Exhibit 99.2
LIGHTSTONE MEMBER II LLC
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2008 AND 2007
LIGHTSTONE MEMBER II LLC AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2008 AND 2007
TABLE OF CONTENTS
Page No.
| Independent Auditors’ Report | 1 |
| | |
| Consolidated Balance Sheets | 2 |
| | |
| Consolidated Statements of Operations | 3 |
| | |
| Consolidated Statements of Changes in Members’ Deficit | 4 |
| | |
| Consolidated Statements of Cash Flows | 5 |
| | |
| Notes to Consolidated Financial Statements | 6 – 13 |
INDEPENDENT AUDITORS’ REPORT
To the Members
Lightstone Member II LLC and Subsidiaries
We have audited the accompanying consolidated balance sheets of Lightstone Member II LLC and Subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of operations, changes in members’ deficit and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lightstone Member II LLC and Subsidiaries as of December 31, 2008 and 2007, and the results of their operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ Cornerstone Accounting Group LLP
Roseland, New Jersey
March 25, 2009
| LIGHTSTONE MEMBER II LLC AND SUBSIDIARIES | |
| CONSOLIDATED BALANCE SHEETS | |
| DECEMBER 31, 2008 AND 2007 | |
| | |
| | | | | | | |
| | | | | | | |
| ASSETS | |
| | | 2008 | | | 2007 | |
| | | | | | | |
| Investments in Real Estate, net | | $ | 61,751,076 | | | $ | 62,913,297 | |
| | | | | | | | | |
| Other Assets | | | | | | | | |
| Cash and cash equivalents | | | 440,107 | | | | 699,014 | |
| Escrow deposits | | | 1,613,699 | | | | 1,875,440 | |
| Rents and other receivables, net of allowance of $671,186 | | | | | | | | |
| and $352,340 in 2008 and 2007, respectively | | | 1,307,913 | | | | 1,935,687 | |
| In place lease value, net | | | 495,430 | | | | 795,299 | |
| Acquired lease rights, net | | | 420,117 | | | | 654,114 | |
| Deferred lease costs, net | | | 622,333 | | | | 758,381 | |
| Prepaid expenses | | | 92,524 | | | | 226,020 | |
| | | | | | | | | |
| | | $ | 66,743,199 | | | $ | 69,857,252 | |
| | | | | | | | | |
| LIABILITIES AND MEMBERS’ DEFICIT | |
| | | | | | | | | |
| Liabilities | | | | | | | | |
| Mortgage note payable | | $ | 39,061,078 | | | $ | 39,500,000 | |
| Notes payable – related party | | | 35,899,387 | | | | 29,294,413 | |
| Interest payable | | | 202,986 | | | | 174,078 | |
| Deferred revenue | | | 348,924 | | | | 495,098 | |
| Accounts payable, accrued expenses and other liabilities | | | 2,598,648 | | | | 3,387,979 | |
| Acquired lease obligations, net | | | 271,547 | | | | 493,708 | |
| Due to affiliates | | | 3,992,813 | | | | 3,871,466 | |
| | | | 82,375,383 | | | | 77,216,742 | |
| | | | | | | | | |
| | | | | | | | | |
| Members’ Deficit | | | (15,632,184 | ) | | | (7,359,490 | ) |
| | | | | | | | | |
| | | $ | 66,743,199 | | | $ | 69,857,252 | |
| | | | | | | | | |
| The accompanying notes are an integral part of these consolidated financial statements. | |
| LIGHTSTONE MEMBER II LLC AND SUBSIDIARIES | |
| CONSOLIDATED STATEMENTS OF OPERATIONS | |
| YEARS ENDED DECEMBER 31, 2008 AND 2007 | |
| | |
| | | | | | | |
| | | | | | | |
| | | 2008 | | | 2007 | |
| Revenues | | | | | | |
| Rental | | $ | 6,720,711 | | | $ | 6,979,761 | |
| Tenant reimbursements | | | 2,770,927 | | | | 2,714,104 | |
| Interest and other income | | | 138,241 | | | | 117,650 | |
| | | | 9,629,879 | | | | 9,811,515 | |
| | | | | | | | | |
| Expenses | | | | | | | | |
| Rental property operating and maintenance expenses | | | 5,975,458 | | | | 5,237,346 | |
| Real estate taxes | | | 732,675 | | | | 643,168 | |
| Loss on sale of real estate asset | | | 38,533 | | | | - | |
| Interest expense | | | 6,026,444 | | | | 5,849,589 | |
| Depreciation and amortization | | | 4,570,001 | | | | 2,846,790 | |
| General and administrative | | | 432,962 | | | | 475,870 | |
| | | | 17,776,073 | | | | 15,052,763 | |
| | | | | | | | | |
