $15,591,255 $16,595,998 =========== =========== 3. MORTGAGE PORTFOLIO The components of the net mortgage portfolio are as follows: March 31, December 31, 2010 2009 ----------- ------------ Notes receivable $2,907,040 $2,917,134 Less: Discounts 25,154 36,212 ---------- ---------- Net mortgage portfolio $2,881,886 $2,880,922 ========== ========== At March 31, 2010, all of the notes in the Company's mortgage portfolio are current in accordance with their terms, as modified. On February 27, 2009, the Company completed a Settlement Agreement with The Lightstone Group ("Lightstone") and David Lichtenstein regarding various claims the Company had asserted against them. Under the terms of the Settlement Agreement, an affiliate of Lightstone, which is the debtor on an existing loan from the Company in the outstanding principal amount of $2,074,994, assumed $10,000,006 of indebtedness under the $9,500,000 and $8,600,000 mezzanine loans due from Lightstone. The total indebtedness was consolidated into a nonrecourse loan in the outstanding principal amount of $12,075,000 (the "Consolidated Note"). The Consolidated Note is secured by the ownership interests in entities owning nine apartment properties (1,056 apartment units) located in Virginia (which had previously secured the $2,074,994 indebtedness) and 75% of the ownership interests in entities owning nine additional apartment properties (931 apartment units) located in Virginia and North Carolina. The carrying value of the $12,075,000 Consolidated Note on the Company's consolidated balance sheet is $2,074,994. This is the same carrying value of the $2,074,994 note that was on the Company's consolidated balance sheet prior to the consolidation of that note with the additional $10,000,006 indebtedness assumed by the affiliate of Lightstone pursuant to the Settlement Agreement. The $10,000,006 additional portion of the Consolidated Note was received in partial settlement of the $9,500,000 and $8,600,000 mezzanine loans held by the Company, which had a net carrying value of $0 on the Company's consolidated balance sheet at December 31, 2008. Accordingly, in 2009, there was no adjustment on the Company's consolidated balance sheet and no gain or loss was recorded on the Company's consolidated financial statements as a result of the receipt of the Consolidated Note. The Consolidated Note accrues interest at the rate of 13% per annum and is due on February 1, 2012. All net cash flow from the eighteen apartment properties will be utilized to pay the interest accrued on the Consolidated Note and to the extent that there is not sufficient cash flow to pay all accrued interest, the unpaid interest will be deferred until the maturity of the Consolidated Note. The Company does not believe that there will be sufficient cash flow from the security for the Consolidated Note to pay all of the interest that is due on the note, the deferred interest that will be due at maturity and the $12,075,000 principal amount due at maturity. However, the Company believes that the monthly interest due on the $2,074,994 portion of the note will be paid in accordance with the terms of the note and, as a result, the Company will accrue the interest on this portion of the note. For the three months ended March 31, 2010, the Company received the interest due on the $2,074,994 portion of the Note. The interest due on the $10,000,006 portion of the note is being recorded in income on a cash basis as interest is received and the balance of the interest due on the $10,000,006 is deferred and is due at maturity of the note. For the three months ended March 31, 2010, the Company did not receive any interest payments on this portion of the Consolidated Note and the unaccrued deferred interest was $1,354,557. Under the terms of the Settlement Agreement, the Company also received a $750,000 non-interest bearing, nonrecourse note originally due on January 31, 2010, which is secured by a 25% ownership interest in IATG Puerto Rico, LLC ("IATG") (see Note 4). In May, 2010, the Company extended the maturity date of the note to December 31, 2010 and received a $10,000 fee. In March, 2009, the Company had preliminarily estimated the fair value of the $750,000 note to be $200,000 and the Company recorded the $200,000 note receivable on its consolidated balance sheet and recognized a gain on settlement of joint venture loans of $200,000 in its consolidated financial statements at March 31, 2009. Subsequently, the Company received an independent appraisal of the IATG property (see Note 4) and based upon that appraisal, the Company estimated the fair value of the $750,000 note to be $664,000 ($750,000 note receivable less a discount on the note receivable of $86,000). Accordingly, in June, 2009, the Company recorded an additional $464,000 for the note receivable on its consolidated balance sheet and recognized an additional gain of $464,000 on settlement of joint venture loans in its consolidated financial statements. For the period ended March 31, 2010, the Company recognized in interest income $8,329 of the amortization of discount recorded on the note receivable. 4. INVESTMENTS IN JOINT VENTURES Pursuant to the February 27, 2009 Settlement Agreement, the Company assigned its interests in PRC Member LLC, Lightstone I and Lightstone III, which the Company believed had no value, to Lightstone and received, among other assets, a 50% interest in IATG described below. At March 31, 2010, the Company had investments in joint ventures in two entities that are controlled by David Lichtenstein and Lightstone. The Company accounts for these investments using the equity method. The first investment is the Company's mezzanine loan in the amount of $7,835,000 to Lightstone II which is secured by ownership interests in the Shawnee Mall and the Brazos Mall properties ("Shawnee/Brazos Malls"). In connection with this loan, the Company received a 29% ownership interest in Lightstone II. The loan was in good standing at December 31, 2008. However, in January, 2009, the holder of the first mortgage loan exercised its right (exercisable because the cash flow from the properties did not satisfy a required debt service coverage ratio) to retain all cash flow from the properties (after payment of all operating expenses but before payment of interest on the Company's mezzanine loan) as additional security for the repayment of the first mortgage loan and Lightstone II failed to make the interest payments due on the Company's mezzanine loan on January 1, 2009 and on the first day of subsequent months. The first mortgage loan on the properties became due on January 10, 2010 and has not been paid. Lightstone has been unable to refinance the first mortgage indebtedness and the holder of the first mortgage loan has commenced foreclosure proceedings. As part of the Settlement Agreement, the Company received a personal guaranty from Mr. Lichtenstein of certain amounts due under the Company's $7,835,000 mezzanine loan (relating to the Shawnee/Brazos Malls), which personal guaranty was limited to $500,000. At December 31, 2009, the Company recognized a $500,000 gain on settlement of joint venture loans in its consolidated financial statements and recorded a $500,000 receivable due from Mr. Lichtenstein on its consolidated balance sheet, which payment was received in March, 2010. The Company believes that it is likely that the first mortgage loan will be foreclosed and that the Company will not be able to obtain any recovery on its mezzanine loan other than the recovery of the $500,000 on the guaranty. The second investment, which the Company received as part of the Settlement Agreement, is a 50% ownership interest in IATG, the Lightstone affiliate that owns The Las Piedras Industrial Complex, an industrial property located in Las Piedras, Puerto Rico consisting of approximately 68 acres of land and 380,800 square feet of rentable space contained in several buildings in the complex. The property is substantially vacant and the owners may attempt to sell the property. The property is managed by a Lightstone affiliate and Lightstone has agreed to advance funds to pay any negative cash flow from the operations of the property until a sale can be accomplished and has agreed that if it does not do so, it will transfer its remaining 49% interest in the property to Presidential. The Company's preliminary estimate of the fair value of its 50% ownership interest in IATG was $1,500,000 and in March, 2009, the Company recorded a $1,500,000 investment in joint ventures on its consolidated balance sheet and recognized a gain on settlement of joint venture loans of $1,500,000 in its consolidated financial statements. The Company based the preliminary estimated fair value of its interest in the IATG property on information available to it at the time. During the quarter ended June 30, 2009, the Company obtained an independent appraisal of the property owned by IATG and based on the appraised value of $6,500,000, the Company adjusted the preliminary estimate of the value of its 50% ownership interest in the IATG property from $1,500,000 to $3,250,000 on its consolidated financial statements. In the quarter ended June 30, 2009, the Company recorded an additional $1,750,000 investment in joint ventures on its consolidated balance sheet and recognized an additional $1,750,000 gain on the settlement of joint venture loans in its consolidated financial statements. While management believes that the $6,500,000 appraised value of the IATG property is a reasonable value, there can be no assurance that if and when the property is sold, it can be sold for its appraised value. Activity in investments in joint ventures for the period ended March 31, 2010 is as follows: Equity in the Loss Balance at from Balance at December 31, Joint March 31, 2009 Ventures 2010 ------------ ------------- --------- IATG (1) $2,595,603 $(194,598) $2,401,005 Shawnee/Brazos Malls (2) - - - ---------- --------- ---------- $2,595,603 $(194,598) $2,401,005 ========== ========= ========== Equity in the loss from joint ventures is as follows: Three Months Ended March 31, 2010 2009 -------- ---------- IATG (1) $(194,598) $ (65,536) Shawnee/Brazos Malls (2) - (147,836) ---------- --------- $(194,598) $(213,372) ========== ========= (1) The Company recorded its 50% share of the loss from IATG for the three months ended March 31, 2010 and for the month ended March 31, 2009. (2) Interest income earned by the Company at the rate of 11% per annum on the outstanding $7,835,000 loan from the Company to Lightstone II was included in the calculation of the Company's share of the loss from joint ventures for the Shawnee/Brazos Malls. At December 31, 2009, the Company's investment in the Shawnee/Brazos Malls was reduced by distribution and losses to zero. The summary financial information for IATG is as follows: March 31, December 31, 2010 2009 --------- ------------ (Amounts in thousands) Condensed Balance Sheets Net real estate $ 5,461 $ 5,506 Cash and cash equivalents 36 43 Accounts receivable 31 4 Deferred expenses 198 203 Prepaid expenses 6 14 ------- ------- Total Assets $ 5,732 $ 5,770 ======= ======= Note payable (1) $ 8,009 $ 7,748 Other liabilities 2,547 2,456 ------- ------- Total Liabilities 10,556 10,204 Members' Deficit (4,824) (4,434) ------- ------- Total Liabilities and Members' Deficit $ 5,732 $ 5,770 ======= ======= (1) The note payable is payable to an affiliate of Lightstone and payment thereof is subordinate to the Company's right to receive its share of any proceeds of a sale or refinancing. Three Months One Month Ended Ended March 31, March 31, 2010 2009 -------- -------- (Amounts in thousands) Condensed Statements of Operations Revenues $ 236 $ 62 Interest on note payable (235) (69) Other expenses (338) (106) ----- ----- Loss before depreciation and amortization (337) (113) Depreciation and amortization (52) (18) ------ ----- Net Loss $(389) $(131) ===== ===== The summary financial information for the Shawnee/Brazos Malls is as follows: March 31, December 31, 2010 2009 ------------- ------------ (Amounts in thousands) Condensed Balance Sheets Net real estate $ 38,286 $ 38,714 In-place lease values and acquired lease rights 552 607 Prepaid expenses and deposits in escrow 4,503 3,903 Cash and cash equivalents 1,616 1,311 Deferred financing costs 765 643 Other assets 1,051 1,069 -------- -------- Total Assets $ 46,773 $ 46,247 ======== ======== Nonrecourse mortgage debt $ 39,061 $ 39,061 Mezzanine notes payable(1) 40,248 39,373 Other liabilities 8,556 7,960 -------- -------- Total Liabilities 87,865 86,394 Members' Deficit (41,092) (40,147) -------- -------- Total Liabilities and Members' Deficit $ 46,773 $ 46,247 ======== ======== (1) The mezzanine notes payable include a $7,835,000 mezzanine note which is payable to the Company and the balance is payable to an affiliate of Lightstone. The payment due to the affiliate of Lightstone is subordinate to the Company's mezzanine note. Three Months Ended March 31, 2010 2009 -------- -------- (Amounts in thousands) Condensed Statements of Operations Revenues $ 2,426 $ 2,562 Interest on mortgage debt and other debt (1,595) (1,499) Other expenses (1,191) (1,349) ------- ------- Loss before depreciation and amortization (360) (286) Depreciation and amortization (580) (751) ------- ------- Net Loss $ (940) $(1,037) ======= ======= The Lightstone Group is controlled by David Lichtenstein. At March 31, 2010, in addition to Presidential's investments of $2,401,005 in these joint ventures with entities controlled by Mr. Lichtenstein, Presidential has two loans that are due from entities that are controlled by Mr. Lichtenstein in the aggregate outstanding principal amount of $12,825,000 with a net carrying value of $2,824,994. The $5,225,999 net carrying value of investments in joint ventures with entities controlled by Mr. Lichtenstein and loans outstanding to entities controlled by Mr. Lichtenstein constitute approximately 20% of the Company's total assets at March 31, 2010. 5. DISCONTINUED OPERATIONS For the three months ended March 31, 2010 and 2009, income from discontinued operations includes the Building Industries Center in White Plains, New York (which consists of 23,500 square feet of commercial space), the Mapletree Industrial Center property in Palmer, Massachusetts (which consists of 385,000 square feet of commercial space), two cooperative apartment units in Riverdale, New York and two cooperative apartment units in New York, New York. In addition, income from discontinued operations for the three months ended March 31, 2009 included the Crown Court property in New Haven, Connecticut (105 apartment units and 2,000 square feet of commercial space) and one cooperative apartment unit in Riverdale, New York which were sold in April, 2009 and October, 2009, respectively. The following table summarizes income for the properties sold or held for sale: Three Months Ended March 31, 2010 2009 ---- ---- Revenues: Rental $316,473 $461,316 -------- -------- Rental property expenses: Operating expenses 227,139 227,245 Interest on mortgage debt 14,847 51,557 Real estate taxes 46,751 93,908 Depreciation 7,566 17,687 Amortization of mortgage costs 4,180 2,075 -------- -------- Total 300,483 392,472 -------- -------- Other income: Investment income 35 124 -------- -------- Income from discontinued operations $ 16,025 $ 68,968 ======== ======== During the quarter ended December 31, 2009, the Company began to market the Building Industries Center property in White Plains, New York for sale and designated it as held for sale. The Company expects to sell the property within one year for net proceeds in excess of its carrying value. The carrying value of the property at March 31, 2010 was $225,589, net of accumulated depreciation of $1,196,305. In March, 2010, the Company obtained a new $1,250,000 mortgage on the property and repaid the $1,038,086 outstanding balance of the prior mortgage. The new mortgage bears interest at the rate of 6.25% per annum, requires monthly payments of principal and interest of $8,317 and has a balloon payment of $1,184,341 due at maturity on March 23, 2013. The mortgage will be repaid in full upon the sale of the property. During the quarter ended March 31, 2010, the Company designated its Mapletree Industrial Center in Palmer, Massachusetts as held for sale. The carrying value of the property at March 31, 2010 was $657,457, net of accumulated depreciation of $330,482. The property is subject to a first mortgage in the outstanding principal amount of $37,633 at March 31, 2010. The mortgage bears interest at the rate of 3.25% per annum, requires monthly payments of principal and interest of $2,564 and matures on June 24, 2011. The property is currently being marketed for sale and the Company expects to sell the property within one year for net proceeds in excess of its carrying value. During the quarter ended March 31, 2010, the Company also designated two cooperative apartment units in New York, New York and one cooperative apartment unit in Riverdale, New York as held for sale. The Company had previously designated one cooperative apartment unit in Riverdale, New York as held for sale during the three months ended June, 2009. The carrying value of these four apartments at March 31, 2010 is $28,194, net of accumulated depreciation of $11,912. Subsequent to March 31, 2010, the Company entered into a contract of sale for these four cooperative apartment units for a sales price of $403,500. The net proceeds of sale are estimated to be approximately $334,000 and the gain from sale for financial reporting purposes is estimated to be approximately $305,000. It is anticipated that the sale will be completed by the end of the third quarter of 2010. In April, 2009, the Company sold its Crown Court property in New Haven, Connecticut for a purchase price of $1,635,000 over the outstanding principal mortgage balance of $2,053,964. The net proceeds of sale were $1,545,851 and the gain from sale for financial reporting purposes was $3,208,336. In October, 2009, the Company sold a cooperative apartment unit in Riverdale, New York for a sales price of $154,000. The net proceeds of sale were $145,738 and the gain from sale for financial reporting purposes was $121,144. The combined assets and liabilities of the properties held for sale at March 31, 2010 and the assets and liabilities of the properties held for sale at December 31, 2009 are segregated in the consolidated balance sheets. The components are as follows: March 31, December 31, 2010 2009 ---- ---- Assets related to discontinued operations: Land $ 152,117 $ 62,601 Buildings 2,223,367 1,324,074 Furniture and equipment 74,455 44,705 Less: accumulated depreciation (1,538,699) (1,199,567) ----------- ----------- Net real estate 911,240 231,813 Other assets 43,192 - ----------- ----------- $ 954,432 $ 231,813 =========== =========== Liabilities related to discontinued operations: Mortgage debt $ 1,287,633 $ 1,045,867 =========== =========== 6. SECURITIES AVAILABLE FOR SALE The tables below summarize the Company's securities available for sale: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ----- March 31, 2010 - ------------------ U.S. Government Agencies notes and bonds maturing within one year $ 302,676 $ 324 $ - $ 303,000 U.S. Government Agencies notes and bonds maturing from one to three years 2,554,398 8,315 (16,083) 2,546,630 Common stock of REITS 2,011 9,269 - 11,280 ---------- ------- -------- ---------- $2,859,085 $17,908 $(16,083) $2,860,910 ========== ======= ======== ========== December 31, 2009 - ------------------ U.S. Government Agencies notes and bonds maturing within one year $ 719,591 $ - $(12,402) $ 707,189 U.S. Government Agencies notes and bonds maturing from one to four years 