ITEM 1. BUSINESS
(a) General
Presidential Realty Corporation is a Delaware corporation organized in 1983 to succeed to the business of a company of the same name which was organized in 1961 to succeed to the business of a closely held real estate business founded in 1911. The terms "Presidential" or the "Company" refer to the present Presidential Realty Corporation or its predecessor company of the same name and to any subsidiaries. Since 1982 the Company has elected to be treated as a real estate investment trust ("REIT") for Federal and State income tax purposes. See Qualification as a REIT.
The Company's principal assets fall into the following three general categories:
(i) The largest portion of the Company's assets consists of notes receivable, which are reflected on the Company's Consolidated Balance Sheet at December 31, 1996 as "Mortgage portfolio: sold properties (accrual and impaired)". The $61,182,593 aggregate principal amount of these notes have been reduced by $14,088,366 of discounts (which reflect either the difference between the stated interest rates on the notes and the market interest rates at the time the notes were accepted or discounts received on the purchase of notes) and $19,535,536 of gains on sales which have been deferred. See Note 1-D and 1-E of Notes to Consolidated Financial Statements. Accordingly, the net carrying value of the Company's "Mortgage portfolio: sold properties" was $27,558,691 at December 31, 1996 which includes $5,613,041 of wrapped mortgage debt.
Included in this category is a note having an outstanding principal balance of $14,650,867 at December 31, 1996 secured by a first mortgage on 1,017 condominium units at Fairfield Towers in Brooklyn, New York (the "Fairfield Towers First Mortgage"). At December 31, 1996 the net carrying value of this note was $11,179,548 after deducting a discount of $3,471,319. The Fairfield Towers First Mortgage was acquired by the Company in the fourth quarter of 1996 for a purchase price of $11,150,867 which reflected a $3,500,000 discount. See Loans and Investments below and Note 2 of Notes to Consolidated Financial Statements. The Company also holds a subordinate note secured by the Fairfield Towers condominium units (the "Fairfield Towers Second Mortgage") which the Company received in 1984 when it sold the Fairfield Towers property to the present owner.
All of the loans included in this category of assets were in good standing at December 31, 1996 with the exception of the Fairfield Towers Second Mortgage. This loan has been classified as an impaired loan in accordance with Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan", which was adopted by the Company as of January 1, 1995. Prior to the adoption of SFAS No. 114, the Fairfield Towers Second Mortgage was classified as a nonaccrual loan.
The Fairfield Towers Second Mortgage, which has an outstanding principal balance of $14,659,841 at December 31, 1996, has been in nonaccrual status since the fourth quarter of 1991. The net carrying value of this note is $1,404,764, after discount and deferred gain in the amount of $13,255,077. Income with respect to this loan is recognized only to the extent that payments are actually received. See Loans and Investments.
While notes reflected under "Mortgage portfolio: sold properties (accrual and impaired)" consist primarily of notes received from sales of real properties previously owned by the Company, this category of assets also includes the $14,650,867 Fairfield Towers First Mortgage purchased in 1996 and notes in the aggregate principal amount of $1,464,076 which relate to sold cooperative apartments, the majority of which were either acquired by the Company in connection with the settlement agreement executed in November, 1991 (the "Settlement Agreement") with Ivy Properties, Ltd. and its affiliates (collectively "Ivy") or obtained as a result of sales of cooperative apartments which the Company received pursuant to the Settlement Agreement. See Relationship with Ivy Properties, Ltd. below.
(ii) A smaller portion of the Company's assets consists of notes receivable in the aggregate principal amount of $2,543,541 from loans made to Ivy in connection with the conversion of apartment buildings to cooperative ownership or the sales in 1981 and 1984 by the Company to Ivy of two apartment projects. These loans are reflected on the Company's Consolidated Balance Sheet at December 31, 1996 as "Mortgage portfolio: related parties (accrual and impaired)". The principal amounts of these notes have been reduced by discounts of $145,915 and deferred gains of $1,567,400 and, accordingly, these notes have a net carrying value at December 31, 1996 of $830,226. Management believes that it holds sufficient collateral to protect its interests in all of the outstanding loans to Ivy to the extent of the net carrying value of these loans.
At December 31, 1996, all of the loans due from related parties were in good standing except for the Overlook loan, a nonrecourse loan made to Ivy in connection with the sale of real property previously owned by the Company. This loan has been in default since 1990 and is classified as an impaired loan. At December 31, 1996, this loan had a carrying value of $1,567,400 and a net carrying value of zero after a deferred gain of $1,567,400. See Relationship with Ivy Properties, Ltd., and Notes 2 and 19 of Notes to Consolidated Financial Statements.
(iii) The Company owns equity interests in eight rental properties and one parcel of land. These properties have an historical cost of $25,369,405, less accumulated depreciation of $5,680,108, resulting in a net carrying value of $19,689,297. See Properties below.
In addition to the above mentioned general categories, at December 31, 1996, Presidential also had $588,683 in foreclosed properties. These foreclosed properties were acquired by the Company in satisfaction of loans due to Presidential and are carried at the lower of cost or estimated fair value (net of estimated costs to sell). See Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes 4 and 19 of Notes to Consolidated Financial Statements.
Under the Internal Revenue Code of 1986, as amended (the "Code"), a REIT which meets certain requirements is not subject to Federal income tax on that portion of its taxable income which is distributed to its shareholders, if at least 95% of its "real estate investment trust taxable income" (exclusive of capital gains) is so distributed. Since January 1, 1982, the Company has elected to be taxed as a REIT and has paid regular quarterly cash distributions. Total dividends paid by the Company in 1996 were $.60 per share. While the Company intends to operate in such a manner as to enable it to be taxed as a REIT, and to pay dividends in an amount sufficient to maintain REIT status, no assurance can be given that the Company will, in fact, continue to be taxed as a REIT, or that distributions will be maintained at the current rate or that the Company will have cash available to pay sufficient dividends in order to maintain REIT status. See Qualification as a REIT and Market for the Registrant's Common Equity and Related Stockholder Matters.
At December 31, 1996, the Company employed ten persons.
(b) Investment Strategies
The Company's current overall investment strategy is to make
investments in real property which offer attractive current yields with potential for capital appreciation. The Company's investment policy is not contained in or subject to restrictions included in the Company's Certificate of Incorporation or Bylaws, and there are no limits in the Company's Certificate of Incorporation or Bylaws on the percentage of assets which it may invest in any one type of asset or the percentage of securities of any one issuer which it may acquire. The investment policy may, therefore, be changed by the Directors or Officers of the Company without the concurrence of the holders of its outstanding stock. However, to continue qualifying as a REIT, the Company must restrict its activities to those permitted under the Code. See Qualification as a REIT.
The Company's current primary investment strategies are as follows:
(i) Holding of Long Term Notes
The Company holds and expects to continue to hold long term mortgage notes obtained from the sales of real property previously owned by the Company. These notes provide for balloon principal payments at varying times. The Company may in appropriate circumstances agree to extend and modify these notes. See the table set forth below under Loans and Investments.
The capital gains from sales of real properties previously owned by the Company are recognized for income tax purposes on the installment method as principal payments are received. To the extent that such payments are received by Presidential, it may, as a REIT, either (i) elect to retain such payments, in which event it will be required to pay Federal and State income tax on the portion of the payments which represent capital gain, or (ii) distribute all or a portion of such payments to shareholders, in which event Presidential will not be required to pay taxes on the capital gain to the extent that it is distributed to shareholders. To the extent that Presidential retains such payments, the proceeds, after payment of any taxes, will be available for future investment. Presidential has not adopted a specific policy with respect to the distribution or retention of capital gains, and its decision as to any such gain will be made in connection with all of the circumstances existing at the time the gain is recognized. It should be noted that there can be no assurance that the balloon principal payments due in accordance with the purchase money notes will actually be made when due.
