| Related Party Transactions and Other Arrangements | 4. Related Party Transactions and Other Arrangements The Company had an agreement with the Dealer Manager for services related to the Offering which was terminated on March 31, 2017. In addition, the Company has agreements with the Advisor and its affiliates to pay certain fees, in exchange for services performed by these entities. The following table summarizes all the compensation and fees the Company paid or may pay to the Dealer Manager or to the Advisor or its affiliates, including amounts to reimburse their costs in providing services. Organization and Offering Stage Fees Amount Selling Commissions The Dealer Manager received selling commissions in an amount of up to 7% of the gross proceeds in the Primary Offering. From the Company’s inception through March 31, 2017 (the termination date of the Offering), the Company incurred $5.1 million of selling commissions. Dealer Manager Fee The Dealer Manager received a dealer manager fee in an amount of up to 3% of gross proceeds in the Primary Offering. From the Company’s inception through March 31, 2017 (the termination date of the Offering), the Company incurred $2.5 million of dealer manager fees. Organization and Offering Expenses The Company reimbursed the Advisor for all organization and offering expenses that it funded in connection with the Offering, other than the selling commissions and dealer manager fee. From the Company’s inception through March 31, 2017 (the termination date of the Offering), approximately $3.2 million of organization and offering costs were incurred. 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. Operational Stage Fees Amount 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. Liquidation/Listing Stage Fees Amount Subordinated Fee upon Termination or Non- Renewal of the Advisory Agreement Upon termination or non-renewal of the advisory agreement with or without cause, including for poor performance by the Advisor, the Advisor will be entitled to receive a fee equal to 15% of the amount by which the sum of the market value of the Company’s investments (as of the date of termination or non-renewal) plus distributions attributable to net sales proceeds paid to 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; provided, however , that the subordinated fee upon termination or non-renewal of the advisory agreement will not be paid unless and until holders of Common Shares receive a return of the aggregate capital contributed by them plus 8% annually thereon. 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, 2018 2017 Acquisition fee (1) $ - $ 573,750 Asset management fees (general and administrative costs) 627,028 574,072 Total $ 627,028 $ 1,147,822 (1) The acquisition fee for the Company’s investment in the Cove Joint Venture (see below) of $573,750 during the year ended December 31, 2017 was capitalized and included in its investments in unconsolidated affiliated real estate entities on the consolidated balance sheets. From the Company’s inception through the termination of the Offering on March 31, 2017, it incurred selling commissions and dealer manager fees which were payable to the Dealer Manager pursuant to various agreements. These selling commissions and dealer manager fees and other third-party offering costs such as registration fees, due diligence fees, marketing costs, and professional fees were accounted for as a reduction against additional paid-in capital as costs were incurred. Organizational costs were expensed as general and administrative costs. During the three months ended March 31, 2017, the Company incurred approximately $2.3 million of selling commissions and deal manager fees and less than $0.1 million of other offering costs. The Company has not incurred any of these costs subsequent to the termination of the Offering. 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, 2018 December 31, 2017 RP Maximus Cove, L.L.C. (the "Cove Joint Venture") January 31, 2017 22.5 % $ 17,214,789 $ 17,805,871 40 East End Ave. Pref Member LLC ( “40 East End Ave. Joint Venture”) March 31, 2017 33.3 % 13,569,066 12,911,770 Total investments in unconsolidated affiliated real estate entities $ 30,783,855 $ 30,717,641 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 Company’s 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, which consisted of $80.0 million of cash and $175.0 million of proceeds from a loan from a financial institution. The Cove Joint Venture owns and operates The Cove at Tiburon (the “Cove”), a multi-family complex consisting of 281-units, or 289,690 square feet, contained within 32 apartment buildings over 20.1 acres originally constructed in 1967, located in Tiburon, California. In connection with the acquisition, the Company paid the Advisor an acquisition fee of approximately $0.6 million, equal to 1.0% of the Company’s pro-rata share of the contractual purchase price which is reflected in the Company’s carrying value which is included in investments in unconsolidated affiliated real estate entities on the consolidated balance sheets. 