| 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 provided further
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 the Company is 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,
2020 2019
Acquisition fee (1) $ - $ 304,195
Development cost reimbursement (2) 304,366 129,299
Asset management fees (general and administrative costs) 77,313 685,678
Total $ 381,679 $ 1,119,172
(1) Acquisition fees are 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.
(2)
Development costs that we reimburse our Advisor for are 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. Sponsor Investments in Unconsolidated Affiliated Real Estate Entities The entities listed below are or were 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 over these entities. A summary of the Company’s
investments in the unconsolidated affiliated real estate entities is as follows:
As of
Entity Date Acquired Ownership % December 31, December 31,
RP Maximus Cove, L.L.C. (the “Cove Joint Venture”) January 31, 2017 22.50 % $ - $ 13,846,410
40 East End Ave. Pref Member LLC ( “40 East End Ave. Joint Venture”) March 31, 2017 33.30 % 10,988,023 12,551,394
Total investments in unconsolidated affiliated real estate entities $ 10,988,023 $ 26,397,804 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 from January 31, 2017 through February 12, 2020 (see below). 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
was a non-managing interest. The Company determined that the Cove Joint Venture was a variable interest entity but the Company
was not the primary beneficiary. The Company accounted for its ownership interest in the Cove Joint Venture in accordance with
the equity method of accounting because it exerted significant influence over but did not control the Cove Joint Venture. The Company
commenced recording its allocated portion of profit/loss and cash distributions beginning as of January 31, 2017 with respect
to its 22.5% membership interest in the Cove Joint Venture. Subsequent to the Company’s acquisition
of its 22.5% membership interest in the Cove Joint Venture, it made an aggregate of $2.6 million of additional capital contributions
and received aggregate distributions of $0.9 million. All of these additional capital contributions were made and distributions
received in periods prior to 2020. 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 which resulted in a gain on the
disposition of investment in unconsolidated affiliated real estate entity of approximately $8.2 million during the first quarter
of 2020. As a result of the redemption of its 22.5% membership interest in the Cove Joint Venture on February 12, 2020, the Company
no longer has an ownership interest in the Cove Joint Venture. During August 2020, the Company received $0.1
million of additional proceeds related to the redemption of its membership interest in the Cove Joint Venture and recognized a
gain on the disposition of investment in unconsolidated affiliated real estate entity of $0.1 million during the third quarter
of 2020. As a result, the Company has recognized an aggregate gain on the disposition of investment in unconsolidated affiliated
real estate entity of approximately $8.3 million during the year ended December 31, 2020. 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 because the Company’s basis of its investment was in excess of the historical net book value of the Cove Joint
Venture. The Company’s additional basis was allocated to depreciable assets was 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 Period January 1 through February 12, For the Year Ended December 31,
Revenues $ 1,375 $ 16,129
Property operating expenses 430 5,057
General and administrative costs 13 119
Depreciation and amortization 960 11,498
Operating loss (28 ) (545 )
Loss on debt extinguishment - (1,521 )
Interest expense and other, net (652 ) (9,424 )
Net loss $ (680 ) $ (11,490 )
Company’s share of net loss (22.5%) $ (153 ) $ (2,585 )
Adjustment to depreciation and amortization expense (1) (5 ) (40 )
Company’s loss from investment $ (158 ) $ (2,625 ) The following table represents the condensed
balance sheets for the Cove Joint Venture:
As of
(amounts in thousands) December 31,
Real estate, at cost (net) $ 138,045
Cash and restricted cash 1,491
Other assets 1,141
Total assets $ 140,677
Mortgage payable, net $ 178,353
Other liabilities 1,339
Members’ deficit (1) (39,015 )
Total liabilities and members’ deficit $ 140,677
(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 the 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 the Company’s 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,
owns the 40 East End Avenue Project, a luxury residential 29-unit condominium project located at the corner of 81st Street and
East End Avenue in the Upper East Side neighborhood of New York City. The 40 East End Avenue Project received its final TCO in
March 2020 and through December 31, 2020, six of the condominium units have been sold. 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. On December 19, 2019, the 40 East End Ave. Joint
Venture refinanced the 40 East End Ave. Mortgage with a loan (the “Condo Loan”) from another financial institution
of $95.2 million, of which $90.2 million was initially funded at closing and the remaining $5.0 million was subsequently advanced