| Net Loss | | $ | (8,146,194 | ) | | $ | (5,241,248 | ) |
| | | | | | | | | |
| The accompanying notes are an integral part of these consolidated financial statements. | |
| LIGHTSTONE MEMBER II LLC AND SUBSIDIARIES | |
| CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ DEFICIT | |
| YEARS ENDED DECEMBER 31, 2008 AND 2007 | |
| | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Presidential | | | David | | | Harold | | | | |
| | | Realty Corp. | | | Lichtenstein | | | Rubin | | | Total | |
| | | | | | | | | | | | | |
| Balance at January 1, 2007 | | $ | (1,326,658 | ) | | $ | (851,929 | ) | | $ | 76,845 | | | $ | (2,101,742 | ) |
| | | | | | | | | | | | | | | | | |
| Distributions | | | - | | | | - | | | | (16,500 | ) | | | (16,500 | ) |
| | | | | | | | | | | | | | | | | |
| Net loss | | | (1,519,962 | ) | | | (3,668,874 | ) | | | (52,412 | ) | | | (5,241,248 | ) |
| | | | | | | | | | | | | | | | | |
| Balance at December 31, 2007 | | | (2,846,620 | ) | | | (4,520,803 | ) | | | 7,933 | | | | (7,359,490 | ) |
| | | | | | | | | | | | | | | | | |
| Distributions | | | - | | | | - | | | | (126,500 | ) | | | (126,500 | ) |
| | | | | | | | | | | | | | | | | |
| Net loss | | | (2,362,396 | ) | | | (5,702,336 | ) | | | (81,462 | ) | | | (8,146,194 | ) |
| | | | | | | | | | | | | | | | | |
| Balance at December 31, 2008 | | $ | (5,209,016 | ) | | $ | (10,223,139 | ) | | $ | (200,029 | ) | | $ | (15,632,184 | ) |
| | | | | | | | | | | | | | | | | |
| The accompanying notes are an integral part of these consolidated financial statements. | | | | | |
| LIGHTSTONE MEMBER II LLC AND SUBSIDIARIES | |
| CONSOLIDATED STATEMENTS OF CASH FLOWS | |
| YEARS ENDED DECEMBER 31, 2008 AND 2007 | |
| | |
| | | | | | | |
| | | 2008 | | | 2007 | |
| Cash Flows From Operating Activities: | | | | | | |
| Net loss | | $ | (8,146,194 | ) | | $ | (5,241,248 | ) |
| Adjustments to reconcile net loss to net cash | | | | | | | | |
| from operating activities: | | | | | | | | |
| Depreciation and amortization | | | 4,570,001 | | | | 2,846,790 | |
| Loss on sale of real estate asset | | | 38,533 | | | | - | |
| Net change in revenue related to acquired lease rights/obligations | | | 11,836 | | | | 101,109 | |
| Bad debt allowance | | | 318,846 | | | | 265,974 | |
| Interest accrued into note payable - related | | | 2,828,710 | | | | 1,761,086 | |
| Rents and other receivables | | | 308,928 | | | | (290,507 | ) |
| Prepaid expenses | | | 133,462 | | | | (128,960 | ) |
| Accounts payable, accrued expenses and other liabilities | | | (398,186 | ) | | | 365,280 | |
| Interest expense payable | | | 28,908 | | | | (22,654 | ) |
| Due to affiliates | | | 121,347 | | | | 3,042,639 | |
| Deferred revenue | | | (146,174 | ) | | | 220,930 | |
| Net cash provided by (used in) operating activities | | | (329,983 | ) | | | 2,920,439 | |
| | | | | | | | | |
| Cash Flows From Investing Activities: | | | | | | | | |
Escrow deposits, net | | | 261,741 | | | | 66,794 | |
| Deferred leasing costs | | | 21,088 | | | | (839,446 | ) |
| Accounts payable, accrued expenses and other liabilities | | | (391,143 | ) | | | (704,032 | ) |
| Sales proceeds from sale of real estate asset | | | 411,467 | | | | - | |
| Additions to properties | | | (3,367,546 | ) | | | (13,237,423 | ) |
| Net cash used in investing activities | | | (3,064,393 | ) | | | (14,714,107 | ) |
| | | | | | | | | |
| Cash Flows From Financing Activities: | | | | | | | | |
| Repayment of mortgage note payable | | | (438,922 | ) | | | - | |
| Proceeds from notes payable – related party | | | 3,776,264 | | | | 16,562,870 | |
| Repayment of notes payable – related party | | | - | | | | (4,425,685 | ) |
| Deferred financing costs | | | (75,373 | ) | | | (27,900 | ) |
| Member distributions | | | (126,500 | ) | | | (16,500 | ) |
| Net cash provided by financing activities | | | 3,135,469 | | | | 12,092,785 | |