2,907,046 5,683 (16,270) 2,896,459 Common stock of REITS 2,011 8,454 - 10,465 ---------- ------- -------- ---------- $3,628,648 $14,137 $(28,672) $3,614,113 ========== ======= ======== ========== Sales activity results for securities available for sale for the three months ended March 31, 2010 are as follows: Gross sales proceeds $ 750,900 ========== Gross realized gains $ 228 Gross realized losses (18,891) ---------- Net realized loss $ (18,663) ========== 7. HATO REY PARTNERSHIP PDL, Inc. (a wholly owned subsidiary of Presidential) is the general partner of the Hato Rey Partnership. Presidential and PDL, Inc. have an aggregate 60% general and limited partner interest in the Hato Rey Partnership. The Company exercises effective control over the partnership through its ability to manage the affairs of the partnership in the ordinary course of business. Accordingly, the Company consolidates the Hato Rey Partnership in the accompanying consolidated financial statements. The Hato Rey Partnership owns and operates the Hato Rey Center, an office building with 207,000 square feet of commercial space, located in Hato Rey, Puerto Rico. The Company agreed to lend up to $2,500,000 to the Hato Rey Partnership to pay for the cost of improvements to the building and fund any negative cash flows from the operation of the property. The loan, which is advanced from time to time as funds are needed, bears interest at the rate of 13% per annum, with interest and principal to be paid out of the first positive cash flow from the property or upon a refinancing of the first mortgage on the property. In July, 2009, the Company agreed to loan an additional $250,000 to the Hato Rey Partnership which increased the agreed upon $2,500,000 loan to $2,750,000. The additional $250,000 will be advanced to the Partnership as funds are needed and will have the same terms as the $2,500,000 loan. At March 31, 2010, the Company had advanced $2,670,000 of the loan to the Hato Rey Partnership. The $2,670,000 loan and accrued interest in the amount of $910,158 have been eliminated in consolidation. On January 1, 2009, the Company adopted ASC 810-10-65 which requires amounts attributable to noncontrolling interests to be reported separately. For the three months ended March 31, 2010 and 2009, the Hato Rey Partnership had a loss of $117,940 and $95,258, respectively. For the three months ended March 31, 2010 and 2009, the consolidated financial statements reflect the separate disclosure of the noncontrolling interest's share (40%) of the loss of $47,176 and $38,103, respectively. 8. INCOME TAXES Presidential has elected to qualify as a Real Estate Investment Trust under the Internal Revenue Code. A REIT which distributes at least 90% of its real estate investment trust taxable income to its shareholders each year by the end of the following year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. In accordance with ASC 740-10-25, if the Company's tax positions in relation to a transaction were to be examined and not ultimately upheld, the Company would be required to pay an income tax assessment and related interest. Alternatively, the Company could elect to pay a deficiency dividend to its shareholders in order to continue to qualify as a REIT and the related interest assessment to the taxing authorities. As of March 31, 2010, the tax years that remain open to examination by the federal, state and local taxing authorities are the 2006 - 2008 tax years and the Company was not required to accrue any liability for those years. For the year ended December 31, 2009, the Company had a tax loss of approximately $4,790,000 ($1.41 per share), which is comprised of an ordinary loss of approximately $8,022,000 ($2.36 per share) and capital gains of $3,232,000 ($0.95 per share). As previously stated, in order to maintain REIT status, Presidential is required to distribute 90% of its REIT taxable income (exclusive of capital gains). As a result of the ordinary tax loss of $2.36 per share for 2009, the Company will not be required to make a distribution in 2010 for the 2009 year in order to maintain its qualification as a REIT. For the three months ended March 31, 2010, the Company had a tax loss of approximately $1,040,000 ($0.31 per share), which is comprised of an ordinary loss of approximately $1,021,000 ($0.30 per share) and a capital loss of approximately $19,000 ($0.01 per share). 9. ACCUMULATED OTHER COMPREHENSIVE LOSS The components of accumulated other comprehensive loss are as follows: March 31, December 31, 2010 2009 ----------- ----------- Defined benefit plan liability $(3,739,084) $(3,739,084) Contractual postretirement benefits liability 183,988 191,804 Minimum contractual pension benefit liability 762,351 762,351 Net unrealized gain (loss) on securities available for sale 1,825 (14,535) ----------- ----------- Total accumulated other comprehensive loss $(2,790,920) $(2,799,464) =========== =========== The Company's other comprehensive income (loss) consists of the changes in the net unrealized gain (loss) on securities available for sale and the adjustments to the pension liabilities and the postretirement benefits liability, if any. Thus, comprehensive income (loss), which consists of net income (loss) plus or minus other comprehensive income, is as follows: Three Months Ended March 31, 2010 2009 ----------- ----------- Net income (loss) $(939,910) $751,360 Other comprehensive income (loss)- Net unrealized gain (loss) on securities available for sale 16,360 (2,517) Adjustment for contractual postretirement benefits (7,816) (6,164) --------- -------- Comprehensive income (loss) (931,366) 742,679 Comprehensive loss attributable to noncontrolling interest 47,176 38,103 --------- -------- Comprehensive income (loss) attributable to Presidential Realty Corporation $(884,190) $780,782 ========= ======== 10. COMMITMENTS AND CONTINGENCIES Presidential is not a party to any material legal proceedings. The Company may from time to time be a party to routine litigation incidental to the ordinary course of its business. In the opinion of management, all of the Company's properties are adequately covered by insurance in accordance with normal insurance practices. The Company is involved in an environmental remediation process for contaminated soil found on its Mapletree Industrial Center property in Palmer, Massachusetts. The land area involved is approximately 1.25 acres. Since the most serious identified threat on the site is to songbirds, the proposed remediation consisted of removing all exposed materials and a layer of soil. The Company estimated that the costs of the cleanup will not exceed $1,000,000. In accordance with the provisions of ASC Contingencies Topic, in the fourth quarter of 2006, the Company accrued a $1,000,000 liability, which was discounted by $145,546, and charged $854,454 to expense. The discount rate used was 4.625%, which was the interest rate on 10 year Treasury Bonds. At March 31, 2010, the accrued liability balance was $349,513 and the discount balance was $116,790 for a net accrued liability of $232,723. The remediation must comply with the requirements of the Massachusetts Department of Environmental Protection ("MADEP") and during the three months ended March 31, 2009, the Company obtained the consent of MADEP to a specific plan of remediation. The Company has commenced the remediation work and expects to complete it by June, 2010. While the final cost of the remediation work has not been finally determined, management believes that it will be less than the net accrued liability at March 31, 2010. Actual costs incurred may vary from these estimates due to the inherent uncertainties involved. The Company believes that any liability in excess of amounts accrued which may result from the resolution of this matter will not have a material adverse effect on the financial condition, liquidity or the cash flow of the Company. 11. CONTRACTUAL PENSION AND POSTRETIREMENT BENEFITS The following table sets forth the components of net periodic benefit costs: Contractual Contractual Pension Benefits Postretirement Benefits Three Months Ended Three Months Ended March 31, March 31, 2010 2009 2010 2009 -------- -------- -------- -------- Service cost $ - $ - $ 444 $ 406 Interest cost 7,532 19,450 5,471 6,701 Amortization of prior service cost - (7,730) 926 926 Recognized actuarial (gain) loss (11,831) 14,029 (9,533) (8,194) -------- ------- ------- ------ Net periodic benefit cost $ (4,299) $25,749 $(2,692) $ (161) ======== ======= ======= ======= During the three months ended March 31, 2010, the Company made contributions of $4,002 for postretirement benefits. The Company anticipates additional contributions of $12,136 for postretirement benefits for the remainder of 2010. 12. DEFINED BENEFIT PLAN The following table sets forth the components of net periodic benefit costs: Three Months Ended March 31, 2010 2009 --------- ------ Service cost $ - $ 39,393 Interest cost 123,900 69,452 Expected return on plan assets (122,863) (36,891) Amortization of prior service cost - 3,154 Amortization of accumulated loss 72,872 63,183 --------- -------- Net periodic benefit cost $ 73,909 $138,291 ========= ======== The Company's funding policy for the defined benefit plan is based on contributions that comply with the minimum and maximum amounts required by law. During the three months ended March 31, 2010, the Company did not make a contribution to the defined benefit plan. The Company is required to and intends to make a $100,000 contribution to the plan in 2010. 13. