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Real Estate Owned, Net | 9 Months Ended
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Sep. 30, 2021
Real Estate [Abstract] |
Real Estate Owned, Net | Note 6. Real Estate Owned, Net Real Estate Activities 2020 — In June 2020, the Company received a notice from a tenant occupying a portion of the office building that the Company acquired in July 2018 pursuant to a foreclosure of their intention to terminate the lease. In connection with the lease termination effective September 4, 2020, the Company received from the tenant lease termination fee of $0.4 million, which included approximately $0.2 million of cash and $0.2 million of the furniture and fixtures in the office space. The furniture and fixtures have a remaining useful life of 2.5 years and are being depreciated on a straight-line basis over the remaining useful life. Additionally, the Company wrote off the related unamortized in-place lease intangible assets of $0.9 million, unamortized below-market rent intangible liabilities of $0.6 million and rent receivable of $0.1 million. There was no gain or loss recognized on the lease termination. 2021 — In September 2021, the Company signed a new lease for the vacant space in the office building. The lease commences on December 1, 2021 and has term of 10 years with an option to extend the lease for 5 years. Additionally, the lease provides for a fixed rental payment plus a percentage rent that is based on 6% of the gross sales of the tenant’s business. The lease also provides a 3% increase in rental payment every year. Real Estate Owned, Net Real estate owned is comprised of 4.9 acres of adjacent land located in Pennsylvania and a multi-tenant office building, with lease intangible assets and liabilities, located in California. The following table presents the components of real estate owned, net:
| September 30, 2021 |  | December 31, 2020
| Cost |  | Accumulated Depreciation/Amortization |  | Net |  | Cost |  | Accumulated Depreciation/Amortization |  | Net
Real estate: |  |  |  |  |  |  |  |  |  |  |
Land | $ | 13,395,430 |  |  | $ | — |  |  | $ | 13,395,430 |  |  | $ | 13,395,430 |  |  | $ | — |  |  | $ | 13,395,430 |
Building and building improvements | 51,725,969 |  |  | (4,095,015) |  |  | 47,630,954 |  |  | 51,725,969 |  |  | (3,125,143) |  |  | 48,600,826 |
Tenant improvements | 1,854,640 |  |  | (885,916) |  |  | 968,724 |  |  | 1,854,640 |  |  | (670,090) |  |  | 1,184,550 |
Furniture and fixtures | 236,000 |  |  | (94,400) |  |  | 141,600 |  |  | 236,000 |  |  | (31,467) |  |  | 204,533 |
Total real estate | 67,212,039 |  |  | (5,075,331) |  |  | 62,136,708 |  |  | 67,212,039 |  |  | (3,826,700) |  |  | 63,385,339 |
Lease intangible assets: |  |  |  |  |  |  |  |  |  |  |
In-place lease | 14,982,538 |  |  | (6,849,595) |  |  | 8,132,943 |  |  | 15,852,232 |  |  | (6,172,747) |  |  | 9,679,485 |
Above-market rent | 156,542 |  |  | (55,594) |  |  | 100,948 |  |  | 156,542 |  |  | (42,427) |  |  | 114,115 |
Total intangible assets | 15,139,080 |  |  | (6,905,189) |  |  | 8,233,891 |  |  | 16,008,774 |  |  | (6,215,174) |  |  | 9,793,600 |
Lease intangible liabilities: |  |  |  |  |  |  |  |  |  |
Below-market rent | (2,754,922) |  |  | 1,353,240 |  |  | (1,401,682) |  |  | (3,371,314) |  |  | 1,702,800 |  |  | (1,668,514) |
Above-market ground lease | (8,896,270) |  |  | 412,770 |  |  | (8,483,500) |  |  | (8,896,270) |  |  | 315,008 |  |  | (8,581,262) |
Total intangible liabilities | (11,651,192) |  |  | 1,766,010 |  |  | (9,885,182) |  |  | (12,267,584) |  |  | 2,017,808 |  |  | (10,249,776) |
Total real estate | $ | 70,699,927 |  |  | $ | (10,214,510) |  |  | $ | 60,485,417 |  |  | $ | 70,953,229 |  |  | $ | (8,024,066) |  |  | $ | 62,929,163 |
Real Estate Operating Revenues and Expenses The following table presents the components of real estate operating revenues and expenses that are included in the consolidated statements of operations:
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|  | 2021 |  | 2020 |  | 2021 |  | 2020
Real estate operating revenues: |  |  |  |  |  |  |  |
Lease revenue |  | $ | 1,805,647 |  |  | $ | 2,515,678 |  |  | $ | 5,417,341 |  |  | $ | 6,359,883 |
