| Related Party Transaction and Other Arrangements | 6. Related Party Transactions and Other Arrangements
The Company has agreements with the Advisor and its affiliates to pay certain fees, as follows, in exchange for services performed by these entities and other related party entities. The Company’s ability to secure financing and acquire real estate and real estate-related investments are dependent upon its Advisor and affiliates to perform such services as provided in these agreements.
Operational Stage
Fees
Amount
Acquisition Fee
The Company pays to the Advisor or its affiliates 1% of the amount funded by us to originate or acquire an investment (including the Company’s pro rata share (direct or indirect) of debt incurred in respect of such investment, but excluding acquisition fees and acquisition expenses). Notwithstanding the foregoing, the Company will not pay any acquisition fee to the Advisor or any of its affiliates with respect to any transaction between the Company and the Sponsor, any of its affiliates or any program sponsored by it.
Acquisition Expenses
The Company reimburses the Advisor for expenses actually incurred related to selecting, originating or acquiring investments on the Company’s behalf, regardless of whether or not the Company acquires the related investments. In addition, the Company pays third parties, or reimburses the Advisor or its affiliates, for any investment-related expenses due to third parties, including, but not limited to, legal fees and expenses, travel and communications expenses, accounting fees and expenses and other closing costs and miscellaneous expenses, regardless of whether or not the Company acquires the related investments. In no event will the total of all acquisition fees and acquisition expenses (including those paid to third parties, as described above) with respect to a particular investment be unreasonable or, except in limited circumstances, exceed 5% of the amount funded by us to originate or acquire an investment (including the Company’s pro rata share (direct or indirect) of debt attributable to such investment, but exclusive of acquisition fees and acquisition expenses).
Asset Management Fee
The Company pays the Advisor or its assignees a monthly asset management fee equal to one-twelfth (1⁄12) of 1% of the cost of the Company’s assets. The cost of the Company’s assets means the amount funded by the Company for investments, including expenses and any financing attributable to such investments, less any principal received on such investments.
Operating Expenses
The Company reimburses the Advisor’s costs of providing administrative services, subject to the limitation that the Company generally will not reimburse the Advisor for any amount by which the total operating expenses at the end of the four preceding fiscal quarters exceeds the greater of (i) 2% of average invested assets (as defined in the advisory agreement), and (ii) 25% of net income other than any additions to reserves for depreciation, bad debt or other similar non-cash reserves and excluding any gain from the sale of investments for that period. After the end of any fiscal quarter for which the Company’s total operating expenses exceed this 2%/25% limitation for the four fiscal quarters then ended, if the Company’s independent directors exercise their right to conclude that this excess was justified, this fact will be disclosed in writing to the holders of Common Shares within 60 days. If the Company’s independent directors do not determine such excess expenses are justified, the Advisor is required to reimburse the Company, at the end of the four preceding fiscal quarters, by the amount that the Company’s aggregate annual total operating expenses paid or incurred exceed this 2%/25% limitation.
Additionally, the Company reimburses the Advisor for personnel costs in connection with other services; however, the Company does not reimburse the Advisor for (a) services for which the Advisor or its affiliates are entitled to compensation in the form of a separate fee, or (b) the salaries and benefits of the Company’s named executive officers.
Liquidation/Listing Stage
Fees
Amount
Disposition Fee
For substantial assistance in connection with the sale of investments and based on the services provided, as determined by the Company’s independent directors, the Company will pay to the Advisor or any of its affiliates a disposition fee equal to up to 1% of the contractual sales price of each investment sold. The Company will not pay a disposition fee upon the maturity, prepayment, workout, modification or extension of a debt instrument unless there is a corresponding fee paid by the borrower, in which case the disposition fee will be the lesser of: (a) 1% of the principal amount of the debt prior to such transaction; and (b) the amount of the fee paid by the borrower in connection with such transaction. If the Company takes ownership of a property as a result of a workout or foreclosure of debt, the Company will pay a disposition fee upon the sale of such property.
Annual Subordinated Performance Fee
The Company will pay the Advisor an annual subordinated performance fee calculated on the basis of the annual return to holders of Common Shares, payable annually in arrears. Specifically, in any year in which holders of Common Shares receive payment of an 8% annual cumulative, pre-tax, non- compounded return on the aggregate capital contributed by them, the Advisor will be entitled to 15% of the amount in excess of the 8% per annum return; provided , that the annual subordinated performance fee will not exceed 10% of the aggregate return paid to the holders of Common Shares for the applicable year, and provided , further , that the annual subordinated performance fee will not be paid unless and until holders of Common Shares receive a return of the aggregate capital contributed by them. This fee will be payable only from net sales proceeds, which results in, or is deemed to result in, the return on the aggregate capital contributed by holders of Common Shares plus 8% per annum thereon.
