Clipper Realty Inc.: Form 10-Q for the period ended Sep 30, 2024

You should read the following discussion of our financial condition and results of operations together with our condensed consolidated financial statements and related notes included in Part I-Item 1 of this Form 10-Q, as well as our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those discussed in these forward-looking statements. See “Cautionary Note Concerning Forward-Looking Statements” in this Form 10-Q.

Overview of Our Company

Clipper Realty Inc. (the “Company” or “we”) is a self-administered and self-managed real estate company that acquires, owns, manages, operates and repositions multifamily residential and commercial properties in the New York metropolitan area, with a current portfolio in Manhattan and Brooklyn. Our primary focus is to own, manage and operate our portfolio and to acquire and reposition additional multifamily residential and commercial properties in the New York metropolitan area. The Company has been organized and operates in conformity with the requirements for qualification and taxation as a real estate investment trust (“REIT”) under the U.S. federal income tax law and elected to be treated as a REIT commencing with the taxable year ended December 31, 2015.

As of September 30, 2024, the Company owns:

• two neighboring residential/retail rental properties at 50 Murray Street and 53 Park Place in the Tribeca neighborhood of Manhattan;
• one residential property complex in the East Flatbush neighborhood of Brooklyn consisting of 59 buildings;
• two primarily commercial properties in Downtown Brooklyn (one of which includes 36 residential apartment units);
• one residential/retail rental property at 1955 1st Avenue in Manhattan;
• one residential rental property at 107 Columbia Heights in the Brooklyn Heights neighborhood of Brooklyn;
• one residential rental property at 10 West 65th Street in the Upper West Side neighborhood of Manhattan;
• one residential rental property at 1010 Pacific Street in the Prospect Heights neighborhood of Brooklyn; and
• the Dean Street property, to be redeveloped as a residential/retail rental building.

These properties are located in the most densely populated major city in the United States, each with immediate access to mass transportation.

The Company’s ownership interest in its initial portfolio of properties, which includes the Tribeca House, Flatbush Gardens and the two Livingston Street properties, was acquired in the formation transactions in connection with the private offering. These properties are owned by the LLC subsidiaries, which are managed by the Company through the Operating Partnership. The Operating Partnership’s interests in the LLC subsidiaries generally entitle the Operating Partnership to all cash distributions from, and the profits and losses of, the LLC subsidiaries other than the preferred distributions to the continuing investors who hold Class B LLC units in these LLC subsidiaries. The continuing investors own an aggregate amount of 26,317,396 Class B LLC units, representing 62.1% of the Company’s common stock on a fully diluted basis. Accordingly, the Operating Partnership’s interests in the LLC subsidiaries entitle the Operating Partnership to receive 37.9% of the aggregate distributions from the LLC subsidiaries. The Company, through the Operating Partnership, owns all of the ownership interests in the Aspen property, the Clover House property, the 10 West 65th Street property, the 1010 Pacific Street property and the Dean Street property.

How We Derive Our Revenue

Our revenue consists primarily of rents received from our residential, commercial and, to a lesser extent, retail tenants. We have two reportable operating segments, Residential Rental Properties and Commercial Rental Properties. See Note 9, “Segment Reporting” to our condensed consolidated financial statements included in this Form 10-Q.

Trends

As of February 23, 2024, the City of New York informed the Company of its intention to terminate the lease at 250 Livingston Street effective August 23, 2025. Additionally, as we move forward with the approaching expiration of the lease at 141 Livingston Street in December 2025, the Company and the City of New York are negotiating the terms of a five-year extension of their current lease. There can be no assurance that the negotiations will conclude with an agreement and the Company is at risk of not replacing the City of New York as its tenant or not being able to replace it at comparable rents. See “- Liquidity and Capital Resources” below and Part II, Item 1A. Risk Factors.”

Results of Operations

Our focus throughout 2023 and year-to-date 2024 has been to manage our properties to optimize revenues and control costs, while continuing to renovate and reposition certain properties. The discussion below highlights the specific properties contributing to the changes in the results of operations and focuses on the properties that were in operation for the full period in each comparison.

