| Summary of Significant Accounting Policies | 2. Summary
of Significant Accounting Policies Principles
of Consolidation and Basis of Presentation The
consolidated financial statements include the accounts of Lightstone REIT I and the Operating Partnership and its subsidiaries
(over which the Company exercises financial and operating control). As of December 31, 2021, Lightstone REIT I had a 98 The
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America (“GAAP”). GAAP requires the Company’s management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses during a reporting period. The most significant assumptions and estimates relate to the valuation of real
estate and real estate-related investments, depreciable lives, and revenue recognition. Application of these assumptions requires
the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates. Investments
in entities where the Company has the ability to exercise significant influence, but does not exercise financial and operating
control, and is not considered to be the primary beneficiary of a variable interest entity will be accounted for using the equity
method. Investments in entities where the Company has virtually no influence are recorded initially at cost, as investments in
unconsolidated joint ventures, and subsequently adjusted for cash contributions and distributions. Cash,
Cash Equivalents and Restricted Cash The
Company considers all highly liquid investments with an original maturity of three months or less when made to be cash equivalents. As
required by the Company’s lenders, restricted cash is held in escrow accounts for anticipated capital expenditures, real
estate taxes, and other reserves for certain of its consolidated properties. Capital reserves are typically utilized for non-operating
expenses such as tenant improvements, leasing commissions, and major capital expenditures. Alternatively, a lender may require
its own formula for an escrow of capital reserves. Restricted cash may also include certain funds temporarily placed in escrow
with qualified intermediaries to facilitate potential like-kind exchange transactions in accordance with Section 1031 of the Internal
Revenue Code of 1986, as amended. The
following is a summary of the Company’s cash, cash equivalents, and restricted cash total as presented in the statements
of cash flows for the periods presented:
Schedule
of Company’s cash, cash equivalents
December
31,
2021 2020
Cash
and cash equivalents $ 39,405 $ 44,446
Restricted
cash 3,187 2,395
Total
cash, cash equivalents and restricted cash $ 42,592 $ 46,841 Supplemental
cash flow information for the periods indicated is as follows:
Summary of supplemental cash flow information
For
the
December 31, December 31,
Cash
paid for interest $ 9,395 $ 8,860
Distributions
declared but not paid $ 3,885 $ 3,905
Accrued
development costs $ 4,602 $ 3,995
Amortization
of deferred financing costs included in development projects $ 1,399 $ 1,151
Holding
gain/loss on available for sale debt securities $ 427 $ 21
Value
of shares issued from distribution reinvestment program $ 324 $ 329
Accrued
loan exit fee included in deferred financing costs $ 1,100 $ - Marketable
Securities Marketable
securities consist of equity and debt securities that are designated as available-for-sale. Marketable debt securities are recorded
at fair value and unrealized holding gains or losses are reported as a component of accumulated other comprehensive income. The
Company’s marketable equity securities are recorded at fair value and unrealized holding gains and losses are recognized
on the consolidated statements of operations. Realized
gains or losses resulting from the sale of these securities are determined based on the specific identification of the securities
sold. An impairment charge is recognized when the decline in the fair value of a debt security below the amortized cost basis
is determined to be other-than-temporary. The Company considers various factors in determining whether to recognize an impairment
charge, including the duration and severity of any decline in fair value below our amortized cost basis, any adverse changes in
the financial condition of the issuers and our intent and ability to hold the investment for a period of time sufficient to allow
for any anticipated recovery in market value. The Board of Directors has authorized the Company from time to time to invest the
Company’s available cash in marketable securities of real estate related companies. The Board of Directors has approved
investments of marketable securities of real estate companies up to 30 Revenue
Recognition Minimum
rents are recognized on a straight-line accrual basis, over the terms of the related leases. The capitalized above-market lease
values and the capitalized below-market lease values are amortized as an adjustment to rental income over the initial lease term,
including any below-market renewal periods taken into account. Percentage rents, which are based on commercial tenants’
sales, are recognized once the sales reported by such tenants exceed any applicable breakpoints as specified in the tenants’
leases. Recoveries from commercial tenants for real estate taxes, insurance and other operating expenses, and from residential
tenants for utility costs, are recognized as revenues in the period that the applicable costs are incurred. Consolidated
VIEs The
Company consolidates certain joint ventures which have originated nonrecourse loans to unaffiliated third-party borrowers
(see Note 5) which are variable interest entities, or VIEs, for which the Company is the primary beneficiary. Generally, a VIE
is a legal entity in which the equity investors do not have the characteristics of a controlling financial interest or the equity
investors lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support.
