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Real Estate Owned, Net | 3 Months Ended
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Mar. 31, 2022
Real Estate [Abstract] |
Real Estate Owned, Net | Note 5. Real Estate Owned, Net Real Estate Activities 2022 — For the three months ended March 31, 2022, the Company recorded an impairment charge of $1.6 million on the 4.9 acres of adjacent land located in Pennsylvania to reduce the carrying value of the land to its estimated fair value, which is based on the selling price in the Agreement of Sale. The sale is expected to close in the second quarter of 2022. As the asset satisfied all the requirements to be classified as held-for-sale, on March 31, 2022, the Company reclassified the land from Real estate owned to Assets held for sale on the consolidated balance sheets. 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. In November 2021, the Company received notice from a tenant of their intention to terminate its lease effective November 30, 2022. In connection with the lease termination, the Company received a termination fee of $3.1 million, to be amortized to income over the remaining life of the lease. In December 2021, the Company recorded an impairment charge of $3.4 million on the 4.9 acres of adjacent land in order to reduce the carrying value of the land to its estimated fair value, which is the estimated selling price less the cost of sale. 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:
| March 31, 2022 |  | December 31, 2021
| Cost |  | Accumulated Depreciation/Amortization |  | Net |  | Cost |  | Accumulated Depreciation/Amortization |  | Net
Real estate: |  |  |  |  |  |  |  |  |  |  |
Land (1) | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 10,000,000 |  |  | $ | — |  |  | $ | 10,000,000 |
Building and building improvements | 51,725,969 |  |  | (4,741,596) |  |  | 46,984,373 |  |  | 51,725,969 |  |  | (4,418,305) |  |  | 47,307,664 |
Tenant improvements | 1,854,640 |  |  | (1,016,689) |  |  | 837,951 |  |  | 1,854,640 |  |  | (947,369) |  |  | 907,271 |
Furniture and fixtures | 236,000 |  |  | (149,467) |  |  | 86,533 |  |  | 236,000 |  |  | (125,867) |  |  | 110,133 |
Total real estate | 53,816,609 |  |  | (5,907,752) |  |  | 47,908,857 |  |  | 63,816,609 |  |  | (5,491,541) |  |  | 58,325,068 |
Lease intangible assets: |  |  |  |  |  |  |  |  |  |  |
In-place lease | 14,982,538 |  |  | (8,929,631) |  |  | 6,052,907 |  |  | 14,982,538 |  |  | (7,627,326) |  |  | 7,355,212 |
Above-market rent | 156,542 |  |  | (64,372) |  |  | 92,170 |  |  | 156,542 |  |  | (59,983) |  |  | 96,559 |
Total intangible assets | 15,139,080 |  |  | (8,994,003) |  |  | 6,145,077 |  |  | 15,139,080 |  |  | (7,687,309) |  |  | 7,451,771 |
Lease intangible liabilities: |  |  |  |  |  |  |  |  |  |
Below-market rent | (2,754,922) |  |  | 1,746,889 |  |  | (1,008,033) |  |  | (2,754,922) |  |  | 1,496,125 |  |  | (1,258,797) |
Above-market ground lease | (8,896,270) |  |  | 477,945 |  |  | (8,418,325) |  |  | (8,896,270) |  |  | 445,357 |  |  | (8,450,913) |
Total intangible liabilities | (11,651,192) |  |  | 2,224,834 |  |  | (9,426,358) |  |  | (11,651,192) |  |  | 1,941,482 |  |  | (9,709,710) |
Total real estate | $ | 57,304,497 |  |  | $ | (12,676,921) |  |  | $ | 44,627,576 |  |  | $ | 67,304,497 |  |  | $ | (11,237,368) |  |  | $ | 56,067,129 |
_______________ (1)The land was reclassified as held-for-sale as of March 31, 2022. 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 March 31,
|  |  | 2022 |  | 2021
Real estate operating revenues: |  |  |  |  |
Lease revenue |  |  | $ | 1,754,561 |  |  | $ | 1,805,874 |
Other operating income |  |  | 1,224,893 |  |  | 205,767 |
Total |  |  | $ | 2,979,454 |  |  | $ | 2,011,641 |
Real estate operating expenses: |  |  |  |  |
Utilities |  |  | $ | 45,334 |  |  | $ | 33,992 |
Real estate taxes |  |  | 346,432 |  |  | 346,354 |
Repairs and maintenances |  |  | 157,416 |  |  | 145,246 |
Management fees |  |  | 67,868 |  |  | 61,325 |
Lease expense, including amortization of above-market ground lease (1) |  |  | 487,163 |  |  | 283,538 |
Other operating expenses |  |  | 113,750 |  |  | 100,860 |
Total |  |  | $ | 1,217,963 |  |  | $ | 971,315 |