Subordinated Participation in Net Sales Proceeds (payable only if the Company is not listed on an exchange and the advisory agreement is not terminated or non-renewed)
The Advisor will receive from time to time, when available, including in connection with a merger, consolidation or sale, or other disposition of all or substantially all the Company’s assets, 15% of remaining “net sales proceeds” (as defined in the Company’s charter) after return of capital contributions plus payment to holders of Common Shares of an 8% annual cumulative, pre-tax, non-compounded return on the aggregate capital contributed by them.
Subordinated Incentive Listing Fee (payable only if we are listed on an exchange)
Upon the listing of the Common Shares on a national securities exchange, including a listing in connection with a merger or other business combination, the Advisor will receive a fee equal to 15% of the amount by which the sum of the Company’s market value (determined after listing) plus distributions attributable to net sales proceeds paid to the holders of Common Shares exceeds the sum of the aggregate capital contributed by them plus an amount equal to an 8% annual cumulative, pre-tax, non-compounded return.
The following table represents the fees incurred associated with the payments to the Company’s Advisor for the period indicated:
For the Years Ended December 31,
2019
2018
Acquisition fee (1)
$
304,195
$
—
Asset management fees (general and administrative costs)
685,678
627,028
Total
$
989,873
$
627,028
(1)
Acquisition fees of $304,195 were capitalized and are included in the carrying value of our investment in the Williamsburg Moxy Hotel which is classified as construction in progress on the consolidated balance sheets.
Investments in Unconsolidated Affiliated Real Estate Entities
The entities listed below are partially owned by the Company. The Company accounts for these investments under the equity method of accounting as the Company exercises significant influence, but does not exercise financial and operating control, and is not considered to be the primary beneficiary of these entities. A summary of the Company’s investments in the unconsolidated affiliated real estate entities is as follows:
As of
Entity
Date of Ownership
Ownership %
December 31, 2019
December 31, 2018
RP Maximus Cove, L.L.C. (the "Cove Joint Venture")
January 31, 2017
%
$
13,846,410
$
17,214,789
40 East End Ave. Pref Member LLC ( “40 East End Ave. Joint Venture”)
March 31, 2017
%
12,551,394
13,569,066
Total investments in unconsolidated affiliated real estate entities
$
26,397,804
$
30,783,855
The Cove Joint Venture
On January 31, 2017, the Company, through its wholly owned subsidiary, REIT IV COVE LLC along with LSG Cove LLC, an affiliate of the Sponsor and a related party, REIT III COVE LLC, a subsidiary of the operating partnership of Lightstone Value Plus Real Estate Investment Trust III, Inc., a real estate investment trust also sponsored by the Company’s Sponsor and a related party and Maximus Cove Investor LLC (“Maximus”), an unrelated third party, completed the acquisition of all of RP Cove, L.L.C’s membership interest in RP Maximus Cove, L.L.C. (the “Cove Joint Venture”) for aggregate consideration of approximately $255.0 million (the "Cove Transaction"). The Cove Joint Venture owns and operates The Cove at Tiburon (the “Cove”), a 281-unit, luxury waterfront multifamily residential property located in Tiburon, California.
Prior to entering into the Cove Transaction, Maximus previously owned a separate noncontrolling interest in the Cove Joint Venture.
The Company paid approximately $20.0 million for a 22.5% membership interest in the Cove Joint Venture. The Company’s ownership interest in the Cove Joint Venture is a non-managing interest. The Company has determined that the Cove Joint Venture is a variable interest entity but the Company is not the primary beneficiary. The Company accounts for its ownership interest in the Cove Joint Venture in accordance with the equity method of accounting because it exerts significant influence over but does not control the Cove Joint Venture. All capital contributions and distributions of earnings from the Cove Joint Venture are made on a pro rata basis in proportion to each member’s equity interest percentage. Any distributions in excess of earnings from the Cove Joint Venture are made to the members pursuant to the terms of the Cove Joint Venture’s operating agreement. An affiliate of Maximus is the asset manager of the Cove and receives certain fees as defined in the Property Management Agreement for the management of the Cove. The Company commenced recording its allocated portion of profit/loss and cash distributions, if any, beginning as of January 31, 2017 with respect to its membership interest of 22.5% in the Cove Joint Venture.