in April 2020. The Condo Loan matures on December 19, 2021, bears interest at LIBOR plus 2.45%, which is payable monthly, and requires
principal payments to be made at certain prescribed amounts from proceeds from the sales of condominium units. During 2020, the 40 East End Ave. Joint Venture
made aggregate principal payments of $5.3 million on the Condo Loan reducing its outstanding principal balance to $90.7 million
($89.9 million, net of deferred financing costs) as of December 31, 2020. These principal payments were made with proceeds
from the sales of condominium units totaling $3.3 million and a balloon payment of $2.0 million, of which the Company’s proportionate
share was approximately $0.7 million. Pursuant to the terms of the Condo Loan, the
40 East End Ave. Joint Venture was required to make a principal paydown on December 19, 2020 if the then outstanding principal
balance of the Condo Loan had not been paid down to at least $81.0 million as of that date. However, in lieu of a required principal
paydown of $11.7 million, the lender agreed to accept an immediate principal paydown of $2.0 million, which was paid on December
18, 2020, and allow for the remaining required principal paydown of $9.7 million to be paid during the first quarter of 2021, all
of which was paid in March 2021. The 40 East End Ave. Joint Venture used proceeds from the sales of condominium units which closed
in the first quarter of 2021 to make the remaining required principal paydown. The 40 East End Ave. Joint Venture will be required
to make another principal paydown on June 19, 2021 if principal paydowns from additional condominium sales proceeds do not reduce
the outstanding principal balance of the Condo Loan to at least $73.0 million as of that date. In connection with the closing of the Condo Loan
, the 40 East End Ave. Joint Venture used a portion of the initial loan proceeds to (i) fully repay the then outstanding principal
balance of $80.3 million plus accrued and unpaid interest of $0.2 million for the 40 East End Ave. Mortgage and (ii) redeem
$9.5 million of Lightstone I’s Preferred Contributions. Additionally, in connection with the refinancing, the 40 East End
Ave. Joint Venture recognized a loss on the early extinguishment of debt of $0.8 million during the fourth quarter of 2019, of
which the Company’s proportionate share was approximately $0.3 million. The Condo Loan is scheduled to mature on December
19, 2021. Because of the impact of the COVID-19 pandemic on the pace of condominium unit sales, the 40 East End Ave. Joint Venture
is engaged in discussions with the lender to extend the maturity date of the Condo Loan. However, there can be no assurance that
the 40 East End Ave. Joint Venture will be successful in such endeavors. 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
outstanding Preferred Contributions were $17.0 million as of December 31, 2019. 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, which remains outstanding as of December 31, 2020. Subsequent to the Company’s acquisition
through December 31, 2020, it has made an aggregate of $5.7 million (including $1.1 million and $0.8 million during the years
ended December 31, 2020 and 2019, respectively) of additional capital contributions to the 40 East End Ave. Joint Venture. The 40 East End Ave. Joint Venture Financial Information The following table represents the condensed
income statements for the 40 East End Ave. Joint Venture:
(amounts in thousands)
For the Year Ended December 31,
For the Year Ended December 31,
Revenues $ 15,448 $ 13,578
Cost of goods sold 14,347 12,593
Other expenses 2,630 2,120
Impairment of real estate inventory 2,288 -
Depreciation and amortization - 534
Operating loss (3,817 ) (1,669 )
Interest expense and other, net (4,239 ) (2,872 )
Loss on debt extinguishment - (836 )
Net loss $ (8,056 ) $ (5,377 )
Company’s share of net loss (33.3%) $ (2,683 ) $ (1,791 ) 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, December 31,
Real estate inventory $ 125,086 $ 139,170
Cash and restricted cash 4,446 7,739
Other assets 587 637
Total assets $ 130,119 $ 147,546
Mortgage payable, net $ 89,876 $ 89,102
Other liabilities 1,309 2,404
Members’ capital 38,934 56,040
Total liabilities and members’ capital $ 130,119 $ 147,546 Investment in Related Party 105-109 W. 28 th The Company previously
entered into an agreement, as amended, with various related party entities pursuant to which it made aggregate preferred
equity contributions (the “105-109 W. 28 th th
th 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. 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 be made according
to the terms of the Subordinated Agreement disclosed above. As of both December 31, 2020 and 2019, an
aggregate of approximately $12.6 million of principal advances have been funded, which along with the related accrued interest
of $819,679 and $632,725, respectively, are classified as Subordinated Advances – Related Party, a liability on the consolidated
balance sheets. December 31, 2020 and 2019, respectively, are classified as Subordinated Advances – related party, a
liability, on the consolidated balance sheets. During both of the years ended December 31, 2020 and 2019, the Company accrued
$186,954 of interest expense, on the principal advances. |