(ii) Equity Properties
The Company's current investment policy is focused on
acquiring additional equity interests in income producing properties, principally moderate income apartment properties in the eastern United States. Although the Company's present intention is to acquire additional moderate income apartment properties, Presidential has in the past invested in other commercial properties, including office buildings, shopping centers and light industrial properties, and may do so in the future. Geographically, the Company expects to invest primarily in the eastern United States, although Presidential has in the past invested in other locations and may do so in the future. However, the Company's plans to expand its portfolio of real estate equities may be adversely affected by limitations on its ability to obtain funds for investment on satisfactory terms from external sources.
Notwithstanding the fact that the Company's current investment policy is focused on acquiring additional equity interests in income producing properties, in 1996 the Company acquired the Fairfield Towers First Mortgage for a purchase price of $11,150,867, which reflected a discount of $3,500,000 from the $14,650,867 outstanding principal balance (see Loans and Investments). The Company decided to make such acquisition because management believed that the Company could obtain a substantial current return on the funds utilized for the acquisition of the Fairfield Towers First Mortgage and also protect its position as the holder of the Fairfield Towers Second Mortgage.
(iii) Cooperative/Condominium Conversion Loans
During the 1980's, the Company's primary investment strategy for new investments was to make participating loans on apartment buildings which were in the process of being converted to cooperative or condominium ownership. All of these buildings were in the New York metropolitan area and many of these loans were to Ivy. In 1991, the Company entered into a Settlement Agreement with Ivy with respect to a number of loans previously made to Ivy, some of which were in default. See Relationship with Ivy Properties, Ltd. As part of the settlement arrangements, in 1991 and 1992 Presidential received 191 cooperative apartments from Ivy in satisfaction of certain indebtedness. Most of these apartments were occupied by tenants whose right to remain in occupancy is protected by local rent laws. While many of these cooperative apartments have since been sold by Presidential (many of which were sold at discounted prices subject to the occupancy rights of existing tenants) at December 31, 1996, Presidential still owns 53 cooperative apartments. Many of these remaining cooperative apartments generate a positive cash flow from rental operations.
Although it may from time to time sell individual or groups of occupied apartments, Presidential generally intends to continue to hold these apartments until they become vacant and may, in some circumstances, rerent apartments free from rent regulations after they have become vacant.
The Company is not currently making loans in connection with cooperative/condominium conversion projects.
(iv) Funding of Investments
In the past, the Company has obtained funds to make loans and investments from excess cash from operations or capital transactions, loans from financial institutions secured by specific real property or from general corporate borrowings. Such loans have in the past been, and may in the future be, secured by real property and have recourse to Presidential. However, funds may not be readily available from these sources and such unavailability may limit the Company's ability to make new investments. See Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.
(c) Loans and Investments
The Company's portfolio of investments consists of the three types of assets described under General above. At December 31, 1996, all of the loans included in "Mortgage portfolio: sold properties" were current except for the Fairfield Towers Second Mortgage. This $14,659,841 loan is classified as an impaired loan in accordance with SFAS No. 114 and has a net carrying value of $1,404,764 at December 31, 1996, after a discount of $7,765,964 and a deferred gain of $5,489,113. The Company has determined that at this time no allowance for credit losses is required for this loan because the net carrying value of the loan is less than the fair value of the underlying collateral.
In the fourth quarter of 1996, the Company acquired the Fairfield Towers First Mortgage, having an outstanding principal balance of $14,650,867, for a purchase price of $11,150,867. In connection with the acquisition of the Fairfield Towers First Mortgage, which was to become due in December of 1996, the maturity date was extended to October 30, 2006. The Fairfield Towers First Mortgage, which is nonrecourse except for certain limited personal guarantees made by certain of the principals of the borrower, provides for principal repayments prior to maturity upon the sale of individual condominium units in an amount equal to substantially all of the net proceeds of sale (after payment of $2,916 per unit to the holder of a $422,500 lien on the property, $3,000 per unit to Presidential as holder of the Fairfield Towers Second Mortgage, $4,050 per unit on account of past due real estate taxes and $5,917 per unit to fund various
obligations to the condominium association), which principal repayments have averaged approximately $27,000 per unit over the sale of the first 135 units. All accrued interest on this mortgage has been paid to date. However, there are approximately $4,800,000 of unpaid real estate taxes (including interest accrued thereon) outstanding with respect to this property. Approximately $3,000,000 of this amount arose prior to the condominium conversion of the property and was covered by a deferred payment agreement with the City of New York which required payments as condominium units were sold. However, as a result of the slower than projected pace of sales, the term of the deferred payment agreement expired. Real estate taxes are now being paid by the owner in an amount equal to the currently accruing taxes, and the unpaid balance is being reduced at the rate of $4,050 per unit as condominium units are sold and an additional $200,000 per year from the cash flow of the property. Subsequent to December 31, 1996, the Company advanced $600,000 to the owner to repay a portion of the unpaid taxes and interest. The $600,000 advance was added to the $14,650,867 indebtedness secured by the Fairfield Towers First Mortgage and the interest rate will be the same as the interest rate on the Fairfield Towers First Mortgage. The owner is in the process of negotiating a new deferment agreement with the City of New York. However, no assurances can be given that the owner will be successful in negotiating a satisfactory deferment agreement with the City of New York, and if a satisfactory agreement is not obtained, a continuing default in the payment of real estate taxes could adversely affect the success of the condominium conversion at Fairfield Towers and the value of Presidential's First and Second Mortgages. See Notes 2 and 22 of Notes to Consolidated Financial Statements.
Presidential paid $2,500,867 of its $11,150,867 purchase price for the Fairfield Towers First Mortgage in cash and executed an $8,650,000 note for the balance (the "Fairfield Purchase Money Note"). The Fairfield Purchase Money Note is secured by a collateral assignment of the Fairfield Towers First Mortgage and, except for a guarantee of $1,000,000, is nonrecourse to Presidential. All payments of principal received by Presidential under the Fairfield Towers First Mortgage will be utilized to make principal repayments on the Fairfield Purchase Money Note. In addition, Presidential is making principal payments on the Fairfield Purchase Money Note in amounts sufficient to amortize it based on a 9.25% interest rate for a 25 year term, with the entire outstanding principal balance due on October 30, 2001.
Presidential is also the holder of the Fairfield Towers Second Mortgage on the condominium units, which it received in 1984 when it sold the Fairfield Towers property to the present owner. The Fairfield Towers Second Mortgage, which is nonrecourse, has an outstanding principal balance of $14,659,841 and a net carrying value of $1,404,764. The cash flow from the rental operations of
the condominium units is not sufficient to pay more than a nominal amount of the interest that is due on the Fairfield Towers Second Mortgage and, accordingly, pursuant to a modification agreement executed in December, 1992, all unpaid interest is deferred. While Presidential received $227,001 of interest payments on the Fairfield Towers Second Mortgage in 1996, it is possible that interest payments on the Fairfield Towers Second Mortgage will be substantially reduced in 1997 and subsequent years since cash flow from the rental operations of the property will be partially utilized to pay down the accrued real estate taxes. Until the Fairfield Towers First Mortgage is repaid in full, Presidential, as holder of the Fairfield Towers Second Mortgage, will continue to receive release payments of only $3,000 per unit upon the sale of each condominium apartment unit. However, after the Fairfield Towers First Mortgage is repaid, Presidential will receive substantially all of the net proceeds of sales of condominium units in repayment of the principal amount of its Second Mortgage and all deferred interest thereon, including additional interest which is based on percentages of gross sales prices. By acquiring the Fairfield Towers First Mortgage at a $3,500,000 discount, Presidential believes that, in addition to obtaining a significant return on the funds utilized to make the acquisition, it has protected its position as holder of the Fairfield Towers Second Mortgage since that position could have been adversely affected upon the maturity of the First Mortgage in December, 1996. Pursuant to the terms of the Fairfield Towers Second Mortgage, Presidential has implemented substantial restrictions relating to the operation and condominium conversion of the property and control of the funds generated from operations and sales.
