| Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies As the Company has not yet commenced significant operations, some of the significant accounting policies may or may not be relevant during the period September 9, 2014 (date of inception) through June 30, 2015, but the Company anticipates that these significant accounting policies will apply in the future. The accompanying unaudited interim financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair statement of the results for the periods presented. The accompanying unaudited financial statements of the Lightstone Real Estate Income Trust Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. The 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 debt investments and securities 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. The unaudited statements of operations for interim periods are not necessarily indicative of results for the full year or any other period.
Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. All cash and cash equivalents are held in commercial paper and money market funds.
Real Estate-Related Debt Investments Real estate-related debt investments are intended to be held until maturity and accordingly, will be carried at cost, net of unamortized loan fees, origination fees, discounts, premiums and unfunded commitments. Real estate-related debt investments that are deemed impaired will be carried at amortized cost less a loan loss reserve, if deemed appropriate, which approximates fair value. Real estate-related debt investments where the Company does not intend to hold the investment for the foreseeable future or until the debt investment's expected payoff will be classified as held for sale and recorded at the lower of cost or estimated value. Interest income will be recognized on an accrual basis and any related premium, discount, origination costs and fees will be amortized over the life of the investment using the effective interest method. The amortization will be reflected as an adjustment to interest income in the Company's statements of operations. The amortization of a premium or accretion of a discount will be discontinued if such debt investment is reclassified to held for sale.
Real Estate Securities Real estate securities will be classified as available for sale on the acquisition date, which will be carried at fair value. Unrealized gains (losses) will be recorded as a component of accumulated other comprehensive income, or AOCI, in the Company's statements of stockholders' equity. However, the Company may elect the fair value option for certain of the available-for-sale securities, and as a result, any unrealized gains (losses) on such securities will be recorded in unrealized gain (loss) on investments in the Company's statements of operations. Interest income will be recognized using the effective interest method with any premium or discount amortized or accreted through earnings based on expected cash flow through the expected maturity date of the security. Changes to expected cash flow may result in a change to the yield, which will then be applied retrospectively for high-credit-quality securities that cannot be prepaid or otherwise settled in such a way that the holder would not recover substantially all the investment or prospectively for all other securities to recognize interest income.
Credit Losses and Impairment on Investments Real Estate-Related Debt Investments Real estate-related debt investments will be considered impaired when, based on current information and events, it is probable that the Company will not be able to collect principal and interest amounts due according to the contractual terms. The Company will assess the credit quality of the portfolio and adequacy of loan loss reserves on a quarterly basis, or more frequently as necessary. Significant judgment of management will be required in this analysis. The Company will consider the estimated net recoverable value of the debt investment 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 will be 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 debt investment, a loan loss reserve will be recorded with a corresponding charge to provision for loan losses. The loan loss reserve for each debt investment will be maintained at a level that is determined to be adequate by management to absorb probable losses. Income recognition will be suspended for a debt investment at the earlier of the date at which payments become 90 days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired debt investment is in doubt, all payments will be applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired debt investment is not in doubt, contractual interest will be recorded as interest income when received, under the cash basis method, until an accrual is resumed when the debt investment becomes contractually current and performance is demonstrated to be resumed. A debt investment will be written off when it is no longer realizable or is legally discharged. Real Estate Securities Real estate securities for which the fair value option is elected will not be evaluated for other-than-temporary impairment (OTTI'') as any change in fair value will be recorded in the Company's statements of operations. Realized losses on such securities will be reclassified to realized gain (loss) on investments and other as losses occur. Real estate securities for which the fair value option is not elected will be evaluated for OTTI quarterly. Impairment of a security is considered to be other-than-temporary when: (a) the holder has the intent to sell the impaired security; (b) it is more likely than not the holder will be required to sell the security; or (c) the holder does not expect to recover the entire amortized cost of the security. When a real estate security has been deemed to be other-than-temporarily impaired due to (a) or (b), the security will be written down to its fair value and an OTTI will be recognized in the statements of operations. In the case of (c), the security will be written down to its fair value and the amount of OTTI will then be bifurcated into: (i) the amount related to expected credit losses; and (ii) the amount related to fair value adjustments in excess of expected credit losses. The portion of OTTI related to expected credit losses will be recognized in the Company's statements of operations. The remaining OTTI related to the valuation adjustment will be recognized as a component of accumulated other comprehensive income in the Company's statements of stockholders '
Deferred Financing Costs The Company will capitalize initial direct costs associated with financing activities. The costs will be capitalized upon the execution of the loan and amortized over the initial term of the corresponding loan. Amortization of deferred loan costs will begin in the period during which the loan is originated using the effective interest method over the term of the loan.