Other operating income |  | 385,531 |  | 475,241 |  | 1,051,178 |  |  | 1,195,182 |
Total |  | $ | 2,191,178 |  |  | $ | 2,990,919 |  |  | $ | 6,468,519 |  |  | $ | 7,555,065 |
Real estate operating expenses: |  |  |  |  |  |  |  |
Utilities |  | 82,672 |  | 58,468 |  | $ | 153,140 |  |  | $ | 131,498 |
Real estate taxes |  | 356,350 |  | 234,375 |  | 1,046,823 |  |  | 700,125 |
Repairs and maintenances |  | 184,173 |  | 119,512 |  | 453,391 |  |  | 516,073 |
Management fees |  | 55,609 |  | 50,392 |  | 205,915 |  |  | 165,169 |
Lease expense, including amortization of above-market ground lease (1) |  | 487,163 |  | 283,538 |  | 1,597,239 |  |  | 850,614 |
Other operating expenses |  | 98,534 |  | 95,423 |  | 295,413 |  |  | 293,954 |
Total |  | $ | 1,264,501 |  |  | $ | 841,708 |  |  | $ | 3,751,921 |  |  | $ | 2,657,433 |
_______________ (1)As discussed in “Leases” below, the multi-tenant office building is subject to a ground lease, for which the rent resets every five years. The last rent reset was on November 1, 2020. Based on information available to the Company as of November 1, 2020, including the fact that there was a global pandemic with a potentially significant negative impact on real estate values, the Company estimated the value of the land was no greater than the value on the date of foreclosure and continued to accrue and pay rent at the then-existing rate. On June 2, 2021, the third-party appraisal process was completed, resulting in an increase of the annual base rent to $2.1 million from $1.3 million. The increase in base rent was retroactive back to November 1, 2020. The Company accounted for the change in base rent as a change in accounting estimate; as a result, the increase in rent from November 2020 through March 2021 was recorded in the period in which the change occurred, which is June 2021. Had the new base rent been recorded on November 1, 2020, lease expense including amortization of above-market ground lease would have been $1.3 million for the nine months ended September 30, 2021 and total real estate operating expenses would have been $3.4 million for the nine months ended September 30, 2021. Leases On July 30, 2018, the Company foreclosed on a multi-tenant office building in full satisfaction of a first mortgage and related fees and expenses. In connection with the foreclosure, the Company assumed four leases whereby the Company is the lessor to the leases. These four tenant leases had remaining lease terms ranging from 6.3 years to 8.8 years as of July 30, 2018 and provide for annual fixed rent increases. Each of the three tenant leases provides two options to renew the lease for five years and the remaining tenant lease provides one option to renew the lease for five years. In addition, the Company assumed a ground lease whereby the Company is the lessee (or a tenant) to the ground lease. The ground lease had a remaining lease term of 68.3 years and provides for a new base rent every 5 years based on the greater of the annual base rent for the prior lease year or 9% of the fair market value of the land. The next rent reset on the ground lease is scheduled for November 1, 2025. The Company is currently litigating with the landlord with respect to the appropriate determination of the fair value of the land, on which the ground rent is based. Since future rent increases on the ground lease are unknown, the Company did not include any potential future rent increases in calculating the present value of future rent payments. The ground lease does not provide for renewal options. On the date of foreclosure, the Company performed lease classification test on the tenant leases as well as the ground lease in accordance with ASC 840. The result of the lease classification test indicated that the tenant leases and the ground lease shall be classified as operating leases on the date of foreclosure. Scheduled Future Minimum Rent Income Scheduled future minimum rents, exclusive of renewals and expenses paid by tenants, under non-cancelable operating leases at September 30, 2021 are as follows:
Years Ending December 31, |  | Total
2021 (October 1 through December 31) |  | $ | 2,341,470 |
2022 |  | 7,504,551 |