The first sales of apartment units pursuant to the conversion of the property to condominium ownership closed in June, 1994. A total of 50 condominium units were sold during 1994, with 41 additional units sold in 1995 and 44 additional units sold in 1996. Although sales during the initial years of the conversion have been slower than originally anticipated and the Company's return on the Fairfield Towers Second Mortgage during these initial years has been and will continue to be limited, if the conversion is successful and the Fairfield Towers First Mortgage is repaid, the Company expects to ultimately recover the outstanding principal amount of the Fairfield Towers Second Mortgage and substantial amounts of the deferred basic and additional interest thereon. While the ultimate success of the conversion will depend upon a number of factors, including the owner's ability to attract tenant purchasers as well as purchasers for vacant apartments, and the ability of purchasers to obtain satisfactory financing, the Company believes that the initial closings under the conversion plan are a significant step forward in this process. From the initial closing of sales under the conversion through December 31, 1996, the Company has received $340,159 in payments from sales of apartment units,
which has reduced the original outstanding principal balance of the Fairfield Towers Second Mortgage from $15,000,000 to $14,659,841 at December 31, 1996. In addition, the Fairfield Towers First Mortgage in the original outstanding principal balance of $18,113,118 has been reduced to $14,650,867 at December 31, 1996. However, the Fairfield Towers Second Mortgage is still classified as an impaired loan and the Company recognizes interest income on this loan only to the extent that such interest is actually received. During 1996, the Company received $230,697 of interest and fees on this note. See Note 2 of Notes to Consolidated Financial Statements.
Subsequent to December 31, 1996, the Company received prepayment of its $1,074,200 Cedarbrooke note receivable and modified its Woodland notes receivable, extending the maturity date from 2000 to 2005, with interest rates increasing in 2002 from 9% to 9.25%.
At December 31, 1996, all of the loans included in "Mortgage portfolio: related parties" were in good standing, except for the Overlook loan which was placed in nonaccrual status in 1990 and, as of January 1, 1995, was classified as an impaired loan in accordance with SFAS No. 114. At December 31, 1996, the carrying value of the Overlook loan is $1,567,400 and is reflected on the Company's Consolidated Balance Sheet at a net carrying value of zero after a deferred gain of $1,567,400. The note was modified in 1995, extending the maturity date to December 31, 2003 with an interest rate of 6%. The Overlook loan, which is a nonrecourse loan, continues to be secured by three second mortgages (the "Collateral Security") with face amounts totalling $1,617,400. Pursuant to the Settlement Agreement with Ivy (see Relationship with Ivy Properties, Ltd.), Ivy agreed to give Presidential a deed in lieu of foreclosure to the various assets held by Presidential as collateral for the Overlook loan, but since the Company in its capacity as a secured creditor exercises significant control over, and receives the economic benefits from, such collateral, the Company has no current plans to request such deed or to foreclose on its collateral. See Note 2 of Notes to Consolidated Financial Statements.
The following tables set forth information as of December 31, 1996 with respect to the mortgage loan portfolio resulting from the sale of properties and the loan portfolio due from Ivy.
- -------------------------------------------------------------------------------- MORTGAGE PORTFOLIO: NOTES RECEIVABLE - SOLD PROPERTIES DECEMBER 31, 1996 - --------------------------------------------------------------------------------
MORTGAGE PORTFOLIO: NOTES RECEIVABLE - SOLD PROPERTIES DECEMBER 31, 1996 (CONTINUED) - --------------------------------------------------------------------------------
MORTGAGE PORTFOLIO: NOTES RECEIVABLE - SOLD PROPERTIES DECEMBER 31, 1996 (CONCLUDED) - -------------------------------------------------------------------------------- (1) The discounts on the Cedarbrooke and Woodgate notes were computed at a yield of 12%. Subsequent to December 31, 1996, the $1,074,200 Cedarbrooke note receivable was paid in full. (2) This note is a wraparound mortgage note, whereby the Company holds a junior mortgage which secures a liability which includes the amount of the outstanding senior or underlying mortgage. The purchaser services the entire debt secured by the wraparound mortgage and Presidential services the senior debt from the proceeds of the wrap mortgage. (3) The discount on this note was computed at a yield of 14%. (4) The maturity dates of these notes may be extended at the option of the buyer from April 30, 1999 to April 30, 2009. (5) This note was purchased by the Company in the fourth quarter of 1996 at a discount of $3,500,000. The interest rate, currently 9.25%, is a variable rate equal to 1% above the prime rate. (6) The maturity dates of the Fairfield Towers Second Mortgage and the Mark Terrace note may be extended at the option of the buyers from November 29, 1999 to November 29, 2005. (7) This note is classified as an impaired loan and interest income is recorded on a cash basis. (8) Interest is paid on this note at the rate of 6% per annum through July 31, 1999 and a rate of not less than 7.5% per annum through maturity. In connection with the modification of the note in 1994, the borrower paid a fee of $628,863 in order to increase the effective interest rate on the note to 8.5% per annum through July 31, 1999. (9) The discounts on the Woodland Village notes were computed at a yield of 25%. In December, 1995, the borrower excercised its option to extend the maturity date of the notes from 1995 to 2000. Subsequent to December 31, 1996, the maturity dates of these loans were further extended to 2005. The interest rate is 9% per annum through December 31, 2002 and 9.25% per annum thereafter. The notes are amortizing monthly, based on a 20 year term at the above rates, and have balloon payments due at maturity. (10) These notes were either assigned by Ivy to reduce Ivy loans in process of foreclosure or were received from purchasers of apartments which Presidential held as foreclosed property. (11) The amount under discount represents unamortized mortgage points received from purchasers. (12) These notes were assigned by Ivy as a result of the Settlement Agreement with Ivy. (13) The discount on this note was computed at 16% of face value. (14) The discount on this note was computed at 15% of face value.
MORTGAGE PORTFOLIO: NOTES RECEIVABLE - RELATED PARTIES DECEMBER 31, 1996 - --------------------------------------------------------------------------------
(1) Ivy's equity in these purchase money notes (which are secured by co-op apartment units at University Towers, New Haven, CT) was transferred to Presidential as part of the Settlement Agreement. (2) As part of the Settlement Agreement with Ivy, certain of Presidential's outstanding nonrecourse loans (most of which had previously been written down to zero) were consolidated into two notes which currently have an aggregate outstanding principal balance of $4,886,837. The $116,787 represents Presidential's net carrying value of the notes. Presidential does not expect to recover any material amounts on these notes in excess of their net carrying value. (3) This loan has been in default since 1990 and is classified as an impaired loan. (4) These notes represent a 100% interest in notes receivable held by UTB Associates, a partnership in which Presidential has a 66-2/3% interest. These notes are amortized over a period of approximately 28 years from the date of a co-op apartment sale.
(d) Qualification as a REIT
Since 1982, the Company has operated in a manner intended to permit it to qualify as a REIT under Sections 856 to 860 of the Code. The Company intends to continue to operate in a manner to permit it to qualify as a REIT. However, no assurance can be given that it will be able to continue to operate in such a manner or to remain qualified.
In any year that the Company qualifies as a REIT and meets other conditions, including the distribution to stockholders of at least 95% of its "real estate investment trust taxable income" (excluding long-term capital gains but before a deduction for dividends paid), the Company will be entitled to deduct the distributions that it pays to its stockholders in determining its ordinary income and capital gains that are subject to federal income taxation (see Note 10 of Notes to Consolidated Financial Statements). Income not distributed is subject to tax at rates applicable to a domestic corporation. In addition, the Company is subject to an excise tax (at a rate of 4%) if the amounts actually or deemed distributed during the year do not meet certain distribution requirements. In order to receive this favorable tax treatment, the Company must restrict its operations to those activities which are permitted under the Internal Revenue Code and to restrict itself to the holding of assets that a REIT is permitted to hold.
It should be noted that no assurance can be given that the Company will, in fact, continue to be taxed as a REIT, that distributions will be maintained at the current rate, that the Company will have sufficient cash to pay dividends in order to maintain REIT status or that it will be able to make cash distributions in the future. In addition, even if the Company continues to qualify as a REIT, the Board of Directors has the discretion to determine whether or not to distribute long-term capital gains and other types of income not required to be distributed in order to maintain REIT tax treatment.
(e) Relationship with Ivy Properties, Ltd.