Subsequent to the Company’s acquisition of its 22.5% membership interest in the Cove Joint Venture through December 31, 2019, it made an aggregate of $2.4 million (including $0.2 million during the year ended December 31, 2019) of additional capital contributions and received aggregate distributions of $0.9 million (all during the year ended December 31, 2019).
The Cove Joint Venture recognized a loss on the early extinguishment of debt of approximately $1.5 million during the year ended December 31, 2019, of which the Company’s proportionate share was approximately $0.3 million.
On December 17, 2019, REIT IV Cove LLC, REIT III Cove LLC, LSG Cove LLC (collectively, the “Redeemers”), Maximus and the Cove Joint Venture entered into a redemption agreement (the “Redemption Agreement”), pursuant to which the Cove Joint Venture would redeem the membership interests of the Redeemers for an aggregate redemption price of approximately $87.6 million.
On February 12, 2020, the Cove Joint Venture completed the redemption of the Redeemers’ membership interests in the Cove Joint Venture pursuant to the terms of the Redemption Agreement for an aggregate redemption price of approximately $87.6 million. In connection, with the redemption of its 22.5% membership interest in the Cove Joint Venture, the Company received proceeds of approximately $21.9 million.
The Cove Joint Venture Financial Information
The Company’s carrying value of its interest in the Cove Joint Venture differed from its share of member’s equity reported in the condensed balance sheet of the Cove Joint Venture due to the Company’s basis of its investment in excess of the historical net book value of the Cove Joint Venture. The Company’s additional basis allocated to depreciable assets was being recognized on a straight-line basis over the lives of the appropriate assets.
The following table represents the condensed income statements for the Cove Joint Venture:
For the Year Ended
For the Year Ended December
(amounts in thousands)
December 31, 2019
31, 2018
Revenues
$
16,129
$
14,604
Property operating expenses
5,057
4,995
General and administrative costs
119
169
Depreciation and amortization
11,498
10,211
Operating loss
(545)
(771)
Loss on debt extinguisment
(1,521)
—
Interest expense and other, net
(9,424)
(11,002)
Net loss
$
(11,490)
$
(11,773)
Company's share of net loss (22.5%)
$
(2,585)
$
(2,649)
Adjustment to depreciation and amortization expense (1)
(40)
(97)
Company's loss from investment
$
(2,625)
$
(2,746)
The following table represents the condensed balance sheets for the Cove Joint Venture:
As of
As of
(amounts in thousands)
December 31, 2019
December 31, 2018
Real estate, at cost (net)
$
138,045
$
148,441
Cash and restricted cash
1,491
2,138
Other assets
1,141
1,810
Total assets
$
140,677
$
152,389
Mortgage payable, net
$
178,353
$
174,098
Other liabilities
1,339
2,776
Members' deficit (1)
(39,015)
(24,485)
Total liabilities and members' deficit
$
140,677
$
152,389
(1)
The adjustment to depreciation and amortization expense related to the difference between the Company’s basis in the Cove Joint Venture and the amount of the underlying equity in net assets of the Cove Joint Venture.
40 East End Ave. Joint Venture
On March 31, 2017, the Company entered into a joint venture agreement (the “40 East End Ave. Transaction”) with SAYT Master Holdco LLC, an entity majority-owned and controlled by David Lichtenstein, who also majority owns and controls the Company’s Sponsor, and a related party, (the “40 East End Seller”), providing for the Company to acquire approximately 33.3% of the 40 East End Seller’s approximate 100% membership interest in 40 East End Ave. Pref Member LLC ( “40 East End Ave. Joint Venture”) for aggregate consideration of approximately $10.3 million.