Income Statement for the Three Months Ended September 30, 2024 and 2023 (in thousands except rent per square foot and occupancy)

Revenue. Residential rental income increased to $27,846 for the three months ended September 30, 2024, from $25,501 for the three months ended September 30, 2023, primarily due to increases in rental rates and leased occupancy at all properties in 2024 partially offset by higher bad debt expense. For example, base rent per square foot increased at the Tribeca House property to $82.39 (99.8% leased occupancy) at September 30, 2024, from $78.22 (98.2% leased occupancy) at September 30, 2023, the Flatbush Gardens property to $29.07 (98.6% leased occupancy) at September 30, 2024, from $26.62 (98.6% leased occupancy) at September 30, 2023 and the 1010 Pacific Street property to $62.67 (96.6% leased occupancy) at September 30, 2024, from $58.20 (93.2% leased occupancy) at September 30, 2023.

Commercial rental income increased to $9,776 for the three months ended September30, 2024, from $9,627 for the three months ended September 30, 2023 due to higher real estate tax reimbursement income at our commercial properties.

Property operating expenses. Property operating expenses include property-level costs such as compensation costs for property-level personnel, repairs and maintenance, supplies, utilities and landscaping. Property operating expenses increased to $8,482 for the three months ended September 30, 2024, from $7,930 for the three months ended September 30, 2023, primarily due to higher payroll costs at Flatbush Gardens due to the prevailing wage requirement from the Article 11 transaction, higher utilities costs and higher tenant legal costs, partially offset by lower repairs and maintenance costs.

Real estate taxes and insurance. Real estate taxes and insurance expenses increased to $7,562 for the three months ended September 30, 2024, from $7,374 for the three months ended September 30, 2023, primarily due to slightly increased real estate taxes across the portfolio, partially offset by lower insurance costs.

General and administrative. General and administrative expenses increased to $3,370 for the three months ended September 30, 2024, from $3,340 for the three months ended September 30, 2023.

Depreciation and amortization. Depreciation and amortization expense increased to $7,456 for the three months ended September 30, 2024, from $7,282 for the three months ended September 30, 2023 due to additions to real estate across the portfolio

Interest expense, net. Interest expense, net, increased to $11,840 for the three months ended September 30, 2024, from $11,527 for the three months ended September 30, 2023 primarily due to increased borrowings at the 1010 Pacific Property in the third quarter of 2023.

Net loss. As a result of the foregoing, net loss decreased to $1,088 for the three months ended September 30, 2024, from $2,325 for the three months ended September 30, 2023.

Income Statement for the Nine Months Ended September 30, 2024 and 2023 (in thousands)

Revenue. Residential rental income increased to $76,752 for the nine months ended September 30, 2024, from $72,529 for the nine months ended September 30, 2023, primarily due to increases in rental rates and leased occupancy at all properties partially offset by higher bad debt expense. For example, base rent per square foot increased at the Tribeca House property to $82.39 (99.8% leased occupancy) at September 30, 2024, from $78.22 (98.2% leased occupancy) at September 30, 2023, the Flatbush Gardens property to $29.07 (98.6% leased occupancy) at September 30, 2024, from $26.62 (98.6% leased occupancy) at September 30, 2023 and the 1010 Pacific Street property to $62.67 (96.6% leased occupancy) at September 30, 2024, from $58.20 (93.2% leased occupancy) at September 30, 2023.

Commercial rental income increased to $28,974 for the nine months ended September 30, 2024, from $28,845 for the nine months ended September 30, 2023, primarily due to higher property tax reimbursement income at our Livingston office properties, partially offset by lower rents at our Tribeca House and slightly higher bad debt expense.

Property operating expenses. Property operating expenses include property-level costs such as compensation costs for property-level personnel, repairs and maintenance, supplies, utilities and landscaping. Property operating expenses increased to $25,417 for the nine months ended September 30, 2024, from $22,353 for the nine months ended September 30, 2023, primarily due to higher apartment repairs costs at Flatbush Gardens to prepare units for leasing, higher payroll costs at Flatbush Gardens due to the living wage requirement from the Article 11 transaction, higher utilities and water and sewer cost and higher tenant legal costs slightly offset by lower supplies expense.

Real estate taxes and insurance. Real estate taxes and insurance expenses decreased to $22,212 for the nine months ended September 30, 2024, from $24,373 for the nine months ended September 30, 2023, primarily due to the real estate tax exemption at Flatbush Gardens that began July 1, 2023, partially offset by increased real estate taxes at the remainder of the portfolio and higher insurance costs across the portfolio.