A limited partnership, or legal entities such as an LLC, are considered a VIE when the majority of the limited partners unrelated
to the general partner possess neither the right to remove the general partner without cause, nor certain rights to participate
in the decisions that most significantly affect the financial results of the partnership. In determining whether the Company is
the primary beneficiary of a VIE, the Company considers qualitative and quantitative factors, including, but not limited to: which
activities most significantly impact the VIE’s economic performance and which party controls such activities; the amount
and characteristics of our investment; the obligation or likelihood for us or other investors to provide financial support; and
the similarity with and significance to our business activities and the business activities of the other investors. Significant
judgments related to these determinations include estimates about the current and future fair values and performance of real estate
held by these VIEs and general market conditions. Investments
in Real Estate Accounting
for Asset Acquisitions The
cost of the real estate assets acquired in an asset acquisition is allocated to the acquired tangible assets, consisting of land,
building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and
below-market leases for acquired in-place leases and the value of tenant relationships, based in each case on their relative fair
values. Fees incurred related to asset acquisitions are capitalized as part of the cost of the investment. Accounting
for Business Combinations Upon
the acquisition of real estate operating properties that meet the definition of a business, the Company estimates the fair value
of acquired tangible assets and identified intangible assets and liabilities and assumed debt at the date of acquisition, based
on evaluation of information and estimates available at that date. Based on these estimates, the Company evaluates the existence
of goodwill or a gain from a bargain purchase and allocates the initial purchase price to the applicable assets, liabilities and
noncontrolling interests, if any. As final information regarding fair value of the assets acquired, liabilities assumed and noncontrolling
interests is received and estimates are refined, appropriate adjustments are made to the purchase price allocation. The allocations
are finalized as soon as all the information necessary is available. Accounting
for Development Projects The
Company incurs a variety of costs in the development of a property. The costs of land and building under development include specifically
identifiable costs. The capitalized costs include, but are not limited to, pre-construction costs essential to the development
of the property, development costs, construction costs, interest costs, real estate taxes and other costs incurred during the
period of development. The Company ceases capitalization when the development project is substantially complete and placed
in service, which may occur in phases. Determination of when a development project is substantially complete and capitalization
must cease involves a degree of judgment. Once
a development project is placed in service, which may occur in phases or for an entire building or project, the costs capitalized
to that development project are transferred to land and improvements, buildings and improvements, and furniture and fixtures on
the Company’s consolidated balance sheets at the historical cost of the property. Impairment
Evaluation The
Company evaluates the recoverability of its investments in real estate assets at the lowest identifiable level, the individual
property level. An impairment loss is recognized only if the carrying amount of a long-lived asset is not recoverable and exceeds
its fair value. The
Company evaluates the long-lived assets for potential impairment whenever events or changes in circumstances indicate that the
undiscounted projected cash flows are less than the carrying amount for a particular property. No single indicator would necessarily
result in the Company preparing an estimate to determine if a long-lived asset’s future undiscounted cash flows are less
than its book value. The Company uses judgment to determine if the severity of any single indicator, or the fact there are a number
of indicators of less severity that when combined, would result in an indication that a long-lived asset requires an estimate
of the undiscounted cash flows to determine if an impairment has occurred. Relevant facts and circumstances include, among others,
significant underperformance relative to historical or projected future operating results and significant negative industry or
economic trends. The estimated cash flows used for the impairment analysis are subjective and require the Company to use its judgment
and the determination of estimated fair value are based on the Company’s plans for the respective assets and the Company’s
views of market and economic conditions. The estimates consider matters such as future operating income, market and other applicable