_______________ (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 $0.5 million for the three months ended March 31, 2021 and total real estate operating expenses would have been $1.2 million for the three months ended March 31, 2021. Leases As of March 31, 2022, the Company owned a multi-tenant office building that was leased to four tenants. In addition, the office building is subject to 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 64.6 years as of March 31, 2022, 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 method for determining the fair value of the land for purposes of setting the ground rent – Terra Ocean Ave., LLC v. Ocean Avenue Santa Monica Realty LLC, Superior Court of California, Los Angeles County, Case No. 20STCV34217. The Company believes this determination should be based on comparable sales, while the landlord insists that the rent under the ground lease itself is also relevant. The Company’s position has prevailed in all three of the prior arbitrations to reset the ground rent. Since future rent reset determinations under the ground lease cannot be known at this time, the Company did not include any potential future rent increases in calculating the present value of future rent payments. The Company intends vigorously to pursue the litigation. While the Company believes its arguments will likely prevail, the outcome of the legal proceeding cannot be predicted with certainty. If the landlord prevails, the future rent reset determinations could result in significantly higher ground rent, which would likely result in a significant diminution in the value of the Company’s interest in the ground lease and the office building. Scheduled Future Minimum Rent Income Scheduled future minimum rents, exclusive of renewals and expenses paid by tenants, under non-cancelable operating leases at March 31, 2022 are as follows:
Years Ending December 31, |  | Total
2022 (April 1 through December 31) |  | $ | 5,357,817 |
2023 |  | 4,235,538 |
2024 |  | 4,380,043 |
2025 |  | 792,925 |
2026 |  | 816,724 |
2027 |  | 598,943 |
Thereafter |  | 1,815,497 |
Total |  | $ | 17,997,487 |
Scheduled Annual Net Amortization of Intangibles Based on the intangible assets and liabilities recorded at March 31, 2022, 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
2022 (April 1 through December 31) |  | $ | (680,178) |  |  | $ | 3,654,609 |  |  | $ | (97,761) |  |  | $ | 2,876,670 |
2023 |  | (139,056) |  |  | 1,093,878 |  |  | (130,348) |  |  | 824,474 |
2024 |  | (139,056) |  |  | 1,093,878 |  |  | (130,348) |  |  | 824,474 |
2025 |  | 17,556 |  |  | 87,121 |  |  | (130,348) |  |  | (25,671) |
2026 |  | 17,556 |  |  | 87,121 |  |  | (130,348) |  |  | (25,671) |
2027 |  | 7,315 |  |  | 36,300 |  |  | (130,348) |  |  | (86,733) |
Thereafter |  | — |  |  | — |  |  | (7,668,824) |  |  | (7,668,824) |
Total |  | $ | (915,863) |  |  | $ | 6,052,907 |  |  | $ | (8,418,325) |  |  | $ | (3,281,281) |
_______________ (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:
| March 31, 2022 |  | December 31, 2021
Operating lease |  |  |
Operating lease right-of-use asset | $ | 27,391,012 |  |  | $ | 27,394,936 |
Operating lease liability | $ | 27,391,012 |  |  | $ | 27,394,936 |
Weighted average remaining lease term — operating lease (years) | 64.6 |  | 64.8
Weighted average discount rate — operating lease | 7.6 | % |  | 7.6 | %
The component of lease expense for the ground lease was as follows:
|  |  | Three Months Ended March 31,
|  |  | 2022 |  | 2021
Operating lease cost (1) |  |  | $ | 519,750 |  |  | $ | 316,125 |
_______________ (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:
|  | Three Months Ended March 31,
|  | 2022 |  | 2021
Cash paid for amounts included in the measurement of lease liability: |  |  |  |
Operating cash flows from an operating lease |  | $ | 519,750 |  |  | $ | 316,125 |
Right-of-use asset obtained in exchange for lease obligations: |  |  |  |
Operating lease |  | $ | 519,750 |  |  | $ | 316,125 |
Maturities of operating lease liability are as follows:
Years Ending December 31, |  | Operating Lease
2022 (April 1 through December 31) |  | $ | 1,559,250 |
2023 |  | 2,079,000 |
2024 |  | 2,079,000 |
2025 |  | 2,079,000 |
2026 |  | 2,079,000 |
2027 |  | 2,079,000 |
Thereafter |  | 122,227,875 |
Total lease payments |  | 134,182,125 |
Less: Imputed interest |  | (106,791,113) |
Total |  | $ | 27,391,012 |

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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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