General and administrative. General and administrative expenses increased to $10,050 for the nine months ended September 30, 2024, from $9,831 for the September months ended September 30, 2023 primarily due to higher payroll expenses, partially offset by lower accounting fees in the period ended September 30, 2024 due to higher fees that were incurred in the period ended September 30, 2023 in relation to the separation from our prior auditor.

Transaction pursuit costs. Transaction pursuit costs primarily reflect costs incurred in respect of the entry into the Article 11 Agreement during the nine-months ended September 30, 2024.

Depreciation and amortization. Depreciation and amortization expense increased to $21,226 for the nine months ended September 30, 2024, from $20,524 for the nine months ended September 30, 2023, due to the additions to real estate across the portfolio during the nine months ended September 30, 2024.

Interest expense, net. Interest expense, net, increased to $31,474 for the nine months ended September 30, 2024, from $31,340 for the nine months ended September 30, 2023 primarily due to increased interest at the 10 West 65th Street as a result of the interest rate changing from fixed to a floating rate in the fourth quarter of 2022.

Loss on modification/extinguishment of debt. Loss on the extinguishment of debt consists of costs related to the early termination of our construction loan at 1010 Pacific. Additionally, we accelerated the remaining unamortized loan costs from the prior loan.

Net loss. As a result of the foregoing, net loss decreased to $4,653 for the nine months ended September 30, 2024, from $11,272 for the nine months ended September 30, 2023.

Liquidity and Capital Resources

As of September 30, 2024, we had $1,258 million indebtedness, net of unamortized issuance costs, secured by our properties, $18.6 million of cash and cash equivalents, and $17.5 million of restricted cash. See Note 4, “Notes Payable” of our consolidated financial statements for a discussion of the Company’s property-level debt.

Our short-term liquidity needs will primarily be to fund operating expenses, capital expenditures, property taxes and insurance, interest and scheduled debt principal payments, general and administrative expenses, and distributions to stockholders and unit holders. As a REIT, we are required to distribute at least 90% of our REIT taxable income, computed without regard to the dividends paid deduction and excluding net capital gains, to stockholders on an annual basis.

In connection with the notice of termination of the City of New York lease at our 250 Livingston Street property and pursuant to the terms of the loan agreement described in Note 4, our available cash will be impacted by the establishment of a cash management account for the benefit of the Lender, which the Company expects to establish shortly, into which the Company will be obligated to deposit all revenue generated by the property. Additionally, the Company and the City of New York are negotiating the terms of a five-year extension of its current lease at 141 Livingston Street upon its termination in December of 2025. There can be no assurance that the negotiations will conclude with an agreement. Should the lease not be extended for a minimum of five years, in accordance with the terms of the mortgage note, the Company will be required to either fund an escrow account in the amount of $10,000 payable in equal monthly payments over the 18 months after lease expiration or deliver to the lender a letter of credit in the amount of $10,000. The loan servicer has, we believe, erroneously interpreted the loan agreement to require that the monthly payments begin July 2024 and we continue to discuss this issue with the servicer.

On October 28, 2024 we received notice that as of October 7, 2024 the servicing of the mortgage note was transferred to a special servicer (“Special Servicer”) due to, they contend, our failure to make certain required payments under the loan, including, but not limited to, the reserve monthly deposit. The Special Servicer has demanded that we pay $2,222 of reserve payments into an escrow account immediately and continued monthly payments of $555 for an additional 14 months, $1,166 of default interest and late charges through October 7, 2024, and an additional $10 per diem interest for each day thereafter. We contend the Special Servicer has misinterpreted the terms of the loan agreement requiring monthly reserve payments beginning on July 7, 2024, and that the Company has no obligation to make reserve payments at this time under the terms of the loan agreement. We continue to discuss this issue with the Special Servicer.

Our principal long-term liquidity needs will primarily be to fund additional property acquisitions, major renovations and upgrading projects, leasehold improvements at the 250 Livingston property upon identification of a new tenant following move-out of the existing City of New York tenant, and debt payments at maturity and funding a $10,000 escrow and other payments discussed above, related to the 141 Livingston Street property if the Company we and the City of New York are unable to agree to terms of the lease extension and we and the Special Servicer are unable to agree on the terms of the loan agreement related to such property.