From 1979 to 1989, Presidential made loans to Ivy Properties, Ltd. and its affiliates ("Ivy") in connection with Ivy's cooperative conversions of apartment properties in the New York metropolitan area. In 1981, UTB Associates, a partnership controlled by Presidential, sold an apartment property to Ivy in return for purchase money notes. In addition, in 1984, Presidential sold to Ivy its 50% partnership interest in the partnership which owned Overlook Gardens, a 308 unit apartment complex in Alexandria, Virginia for a purchase money note.
Ivy is owned by Thomas Viertel, Steven Baruch and Jeffrey Joseph (the "Ivy Principals"), who are the sole partners of Pdl
Partnership, which since 1991 has owned 198,735 shares of the Company's Class A common stock. From 1985 through 1991, these 198,735 shares of Class A common stock were owned by BJV Partnership, another partnership wholly owned by the Ivy Principals. As a result of the ownership of the 198,735 shares of Class A common stock described above and 24,601 additional shares of Class A common stock owned in the aggregate individually by the Ivy Principals, Pdl Partnership and the Ivy Principals have, and BJV Partnership and the Ivy Principals had, beneficial ownership of an aggregate of approximately 47% of the outstanding shares of Class A common stock of the Company, which class of stock is entitled to elect two-thirds of the Board of Directors of the Company. By reason of such beneficial ownership, the Ivy Principals are in a position substantially to control elections of the Board of Directors of the Company.
Thomas Viertel is the son of Joseph Viertel, a Director and a former President of Presidential, and the nephew of Robert E. Shapiro, Chairman of the Board of Directors and a former President of Presidential. Steven Baruch is the cousin of Robert E. Shapiro and Joseph Viertel.
As a result of the deterioration of the sales market for cooperative apartments in the New York metropolitan area in 1989 and 1990, Ivy defaulted on certain of its outstanding loans from Presidential in 1990 and 1991. In early 1990, Ivy began negotiations with Presidential with respect to a workout of the loans then in default. Because of the relationships described above between the Ivy Principals and Presidential, the negotiations with Ivy were conducted on behalf of Presidential by a committee of three members of the Board of Directors with no affiliations with the Ivy Principals (the "Independent Committee") and an officer of Presidential who was not affiliated with the Ivy Principals. On November 14, 1991, Presidential and Ivy consummated a Settlement Agreement with respect to various outstanding loans to Ivy, which was approved unanimously by the Board of Directors of Presidential.
In connection with the Settlement Agreement, Presidential received, among other things, a number of vacant and occupied cooperative apartment units in the New York metropolitan area and certain third party promissory notes held by Ivy. Presidential received these assets in exchange for (i) the satisfaction of all of Ivy's recourse debt to Presidential and certain of its nonrecourse debt to Presidential with respect to which Presidential held first priority security interests and (ii) the release by Presidential of certain subordinate security interests in collateral securing some of the defaulted loans.
Most of Ivy's remaining nonrecourse debt to Presidential was consolidated, on modified terms, into two nonrecourse loans (collectively, the "Consolidated Loans") which were collateralized by substantially all of Ivy's remaining business assets with respect to which Presidential either did not previously have any security interest or had a junior security interest (collectively, the "Consolidated Collateral"). The terms of the Settlement Agreement permit Ivy to use the proceeds of each sale of Consolidated Collateral to (1) pay existing indebtedness of Ivy to its bank and trade creditors and certain operating expenses and (2) create and fund specified reserves to provide for payment of future obligations and potential liabilities. At December 31, 1996, the Consolidated Loans had an outstanding principal balance of $4,886,837 and a net carrying value of $116,787. Since, as permitted by the terms of the Consolidated Loans, most of Ivy's assets have been sold with the sales proceeds used to pay other recourse obligations of Ivy, Presidential does not expect to recover any material amount on the Consolidated Loans in excess of their net carrying value.
In 1996 Presidential and the Ivy Principals agreed to a modification of the Settlement Agreement to provide that the Ivy Principals will make payments on the Consolidated Loans in an amount equal to 25% of the operating cash flow (after provision for certain reserves) of Scorpio Entertainment, Inc. ("Scorpio"), a company owned by the Ivy Principals which acts as a producer of theatrical productions. This agreement, and Presidential's decision not to exercise an option (which it had received as part of the original Settlement Agreement) to acquire the capital stock of Scorpio, was made pursuant to the unanimous determination of the Independent Committee that such actions were in the best interests of Presidential. Presidential does not expect to receive any material payments on the Consolidated Loans in 1997.
The table entitled "Mortgage portfolio: notes receivable related parties" set forth under Loans and Investments above reflects all loans to Ivy outstanding at December 31, 1996 All of such loans are in good standing except for the Overlook loan. See Loans and Investments. Management believes that it holds sufficient collateral to protect its interests in the loans that remain outstanding to Ivy to the extent of the net carrying value of these loans.
Jeffrey Joseph is the President and a Director of Presidential, Thomas Viertel is an Executive Vice President and the Chief Financial Officer of Presidential and Steven Baruch is an Executive Vice President of Presidential.
Any transactions relating to the implementation of the terms of the Settlement Agreement, or otherwise involving the Ivy Principals, are subject to the approval of the Independent Committee.
(f) Competition
The real estate business is highly competitive in all respects. In attempting to expand its portfolio of owned properties, the Company will be in competition with other potential purchasers for properties and sources of financing, many of whom will be larger and have greater financial resources than the Company. As a result of such competition, there can be no assurance that the Company will be able to obtain opportunities for new investments at attractive rates of return.
(g) Lines of Business
Revenues for 1996 were derived approximately 65% from rental property operations, 30% from mortgage loan operations - sold properties, 2% from mortgage loan operations - related parties, and 3% from investment income and other income. (See Management's Discussion and Analysis of Financial Condition and Results of Operations).
The following table reflects the contributions for the years ended December 31, 1996, 1995 and 1994 of Presidential's lines of business to (I) revenues and (II) operating income before general and administrative expenses:
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
(1) Does not include depreciation from non-rental property (home office furniture and equipment), net gain from the sale of properties and securities, and the cumulative effect of change in accounting for securities.
(2) Net of interest expense for wrap mortgage debt, interest expense on borrowings to fund loan agreements and amortization of loan acquisition costs.
(3) Net of miscellaneous interest expense.
ITEM 2.
ITEM 2. PROPERTIES
As of December 31, 1996, the Company had an ownership or leasehold interest in 629 apartment units, 641,300 square feet of commercial, industrial and professional space and one parcel of land, all of which are carried on the balance sheet at $19,689,297 (net of accumulated depreciation of $5,680,108). The Company has mortgage debt on the majority of these properties in the aggregate amount of $26,513,465, all of which is nonrecourse to Presidential with the exception of $294,824 pertaining to the mortgage on the Mapletree Industrial Center property.
In February, 1996, the Company foreclosed on its mortgage receivable on the Kent Terrace Apartments and became the owner of this 112 unit apartment property in Martinsburg, West Virginia. The Company intends to hold this property as a rental property and, accordingly, has reclassified the $329,212 net carrying value of the loan and deferred interest of $338,190 to real estate on its consolidated balance sheet.
The chart below indicates the operating results of each of the properties owned by the Company at December 31, 1996 in accordance with generally accepted accounting principles ("GAAP") and, following that, in terms of cash flow from operations.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES ------------------------------------------------- REAL ESTATE DECEMBER 31, 1996
See notes on following page.
(1) The results are calculated in accordance with GAAP and therefore reflect the deduction of noncash charges such as depreciation and amortization of mortgage costs.
(2) Cash flow or deficiencies from operations as reflected in the above chart are calculated before deduction of depreciation, valuation adjustments, amortization of mortgage costs and property replacements and additions, but after deduction of mortgage amortization. These results should not be considered as an alternative to income or loss from operations on the GAAP basis as an indicator of the properties' performance or to cash flows presented in accordance with GAAP. These results do not reflect the cash available to fund cash requirements.
(3) The Crown Court property is subject to a long-term net lease containing an option to purchase commencing in 1999 and a right to extend the net lease for an additional ten years.