The Company’s ownership interest in the 40 East End Ave. Joint Venture is a non-managing interest. Because the Company exerts significant influence over but does not control the 40 East End Ave. Joint Venture, it accounts for its ownership interest in the 40 East End Ave. Joint Venture in accordance with the equity method of accounting. All contributions to and distributions of earnings from the 40 East End Ave. Joint Venture are made on a pro rata basis in proportion to each member’s equity interest percentage. Any distributions in excess of earnings from the 40 East End Ave. Joint Venture are made to the members pursuant to the terms of its operating agreement. The Company commenced recording its allocated portion of earnings and cash distributions, if any,from the 40 East End Ave. Joint Venture beginning as of March 31, 2017 with respect to its membership interest of approximately 33.3% in the 40 East End Ave. Joint Venture. Additionally, Lightstone Value Plus Real Estate Investment Trust, Inc. (“Lightstone I”), a real estate investment trust also sponsored by our Sponsor, made $30.0 million of preferred equity contributions (the “Preferred Contributions”) to a subsidiary of the 40 East End Ave. Joint Venture, pursuant to an instrument that entitles Lightstone I to monthly preferred distributions at a rate of 12% per annum. No distributions may be paid to the members until the Preferred Contributions are redeemed in full.
The 40 East End Ave. Joint Venture, through affiliates, has acquired a parcel of land located at the corner of 81 st Street and East End Avenue in the Upper East Side neighborhood of New York City on which it is developing a luxury residential project consisting of 29 condominium units (the “40 East End Ave. Project”).
On March 21, 2017, the 40 East End Ave. Joint Venture obtained financing from a financial institution of up to $85.3 million (the “40 East End Ave. Mortgage”) for the land acquisition and construction of the 40 East End Ave. Project. The 40 East End Ave. Mortgage bore interest at Libor plus 4.50% (subject to floor of 5.00%) and was collateralized by the 40 East End Ave. Project. On December 19, 2019, the 40 East End Ave. Joint Venture entered into a loan (the “Condo Loan”) with a financial institution of up to $95.2 million, of which approximately $90.2 million was funded at closing and the remaining availability of $5.0 million will be advanced upon satisfaction of certain conditions, including obtaining final temporary certificates of occupancy (the “TCO”) for the 40 East End Ave. Project. The Condo Loan matures in two years and bears interest at Libor plus 2.45%, which is payable monthly, and principal payments are required to be made from condominium sales proceeds. If principal paydowns from condominium sales proceeds do not reduce the outstanding principal balance of the Condo Loan to at least $81.0 million and $73.0 million as of December 19, 2020 and June 19, 2021, respectively, then the 40 East End Ave. Joint Venture will be required to make balloon payments in the amounts necessary to reach these thresholds. At closing, the 40 East End Ave. Joint Venture used a portion of the proceeds from the Condo Loan to (i) fully repay the then outstanding principal balance of $80.3 million plus accrued and unpaid interest of $0.2 million for the Mortgage Payable and (ii) redeem $9.5 million of Lightstone I’s Preferred Contributions. Additionally, $3.1 million of the additional $5.0 million of the remaining availability that were placed in a lender escrow to be released for payment of remaining estimated construction costs.
In connection with the refinancing, the 40 East End Ave. Joint Venture recognized a loss on the early extinguishment of debt of approximately $0.8 million during the year ended December 31, 2019, of which the Company’s proportionate share was approximately $0.3 million.
The Company’s Sponsor and its affiliates (collectively, the “40 East End Guarantors”) have provided certain guarantees with respect to the Condo Loan and the members have agreed to reimburse the 40 East End Guarantors for any balance that may become due under the guarantees (the “40 East End Guarantee”), of which the Company’s share is approximately 33.3%. The Company has determined that the fair value of its share of the 40 East End Guarantee is immaterial.
On December 26, 2019, the 40 East End Ave. Joint Venture redeemed an additional $3.5 million of Lightstone I’s Preferred Contributions. As a result, Lightstone I’s remaining outstanding Preferred Contributions were $17.0 million as of December 31, 2019. Subsequently, an additional $11.0 million of Lightstone I’s Preferred Contributions were redeemed on February 13, 2020 reducing Lightstone I’s Preferred Contributions to $6.0 million.
Subsequent to our acquisition through December 31, 2019, we have made an aggregate of $4.6 million (including $0.8 million during the year ended December 30, 2019) of additional capital contributions to the 40 East End Ave. Joint Venture.
As of December 31, 2019, construction of the 40 East End Ave. Project was substantially complete.