We generally expect to meet our short-term and long-term liquidity requirements by using by cash on hand, as well as cash provided by operations, sales of certain properties, long-term secured or unsecured debt offerings and/or funds from public or private equity offerings. However, we cannot provide assurance that this will be the case. Our ability to secure additional debt will depend on a number of factors, including our cash flow from operations, our degree of leverage, the value of our unencumbered assets and borrowing restrictions that may be imposed. Our ability to access the equity capital markets will depend on a number of factors as well, including general market conditions for REITs and market perceptions about our company.

We believe that our current cash flows from operations and cash on hand coupled with sales of certain properties, long-term secured or unsecured debt offerings and/or funds from public or private equity offerings, will be sufficient to allow us to continue operations, satisfy our contractual obligations and make distributions to our stockholders and the members of our LLC subsidiaries for at least the next twelve months. However, no assurance can be given that we will be able to refinance any of our outstanding indebtedness in the future on favorable terms or at all.

Distributions

In order to qualify as a REIT for Federal income tax purposes, we must currently distribute at least 90% of our taxable income to our shareholders. On August 1, 2024 the company declared dividends and distributions on our common shares, Class B LLC units and LTIP units totaling $4.4 million paid on August 22, 2024. During the three months ended September 30, 2024 and 2023, we paid dividends and distributions on our common shares, Class B LLC units and LTIP units totaling $4.4 million and $4.3 million, respectively.

Cash Flows for the Nine Months Ended September 30, 2024 and 2023 (in thousands)

Cash flows provided by (used in) operating activities, investing activities and financing activities for the nine months ended September 30, 2024 and 2023, were as follows:

Net cash flow provided by operating activities was $21,337 for the nine months ended September 30, 2024, compared to $17,130 for the nine months ended September 30, 2023. The increase in operating cash flows in the period ended September 30, 2024 from September 30, 2023 is primarily the result of an increase in revenues net of slightly higher expenses.

Net cash used in investing activities was $57,097 for the nine months ended September 30, 2024, compared to $27,783 for the nine months ended September 30, 2023. The increase was primarily due to higher capital spending for the Dean Street development of $34,689 and higher capital spending at Flatbush Gardens of $5,857, partially offset by decreased spending at 1010 Pacific Street of $9,759.

Net cash provided by financing activities was $35,629 for the nine months ended September 30, 2024, compared to $17,341 for the nine months ended September 30, 2023. Cash was provided in the nine months ended September 30, 2024, by $50,300 borrowings related to the Dean Street property, partially offset by $1,483 of amortization payments and dividend and distributions of $13,189. Cash was provided in the nine months ended September 30, 2023, by $40,617 refinancing the 1010 Pacific Street and Dean Street property loans, partially offset by scheduled debt amortization payments, $9,921 of loan extinguishment and issuance costs, and $13,044 of dividends and distributions.

Income Taxes

No provision has been made for income taxes since all of the Company’s operations are held in pass-through entities and accordingly the income or loss of the Company is included in the individual income tax returns of the partners or members.

We elected to be treated as a REIT for U.S. federal income tax purposes, beginning with our first taxable three months ended March 31, 2015. As a REIT, we generally will not be subject to federal income tax on income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate tax rates. We believe that we are organized and operate in a manner that will enable us to qualify and be taxed as a REIT and we intend to continue to satisfy the requirements for qualification as a REIT for federal income tax purposes.

Inflation

Inflation has recently become a factor in the United States economy and has increased the cost of acquiring, developing, replacing and operating properties. A substantial portion of our interest costs relating to operating properties are fixed through 2027. Leases at our residential rental properties, which comprise approximately 74% of our revenue, are short-term in nature and permit rent increases to recover increased costs, and our longer-term commercial and retail leases generally allow us to recover some increased operating costs.

Non-GAAP Financial Measures

In this Quarterly Report on Form 10-Q, we disclose and discuss funds from operations (“FFO”), adjusted funds from operations (“AFFO”), adjusted earnings before interest, income taxes, depreciation and amortization (“Adjusted EBITDA”) and net operating income (“NOI”), all of which meet the definition of “non-GAAP financial measures” set forth in Item 10(e) of Regulation S-K promulgated by the SEC.

While management and the investment community in general believe that presentation of these measures provides useful information to investors, neither FFO, AFFO, Adjusted EBITDA, nor NOI should be considered as an alternative to net income (loss) or income from operations as an indication of our performance. We believe that to understand our performance further, FFO, AFFO, Adjusted EBITDA, and NOI should be compared with our reported net income (loss) or income from operations and considered in addition to cash flows computed in accordance with GAAP, as presented in our consolidated financial statements.