2023 |  | 7,746,538 |
2024 |  | 7,995,237 |
2025 |  | 4,517,455 |
Thereafter |  | 3,864,450 |
Total |  | $ | 33,969,701 |
Scheduled Annual Net Amortization of Intangibles Based on the intangible assets and liabilities recorded at September 30, 2021, scheduled annual net amortization of intangibles for each of the next five calendar years and thereafter is as follows:
Years Ending December 31, |  | Net Decrease in Real Estate Operating Revenue (1) |  | Increase in Depreciation and Amortization (1) |  | Decrease in Rent Expense (1) |  | Total
2021 (October 1 through December 31) |  | $ | (84,555) |  |  | $ | 515,515 |  |  | $ | (32,587) |  |  | $ | 398,373 |
2022 |  | (338,220) |  |  | 2,062,060 |  |  | (130,348) |  |  | 1,593,492 |
2023 |  | (338,220) |  |  | 2,062,060 |  |  | (130,348) |  |  | 1,593,492 |
2024 |  | (338,220) |  |  | 2,062,060 |  |  | (130,348) |  |  | 1,593,492 |
2025 |  | (181,608) |  |  | 1,431,248 |  |  | (130,348) |  |  | 1,119,292 |
Thereafter |  | (19,911) |  |  | — |  |  | (7,929,521) |  |  | (7,949,432) |
Total |  | $ | (1,300,734) |  |  | $ | 8,132,943 |  |  | $ | (8,483,500) |  |  | $ | (1,651,291) |
_______________ (1)Amortization of below-market rent and above-market rent intangibles is recorded as an adjustment to lease revenues; amortization of in-place lease intangibles is included in depreciation and amortization; and amortization of above-market ground lease is recorded as a reduction to rent expense. Supplemental Ground Lease Disclosures Supplemental balance sheet information related to the ground lease was as follows:
| September 30, 2021 |  | December 31, 2020
Operating lease |  |  |
Operating lease right-of-use assets (1) | $ | 27,398,786 |  |  | $ | 16,105,888 |
Operating lease liabilities | $ | 27,398,786 |  |  | $ | 16,105,888 |
Weighted average remaining lease term — operating lease (years) | 65.1 |  | 65.8
Weighted average discount rate — operating lease | 7.6 | % |  | 7.9 | %
_______________ (1)The operating lease ROU assets and liabilities were remeasured at June 30, 2021 based on the new base rent resulting from the ground rent reset. The component of lease expense for the ground lease was as follows:
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|  | 2021 |  | 2020 |  | 2021 |  | 2020
Operating lease cost (1) |  | $ | 519,750 |  |  | $ | 316,125 |  |  | $ | 1,695,000 |  |  | $ | 948,375 |
_______________ (1)The increase in operating lease cost was a result of the ground rent reset described above. Supplemental non-cash information related to the ground lease was as follows:
|  | Nine Months Ended September 30,
|  | 2021 |  | 2020
Cash paid for amounts included in the measurement of lease liabilities: |  |  |  |
Operating cash flows from operating leases |  | $ | 1,695,000 |  |  | $ | 948,375 |
Right-of-use assets obtained in exchange for lease obligations |  |  |  |
Operating leases |  | $ | 1,695,000 |  |  | $ | 948,375 |
Maturities of operating lease liabilities are as follows:
Years Ending December 31, |  | Operating Lease
2021 (October 1 through December 31) |  | $ | 519,750 |
2022 |  | 2,079,000 |
2023 |  | 2,079,000 |
2024 |  | 2,079,000 |
2025 |  | 2,079,000 |
Thereafter |  | 126,385,875 |
Total lease payments |  | 135,221,625 |
Less: Imputed interest |  | (107,822,839) |
Total |  | $ | 27,398,786 |

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- Definition The entire disclosure for certain real estate investment financial statements, real estate investment trust operating support agreements, real estate owned, retail land sales, time share transactions, as well as other real estate related disclosures. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 970 -URI http://asc.fasb.org/topic&trid=2156125 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 978 -URI http://asc.fasb.org/topic&trid=2134977 Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 976 -URI http://asc.fasb.org/topic&trid=2134846 Reference 4: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 974 -URI http://asc.fasb.org/topic&trid=2156429 Reference 5: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 972 -URI http://asc.fasb.org/topic&trid=2134617 + Details
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