Income Taxes As of June 30, 2015 and December 31, 2014, the Company is subject to federal income taxes as a regular (subchapter C) corporation. The Company intends to elect to be taxed as a REIT commencing with the taxable year ended December 31, 2015. 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 Additionally, even if the Company qualifies as a REIT, it may still be subject to some U.S. federal, state and local taxes on its income and property and to U.S. federal income taxes and excise taxes on its undistributed income. To maintain qualification as a REIT, the Company may engage in certain activities through a wholly owned taxable REIT subsidiary (TRS''). A TRS will be subject to U.S. federal, state, local and foreign income taxes.
Organization and Offering Costs Organization and offering costs include all the costs incurred in connection with the Offering. Organization and offering costs (other than selling commissions and dealer manager fees) of the Company may be paid by the Advisor on behalf of the Company. These costs include all costs and expenses paid by the Company in connection with its formation and the offering, including the Company's legal, accounting, printing, mailing and filing fees, charges of the escrow agent, reimbursements to the Dealer Manager and participating broker-dealers for due diligence expenses set forth in detailed and itemized invoices, amounts to reimburse the Advisor for its portion of the salaries of the employees of its affiliates who provide services to the Advisor, and other costs in connection with administrative oversight of such offering and the marketing process, such as preparing supplemental sales materials, holding educational conferences and attending retail seminars conducted by the Dealer Manager or participating broker-dealers. The Advisor has and will continue to advance organization and offering costs to the extent that the Company does not have the funds to pay such costs. Subsequent to June 12, 2015 (date of breaking escrow), the Company recorded any offering costs incurred from its inception through June 12, 2015 (date of breaking escrow) to stockholders' equity as a reduction to additional paid in capital (APIC) as well as any organization costs incurred from its inception through June 12, 2015 (date of breaking escrow) as a general and administrative cost and a liability to the Advisor for any costs paid by the Advisor. The Company recorded an adjustment to APIC in the amount of $ 0.8 1.6 1.6
Accounting for Derivative Financial Instruments 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 will record all derivative instruments at fair value on the balance sheet. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, will be considered cash flow hedges. The Company will formally document all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking each hedge transaction. The Company will periodically review the effectiveness of each hedging transaction, which involves estimating future cash flows. Cash flow hedges will be accounted for by recording the fair value of the derivative instrument on the balance sheet as either an asset or liability, with a corresponding amount recorded in AOCI within stockholder's equity. Amounts will be reclassified from AOCI to the statement of operations in the period or periods the hedged forecasted transaction affects earnings. Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, will be considered fair value hedges. The effective portion of the derivatives gain or loss will be initially reported as a component of AOCI and subsequently reclassified into earnings when the transaction affects earnings. The ineffective portion of the gain or loss will be reported in earnings immediately.
Stock-Based Compensation The Company intends to adopt a stock incentive plan to align the long-term financial interest of its independent directors, officers and employees (if it ever has employees), employees of the Advisor and other affiliates, certain of its consultants and certain consultants to the Advisor and other affiliates who, directly or indirectly, provide services to the Company, with those of the stockholders. Awards will be granted at the fair market value on the date of the grant with fair value estimated using the Black-Scholes-Merton option valuation model, which incorporates assumptions surrounding the volatility, dividend yield, risk-free interest rate, expected life, and exercise price as compared to the underlying stock price on the grant date. As stock-based compensation expense recognized in the statements of operations will be based on awards ultimately expected to vest, the amount of expense will be reduced for forfeitures estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The tax benefits associated with these stock-based payments will be classified as financing activities in the statement of cash flows as required under previous regulations.
Concentration of Risk The Company maintains its cash in bank deposit accounts, which, at times, may exceed U.S. 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 cash and cash equivalents.
Basic and Diluted Net Earnings per Common Share Net earnings per Common Share will be computed by dividing the net income/(loss) by the weighted average number of shares of common stock outstanding. Diluted income per Common Share takes into account the effect of dilutive instruments, such as stock options, but uses the average Common Share price for the period in determining the number of incremental Common Shares that are to be added to the weighted-average number of Common Shares outstanding.
New Accounting Pronouncements In May 2014, the Financial Accounting Standards Board Financial Accounting Standards Board (FASB) issued an accounting standards update that completes the joint effort by the FASB and International Accounting Standards Board to improve financial reporting by creating common revenue recognition guidance for GAAP and International Financial Reporting Standards. The update applies to all companies that enter into contracts with customers to transfer goods or services and is effective for us for interim and annual reporting periods beginning after December 15, 2016. Early application is not permitted and companies have the choice to apply the update either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying the update at the date of initial application (January 1, 2017) and not adjusting comparative information. On July 9, 2015, the FASB decided to delay the effective date of the new revenue standard by one year. The Company is currently evaluating the requirements and impact of this update on its financial statements. In April 2015, the FASB issued an accounting standards update to simplify the presentation of debt issuance costs. This update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This new guidance will be effective for the Company beginning January 1, 2016. The Company is currently evaluating the impact of this standard on the Company's financial statements. 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 operations. |