Funds From Operations and Adjusted Funds From Operations

FFO is defined by the National Association of Real Estate Investment Trusts (“NAREIT”) as net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property and impairment adjustments, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Our calculation of FFO is consistent with FFO as defined by NAREIT.

AFFO is defined by us as FFO excluding amortization of identifiable intangibles incurred in property acquisitions, straight-line rent adjustments to revenue from long-term leases, amortization costs incurred in originating debt, interest rate cap mark-to-market adjustments, amortization of non-cash equity compensation, acquisition and other costs, transaction pursuit costs, loss on modification/extinguishment of debt, gain on involuntary conversion, gain on termination of lease and certain litigation-related expenses, less recurring capital spending.

Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. In fact, real estate values have historically risen or fallen with market conditions. FFO is intended to be a standard supplemental measure of operating performance that excludes historical cost depreciation and valuation adjustments from net income. We consider FFO useful in evaluating potential property acquisitions and measuring operating performance. We further consider AFFO useful in determining funds available for payment of distributions. Neither FFO nor AFFO represent net income (loss) or cash flows from operations computed in accordance with GAAP. You should not consider FFO and AFFO to be alternatives to net income (loss) as reliable measures of our operating performance; nor should you consider FFO and AFFO to be alternatives to cash flows from operating, investing or financing activities (computed in accordance with GAAP) as measures of liquidity.

Neither FFO nor AFFO measure whether cash flow is sufficient to fund all of our cash needs, including principal amortization, capital improvements and distributions to stockholders. FFO and AFFO do not represent cash flows from operating, investing or financing activities computed in accordance with GAAP. Further, FFO and AFFO as disclosed by other REITs might not be comparable to our calculations of FFO and AFFO.

The following table sets forth a reconciliation of the Company’s FFO and AFFO for the periods presented to net loss, computed in accordance with GAAP (amounts in thousands):

Adjusted Earnings Before Interest, Income Taxes, Depreciation and Amortization

We believe that Adjusted EBITDA is a useful measure of our operating performance. We define Adjusted EBITDA as net income (loss) before allocation to non-controlling interests, plus real estate depreciation and amortization, amortization of identifiable intangibles, straight-line rent adjustments to revenue from long-term leases, amortization of non-cash equity compensation, interest expense (net), acquisition and other costs, transaction pursuit costs, loss on modification/extinguishment of debt and certain litigation-related expenses, less gain on involuntary conversion and gain on termination of lease.

We believe that this measure provides an operating perspective not immediately apparent from GAAP income from operations or net income (loss). We consider Adjusted EBITDA to be a meaningful financial measure of our core operating performance.

However, Adjusted EBITDA should only be used as an alternative measure of our financial performance. Further, other REITs may use different methodologies for calculating Adjusted EBITDA, and accordingly, our Adjusted EBITDA may not be comparable to that of other REITs.

The following table sets forth a reconciliation of Adjusted EBITDA for the periods presented to net loss, computed in accordance with GAAP (amounts in thousands):

Net Operating Income

We believe that NOI is a useful measure of our operating performance. We define NOI as income from operations plus real estate depreciation and amortization, general and administrative expenses, acquisition and other costs, transaction pursuit costs, amortization of identifiable intangibles and straight-line rent adjustments to revenue from long-term leases, less gain on termination of lease. We believe that this measure is widely recognized and provides an operating perspective not immediately apparent from GAAP income from operations or net income (loss). We use NOI to evaluate our performance because NOI allows us to evaluate the operating performance of our company by measuring the core operations of property performance and capturing trends in rental housing and property operating expenses. NOI is also a widely used metric in valuation of properties.

However, NOI should only be used as an alternative measure of our financial performance. Further, other REITs may use different methodologies for calculating NOI, and accordingly, our NOI may not be comparable to that of other REITs.

The following table sets forth a reconciliation of NOI for the periods presented to income from operations, computed in accordance with GAAP (amounts in thousands):

Critical Accounting Policies

Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Management bases its estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that there have been no material changes to the items that we disclosed as our critical accounting policies under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Form 10-K for the year ended December 31, 2023.