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS Estimated fair values of the Company's financial instruments as of March 31, 2010 and December 31, 2009 have been determined using available market information and various valuation estimation methodologies. Considerable judgment is required to interpret the effects on fair value of such items as future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. The estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. Also, the use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair values. The following table summarizes the estimated fair values of financial instruments: March 31, 2010 December 31, 2009 -------------- ----------------- (Amounts in thousands) Net Estimated Net Estimated Carrying Fair Carrying Fair Value (1) Value Value (1) Value --------- ----- --------- ----- Assets: Cash and cash equivalents $ 1,304 $1,304 $ 785 $ 785 Securities available for sale 2,861 2,861 3,614 3,614 Notes receivable 2,882 2,946 2,881 2,973 Liabilities: Mortgage debt 14,837 20,079 14,970 20,239 (1) Net carrying value is net of discounts where applicable. The fair value estimates presented above are based on pertinent information available to management as of March 31, 2010 and December 31, 2009. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued since March 31, 2010 and, therefore, current estimates of fair value may differ significantly from the amounts presented above. Fair value methods and assumptions are as follows: Cash and Cash Equivalents - The estimated fair value approximates carrying value, due to the short maturity of these investments. Securities Available for Sale - The fair value of securities available for sale was determined to be Level 1 financial assets within the valuation hierarchy established by the ASC Fair Value Measurements and Disclosures Topic, and is based on current market quotes received from financial sources that trade such securities. Notes Receivable - The fair value of notes receivable has been estimated by discounting projected cash flows using current rates for similar notes receivable. Mortgage Debt - The fair value of mortgage debt has been estimated by discounting projected cash flows using current rates for similar debt. PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 Forward-Looking Statements Certain statements made in this report that are not historical fact may constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include statements regarding the intent, belief or current expectations of the Company and its management, including the possibility that the Board of Directors will request the approval of the Company's shareholders for the sale of all or substantially all of the Company's assets and the adoption of a plan of liquidation, which forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the following: o continuing generally adverse economic and business conditions, which, among other things (a) affect the demand for apartments, retail and office space at properties owned by the Company or which are security for loans made by the Company, (b) affect the availability and creditworthiness of prospective tenants and the rental rates obtainable at the properties, and (c) affect consumer demand for the products offered by the tenants at the malls owned by the joint venture in which the Company is a member, which adversely affects the operating results and valuations of such malls; o continuing adverse conditions in the real estate markets, including a severe tightening of the availability of credit, which adversely affect the ability of the Company or the joint ventures in which the Company is a member to sell, or refinance the mortgages on, their properties and which may also affect the ability of prospective tenants to rent space at these properties; o the risk that if the Board of Directors seeks shareholder approval of the sale of all or substantially all of the Company's assets and the adoption of a plan of liquidation, such approval is not obtained; o general risks of real estate ownership and operation; o governmental actions and initiatives; o environmental and safety requirements; and o failure to comply with continuing listing standards of the NYSE AMEX. Overview Presidential Realty Corporation is taxed for federal income tax purposes as a real estate investment trust. Presidential owns real estate directly and through a partnership and joint ventures and makes loans secured by interests in real estate. During the past three years, the downturn in the economy, higher unemployment and lack of consumer confidence have adversely affected the operating results of the shopping mall properties in which the Company invested. These conditions, among others, resulted in defaults in 2008 and in 2009 on three of the mezzanine loans made by the Company to joint ventures owning nine shopping mall properties and in defaults on the first mortgage loans secured by eight of these properties. (See Liquidity and Capital Resources - Joint Venture Mezzanine Loans and Settlement Agreement below.) In addition, the turmoil in the credit markets has made it very difficult for the Company and its joint venture partners to obtain refinancing of the mortgage loans on some of its properties on satisfactory terms. For example, the Company was unable to refinance the existing $14,836,739 first mortgage on its Hato Rey Center office building in May, 2008 when the terms of the mortgage anticipated repayment. As a result, while the mortgage is not in default, the annual interest rate was increased by 200 basis points (the payment of which is deferred until maturity) and the mortgagee is entitled to receive all net cash flow from the property to reduce the outstanding principal balance. There has been no net cash flow available to reduce the principal balance of the mortgage and no assurances can be given that there will be any net cash flow available in 2010. (See Hato Rey Partnership below.) The restrictive credit markets also adversely affect the ability of the Company and the joint ventures to sell properties owned by them on satisfactory terms because of the inability of prospective purchasers to obtain financing on satisfactory terms. From time to time in the Company's recent history, the Company has considered various strategic alternatives, including a merger, consolidation or sale of all or substantially all of its assets. In the past, no appropriate opportunity has been found but the Board of Directors and management will always consider reasonable proposals. In the current economic environment, the Company may seek to sell one or more of its assets if reasonable prices can be determined and obtained. If a sale or sales can be made, management may consider submitting a plan of liquidation to its shareholders for approval. The plan of liquidation would provide for the sale of all of the Company's assets over time and the distribution of the net proceeds of sale to the shareholders after satisfaction of the Company's liabilities. While management has considered this course of action, among others, as noted above, there has been no determination to adopt such a plan of liquidation at this time or to enter into any strategic alternative. Further, there can be no assurance that the Company will be able to sell any of its assets at prices that management deems fair. The Company previously disclosed that its Board of Directors is considering requesting the approval of its shareholders at its next Annual Meeting for the sale of all or substantially all of the Company's assets and the adoption of a Plan of Liquidation of the Company. The Board of Directors continues to consider strategic alternatives and currently plans to hold the Company's Annual Meeting in the third or fourth quarter of 2010. Critical Accounting Policies In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP"), management is required to make estimates and assumptions that affect the financial statements and disclosures. These estimates require difficult, complex and subjective judgments. The Company's critical accounting policies are described in its Form 10-K for the year ended December 31, 2009. There have been no significant changes in the Company's critical accounting policies since December 31, 2009. Results of Operations Financial Information for the three months ended March 31, 2010 and 2009: - --------------------------------------------------------------------------- Continuing Operations: Revenues increased by $79,420 primarily as a result of increases in rental revenues. Rental revenues increased by $74,840 due to increased rental revenues at the Hato Rey Center property. The increased rental revenues at the Hato Rey Center property were primarily due to $118,747 of real estate tax reimbursements billed in the first quarter of 2010. In addition, all other rental revenue items increased by $50,639. These increases were partially offset by increased vacancy losses of $94,576. Costs and expenses increased by $28,494 primarily due to increases in rental property operating expenses and real estate tax expenses which were partially offset by decreases in general and administrative expenses. General and administrative expenses decreased by $56,248 primarily as a result of decreases in pension plan expenses of $96,961 and decreases of $36,858 in other expenses. These decreases were partially offset by increases in professional fees of $77,571. Rental property operating expenses increased by $43,614 primarily as a result of an increase in electric expense of $45,193 at the Hato Rey Center property. Real estate tax expenses increased by $43,972 as a result of a $43,972 increase in real estate tax expense at the Hato Rey Center property. Other income decreased by $1,689,253 primarily as a result of a $1,700,000 gain recorded in 2009 upon the settlement of some joint venture loans to David Lichtenstein and The Lightstone Group ("Lightstone"). Loss from continuing operations increased by $1,638,327 from income of $682,392 in 2009 to a loss of $955,935 in 2010. The $1,638,327 decrease in income was a result of the $1,700,000 gain recorded in 2009 upon the settlement of some joint venture loans. This decrease was partially offset by