trends and residual value, as well as the effects of demand, competition, and recent sales data for comparable properties. Changes
in estimated future cash flows due to changes in the Company’s plans or views of market and economic conditions could result
in recognition of impairment losses, which, under the applicable accounting guidance, may be substantial. Notes
Receivable and Preferred Investments Notes
receivable and preferred investments that we intend to hold to maturity are carried at cost, net of any unamortized origination
costs, fees, discounts, premiums and unfunded commitments. Investment
income will be recognized on an accrual basis and any related premium, discount, origination costs and fees are amortized over
the life of the investment using the effective interest method. The amortization is reflected as an adjustment to investment income
in the Company’s statements of operations. Income
recognition is suspended when, in the opinion of management, a full recovery of income and principal becomes doubtful. When the
ultimate collectability of the principal is in doubt, all payments are applied to principal under the cost recovery method. When
the ultimate collectability of the principal is not in doubt, contractual interest is recorded as investment income when received,
under the cash basis method, until an accrual is resumed when the instrument becomes contractually current and performance is
demonstrated to be resumed. Credit
Losses and Impairment on Notes Receivable Notes
receivable are considered impaired when, based on current information and events, it is probable that we will not be able to collect
principal and interest amounts due according to the contractual terms. We assess the credit quality of our notes receivable and
adequacy of reserves on a quarterly basis, or more frequently as necessary. Significant judgment of management is required in
this analysis. We consider the estimated net recoverable value of the notes receivable as well as other factors, including but
not limited to the fair value of any collateral, the amount and the status of any senior debt, the quality and financial condition
of the borrower and the competitive situation of the area where the underlying collateral is located. Because this determination
is based on projections of future economic events, which are inherently subjective, the amount ultimately realized may differ
materially from the carrying value as of the balance sheet date. If upon completion of the assessment, the estimated fair value
of the underlying collateral is less than the net carrying value of the notes receivable, a reserve is recorded with a corresponding
charge to investment income. The reserve for each note receivable is maintained at a level that is determined to be adequate by
management to absorb probable losses. Credit
Losses and Impairment on Preferred Investments Preferred
investments that are accounted for as held to maturity are assessed for impairment at the individual investment level when there
is a decline in fair value below the amortized cost basis that is deemed to be other than temporary. In making the determination
of an other-than-temporary impairment assessment, the Company considers all available information relevant to the collectability
of the investment, including information about past events, current conditions, and reasonable and supportable forecasts when
developing the estimate of cash flows expected to be collected. This information includes the remaining redemption terms of the
investment, financial condition of the issuer, expected defaults and the value of any underlying collateral. In assessing whether
the entire amortized cost basis of the investment will be recovered, the Company compares the present value of cash flows expected
to be collected from the investment with the amortized cost basis and records an impairment based on the amount by which the present
value of cash flows expected to be collected is less than the amortized cost basis of the investment. Depreciation
and Amortization Depreciation
expense is computed based on the straight-line method over the estimated useful life of the applicable real estate asset. The
Company generally uses estimated useful lives of up to 39
years five to 10
years Leases The
Company’s retail property (St. Augustine Outlet Center) and its multi-family residential property (Gantry Park Landing)
are both leased to tenants under operating leases. Substantially all of our multi-family residential property leases have initial
terms of 12 months or less. Our remaining retail space leases expire from 2022 through 2024. Deferred
Costs The
Company capitalizes initial direct costs associated with financing activities. The costs are capitalized upon the execution of
the loan, presented in the consolidated balance sheets as a direct deduction from the carrying value of the corresponding loan
and amortized over the initial term of the corresponding loan. Amortization of deferred loan costs begin in the period during