(4) The Company received the Kent Terrace property in February, 1996 and is in the process of an extensive rehabilitation program at the property. The rehabilitation program has resulted in vacancies and upgrading expenses that have adversely affected the operations of the property. The Company expects to substantially complete the rehabilitation program in early 1997. The results presented are for approximately eleven months of operations.
(5) These results are net of minority interest share of partnership income.
(6) The Company owns 4 acres of vacant land located in Hartford, Connecticut. During 1996, the Company wrote off to expense the $22,036 carrying value of this land.
In addition, at December 31, 1996, the Company owned four properties which it obtained in foreclosure of loans. These properties are shown on the Company's Consolidated Balance Sheets under "Foreclosed properties". (See Note 4 of Notes to Consolidated Financial Statements).
In the opinion of management, all of the Company's properties are adequately covered by insurance in accordance with normal insurance practices. All real estate owned by the Company is owned in fee simple (except for the University Towers professional space, which is held under a valid and existing long-term lease), with title generally insured for the benefit of the Company by respectable title insurance companies.
The majority of the mortgages on the Company's properties are self-liquidating at fixed rates of interest with the exception of the mortgages on Metmor Plaza ("Home Mortgage Plaza"), Building
Industries Center and Continental Gardens. The Metmor Plaza mortgage amortizes monthly with a balloon payment due at maturity in February, 1999. The Building Industries Center mortgage amortizes monthly with a balloon payment due at maturity in May, 2000. The Continental Gardens mortgage requires monthly payments of interest only through January 1, 1997 and monthly payments of principal and interest from February 1, 1997 through maturity in January, 2005, when a balloon payment will be due.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The principal market for the Company's Class A and Class B Common Stock is the American Stock Exchange (ticker symbols PDL A and PDL B). The high and low prices for the stock on such principal exchange for each quarterly period during the past two years, and the per share dividends declared per quarter, are as follows:
Stock Prices Dividends --------------------------------- Declared Per Class A Class B Share on ---------------- ---------------- Class A and High Low High Low Class B ---- --- ---- --- ------------
Calendar 1996
First Quarter $6 7/8 $6 1/4 $6 3/8 $5 7/8 $.15 Second Quarter 6 3/8 6 6 3/8 5 15/16 .15 Third Quarter 6 1/4 6 6 3/8 5 3/8 .15 Fourth Quarter 6 1/2 6 1/16 6 3/8 5 3/4 .15
Calendar 1995
First Quarter $8 5/8 $7 5/8 $8 1/2 $6 1/2 $.15 Second Quarter 7 1/2 7 1/16 7 6 9/16 .15 Third Quarter 7 3/8 6 7/8 7 6 7/16 .15 Fourth Quarter 7 3/8 6 3/4 7 5 7/8 .15
(b) The number of record holders for the Company's Common Stock at December 31, 1996 was 188 for Class A and 885 for Class B.
(c) Under the Internal Revenue Code of 1986, as amended, a REIT which meets certain requirements is not subject to Federal income tax on that portion of its taxable income which is distributed to its shareholders, if at least 95% of its "real estate investment trust taxable income" (exclusive of capital gains) is so distributed. Since January 1, 1982, the Company has elected to be taxed as a REIT and has paid regular quarterly cash distributions. No assurance can be given that the Company will, in fact, continue to be taxed as a REIT, or that the Company will have sufficient cash to pay dividends in order to maintain REIT status. See Qualification as a REIT above.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA - --------------------------------
(1) The net gain from sales of properties and securities for 1994 includes a net gain from fire insurance settlement of $1,817,000.
ITEM 6. SELECTED FINANCIAL DATA (CONCLUDED) - --------------------------------------------
(1) In October, 1996, the Company purchased the $14,651,000 Fairfield Towers First Mortgage at a $3,500,000 discount for a net purchase price of $11,151,000. The Company paid $2,501,000 in cash and obtained an $8,650,000 bank loan for the balance of the purchase price.
(2) In December, 1994, the Company acquired Continental Gardens in Miami, Florida, for a purchase price of $9,765,000 and obtained a $7,800,000 first mortgage loan on the property.
See Notes to Consolidated Financial Statements.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
1996 vs 1995
Income for 1996 increased by $767,114 from $12,171,425 in 1995 to $12,938,539 in 1996 primarily as a result of increases in rental income and interest income-sold properties, partially offset by a decrease in investment and other income.
Rental income increased by $451,996 from $7,998,825 in 1995 to $8,450,821 in 1996. The Kent Terrace property, which the Company became the owner of in February, 1996, as a result of the foreclosure of its mortgage on that property, resulted in increased rental income of $239,098. In addition, the Metmor Plaza property received income of $127,094 as a result of lease cancellation penalties. Rental income at the Cambridge Green and Continental Gardens properties also increased by an aggregate amount of $181,578. These increases were offset by decreases in rental income of $59,650 at the Mapletree Industrial Center, Building Industries Center and the Metmor Plaza properties.
Interest on mortgages-sold properties increased by $354,721 from $2,118,275 in 1995 to $2,472,996 in 1996 primarily as a result of the purchase of the Fairfield Towers First Mortgage in the fourth quarter of 1996, which resulted in additional interest income of $237,159. There also was an increase of $155,643 of interest received on the Fairfield Towers Second Mortgage. In addition, there was an increase of $156,108 in the amortization of discounts on notes, of which $76,473 pertains to the Town House note, which was prepaid in June, 1996, and $39,937 pertains to the Fairfield mortgages. These increases were partially offset by decreases from 1995 to 1996 of $138,901 of interest on the Kent Terrace note and $44,220 of interest on the Town House note.
Costs and expenses increased by $917,314 from $10,298,209 in 1995 to $11,215,523 in 1996 primarily due to increased general and administrative expenses, interest on notes payable, rental property operating expenses and an increase in minority interest share of partnership income.
General and administrative expenses increased by $319,935 from $1,940,992 in 1995 to $2,260,927 in 1996. This increase was primarily due to increases in professional fees of $89,948, of which approximately $51,446 was incurred in connection with proposed acquisitions of properties which were not completed; franchise tax expense of $66,345; salary expense of $71,636, of which $46,514 pertains to executive bonuses; general office expense of $36,535 and a reduction in reimbursed overhead from foreclosed properties of $34,736 resulting from sales of
foreclosed properties in 1995 and 1996.
Rental property operating expenses increased by $364,376 from $3,411,014 in 1995 to $3,775,390 in 1996. The addition of the Kent Terrace property resulted in an increase of $362,394. In addition, the Metmor Plaza property had increased expenses of $79,572 for utilities and repairs and maintenance; environmental expenses at the Mapletree Industrial Center property increased $45,593, and the Company wrote off the $22,036 carrying value of vacant land in Hartford, Connecticut. These increases were offset by decreases of $46,252 in bad debts and $96,805 in insurance expense at the Mapletree Industrial Center property.
Rental property depreciation expense increased by $44,653 from $606,999 in 1995 to $651,652 in 1996 primarily as a result of the addition of the Kent Terrace property in 1996 and increases in rental property depreciation expense at the Cambridge Green and Continental Gardens properties as a result of improvements and additions to those properties.
Minority interest share of partnership income increased by $93,061 from $752,812 in 1995 to $845,873 in 1996, as a result of an increase in partnership income on the Metmor Plaza property.
Loss from operations of foreclosed properties decreased by $43,775 from $82,849 in 1995 to $39,074 in 1996. This decrease is primarily a result of the sales of foreclosed properties in 1995 and 1996.
Net gain from sales of foreclosed properties decreased by $54,469 from $88,151 in 1995 to $33,682 in 1996. During 1996, the Company sold the remaining five cooperative apartments at Hastings Gardens in Hastings, New York and, in addition, recognized a deferred gain from the previous sale of a cooperative apartment. During 1995, the Company sold twenty cooperative apartments at three locations.
Net gain from sales of properties and securities are sporadic (as they depend on the timing of sales or the receipt of installments or prepayments on purchase money notes). In 1996, the net gain from sales of properties and investments was $845,051 compared with a net gain of $71,367 in 1995. The 1996 gain is primarily a result of a $1,000,000 principal prepayment received on the Town House loan, which resulted in the recognition of $773,258 of deferred gain. In addition, the Company recognized deferred gains of $71,996 and $56,573, respectively, from principal payments received on the Overlook loan and the Fairfield Towers Second Mortgage. These amounts were offset by a loss of $56,776 from the sale of securities. The 1995 gain is primarily a result of principal payments received on the Fairfield Towers Second Mortgage which resulted in the recognition of $46,582 of deferred gain.