increased rental revenues of $74,840. Discontinued Operations: In 2010, the Company has four properties that are classified as discontinued operations: the Building Industries Center in White Plains, New York (which consists of 23,500 square feet of commercial space); the Mapletree Industrial Center property in Palmer, Massachusetts (which consists of 385,000 square feet of commercial space); two cooperative apartment units in Riverdale, New York and two cooperative apartment units in New York, New York. Subsequent to March 31, 2010, the Company entered into a contract of sale for the four cooperative apartment units for a sales price of $403,500. The net proceeds of sale are estimated to be approximately $334,000 and the gain from sale for financial reporting purposes is estimated to be approximately $305,000. It is anticipated that the sale will be completed by the end of the third quarter of 2010. In 2009, the Company had two other properties that were classified as discontinued operations: the Crown Court property in New Haven, Connecticut (which consisted of 105 apartment units and 2,000 square feet of commercial space) and a cooperative apartment unit in Riverdale, New York. The Crown Court property was sold in April, 2009 and the cooperative apartment unit in Riverdale, New York was sold in October, 2009. The following table compares the total income (loss) from discontinued operations for the three month periods ended March 31, for properties included in discontinued operations: 2010 2009 ---- ---- Income (loss) from discontinued operations: Building Industries Center, White Plains, NY $(25,445) $(34,525) Mapletree Industrial Center, Palmer, MA 42,837 61,346 Cooperative apartment units, Riverdale, NY (1,260) (4,200) Cooperative apartment units, New York, NY (107) 129 Crown Court, New Haven, CT - 46,218 -------- -------- Income from discontinued operations $ 16,025 $ 68,968 ======== ======== Balance Sheet Net real estate decreased by $785,097 primarily as a result of the $686,993 of net real estate assets designated as held for sale during the quarter. In 2010, the Company designated the Mapletree Industrial Center property and three cooperative apartment units as held for sale (see Assets Related to Discontinued Operations below). In addition, during the quarter, additions and improvements were $13,816 and depreciation was $111,920. Investments in joint ventures decreased by $194,598 as a result of the $194,598 loss from the IATG joint venture in the 2010 period. Assets related to discontinued operations increased by $722,619 primarily as a result of designating the following properties as held for sale during the quarter ended March 31, 2010: the Mapletree Industrial Center, in Palmer, Massachusetts, one cooperative apartment unit in Riverdale, New York and two cooperative apartment units in New York, New York. The reclassification of these properties increased assets related to discontinued operations by $686,993. In addition, assets related to discontinued operations were increased by the $40,660 mortgage costs for the new mortgage on the Building Industries Center property and by $4,794 of deferred selling expenses. Other receivables decreased by $460,923 primarily as a result of the $500,000 payment received from Mr. Lichtenstein with respect to the settlement on the joint venture loans. This decrease was partially offset by a $39,813 net increase in tenant accounts receivables. Cash and cash equivalents increased by $519,161 primarily as a result of the $500,000 payment received on the settlement of joint venture loans. Securities available for sale decreased by $753,203 as a result of the sale of $769,563 of securities, partially offset by the increase of $16,360 in the fair value of the securities. Liabilities related to discontinued operations increased by $241,766 primarily as a result of the $1,250,000 new first mortgage loan obtained on the Building Industries Center property and the addition of the $37,633 first mortgage loan on the Mapletree Industrial Center property which was classified as held for sale in the first quarter of 2010. These increases were partially offset by the amortization and repayment of $1,045,867 on the prior first mortgage loan on the Building Industries Center property. Accrued liabilities increased by $200,985 primarily as a result of $96,777 of unbilled professional fees and increased accrued mortgage interest expense of $87,496 for the Hato Rey Center property mortgage. In March, 2010, three independent directors of the Company each received 1,000 shares of the Company's Class B common stock as a partial payment of directors' fees for the 2010 year. The shares were valued at $0.67 per share, which was the market value of the Class B common stock at the grant date, and, accordingly, the Company recorded $2,010 in prepaid directors' fees (to be amortized during 2010) based on the market value of the stock. The Company recorded additions to the Company's Class B common stock of $300 at par value of $.10 per share and $1,710 to additional paid-in capital. Liquidity and Capital Resources Presidential obtains funds for working capital and investment from its available cash and cash equivalents, from securities available for sale, from operating activities, from refinancing of mortgage loans on its real estate equities or from sales of such equities, and from repayments on its mortgage portfolio. Management believes that, barring any unforeseen circumstances, the Company has sufficient liquidity and capital resources to carry on its existing business and to pay any dividends required to maintain REIT status until the Company can effectuate a plan of liquidation or enter into a strategic transaction. However, in the current ongoing economic downturn, given our continuing decline in revenues, expected losses from continuing operations and negative cash flows from operating activities, management believes that Presidential might have insufficient liquidity and capital resources to operate in future years without sales of its assets. Except as discussed herein, management is not aware of any other trends, events, commitments or uncertainties that will have a significant effect on liquidity. In the fourth quarter of 2008, the Company reduced its dividend from $.16 per share to $.08 per share. The decision of the Board of Directors of the Company to reduce the Company's dividend at that time recognized, among other things, the adverse economic conditions currently affecting real estate markets, the existing defaults on two of the Company's loans to affiliates of David Lichtenstein, the Company's inability at the present time to refinance the Hato Rey Center office building mortgage and the desirability of conserving the Company's cash resources under these circumstances. For these reasons, the Company did not declare a dividend in 2009 and does not expect to declare one in 2010. To the extent that payments received on its mortgage portfolio or payments received from sales are taxable as capital gains, the Company has the option to distribute the gain to its shareholders or to retain the gain and pay Federal income tax on it. The Company does not have a specific policy as to the retention or distribution of capital gains. The Company's dividend policy regarding capital gains for future periods will be based upon many factors including, but not limited to, the Company's present and projected liquidity, its desire to retain funds available to pay operating expenses or for additional investment, and its ability to reduce taxes by paying dividends. At March 31, 2010, Presidential had $1,303,835 in available cash and cash equivalents, an increase of $519,161 from the $784,674 at December 31, 2009. This increase in cash and cash equivalents was due to cash provided by investing activities of $1,207,428 and cash provided by financing activities of $68,238, partially offset by cash used in operating activities of $765,505. Joint Venture Mezzanine Loans and Settlement Agreement During 2004 and 2005, the Company made investments in and loans to four joint ventures and received 29% ownership interests in these joint ventures. The initial aggregate investment in the joint ventures (original principal amount of the loans made to and the investments in the joint ventures) was $27,038,410. The Company accounted for these investments and loans under the equity method because it exercises significant influence over, but does not control, these entities, which are controlled by Lightstone and David Lichtenstein. The joint ventures own nine shopping malls in seven states. Starting in 2007, the shopping malls began to suffer from among other things, competition from other and, in some circumstances, newer shopping malls, the inability to attract new tenants and declining rental rates, which conditions worsened during the continuing economic downturn, and in 2008 and 2009, the joint ventures defaulted on the Presidential loans. In February, 2008, Lightstone III defaulted on payments of interest due under the Company's $9,500,000 loan related to the Macon/Burlington Malls. Lightstone III also defaulted on payments of interest due on the first mortgage loan covering the properties and the holder of the first mortgage loan commenced foreclosure proceedings and appointed a receiver to operate the properties. The Company believed that the outstanding principal balance of the first mortgage loan substantially exceeded the current value of the Macon/Burlington Malls and that it was unlikely that the Company would be able to recover any interest or any principal on its mezzanine loan from the collateral that it held as security for the loan. In October, 2008, Lightstone I defaulted on the payment of interest due under the Company's $8,600,000 mezzanine loan relating to the Four Malls and also did not make the payments of the preferential return of 