Recent Accounting Pronouncements

See Note 2, “Significant Accounting Policies” of our consolidated financial statements for a discussion of recent accounting pronouncements.

Our future income, cash flows and fair value relevant to our financial instruments depend upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. Based upon the nature of our operations, the principal market risk to which we are exposed is the risk related to interest rate fluctuations. Many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors that are beyond our control, contribute to interest rate risk.

A one percent change in interest rates on our $132.0 million of variable rate debt as of September 30, 2024, would impact annual net loss by approximately $1.3 million.

At September 30, 2024, there were no interest rate caps for the Company’s outstanding debt.

The fair value of the Company’s notes payable was approximately $1,196.7 million and $1,160.4 million as of September 30, 2024 and December 31, 2023, respectively

Evaluation of Disclosure Controls and Procedures

The Company carried out an evaluation under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2024. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, and summarized, within the time periods specified in the SEC's rules and forms.

We continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The risk factors disclosed in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, set forth information relating to various risks and uncertainties that could materially adversely affect our business, financial condition, liquidity, and operating results. Such risk factors continue to be relevant to an understanding of our business, financial condition, liquidity and operating results, and there have been no material changes to those risk factors for the nine months ended September 30, 2024. except for the following updates:

We depend on certain agencies of the City of New York, as a single government tenant in our office buildings, which could cause an adverse effect on us, including our financial condition, results of operations and cash flow when these agencies opt to early terminate or opt not to renew their leases.

Our rental revenue depends on entering into leases with and collecting rents from tenants. As of September 30, 2024, Kings County Court, the Human Resources Administration, and the Department of Environmental Protection, all of which are agencies of the City of New York, leased an aggregate of 548,580 rentable square feet of commercial space at our commercial office properties at 141 Livingston Street and 250 Livingston Street, representing approximately 22% of our total revenues for the nine months ended September 30, 2024.

As of February 23, 2024, The City of New York, a municipal corporation acting through the Department of Citywide Administrative Services (“NYC”), notified us of its intention to terminate its lease at 250 Livingston Street effective August 23, 2025. The lease generally provides for rent payments in the amount of $15.4 million per annum. The Company may be unable to replace NYC as a tenant or unable to replace them with other commercial tenants at comparable rent rates, may incur substantial costs to improve the vacated space or may have to offer significant inducements to fill the space, all of which may have an adverse effect on our financial condition, results of operations and cash flow. In connection with the termination of the 250 Livingston lease, pursuant to the terms of the loan agreement related to $125 million building mortgage, we expect to establish shortly a cash management account for the benefit of the lender, into which we will be obligated to deposit all revenue generated by the building at 250 Livingston Street. All amounts remaining in such cash management account after the lender’s allocations set forth in the loan agreement will be disbursed to us once the tenant cure conditions are satisfied under the loan agreement. If we are unable to replace the NYC lease at comparable rents, we may not be able to cure the conditions listed in the loan agreement. If the excess cash is not released to us, it could impact our available cash to fund corporate operations and pay dividends and distributions to our stockholders.

If NYC were to decide not to renew the 141 Livingston Street lease which expires December 27, 2025, which is the stated termination date pursuant to the terms of the lease, we would be at risk of not being able to replace the NYC as a tenant, leasing the space below the current rates, incurring costs to improve the space or offer other inducements to fill the space, all of which may have an adverse effect on our financial condition, results of operations and cash flow. If we are not able to extend or replace the NYC lease at our 141 Livingston property for a minimum of a five year term, we will be required to either fund an escrow account in the amount of $10,000 payable in equal monthly payments over the 18 months after lease expiration or deliver to the lender a letter of credit in the amount of $10,000.

In addition, on October 28, 2024 we received notice that as of October 7, 2024 the servicing of the mortgage note was transferred to a special servicer (“Special Servicer”) due to, they contend, our failure to make certain required payments under the loan, including, but not limited to, the reserve monthly deposit. The Special Servicer has demanded that we pay $2,222 of reserve payments into an escrow account immediately and continued monthly payments of $555 for an additional 14 months, $1,166 of default interest and late charges through October 7, 2024, and an additional $10 per diem interest for each day thereafter. We contend the Special Servicer has misinterpreted the terms of the loan agreement requiring monthly reserve payments beginning on July 7, 2024, and that the Company has no obligation to make reserve payments at this time under the terms of the loan agreement. We continue to discuss this issue with the Special Servicer.