Balance Sheet
Net mortgage portfolio increased by $9,507,326 from $18,881,591 at December 31, 1995, to $28,388,917 at December 31, 1996. This increase was primarily the result of the purchase of the $14,650,867 Fairfield Towers First Mortgage in the fourth quarter of 1996. This mortgage was acquired by the Company at a discount of $3,500,000 for a net purchase price of $11,150,867. At December 31, 1996, the net carrying value of this loan was $11,179,548 after deducting the unamortized discount of $3,471,319. This $11,150,867 increase was offset by prepayments of $2,188,787 received on the purchase money notes secured by the Town House, Memphis, Tennessee property ($1,000,000) and the Hoboken, New Jersey property ($1,188,787). This decrease of $2,188,787 was offset by the $773,258 recognition of deferred gain, for a net decrease of $1,415,529. In addition, the $329,212 net carrying value of the Kent Terrace loan was reclassified from net mortgage portfolio to real estate in February, 1996 when the Company foreclosed on its mortgage and became the owner of the property.
Real estate increased by $1,497,787 from $23,871,618 at December 31, 1995 to $25,369,405 at December 31, 1996. This increase was primarily the result of the reclassification of the Kent Terrace note to real estate in February, 1996. Upon receipt of the property, the Company reclassified to real estate the $329,212 net carrying value of the loan from net mortgage portfolio and the $338,190 related deferred interest receivable from other receivables. The Company also recorded $653,681 in acquisition and improvement costs for the Kent Terrace property and $198,740 for additions and improvements to other properties. In June, 1996, the Company wrote off to expense the $22,036 carrying value on 4 acres of vacant land located in Hartford, Connecticut.
Prepaid expenses and deposits in escrow decreased by $203,303 from $1,327,000 at December 31, 1995 to $1,123,697 at December 31, 1996. This decrease is primarily the result of the reduction in mortgage escrow deposits for the Cambridge Green, Continental Gardens and Crown Court properties.
Other receivables decreased by $393,204 from $1,029,052 at December 31, 1995 to $635,848 at December 31, 1996 primarily as a result of the reclassification of the $338,190 deferred interest receivable on Kent Terrace to real estate and the receipt of $75,000 of accrued interest on notes receivable - sold properties.
Securities available for sale decreased by $1,415,138 from $2,390,346 at December 31, 1995 to $975,208 at December 31, 1996. This decrease was the result of the sale of $2,706,835 of securities, offset by the purchase of $1,231,478 of securities and the $60,219 increase in the fair value of securities held at
December 31, 1996.
Note payable to bank was $8,642,600 at December 31, 1996. There were no bank loans at December 31, 1995. In connection with its acquisition of the Fairfield Towers First Mortgage, the Company obtained an $8,650,000 bank loan in the fourth quarter of 1996 from Fleet Bank National Association ("Fleet"). The note is secured by a collateral assignment of the Fairfield Towers First Mortgage and, except for a guarantee of $1,000,000 of the indebtedness, is nonrecourse to Presidential. The note matures on October 30, 2001. See Financing Activities.
Accrued liabilities increased by $316,759 from $1,776,117 at December 31, 1995 to $2,092,876 at December 31, 1996 primarily as a result of increases in accruals for environmental expenses of $82,500 and bank loan and other interest expense of $202,314.
Deferred income decreased by $164,487 from $560,164 at December 31, 1995 to $395,677 at December 31, 1996. This decrease was primarily the result of the recognition of deferred interest income of $119,358 received in connection with the 1994 modification of the Presidential Park note and the recognition of deferred fees of $40,000 from the modification of the Presidential Park note.
Net unrealized loss on securities available for sale decreased by $60,219 from $11,205 at December 31, 1995 to a net unrealized gain of $49,014 at December 31, 1996. This decrease in unrealized loss is a result of the increase in the fair value of the securities available for sale for the year.
Results of Operations
1995 vs 1994
Income for 1995 increased by $1,718,019 from $10,453,406 in 1994 to $12,171,425 in 1995 primarily as a result of increases in rental income and investment income, partially offset by a decrease in other income.
Rental income increased by $1,610,670 from $6,388,155 in 1994 to $7,998,825 in 1995. The Continental Gardens apartment property, which was purchased in December, 1994, resulted in an increase of rental income of $1,543,900. Additionally, rental income increased by $170,427 at the Metmor Plaza property, offset by a decrease of $84,914 at the Mapletree Industrial Center property.
Investment income increased by $112,551 from $226,170 in 1994 to $338,721 in 1995. This increase was primarily due to increased interest income on cash and cash equivalent accounts and interest income received on mortgage deposits in escrow.
Other income decreased by $48,919 from $116,874 in 1994 to $67,955 in 1995. This decrease was primarily the result of the receipt in 1994 of $42,200 in modification and late fees on the Fairfield Towers Second Mortgage.
Costs and expenses increased by $1,669,346 from $8,628,863 in 1994 to $10,298,209 in 1995 primarily due to increases in all areas of rental property operations resulting from the ownership of the Continental Gardens apartment property which was purchased in December, 1994, as well as increases in operating expenses and mortgage interest on other rental properties. These increases were offset by a decrease in general and administrative expenses.
General and administrative expenses decreased by $369,135 from $2,310,127 in 1994 to $1,940,992 in 1995. This decrease was primarily due to decreases in franchise tax expense of $55,781, decreases in professional fees, directors fees and expenses, executive pension plan expense, and annual report printing expense of $98,848 in the aggregate and decreases in salary expense of $136,581, primarily as a result of a decrease of $111,473 in accruals for contractual bonuses. Additionally, in 1994 there was a bad debt write-off of $67,200 relating to the Brookline Manor loan.
Rental property operating expenses increased by $917,217 from $2,493,797 in 1994 to $3,411,014 in 1995. The purchase of Continental Gardens referred to above resulted in increased operating expenses of $419,549. In addition, at the Mapletree Industrial Center property there were increases in bad debts of $48,397, repairs and maintenance of $76,372 and insurance costs of $66,444. Also, the 1994 period reflected the receipt of net insurance proceeds of $294,350 pertaining to a flood in 1993 at the Cambridge Green Apartments.
Rental property mortgage interest increased by $808,648 from $1,464,939 in 1994 to $2,273,587 in 1995. This increase is primarily due to an increase of $660,914 of mortgage interest for Continental Gardens and an increase of $162,289 for the Metmor Plaza property. The Metmor Plaza mortgage has a variable rate of interest based on the LIBOR rate and the "Section 936" rate (which is established by the lender), but cannot exceed 8% per annum.
Real estate tax expense increased by $178,011 from $598,185 in 1994 to $776,196 in 1995 primarily as a result of the purchase of Continental Gardens.
Rental property depreciation expense increased by $126,876 from $480,123 in 1994 to $606,999 in 1995 primarily as a result of the purchase of Continental Gardens. The increase in depreciation for Continental Gardens was $170,505, partially offset by a decrease of $49,001 pertaining to the Mapletree Industrial Center.
Minority interest share of partnership income increased by $88,546 from $664,266 in 1994 to $752,812 in 1995, as a result of an increase in partnership income on the Metmor Plaza property.
Net gain from sales of properties and securities are sporadic (as they depend on the timing of sales or the receipt of installments or prepayments on purchase money notes). In 1995, the net gain from sales of properties and investments was $71,367 compared with a net gain of $2,668,919 in 1994. The 1995 gain is primarily a result of principal payments received on the Fairfield Towers Second Mortgage which resulted in the recognition of $46,582 of deferred gain. Additionally, a $15,293 net gain was recognized on the sale of the Rye Colony cooperative apartments in Rye, New York, and a net gain of $9,492 was recognized from the sale of securities. The 1994 gain is a result of the recognition of a net gain of $1,816,873 resulting from the settlement of a fire insurance claim relating to the Mapletree Industrial Center property, as well as the receipt of principal payments on the Overlook loan, the Fairfield Towers Second Mortgage and the Presidential Park loan, all of which resulted in the recognition of $1,023,639 of deferred gains. These gains were partially offset by a loss of $172,443 which was recorded as a result of the write-off of the loan in process of foreclosure on the Brookline Manor property.
Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities". As a result of the adoption of SFAS No. 115, the cumulative effect of change in accounting for securities of $37,617 of income was recognized in 1994.
Liquidity and Capital Resources
Management believes that the Company has sufficient liquidity and capital resources to carry on its existing business and, barring any unforeseen circumstances, to pay the dividends required to maintain REIT status in the foreseeable future. The Company is seeking to expand its portfolio of real estate equities and plans to utilize for this purpose a portion of its available funds and additional funds that the Company may receive from balloon payments due on the Company's notes receivable as they mature, as well as funds that may be available from external sources. However, the Company's plans to expand its portfolio of real estate equities may be adversely affected by limitations on its ability to obtain funds for investment on satisfactory terms from external sources.
At December 31, 1996, Presidential did not maintain any line of credit or short term financing arrangement. Presidential obtains funds for working capital and investment from its available cash and cash equivalents, from operating activities and from
repayments of its mortgage portfolio. Subsequent to December 31, 1996, the Company obtained a $250,000 line of credit from Citibank, N. A.
At December 31, 1996, Presidential had $1,392,135 in available cash and cash equivalents and $975,208 in securities available for sale. The December 31, 1996 total of $2,367,343 represents a decrease of $1,329,508 from the $3,696,851 total at December 31, 1995. This $1,329,508 decrease is primarily the result of the purchase of the Fairfield Towers First Mortgage in the fourth quarter of 1996. The Company purchased the $14,650,867 mortgage at a discount of $3,500,000 for a net purchase price of $11,150,867. The Company obtained an $8,650,000 purchase money loan and paid $2,673,662 in cash for the balance of the purchase price and costs relating to the acquisition of the Fairfield Towers First Mortgage. In addition, the Company incurred costs of $760,218 for the improvements and operations of the Kent Terrace property. These decreases were offset by the receipt of $2,188,787 in prepayments on the Town House and Hoboken purchase money notes. Subsequent to December 31, 1996, the Company received a $1,074,200 principal prepayment on its Cedarbrooke note receivable.
Operating Activities
Presidential's principal source of cash from operating activities is from interest on its mortgage portfolio, which was $3,178,511 in 1996, net of interest payments on wrap mortgage debt. In 1996, net cash received from rental property operations was $1,158,374 which is net of distributions to minority partners but before additions and improvements and mortgage amortization.
Investing Activities
Presidential holds a portfolio of mortgage notes receivable which consist primarily of notes arising from sales of real properties previously owned by the Company. Some of these notes wrap around underlying mortgage debt (the "Underlying Debt") which is paid by Presidential only out of funds received on its mortgage portfolio relating to the Underlying Debt. During 1996, the Company received principal payments of $2,608,404 on its mortgage portfolio (net of any principal payments attributable to the Underlying Debt), of which approximately $2,500,461 represented prepayments, which are sporadic and cannot be relied upon as a regular source of liquidity. In 1996, the Company also received $69,530 from sales of foreclosed properties, which are also sporadic.
During 1996, the Company invested $11,150,867 in the purchase from Fleet Bank National Association of the $14,650,867 Fairfield
Towers First Mortgage, which mortgage was purchased at a $3,500,000 discount. The Company paid $2,500,867 in cash and executed an $8,650,000 note to Fleet for the purchase of this mortgage. The Fairfield Towers First Mortgage matures in 2006, the interest rate is 1% above Fleet's prime interest rate and principal repayments on the mortgage are required upon the sale of each condominium unit.
During 1996, the Company invested $956,584 in additions and improvements to its properties.
Financing Activities
The Company's indebtedness at December 31, 1996, consisted of $32,126,506 of mortgages (including $5,613,041 of underlying indebtedness on properties not owned by the Company but on which the Company holds wraparound mortgages). The mortgage debt, which is secured by individual properties, is nonrecourse to the Company with the exception of the Mapletree Industrial Center mortgage which was refinanced in June of 1996, and which is secured by the property and a guarantee of repayment by Presidential. Generally mortgage debt repayment is serviced with cash flow from the operations of the individual properties. During 1996, the Company made $526,351 of principal payments on mortgage debt on properties which it owns. In addition, the Company refinanced the mortgage on its Mapletree Industrial Center property in Palmer, Massachusetts in June, 1996 and the existing mortgage of $238,181 was paid from the proceeds of the new $300,000 mortgage. The interest rate is 8.25% for the first year and will be adjusted annually to equal the Lender's prime rate. The mortgage matures in June, 2011 and requires monthly payments of principal and interest in the initial amount of $2,910.
The mortgages on the Company's properties are self-liquidating at fixed rates of interest with the exception of the mortgages on Metmor Plaza, Building Industries Center and Continental Gardens. The Metmor Plaza mortgage in the outstanding amount of $11,399,359 amortizes monthly with a $10,415,779 balloon payment due at maturity in February, 1999 and has a variable interest rate which is capped at 8%. The Building Industries Center mortgage in the outstanding amount of $949,208 amortizes monthly with a $909,833 balloon payment due at maturity in May, 2000 and has an interest rate of 10%. The Continental Gardens mortgage in the amount of $7,800,000, bears interest at 9.1% through January, 2000 and a rate to be based on Treasury bill rates thereafter. This mortgage begins to amortize in 1997 and there will be a balloon payment of approximately $7,214,000 due at maturity in January, 2005.
During the fourth quarter of 1996, the Company obtained an $8,650,000 bank loan from Fleet in connection with the
acquisition of the Fairfield Towers First Mortgage. The note is nonrecourse to Presidential except for a guarantee limited to $1,000,000 of the principal amount and matures on October 30, 2001. The interest rate is variable and is based at the Company's election on either the bank's prime rate plus 1%, a cost of funds rate plus 3%, or various LIBOR rates plus 3%. The note amortizes monthly based on a 9.25% interest rate for a 25 year term with additional principal payments due upon the sale of condominium units.
During 1996, Presidential declared and paid cash distributions of $2,123,045 to its shareholders and received proceeds from dividend reinvestments of $131,677.
Fairfield Towers
The Company's financial performance and liquidity in 1997 and subsequent years will be affected by the results of the condominium conversion of Fairfield Towers Apartments in Brooklyn, New York by the owner of that property and the rental operations of the unsold condominium units. In October of 1996, the Company acquired the $14,650,867 Fairfield Towers First Mortgage on 1,017 condominium units at Fairfield Towers for a purchase price of $11,150,867 and in connection with the acquisition extended the maturity date of the Fairfield Towers First Mortgage to October 30, 2006. The Fairfield Towers First Mortgage provides for principal repayments prior to maturity upon the sale of individual condominium units. The Company also holds the Fairfield Towers Second Mortgage having an outstanding principal balance of $14,659,841 on the 1,017 condominium units. Until the Fairfield Towers First Mortgage is repaid, Presidential will receive basic interest on the Fairfield Towers Second Mortgage only out of net cash flow from operations of the property and release payments upon the sale of each condominium unit in the amount of $3,000 per unit. All unpaid basic interest and additional interest (which is based on percentages of gross sales proceeds) will be deferred until after repayment of the Fairfield Towers First Mortgage.