| | | | | | | | | |
| Net change in cash and cash equivalents | | | (258,907 | ) | | | 299,117 | |
| | | | | | | | | |
| Cash and cash equivalents, beginning of year | | | 699,014 | | | | 399,897 | |
| | | | | | | | | |
| Cash and cash equivalents, end of year | | $ | 440,107 | | | $ | 699,014 | |
| | | | | | | | | |
| Supplemental Disclosures of Cash Flow Information: | | | | | | | | |
| Cash paid during the years ended for: | | | | | | | | |
| Interest | | $ | 3,217,884 | | | $ | 4,075,849 | |
| | | | | | | | | |
| The accompanying notes are an integral part of these consolidated financial statements. | |
LIGHTSTONE MEMBER II LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND 2007
| 1. | ORGANIZATION AND DESCRIPTION OF BUSINESS |
Lightstone Member II LLC (“Lightstone”) was formed under the laws of the Commonwealth of Delaware on December 1, 2004. The purpose of Lightstone is to acquire, own, develop and manage retail malls. Lightstone Member II LLC and Subsidiaries (the “Company”) own the following retail malls as of December 31, 2008:
| Property | | | | Approximate | | | | Occupancy at | |
| Name | | Location | | Square Feet | | Ownership | | Dec. 31, 2008 | |
| | | | | | | | | | |
| Shawnee Mall | | Shawnee, OK | | | 444,000 | | Fee | | | 71 | % |
| Brazos Outlet Center | | Lake Jackson, TX | | | 698,000 | | Fee | | | 76 | % |
| | | | | | 1,142,000 | | | | | | |
| | As of December 31, 2008, members of Lightstone and their respective percentage interests are as follows: |
| | | Ownership | |
| | | Interests | |
| | | | |
| Presidential Realty Corp. | | | 29 | % |
| David Lichtenstein (Managing Member) | | | 70 | % |
| Harold Rubin | | | 1 | % |
| b. | Cash Distribution, Profit and Loss Allocations |
Lightstone shall continue to operate until dissolved per the operating agreement. The liability of each of the members is limited to the amount of capital contributed.
Distributions of proceeds shall be distributed to the members at the discretion of the Managing Member, subject to the terms and conditions of all indebtedness of Lightstone; provided that cash flow shall be distributed not less than annually and capital proceeds shall be distributed not later than forty-five days from the closing of the transaction giving rise to such capital proceeds.
Distributions of cash flow shall be made to the members as follows:
| | (a) | First, to the Managing Member and its affiliate, Cedar Asset Management, LLC (or Harold Rubin), until the Managing Member and its affiliate (or Harold Rubin) have received an aggregate amount equal to an accrued return of 11% per annum (“Preferred Return”) on the Managing Member’s and affiliate’s unreturned capital contribution. |
| | (b) | Then, to the members in accordance with their respective ownership interests. |
LIGHTSTONE MEMBER II LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND 2007
| 1. | ORGANIZATION AND DESCRIPTION OF BUSINESS (Continued) |
| b. | Cash Distribution, Profit and Loss Allocations (continued) |
| | Capital proceeds shall be distributed to the members as follows: |
| | (a) | First, to the Managing Member and its affiliates, until the Managing Member and its affiliates have received an aggregate amount equal to an accrued return of 11% per annum on the Managing Member’s and its affiliates’ unreturned capital contribution. |
| | (b) | Then, to the Managing Member and its affiliates, until the Managing Member and its affiliates have received an aggregate amount equal the Managing Member’s and its affiliates’ capital contribution. |
| | (c) | Then, to the members in accordance with their respective ownership interests. |
| | c. | Allocation of Profits and Losses |
For financial reporting purposes, income is allocated based upon the cash flow distribution formula above. Losses are allocated pro-rata based upon ownership interests.