11% per annum due on the Company's $1,438,410 investment in the Martinsburg Mall. Lightstone I also defaulted on payments of interest due under the first mortgage loan covering the Martinsburg Mall and three of the Four Malls (Bradley Square, Mount Berry Square and Shenango Valley) on and after August 1, 2008 and the holder of the first mortgage loan commenced foreclosure proceedings and appointed a receiver to operate the properties. At that time, the Company believed that the outstanding principal balance of the first mortgage loan substantially exceeded the current value of the mortgaged properties and that it was unlikely that the Company would be able to recover any amount of its mezzanine loan in the amount of $8,600,000 and investment in the amount of $1,438,410 from the collateral that it held as security for its mezzanine loan and investment. Accordingly, a portion of the mezzanine loan indebtedness was assumed by another Lightstone entity pursuant to the Settlement Agreement (as defined below) with Lightstone. As of March 31, 2010, the mortgagee had not completed the foreclosure of its mortgage and the properties continue to be operated by a receiver. The Company's mezzanine loan in the amount of $7,835,000 to Lightstone II secured by interests in the Shawnee Mall and the Brazos Mall has been in default since January, 2009. The first mortgage loan on the properties became due on January 10, 2010 and has not been paid. Lightstone has been unable to refinance the first mortgage loan indebtedness and the holder of the first mortgage loan has commenced foreclosure proceedings. The Company believes that it is likely that the first mortgage loan will be foreclosed and that the Company will not be able to obtain any recovery on its mezzanine loan other than the recovery of the $500,000 received from David Lichtenstein on the guaranty received pursuant to the Settlement Agreement. Subsequent to the defaults under the $9,500,000 and $8,600,000 mezzanine loans, the Company asserted various claims against Lightstone and Mr. Lichtenstein personally with respect to such loans and on February 27, 2009 completed a settlement of such claims (the "Settlement Agreement"). Under the Settlement Agreement: (1) $5,000,003 of the indebtedness under the $9,500,000 mezzanine loan and $5,000,003 of the indebtedness under the $8,600,000 mezzanine loan were assumed by an affiliate of Lightstone which is the debtor on an existing loan from the Company in the outstanding principal amount of $2,074,994. The total indebtedness was consolidated into a nonrecourse loan in the outstanding principal amount of $12,075,000 (the "Consolidated Note") and is secured by the ownership interests in entities owning nine apartment properties (1,056 apartment units) located in Virginia (which had previously secured the $2,074,994 indebtedness) and 75% of the ownership interests in entities owning nine additional apartment properties (931 apartment units) located in Virginia and North Carolina. The Consolidated Note accrues interest at the rate of 13% per annum and is due on February 1, 2012. All net cash flow from the eighteen apartment properties will be utilized to pay the interest accrued on the Consolidated Note and to the extent that there is not sufficient cash flow to pay all accrued interest, the unpaid interest will be deferred until the maturity of the Consolidated Note. The Company anticipates that a substantial portion of the annual interest will not be paid currently and will be deferred in accordance with the terms of the Consolidated Note. The Company also anticipates that it is likely that on the maturity date of the Consolidated Note, the outstanding principal balance of the Consolidated Note plus any unpaid deferred interest thereon will exceed the value of the Company's security therefore and, accordingly, since the Consolidated Note is a nonrecourse loan, the Company does not expect to obtain payment in full of the Consolidated Note on maturity. (2) The Company obtained a 50% ownership interest in IATG Puerto Rico, LLC ("IATG"), the Lightstone affiliate that owns The Las Piedras Industrial Complex, an industrial property located in Las Piedras, Puerto Rico and consisting of approximately 68 acres of land and 380,800 square feet of rentable space contained in several buildings in the complex. The property is substantially vacant and the owners may attempt to sell the property. Lightstone has agreed to advance funds to pay any negative cash flow from the operations of the property until a sale can be accomplished and has agreed that if it does not do so, it will transfer its remaining 49% interest in the property to Presidential. (3) The Company received at closing $250,000 in cash and a note from Mr. Lichtenstein in the amount of $750,000 payable without interest which was originally due on January 31, 2010. Mr. Lichtenstein is not personally liable for payment of the $750,000 note, but the note is secured by a 25% ownership interest in the Las Piedras property. In May, 2010, the Company extended the maturity date of the note to December 31, 2010 and received a $10,000 fee. (4) The Company received a personal guaranty from Mr. Lichtenstein that the Company will receive all accrued interest on the Company's $7,835,000 mezzanine loan (relating to the Shawnee/Brazos Malls) through the date of repayment and $500,000 of the principal amount of the loan, which personal guaranty is limited to $500,000. As part of the settlement, the Company agreed to modify its right to receive repayment in full of the $7,835,000 loan before Mr. Lichtenstein receives any return on his capital contributions to the borrowing entity to the following extent: the Company will receive the first net proceeds of any sale or refinancing of the Shawnee/Brazos Malls in an amount equal to all accrued and unpaid interest and $2,000,000 of principal; Mr. Lichtenstein will receive the next $1,000,000 of any such net sale or refinancing proceeds; the Company will receive the next $1,000,000 of any such net proceeds and any additional net proceeds shall be paid 50% to the Company and 50% to Mr. Lichtenstein. Mr. Lichtenstein's $500,000 guaranty, which was secured by his remaining interest in IATG, was paid to the Company in March, 2010 and the security for the guaranty was released. As a result of the $500,000 guaranty payment received in March, 2010, at December 31, 2009, the Company recognized a $500,000 gain on settlement of joint venture loans in its consolidated financial statements and recorded a $500,000 receivable due from Mr. Lichtenstein on its consolidated balance sheet. The carrying value on the Company's consolidated financial statements of the $7,835,000 mezzanine loan and the Company's minority interest in the entity owning the Shawnee/Brazos Malls was zero at December 31, 2009. The Company does not anticipate any further payments on its mezzanine loan, other than the $500,000 already received. While under existing market conditions it was difficult to place a value on the assets and collateral received from Lightstone and Mr. Lichtenstein in settlement of the Company's claims against them, management believes that the settlement was in the best interests of the Company taking into account the nature of the Company's claims and the cost and unpredictability of litigation and collection of any judgment that might have been obtained. The defaults in payment of the Company's $9,500,000 mezzanine loan to Lightstone III, the $8,600,000 mezzanine loan to Lightstone I, and the $7,835,000 mezzanine loan to Lightstone II have had and continue to have a material adverse effect on the Company's business, financial condition, results of operations and prospects. The principal effect of the transactions resulting from the Settlement Agreement on the Company's consolidated financial statements in 2009, was as follows: (i) The carrying value of the $12,075,000 Consolidated Note on the Company's consolidated balance sheet is $2,074,994. This is the same carrying value of the $2,074,994 note that was on the Company's consolidated balance sheet prior to the consolidation of this note with the additional $10,000,006 indebtedness received in the Settlement Agreement. The $10,000,006 additional portion of the note was received in partial settlement of the $9,500,000 and $8,600,000 mezzanine loans, which had a net carrying value of $0 on the Company's consolidated balance sheet. Accordingly, there was no significant adjustment on the Company's consolidated balance sheet in 2009 as a result of the receipt of the Consolidated Note. No gain or loss was recorded on the Company's consolidated financial statements in connection with the consolidation of the $2,074,994 and $10,000,006 indebtedness and the substitution of the collateral for the $10,000,006 indebtedness. (ii) The 50% membership interest in IATG obtained by the Company was recorded on the Company's consolidated balance sheet at its fair value of $3,250,000 and a gain on the settlement of the joint venture loans in the amount of $3,250,000 was recognized on the Company's consolidated financial statements. (iii) The $750,000 non-interest bearing, nonrecourse note originally due on January 31, 2010, which is secured by an additional 25% ownership interest in IATG, was recorded on the Company's consolidated balance sheet at its fair value of $664,000 ($750,000 note receivable less a discount on the note receivable of $86,000) and a gain on the settlement of the joint venture loans in the amount of $664,000 was recognized on the Company's consolidated financial statements. In May, 2010, the Company extended the maturity date of the loan to December 31, 2010 and received a $10,000 fee. In March, 2009, the Company's preliminary estimate of the fair value of the 50% ownership interest in IATG was $1,500,000 and its preliminary estimate of the fair value of the $750,000 