The following table represents the condensed income statement for the 40 East End Ave. Joint Venture:
For the Year Ended
For the Year Ended
(amounts in thousands)
December 31, 2019
December 31, 2018
Revenues
$
13,998
$
—
Cost of goods sold
15,133
—
Other expenses
—
952
Depreciation and amortization
534
724
Operating loss
(1,669)
(1,676)
Interest expense and other, net
(2,872)
—
Loss on debt extinguishment
(836)
—
Net loss
$
(5,377)
$
(1,676)
Company's share of net loss (33.3%)
$
(1,791)
$
(558)
The following table represents the condensed balance sheets for the 40 East End Ave. Joint Venture:
As of
As of
(amounts in thousands)
December 31, 2019
December 31, 2018
Real estate inventory
$
$
131,397
Cash and restricted cash
7,739
303
Other assets
637
229
Total assets
$
147,546
$
131,929
Mortgage payable, net
89,102
$
51,976
Other liabilities
2,404
9,145
Members’ capital
56,040
70,808
Total liabilities and members’ capital
$
$
131,929
Investment in Related Party
105‑109 W. 28 th Street Preferred Investment
The Company previously entered into an agreement, as amended, with various related party entities that provided for the Company to make aggregate preferred equity contributions (the “105‑109 W. 28th Street Preferred Investment”) of up to $37.0 million in an affiliate of its Sponsor (the “Moxy Developer”), which owns a parcel of land located at 105‑109 W. 28th Street, New York, New York on which it constructed a 343‑room Marriott Moxy hotel, which opened during February 2019. The 105‑109 W. 28th Street Preferred Investment was made pursuant to an instrument that entitled the Company to monthly preferred distributions at a rate of 12% per annum. The 105‑109 W. 28th Street Preferred Investment was classified as a held-to-maturity security and recorded at cost.
As of December 31, 2018, the 105‑109 W. 28th Street Preferred Investment had an outstanding balance of $37.0 million and was classified as an investment in related party on the consolidated balance sheets. The Company received aggregate repayments of $26.5 million during March 2019 and subsequently received the remaining outstanding balance of $10.5 million on August 26, 2019 and as a result, has fully redeemed the 105-109 W. 28th Street Preferred Investment. During the years ended December 31, 2019 and 2018, the Company recorded $1.6 million and $4.5 million, respectively, of investment income related to the 105‑109 W. 28 th Street Preferred Investment.
Subordinated Advances – Related Party
On March 18, 2016, the Company and the Sponsor entered into a subordinated unsecured loan agreement (the "Subordinated Agreement") pursuant to which the Sponsor made aggregate principal advances of $12.6 million to the Company through March 31, 2017 (the termination date of the Offering). The outstanding principal advances bear interest at a rate of 1.48%, but no interest or principal is due and payable to the Sponsor until holders of the Company’s Common Shares have received liquidation distributions equal to their respective net investments (defined as $10.00 per Common Share) plus a cumulative, pre-tax, non-compounded annual return of 8.0% on their respective net investments.
Distributions in connection with a liquidation of the Company initially will be made to holders of the Company's Common Shares until holders of its Common Shares have received liquidation distributions equal to their respective net investments plus a cumulative, pre-tax, non-compounded annual return of 8.0% on their respective net investments. Thereafter, only if additional liquidating distributions are available, the Company will be obligated to repay the outstanding principal advances and related accrued interest to the Sponsor. In the event that additional liquidation distributions are available after the Company repays its holders of common stock their respective net investments plus their 8% return on investment and then the outstanding principal advances and related accrued interest to the Sponsor, such additional distributions will be paid to holders of the Common Shares and the Sponsor as follows: 85.0% of the aggregate amount will be payable to holders of the Common Shares and the remaining 15.0% will be payable to the Sponsor.
The principal advances and the related interest are subordinate to all of the Company’s obligations as well as to the holders of its Common Shares in an amount equal to the shareholder’s net investment plus a cumulative, pre-tax, non-compounded annual return of 8.0% and only potentially payable in the event of a liquidation of the Company.
In connection with the termination of the Offering on March 31, 2017, the Company and the Sponsor simultaneously terminated the Subordinated Agreement and as a result, the Sponsor is no longer obligated to make any additional principal advances to the Company. Interest will continue to accrue on the outstanding principal advances and repayment, if any, of the principal advances and related accrued interest will still be made according to the terms of the Subordinated Agreement disclosed above.
As of both December 31, 2019 and 2018, approximately $12.6 million of principal advances were outstanding. The outstanding principal advances, together with the related accrued interest of $632,725 and $445,771 as of December 31, 2019 and 2018, respectively, are classified as Subordinated Advances – related party, a liability, on the consolidated balance sheets. During both of the years ended December 31, 2019 and 2018, the Company accrued $186,954 of interest expense on the principal advances. |