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
| b. | Principles of Consolidation |
The consolidated financial statements include the accounts of Lightstone Member II and its wholly-owned subsidiaries, Shawnee Mall LLC and Brazos Outlet Mall LLC. All material intercompany balances and transactions have been eliminated in consolidation.
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. They also affect reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the carrying amount of investments in real estate, valuation of receivables and the allocation of purchase price to acquired lease rights and obligations. Actual results could differ from those estimates.
LIGHTSTONE MEMBER II LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND 2007
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
| d. | Cash and Cash Equivalents |
For purposes of the statement of cash flows, the Company considers short-term investments with maturities of 90 days or less when purchased to be cash equivalents. The Company maintains cash accounts at financial institutions, which are insured up to a maximum of $250,000. At various times during the year, balances exceeded the federally insured limit. Due to the credit quality of the financial institutions, such credit risk is considered, by the Company, to be minimal.
| e. | Revenue Recognition and Tenant Receivables |
Base rental revenues from rental retail properties are recognized on a straight-line basis over the noncancelable terms of the related leases, which are all accounted for as operating leases. “Percentage rent” or rental revenue which is based upon a percentage of the sales recorded by the Company’s tenants, is recognized in the period in which the tenants achieve their specified threshold per their lease agreements. These amounts are included in rental revenues in the accompanying consolidated statements of operations.
Rental income is also recognized in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, whereby the amortization of acquired favorable leases and acquired unfavorable leases is recognized as a reduction of or an addition to base rental income, respectively, over the terms of the respective leases. The net amount included in base rental income for the years ended December 31, 2008 and 2007 are as follows:
| | | 2008 | | | 2007 | |
| | | | | | | |
| Shawnee Mall | | $ | (20,977 | ) | | $ | (31,843 | ) |
| Brazos Outlets Center | | | 9,141 | | | | (69,266 | ) |
| | | | | | | | | |
| | | $ | (11,836 | ) | | $ | (101,109 | ) |
Reimbursements from tenants related to real estate taxes, insurance and other shopping center operating expenses are recognized as revenue, based on a predetermined formula, in the period the applicable costs are incurred. Lease termination fees are recognized when the related leases are canceled, the tenant surrenders the space, and the Company has no continuing obligation to provide services to such former tenants.
The Company provides an allowance for doubtful accounts against the portion of tenant receivables which is estimated to be uncollectible. Management of the Company reviews its allowance for doubtful accounts monthly. Balances that are past due over 90 days and over a specified amount are reviewed individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered doubtful.
LIGHTSTONE MEMBER II LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND 2007
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Deferred leasing commissions, acquired in-place lease value, and other direct costs associated with the acquisition of tenants are capitalized and amortized on a straight-line basis over the terms of the related leases. Loan costs are capitalized and amortized to interest expense over the term of the related loan.
| g. | Real Estate and Depreciation |
Real estate is stated at historical cost less accumulated depreciation. The building and improvements thereon are depreciated on the straight-line basis over an estimated useful life of 40 years. Tenant improvements are depreciated on the straight-line basis over the shorter of the lease term or their estimated useful life. Equipment is depreciated on the straight-line basis over estimated useful lives of 5 to 7 years.
Improvements and replacements are capitalized when they extend the useful life or improve the efficiency of the asset. Repairs and maintenance are charged to expense as incurred.
| h. | Impairment of Long-Lived Assets |
Management assesses whether there has been impairment in the value of long-lived assets whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount to the future net cash flows, undiscounted and without interest, expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
| i. | Purchase Accounting for Acquisition of Interests in Real Estate Entities |
Management allocated the purchase price of properties to tangible and identified intangible assets acquired based on its fair value in accordance with the provisions of SFAS No. 141, Business Combinations. The fair value of the tangible assets of an acquired property (which includes land, building, and improvements) was determined by valuing the properties as if vacant, and the “as-if-vacant” value was then allocated to land, building and improvements based on management’s determination of the relative fair values of these assets. Management determined the “as-if-vacant” fair value of properties using methods similar to those used by independent appraisers.
Factors considered by management in performing these analyses included an estimate of carrying costs to execute similar leases. In estimating carrying costs, management included real estate taxes, insurance and other operating expenses and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Management also estimated costs to execute similar leases including leasing commissions, legal and other related costs.