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 beginning as of January 31, 2017 with respect to its membership interest of 22.5% in the Cove Joint Venture. During the year ended December 31, 2018, the Company made additional capital contributions of $2.2 million to the Cove Joint Venture. In connection with the closing of the Cove Transaction, the Cove Joint Venture simultaneously entered into a $175.0 million loan (the “Loan”) initially scheduled to mature on January 31, 2020 with two, one-year extension options, subject to certain conditions. The Loan requires monthly interest payments through its maturity date. The Loan bears interest at Libor plus 3.85% through its initial maturity and Libor plus 4.15% during each of the extension periods. The Loan is collateralized by the Cove and an affiliate of the Company’s Sponsor (the “Guarantor”) has guaranteed the Cove Joint Venture‘s obligation to pay the outstanding balance of the Loan up to approximately $43.8 million (the “Loan Guarantee”). The members have agreed to reimburse the Guarantor for any balance that may become due under the Loan Guarantee, of which the Company’s share is up to approximately $10.9 million. Starting in 2013, the Cove has been undergoing an extensive refurbishment which was substantially completed in 2018. The members have used all of the remaining proceeds from the Loan and also invested additional capital as necessary for the refurbishment. The Guarantor has provided an additional guarantee of up to approximately $13.4 million (the “Refurbishment Guarantee”) to provide any necessary funds to complete the remaining renovations as defined in the Loan. The members have agreed to reimburse the Guarantor for any balance that may become due under the Refurbishment Guarantee, of which the Company’s share is up to approximately $3.3 million. The Company has determined that the fair value of both the Loan Guarantee and the Refurbishment Guarantee are immaterial. The Cove Joint Venture Condensed Financial Information The Company’s carrying value of its interest in the Cove Joint Venture differs 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 is 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: (amounts in thousands) For the Year Ended December 31, 2018 For the Period January 31, 2017 (date of investment) through December 31, 2017 Revenues $ 14,604 $ 12,291 Property operating expenses 4,995 4,300 General and administrative costs 169 249 Depreciation and amortization 10,211 8,743 Operating loss (771 ) (1,001 ) Interest expense and other, net (11,002 ) (8,578 ) Net loss $ (11,773 ) $ (9,579 ) Company's share of net loss (22.5%) $ (2,649 ) $ (2,155 ) Adjustment to depreciation and amortization expense (1) (97 ) (659 ) Company's loss from investment $ (2,746 ) $ (2,814 ) The following table represents the condensed balance sheets for the Cove Joint Venture: As of As of (amounts in thousands) December 31, 2018 December 31, 2017 Real estate, at cost (net) $ 148,441 $ 149,727 Cash and restricted cash 2,138 2,538 Other assets 1,810 1,541 Total assets $ 152,389 $ 153,806 Mortgage payable, net $ 174,098 $ 173,534 Other liabilities 2,776 2,830 Members' deficit (1) (24,485 ) (22,558 ) Total liabilities and members' deficit $ 152,389 $ 153,806 (1) The adjustment to depreciation and amortization expense relates 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”), pursuant to which it acquired 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 subsequently made additional capital contributions aggregating $2.6 million to the 40 East End Ave. Joint Venture during 2017. During the year ended December 31, 2018, the Company made additional capital contributions of $1.2 million to the 40 East End Ave. Joint Venture. 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 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 the Company’s Sponsor, has 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, acquired a parcel of land located at the corner of 81 st As of December 31, 2018, the 40 East End Ave. Project was still under development but has incurred certain selling, general and administrative costs; including marketing/advertising costs and staffing, rent and other costs, and depreciation and amortization expense of furnishing and fixtures related to an off-site sales office, which opened in May 2018. To date, such costs have been fully funded under the Mortgage Payable. The following table represents the income statement for the 40 East End Ave. Joint Venture: (amounts in thousands) For the Year Ended December 31, 2018 Selling, general and administrative costs $ 952 Depreciation and amortization 724 Net loss $ (1,676 ) Company's share of net loss (33.3%) $ (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, 2018 December 31, 2017 Real estate inventory $ 131,397 $ 93,228 Cash and restricted cash 303 765 Other assets 229 227 Total assets $ 131,929 $ 94,220 Mortgage payable, net $ 51,976 $ 20,792 Other liabilities 9,145 4,593 Members' capital 70,808 68,835 Total liabilities and members' capital $ 131,929 $ 94,220 Investment in Related Party 105-109 W. 28 th Street Preferred Investment The Company has 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. 28 th th th th As of both December 31, 2018 and 2017, the 105-109 W. 28 th th On March 25, 2019, the Company received a repayment of $13.0 million on its Preferred Investment. Subordinated Advances – Related Party On March 18, 2016, the Company and its Sponsor entered into the Subordinated Agreement, a subordinated unsecured loan agreement, pursuant to which the Sponsor made aggregate principal advances of $12.6 million 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 or 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 its 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, as described in the Subordinated Agreement. 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 under the Subordinated Agreement and accrued interest to its Sponsor, such additional distributions will be paid to holders of its Common Shares and its Sponsor: 85.0% of the aggregate amount will be payable to holders of the Company’s 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. As a result of the termination, 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, 2018 and 2017 $12.6 million of principal advances were outstanding. The outstanding principal advances, together with the related accrued interest of $445,771 and $258,817 as of December 31, 2018 and 2017, respectively, are classified as Subordinated Advances – related party, a liability, on the consolidated balance sheets. During both of the years ended December 31, 2018 and 2017, the Company accrued $186,954 of interest expense on the principal advances. |