which the loan is originated using the effective interest method over the term of the loan. The Company capitalizes initial direct
costs associated with leasing activities. The costs are capitalized upon the execution of the lease and amortized over the initial
term of the corresponding lease. Income
Taxes The
Company has elected to be taxed as a REIT commencing with the taxable year ended December 31, 2005. If the Company qualifies as
a REIT, it generally will not be subject to U.S. federal income tax on its taxable income or capital gain that it distributes
to its stockholders. To maintain its REIT qualification, the Company must meet a number of organizational and operational requirements,
including a requirement that it annually distribute to its stockholders at least 90% of its REIT taxable income (which does not
equal net income, as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding
any net capital gain. If the Company fails to remain qualified for taxation as a REIT in any subsequent year and does not qualify
for certain statutory relief provisions, its income for that year will be taxed at the regular corporate rate, and it may be precluded
from qualifying for treatment as a REIT for the four-year period following its failure to qualify as a REIT. Such an event could
materially adversely affect the Company’s net income and net cash available for distribution to stockholders. To
maintain its qualification as a REIT, the Company engages in certain activities through wholly-owned taxable REIT subsidiaries
(“TRSs”). As such, the Company is subject to U.S. federal and state income and franchise taxes from these activities. As
of December 31, 2021 and 2020, the Company had no Fair
Value of Financial Instruments The
carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted cash, prepaid expenses
and other assets, accounts payable, accrued expenses and other liabilities, due to related parties, tenant allowances and deposits
payable and deferred rental income approximate their fair values because of the short maturity of these instruments. The carrying
amounts of the notes receivable approximate their fair values because the interest rates are variable and reflective of market
rates. The
estimated fair value (in millions) of the Company’s mortgage debt is summarized as follows:
Schedule
of mortgage debt
As
of December 31, As
of
Carrying Estimated Carrying Estimated
Mortgages
payable $ 171.8 $ 174.4 $ 193.5 $ 198.0 The
fair value of the mortgages payable was determined by discounting the future contractual interest and principal payments by estimated
current market interest rates. Accounting
for Derivative Financial Investments and Hedging Activities. The
Company may enter into derivative financial instrument transactions in order to mitigate interest rate risk on a related financial
instrument. The Company may designate these derivative financial instruments as hedges and apply hedge accounting. The Company
records all derivative instruments at fair value on the consolidated balance sheets and changes in the fair value of the instruments
are recorded in the consolidated statements of operations. Stock-Based
Compensation The
Company had a stock-based incentive award plan for the independent directors of its Board pursuant to which awards were granted
at fair market value as of the date of grant. This plan expired in April 2015. For the years ended December 31, 2021 and 2020,
the Company had no Concentration
of Risk The
Company maintains its cash and cash equivalents in bank deposit accounts, which, at times, may exceed federally insured limits.
The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit
risk on its cash and cash equivalents. Net
Earnings per Share Basic
net earnings per share is calculated by dividing net income attributable to common shareholders by the weighted-average number
of shares of common stock outstanding during the applicable period. Dilutive income per share includes the potentially dilutive
effect, if any, which would occur if our outstanding options to purchase our common stock were exercised. For all periods presented
dilutive net income per share is equivalent to basic net income per share. New
Accounting Pronouncements In
June 2016, the FASB issued an accounting standards update which replaces the incurred loss impairment methodology currently
in use with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and
supportable information to inform credit loss estimates. The new guidance is effective for fiscal years beginning after December 15,
2022, including interim periods within those fiscal years. The Company expects that the adoption of this standard will not have
a material effect on its consolidated financial position, results of operations or cash flows. The
Company has reviewed and determined that other recently issued accounting pronouncements will not have a material impact
on its financial position, results of operations and cash flows, or do not apply to its current operations. Reclassifications Certain
prior period amounts may have been reclassified to conform to the current year presentation. |