LIGHTSTONE MEMBER II LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND 2007
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
| i. | Purchase Accounting for Acquisition of Interests in Real Estate Entities (continued) |
In allocating the fair value of the identified intangible assets and liabilities of acquired properties, above-market and below-market in-place lease values were recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease values (included in the acquired lease rights in the accompanying consolidated balance sheets) are amortized as a reduction of rental income over the remaining non-cancelable terms of the respective leases. The capitalized below-market lease values (presented as acquired lease obligations in the accompanying consolidated balance sheets) are amortized as an increase to rental income over the initial term and any fixed rate renewal periods in the respective leases.
The aggregate value of other acquired intangible assets, consisting of in-place leases and tenant relationships, was measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates over (ii) the estimated fair value of the property as if vacant, determined as set forth above. This aggregate value was allocated between in-place lease values and tenant relationships based on management’s evaluation of the specific characteristics of each tenant’s lease; however, the value of tenant relationships has not been separated from in-place lease value because such value and its consequence to amortization expense is immaterial for these particular acquisitions. The value of in-place leases exclusive of the value of above-market and below-market in-place leases is amortized to expense over the remaining non-cancelable periods of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written off.
The Company is a limited liability company which elected to be treated as a partnership for income tax purposes and is, therefore, not subject to income taxes at the entity level. All income and losses pass through to the members and are reported by them individually for income tax purposes.
Certain reclassifications have been made to the 2007 financial statement presentation to correspond to the current year’s format.
Escrow deposits include funds and other restricted deposits required in conjunction with the Company’s loan agreements. Such amounts are to be used for specific purposes, such as the payment of real estate taxes, insurance and capital improvements.
LIGHTSTONE MEMBER II LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND 2007
At December 31, 2008 and 2007, investments in real estate consists of the following:
| | | 2008 | | | 2007 | |
| | | | | | | |
| Land | | $ | 6,635,593 | | | $ | 7,085,593 | |
| Buildings and improvements | | | 46,423,982 | | | | 47,393,346 | |
| Tenant improvements | | | 15,840,139 | | | | 13,876,645 | |
| | | | 68,899,714 | | | | 68,355,584 | |
| Accumulated depreciation | | | (7,148,638 | ) | | | (5,442,287 | ) |
| | | $ | 61,751,076 | | | $ | 62,913,297 | |
Lease intangibles and the value of assumed lease obligations were comprised as follows:
| | | 2008 | |
| | | | | | | | | Acquired | | | | | | Acquired | |
| | | Lease | | | Leases in | | | Lease | | | | | | Lease | |
| | | Commissions | | | Place | | | Rights | | | Total | | | Obligations | |
| | | | | | | | | | | | | | | | |
| Cost | | $ | 862,594 | | | $ | 2,376,476 | | | $ | 1,589,107 | | | $ | 4,828,177 | | | $ | (1,328,347 | ) |
| Accumulated | | | | | | | | | | | | | | | | | | | | |
| amortization | | | (240,261 | ) | | | (1,881,046 | ) | | | (1,168,990 | ) | | | (3,290,297 | ) | | | 1,056,800 | |
| | | $ | 622,333 | | | $ | 495,430 | | | $ | 420,117 | | | $ | 1,537,880 | | | $ | (271,547 | ) |
| | | 2007 | |
| | | | | | | | | Acquired | | | | | | Acquired | |
| | | Lease | | | Leases in | | | Lease | | | | | | Lease | |
| | | Commissions | | | Place | | | Rights | | | Total | | | Obligations | |
| | | | | | | | | | | | | | | | |
| Cost | | $ | 892,045 | | | $ | 2,818,755 | | | $ | 1,850,970 | | | $ | 5,561,770 | | | $ | (2,052,018 | ) |
| Accumulated | | | | | | | | | | | | | | | | | | | | |
| amortization | | | (133,664 | ) | | | (2,023,456 | ) | | | (1,196,856 | ) | | | (3,353,976 | ) | | | 1,558,310 | |
| | | $ | 758,381 | | | $ | 795,299 | | | $ | 654,114 | | | $ | 2,207,794 | | | $ | (493,708 | ) |
LIGHTSTONE MEMBER II LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND 2007
| 5. | LEASE INTANGIBLES (Continued) |
The estimated aggregate amortization expense or rental revenue adjustment for lease intangibles for the five succeeding years is as follows:
| | | | | | | | | Acquired | | | | | | Acquired | |
| | | Lease | | | Leases in | | | Lease | | | | | | Lease | |
| | | Commission(1) | | | Place (1) | | | Rights (2) | | | Total | | | Obligations(2) | |
| | | | | | | | | | | | | | | | |
| 2009 | | $ | 105,288 | | | $ | 148,563 | | | $ | 159,767 | | | $ | 413,618 | | | $ | (67,240 | ) |
| 2010 | | | 85,556 | | | | 103,673 | | | | 101,114 | | | | 290,343 | | | | (55,943 | ) |
| 2011 | | | 79,860 | | | | 89,999 | | | | 90,341 | | | | 260,200 | | | | (46,559 | ) |
| 2012 | | | 64,524 | | | | 67,425 | | | | 51,990 | | | | 183,939 | | | | (45,493 | ) |
| 2013 | | | 59,283 | | | | 34,210 | | | | 15,726 | | | | 109,219 | | | | (21,127 | ) |
| Thereafter | | | 227,822 | | | | 51,560 | | | | 1,179 | | | | 280,561 | | | | (35,185 | ) |
| | | | | | | | | | | | | | | | | | | | | |
(1) Charged to amortization expense. |
(2) Recorded as an adjustment to base rental revenues. |
The mortgage note payable to Wachovia Bank is due in January 2010, The note is payable in monthly installments of interest only at the 30 day LIBOR plus 280 basis points with the LIBOR rate not to be less that 2.36%. The interest rate at December 31, 2008 was 5.16%. The note is secured by the real estate, assignment of leases, rent and security deposits.