note was $200,000. The Company recorded a $1,500,000 investment in joint ventures and a $200,000 note receivable on its consolidated balance sheet and recognized a gain on settlement of joint venture loans of $1,700,000 in its consolidated financial statements at March 31, 2009. The Company based the preliminary estimated fair value of its interest in the IATG property on information available to it at the time. During the quarter ended June 30, 2009, the Company obtained an independent appraisal of the property owned by IATG and based on the appraised value of $6,500,000, the Company adjusted the preliminary estimate of the value of its 50% ownership interest in the IATG property from $1,500,000 to $3,250,000 and its preliminary estimate of the $750,000 note receivable from $200,000 to $664,000. Accordingly, in June, 2009, the Company recorded an additional $1,750,000 in investments in joint ventures and an additional $464,000 for the note receivable on its consolidated balance sheet and recognized an additional gain of $2,214,000 on the gain on settlement of joint venture loans in its consolidated financial statements. While management believes that the $6,500,000 appraised value of the IATG property is a reasonable value, there can be no assurance that if and when the property is sold, it can be sold for its appraised value. (iv) At December 31, 2009, the Company recorded a $500,000 receivable due from Mr. Lichtenstein on its consolidated balance sheet and recognized a $500,000 gain on settlement of joint venture loans in its consolidated financial statements, which receivable was paid in the first quarter of 2010. In summary, as a result of the Settlement Agreement, in 2009 the Company recorded assets of $4,414,000 on the Company's consolidated balance sheet (a $500,000 receivable, a $750,000 note receivable less an $86,000 discount on the note receivable and a $3,250,000 investment in joint ventures) and recorded a $4,414,000 gain on the settlement of joint venture loans in its consolidated financial statements. The Company also received a net cash payment of $65,289 ($250,000 less $184,711 of expenses for the settlement), which was also recorded in gain on settlement of joint venture loans in its consolidated financial statements. In addition, for the period ended December 31, 2009, the Company recognized in interest income $77,671 of the amortization of discount recorded on the note receivable. Operating Activities Cash from operating activities includes interest on the Company's mortgage portfolio and net cash received from rental property operations. In 2010, cash received from interest on the Company's mortgage portfolio was $135,124. Net cash disbursed for rental property operations was $127,617. Net cash disbursed for rental property operations is before additions and improvements and mortgage amortization. Investing Activities Presidential holds a portfolio of mortgage notes receivable. During 2010, the Company received principal payments of $10,094 on its mortgage portfolio. In the first quarter of 2010, the Company received a $500,000 payment from Mr. Lichtenstein in payment of his guaranty received pursuant to the Settlement Agreement discussed above. During the first quarter of 2010, the Company invested $53,566 in additions and improvements to its properties. During the quarter ended March 31, 2010, the Company received $750,900 of proceeds from the sale of securities. Financing Activities The Company's indebtedness at March 31, 2010, consisted of mortgage debt of $14,836,739 for continuing operations and $1,287,633 for discontinued operations. The mortgage debt is collateralized by individual properties. The $14,836,739 mortgage on the Hato Rey Center property is nonrecourse to the Company. The $1,250,000 Building Industries Center mortgage and the $37,633 Mapletree Industrial Center mortgage are recourse to Presidential. In addition, some of the Company's mortgages provide for Company liability for damages resulting from specified acts or circumstances, such as for environmental liabilities and fraud. Generally, mortgage debt repayment is serviced with cash flow from the operations of the individual properties. During 2010, the Company made $1,141,102 of principal payments on mortgage debt. The mortgages on the Company's properties are at fixed rates of interest and the Mapletree Industrial Center mortgage will fully amortize by periodic principal payments. In March, 2010, the Company obtained a new $1,250,000 mortgage on its Building Industries Center property and repaid the $1,038,086 outstanding principal balance of the prior mortgage. The new mortgage bears interest at the rate of 6.25% per annum, requires monthly payments of principal and interest of $8,317 and has a balloon payment of $1,184,341 due at maturity on March 23, 2013. The $14,836,739 Hato Rey Center mortgage matures in May, 2028, has a fixed rate of interest of 9.38% and requires additional repayments of principal from surplus cash flows from operations of the property (see Hato Rey Partnership below). Investments In Joint Ventures The Company has investments in joint ventures in two entities that are controlled by Mr. Lichtenstein and Lightstone. The Company accounts for these investments using the equity method. The first investment is the Company's mezzanine loan in the amount of $7,835,000 to Lightstone II which is secured by ownership interests in the Shawnee/Brazos Malls. In connection with this loan, the Company received a 29% ownership interest in Lightstone II. The loan matures in 2014 and has an interest rate of 11% per annum. Since January 1, 2009, the interest payments due on the $7,835,000 loan have not been made and the loan is in default (see Joint Venture Mezzanine Loans and Settlement Agreement above). The $7,835,000 investment has been reduced by payments of interest (distributions received) and the Company's share of the losses recorded from the joint venture and the balance of the Company's investment in the Shawnee/Brazos Malls at March 31, 2010 is zero. The second investment is a 50% ownership interest in IATG, the Lightstone affiliate that owns The Las Piedras Industrial Complex, an industrial property located in Las Piedras, Puerto Rico and consisting of approximately 68 acres of land and 380,800 square feet of rentable space contained in several buildings in the complex. The Company's estimate of the fair value of its 50% ownership interest in IATG is $3,250,000 and the Company recorded a $3,250,000 investment in joint ventures on its consolidated balance sheet and recognized a gain on settlement of joint venture loans of $3,250,000 in its consolidated financial statements in 2009 (see Joint Venture Mezzanine Loans and Settlement Agreement above). Activity in investments in joint ventures for the period ended March 31, 2010 is as follows: Equity in the Loss Balance at from Balance at December 31, Joint March 31, 2009 Ventures 2010 ------------ ------------- ----------- IATG (1) $2,595,603 $(194,598) $2,401,005 Shawnee/Brazos Malls (2) - - - ---------- --------- ---------- $2,595,603 $(194,598) $2,401,005 ========== ========= ========== Equity in the loss from joint ventures is as follows: Three Months Ended March 31, 2010 2009 -------- ---------- IATG (1) $(194,598) $ (65,536) Shawnee/Brazos Malls (2) - (147,836) --------- --------- $(194,598) $(213,372) ========= ========= (1) The Company recorded its 50% share of the loss from IATG for the three months ended March 31, 2010 and for the month ended March 31, 2009. (2) Interest income earned by the Company at the rate of 11% per annum on the outstanding $7,835,000 loan from the Company to Lightstone II was included in the calculation of the Company's share of the loss from joint ventures for the Shawnee/Brazos Malls. At December 31, 2009, the Company's investment in the Shawnee/Brazos Malls was reduced by distributions and losses to zero. The Lightstone Group is controlled by David Lichtenstein. At March 31, 2010, in addition to Presidential's investments of $2,401,005 in these joint ventures with entities controlled by Mr. Lichtenstein, Presidential has two loans that are due from entities that are controlled by Mr. Lichtenstein in the aggregate outstanding principal amount of $12,825,000 with a net carrying value of $2,824,994. The $5,225,999 net carrying value of investments in joint ventures with entities controlled by Mr. Lichtenstein and loans outstanding to entities controlled by Mr. Lichtenstein constitute approximately 20% of the Company's total assets at March 31, 2010. Hato Rey Partnership At March 31, 2010 the Company has an aggregate 60% general and limited partnership interest in the Hato Rey Partnership. The Hato Rey Partnership owns and operates the Hato Rey Center, an office building in Hato Rey, Puerto Rico. Over the past four years the vacancy rates at the Hato Rey Center have been fluctuating from a high of 48% in 2006 to a low of approximately 20% in January, 2009. However, as a result of local economic conditions and higher than historical vacancy rates in the Hato Rey area, the vacancy rate has increased to 31% at April 30, 2010. The Company is attempting various marketing methods to improve vacancy rates including reducing the per square footage rates in order to rent office space in the competitive rental market in the Hato Rey area. Over the last four years, Presidential agreed to lend up to $2,750,000 to the owning partnership to fund negative cash flow from the operations of the property during the periods of high vacancy rates and to pay the costs of a modernization program. Interest accrues on the loan at the rate of 13% per annum, with interest and principal to be paid from the first positive cash flow from the property or upon a refinancing of the first mortgage on or sale of the property. At March 31, 2010, total advances under the loan were $2,670,000. The $2,670,000 loan and the accrued interest in the amount of $910,158 have been eliminated in consolidation. The Company had expected to refinance the existing first mortgage on the building in the second quarter of 2008, when the terms of the existing mortgage were to be automatically modified to increase the interest rate thereon, but the combination of the slower than anticipated rent up and the turmoil in the lending markets made a refinancing unfeasible. The modification of the terms of the existing mortgage provided for an increase in its interest rate by 2% per annum (from 7.38% to 9.38%) and that payment of the additional 2% will be deferred until the maturity date of the mortgage in 2028. In addition, the modification provides that all net cash flow from the property will be utilized to repay the outstanding principal of the mortgage loan, which will be prepayable without penalty. The Company intends to refinance this mortgage when occupancy rates at the property have further improved and lending markets have returned to a more normal state. The management of Presidential believes that the vacancy rate at the property can continue to be reduced over the next few years. However, until the first mortgage is refinanced, the Company will not receive any cash payments on its loan to the partnership since principal and interest on the Company's loan are payable only out of operating cash flow or refinancing or sale proceeds and, under the terms of the modified mortgage, all net cash flow will be utilized to reduce principal on the first mortgage. Since the modification in 2008, there has not been any net cash flow available to reduce the principal on the first mortgage. On January 1, 2009, the Company adopted ASC 810-10-65 which requires amounts attributable to noncontrolling interests to be reported separately. For the three months ended March 31, 2010, the Hato Rey Partnership had a loss of $117,940. The consolidated financial statements reflect the separate disclosure of the noncontrolling interest's share (40%) of the loss of $47,176. Environmental Matters Mapletree Industrial Center - Palmer, Massachusetts The Company is involved in an environmental remediation process for contaminated soil found on this property. The land area involved is approximately 1.25 acres. Since the most serious identified threat on the site is to songbirds, the proposed remediation consisted of removing all exposed metals and a layer of soil. The Company estimated that the costs of the cleanup will not exceed $1,000,000. In accordance with the provisions of ASC Contingencies Topic, in the fourth quarter of 2006, the Company accrued a $1,000,000 liability, which was discounted by $145,546, and charged $854,454 to expense. The discount rate used was 4.625%, which was the interest rate on 10 year Treasury Bonds. At March 31, 2010, the accrued liability balance was $349,513 and the discount balance was $116,790 for a net accrued liability of $232,723. The remediation must comply with the requirements of the Massachusetts Department of Environmental Protection ("MADEP") and during the three months ended March 31, 2009, the Company obtained the consent of MADEP to a specific plan of remediation, which the Company expects to complete by June, 2010. While the final cost of the remediation work has not been finally determined, management believes that it will be less than the balance of the net accrued liability at March 31, 2010. Actual costs incurred may vary from these estimates due to the inherent uncertainties involved. The Company believes that any liability in excess of amounts accrued which may result from the resolution of this matter will not have a material adverse effect on the financial condition, liquidity or the cash flow of the Company. Ivy Consolidated Loan Presidential holds two nonrecourse loans (the "Ivy Consolidated Loan"), which it received in 1991 from Ivy Properties, Ltd. and its affiliates "(Ivy"). At March 31, 2010, the Ivy Consolidated Loan has an outstanding principal balance of $4,770,050 and a net carrying value of zero. Pursuant to existing agreements, the Company is entitled to receive, as payments of principal and interest on the Ivy Consolidated Loan, 25% of the cash flow of Scorpio Entertainment, Inc. ("Scorpio"), a company owned by two of the Ivy principals (Steven Baruch, an Executive Vice President and Director of Presidential and Thomas Viertel, an Executive Vice President, Chief Financial Officer and a Director of Presidential) to carry on theatrical productions. Amounts received by Presidential from Scorpio will be applied to unpaid and unaccrued interest on the Ivy Consolidated Loan and recognized as income. While these amounts have been material in the past, the Company believes that they will not be material in 2010. The profitability of theatrical production is by its nature uncertain and management believes that any estimate of payments from Scorpio on the Ivy Consolidated Loan for future periods is too speculative to project. During the quarters ended March 31, 2010 and 2009, the Company did not receive any payments from Scorpio. The Ivy Consolidated Loan bears interest at a rate equal to the JP Morgan Chase Prime rate, which was 3.25% at March 31, 2010. At March 31, 2010, the unpaid and unaccrued interest was $3,716,458 and such interest is not compounded. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK While the Company is not required as a smaller reporting company to comply with this Item 3, it is providing the following general discussion of qualitative market risk. The Company's financial instruments consist primarily of notes receivable and mortgage notes payable. Substantially all of these instruments bear interest at fixed rates, so the Company's cash flows from them are not directly impacted by changes in market rates of interest. However, changes in market rates of interest impact the fair values of these fixed rate assets and liabilities. The Company generally holds its notes receivable until maturity or prepayment and repays its notes payable at maturity or upon sale of the related properties, and, accordingly, any fluctuations in values do not impact the Company's earnings, balance sheet or cash flows. The Company does not own any derivative financial instruments or engage in hedging activities. ITEM 4. CONTROLS AND PROCEDURES a) As of the end of the period covered by this quarterly report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in this report. b) There has been no change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected or is reasonably likely to materially affect the Company's internal control over financial reporting. PART II - OTHER INFORMATION ITEM 6. Exhibits 31.1 Certification of Chief Executive Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. 31.2 Certification of Chief Financial Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. 32.1 Certification of Chief Executive Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PRESIDENTIAL REALTY CORPORATION (Registrant) DATE: May 13, 2010 By: /s/ Jeffrey F. Joseph ------------------------------------- Jeffrey F. Joseph President and Chief Executive Officer DATE: May 13, 2010 By: /s/ Elizabeth Delgado ------------------------------------- Elizabeth Delgado Treasurer EX-31 2 exhibit31-1.txt EXHIBIT 31.1 CEO CERTIFICATION Exhibit 31.1 CERTIFICATION ------------- I, Jeffrey F. Joseph, Chief Executive Officer of Presidential Realty Corporation (the "registrant"), certify that: 1. I have reviewed this quarterly report on Form 10-Q of the registrant; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the Audit Committee of the Board of Directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. DATE: May 13, 2010 By:/s/ JEFFREY F. JOSEPH --------------------------------- Jeffrey F. Joseph Chief Executive Officer EX-31 3 exhibit31-2.txt EXHIBIT 31.2 CFO CERTIFICATION Exhibit 31.2 CERTIFICATION ------------- I, Thomas Viertel, Chief Financial Officer of Presidential Realty Corporation (the "registrant"), certify that: 1. I have reviewed this quarterly report on Form 10-Q of the registrant; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the Audit Committee of the Board of Directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. DATE: May 13, 2010 By: /s/ THOMAS VIERTEL ------------------------------ Thomas Viertel Chief Financial Officer EX-32 4 exhibit32-1.txt EXHIBIT 32.1 CEO CERTIFICATION Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 Of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report on Form 10-Q of Presidential Realty Corporation (the "Company") for the period ending March 31, 2010, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jeffrey F. Joseph, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) the Report fully complies with the requirements of Section 13(a)or 15(d) of the Securities Exchange Act of 1934: and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and the results of operations of the Company. Presidential Realty Corporation By:/s/ Jeffrey F. Joseph -------------------------- Jeffrey F. Joseph Chief Executive Officer Date: May 13, 2010 EX-32 5 exhibit32-2.txt EXHIBIT 32.2 CFO CERTIFICATION Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 Of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report on Form 10-Q of Presidential Realty Corporation (the "Company") for the period ending March 31, 2010, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas Viertel, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) the Report fully complies with the requirements of Section 13(a)or 15(d) of the Securities Exchange Act of 1934: and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and the results of operations of the Company. Presidential Realty Corporation By:/s/ Thomas Viertel ---------------------- Thomas Viertel Chief Financial Officer Date: May 13, 2010 -----END PRIVACY-ENHANCED MESSAGE-----