Under the terms of the subsequent renewal of debt in January 2009, which extended the due date to January 2010, the lender exercised its right to retain the cash flows of the property, pursuant to the provisions in the original mortgage note as the Company’s failed to meet the debt service coverage requirement.
| 7. | NOTES PAYABLE – RELATED PARTY |
Lightstone borrowed $7,835,000 from Presidential Realty Corp., a member of the Company. This loan bears interest at the rate of 11% per annum payable in monthly installments and matures on December 23, 2014. The loan is collateralized by Lightstone’s membership interest in each of the subsidiaries and is subject to the first mortgage lien to Wachovia Bank. The loan has a prepayment penalty of 3% of principal. Subsequent to the date of these financial statements Lightstone defaulted on the loan by failing to pay the monthly interest installment. An agreement was reached whereby, along with certain other provisions, the accrued interest on the loan is personally guaranteed by Mr. Lichtenstein.
The Company incurred interest expense of $876,214 and $873,820 in 2008 and 2007, respectively.
A member of the Company made advances to the Company for working capital needs of the properties. The loan bears interest of 11% and is payable upon demand. Any unpaid interest on the loan is capitalized Interest added to the note balance in 2008 was $2,828,710 and $1,761,086 in 2007. During the year the member made an additional advance of $3,776,264 to the Company under similar terms.
The Company incurred interest expense of $2,829,026 and $1,751,086 in 2008 and 2007, respectively.
LIGHTSTONE MEMBER II LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND 2007
| 7. | NOTES PAYABLE – RELATED PARTY (Continued) |
Also, during 2007, the Company repaid in full an amount of $4,425,685 to another member who had advanced funds to the Company for working capital needs of the properties.
The notes payable to related parties is made up of the above loan balances as follows:
| | | 2008 | | | 2007 | |
| | | | | | | |
| Presidential Realty Corp Loan | | $ | 7,835,000 | | | $ | 7,835,000 | |
| Other Member Loan | | | 28,064,387 | | | | 21,459,413 | |
| | | $ | 35,899,387 | | | $ | 29,294,413 | |
The net amount due to affiliates is due upon demand and bears interest rate of 11%.
| 9. | RENTALS UNDER OPERATING LEASES |
The Company receives rental income from the leasing of retail shopping center space under operating leases. The Company recognizes income from tenant operating leases on a straight-line basis over the respective lease terms and, accordingly, rental income in a given period will vary from actual contractual rental amounts due. Rental income recorded in 2008 was $331,000 less than the amounts contractually due. In 2007 rental income recorded was $235,000 in excess of amounts contractually due.
The minimum annual future base rentals due under non-cancelable operating leases as of December 31, 2008, are as follows:
| 2009 | | $ | 5,574,810 | |
| 2010 | | | 4,924,660 | |
| 2011 | | | 4,271,037 | |
| 2012 | | | 3,656,890 | |
| 2013 | | | 3,099,881 | |
| Thereafter | | | 17,399,838 | |
| | | | | |
| | | $ | 38,927,116 | |
Minimum annual future rentals due do not include amounts which are payable by certain tenants based upon certain reimbursable operating expenses. The tenants include national and regional chains and local retailers and, consequently, the Company’s credit risk is concentrated in the retail industry.