Presidential paid $2,500,867 of its $11,150,867 purchase price for the Fairfield Towers First Mortgage in cash and executed an $8,650,000 note for the balance (the "Fairfield Purchase Money Note"). The Fairfield Purchase Money Note is secured by a collateral assignment of the Fairfield Towers First Mortgage and all payments of principal received by Presidential under the Fairfield Towers First Mortgage are utilized to make principal repayments on the Fairfield Purchase Money Note. In addition, Presidential is making principal payments on the Fairfield Purchase Money Note in amounts sufficient to amortize it based on a 9.25% interest rate over a 25 year term, with the entire outstanding principal balance due on October 30, 2001. The
spread between the interest receivable on the Fairfield Towers First Mortgage and the interest payable by Presidential on the Fairfield Purchase Money Note will result in a substantial return for Presidential on its $2,500,867 cash investment in the Fairfield Towers First Mortgage and, if and when the principal amount of the Fairfield Towers First Mortgage is repaid in full, Presidential will recover the $3,500,000 purchase discount that it obtained in acquiring the Fairfield Towers First Mortgage. While the Company's return on the Fairfield Towers Second Mortgage during the initial years of the conversion has been and will continue to be limited, if the conversion is successful and the Fairfield Towers First Mortgage is repaid, the Company expects to ultimately recover the outstanding principal balance of the Fairfield Towers Second Mortgage and substantial amounts of basic and additional interest. In June of 1994, the owners of the Fairfield Towers property closed the first sales of the condominium units pursuant to the conversion of the property to condominium status. At December 31, 1996, a total of 135 units were sold.
The success of the condominium conversion could be adversely affected by the existence of approximately $4,800,000 of unpaid real estate taxes and interest accrued on such taxes owed by the owners of the property, as of December 31, 1996. Approximately $3,000,000 of this amount arose prior to the condominium conversion of the property and was covered by a deferred payment agreement with the City of New York which required payments as condominium units were sold. However, as a result of the slower than projected pace of sales, the term of the deferred payment agreement expired. Subsequent to December 31, 1996, the Company advanced $600,000 to the owner to be used to pay a portion of the unpaid real estate taxes and interest, which amount was added to the indebtedness secured by the Fairfield Towers First Mortgage, and the holder of the $8,650,000 Fairfield Purchase Money Note has agreed to advance $600,000 to Presidential to reimburse it for its $600,000 advance. The owner is in the process of negotiating a new deferment agreement with the City of New York. However, no assurances can be given that the owner will be successful in negotiating a satisfactory deferment agreement with the City of New York, and if a satisfactory agreement is not obtained, a continuing default in the payment of real estate taxes could adversely affect the success of the condominium conversion at Fairfield Towers and the value of Presidential's First and Second Mortgages.
Environmental Matters
The Company is involved in various stages of environmental projects for the investigation and removal of potentially hazardous drums found at three sites on its Mapletree Industrial Center property in Palmer, Massachusetts. Accrued liabilities for environmental matters have been recorded in operating
expenses when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. These estimates are exclusive of claims against third parties and have not been discounted. Actual costs incurred may vary from these estimates due to the inherent uncertainties involved. The Company believes that any additional liability in excess of amounts provided which may result from the resolution of this matter will not have a material adverse effect on the financial condition, liquidity or the cash flow of the Company. As of December 31, 1996, the response action outcome and cleanup at the first and second disposal sites have been completed. The site investigation at the third disposal site has been completed and, as a result, the Company accrued an additional $120,500 of environmental costs in order to complete further site investigations and cleanup costs at this site. This work is scheduled to be accomplished over the next four years. For 1996, 1995 and 1994, the amounts charged to operations for environmental expenses were $129,129, $83,536 and $17,758, respectively.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Table of Contents to Consolidated Financial Statements.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the Company's definitive Proxy Statement for its Annual Meeting of Shareholders to be held June 12, 1997, which Proxy Statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A and which is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the Company's definitive Proxy Statement for its Annual Meeting of Shareholders to be held June 12, 1997, which Proxy Statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A and which is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the Company's definitive Proxy Statement for its Annual Meeting of Shareholders to be held June 12, 1997, which Proxy Statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A and which is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the Company's definitive Proxy Statement for its Annual Meeting of Shareholders to be held June 12, 1997, which Proxy Statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A and which is incorporated herein by reference.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) and (d) A Table of Contents to Consolidated Financial Statements and Schedules is included in this report.
(b) No report on Form 8-K was filed during the calendar quarter ended December 31, 1996.
(c) Exhibits:
3.1 Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.5 to Post-effective Amendment No. 1 to the Company's Registration Statement on Form S-14, Registration No. 2-83073).
3.2 Certificate of Amendment to Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1987, Commission File No. 1-8594).
3.3 Certificate of Amendment to Certificate of Incorporation of the Company, filed July 21, 1988 with the Secretary of State of the State of Delaware (incorporated herein by reference to Exhibit 3.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1988, Commission File No. 1-8594).
3.4 Certificate of Amendment to Certificate of Incorporation of the Company, filed on September 12, 1989 with the Secretary of State of the State of Delaware (incorporated herein by reference to Exhibit 3.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1989, Commission File No. 1-8594).
3.5 By-laws of the Company (incorporated herein by reference to Exhibit 3.7 to Post-effective Amendment No. 1 to the Company's Registration Statement on Form S-14, Registration No. 2-83073).
10.1 Stock Option Plan effective July 1, 1987 for a maximum of 320,000 shares of Class B Common Stock (incorporated herein by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1988, Commission File No. 1-8594).
10.2 1993 Stock Option Plan for 250,000 shares of Class B common stock (incorporated herein by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-8594).
10.3 Employment Agreement dated as of November 1, 1982 between the Company and Robert E. Shapiro, as amended by Amendments dated March 1, 1983, November 25, 1985, February 23, 1987 and January 4, 1988, (incorporated herein by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1988, Commission File No. 1-8594).
10.4 Employment Agreement dated as of November 1, 1982 between the Company and Joseph Viertel as amended by Amendments dated March 1, 1983, November 22, 1985 and February 23, 1987, (incorporated herein by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 1-8594).
10.5 Employment Agreement dated November 14, 1993 between the Company and Jeffrey F. Joseph, (incorporated herein by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-8594).
10.6 Employment Agreement dated November 14, 1993 between the Company and Steven Baruch, (incorporated herein by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-8594).
10.7 Employment Agreement dated November 14, 1993 between the Company and Thomas Viertel, (incorporated herein by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-8594).
10.8 Settlement Agreement dated November 14, 1991 between the Company and Steven Baruch, Jeffrey F. Joseph and Thomas Viertel, (incorporated herein by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, Commission File No. 1-8594).
10.9 Presidential Realty Corporation Defined Benefit Plan dated December 16, 1994, (incorporated herein by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-8594).
21. List of Subsidiaries of Registrant dated December 31, 1994, (incorporated herein by reference to Exhibit 21 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-8594).
27. Financial Data Schedule for the year ended December 31, 1996 (see page 90).
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PRESIDENTIAL REALTY CORPORATION
By: THOMAS VIERTEL -------------------------- Thomas Viertel Chief Financial Officer March 20, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature and Title Date
By: ROBERT E. SHAPIRO March 20, 1997 ---------------------------- Robert E. Shapiro Chairman of the Board of Directors and Director
By: JEFFREY F. JOSEPH March 20, 1997 ---------------------------- Jeffrey F. Joseph President and Director
By: THOMAS VIERTEL March 20, 1997 ---------------------------- Thomas Viertel Executive Vice President (Chief Financial Officer)
By: ELIZABETH DELGADO March 20, 1997 ---------------------------- Elizabeth Delgado Treasurer (Principal Accounting Officer)
By: RICHARD BRANDT March 20, 1997 ---------------------------- Richard Brandt Director
By: MORTIMER M. CAPLIN March 20, 1997 ---------------------------- Mortimer M. Caplin Director
By: ROBERT FEDER March 20, 1997 ---------------------------- Robert Feder Director
SIGNATURES (Continued)
Signature and Title Date
By: JOSEPH VIERTEL March 20, 1997 ---------------------------- Joseph Viertel Director
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS TO CONSOLIDATED FINANCIAL STATEMENTS
Page ----
Independent Auditors' Report 45
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets - December 31, 1996 and 1995 46
Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994 48
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 49
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 50
Notes to Consolidated Financial Statements 52
CONSOLIDATED SCHEDULES:
II. Valuation and Qualifying Accounts for the Years Ended December 31, 1996, 1995 and 1994 85
III. Real Estate and Accumulated Depreciation at December 31, 1996 86
IV. Mortgage Loans on Real Estate at December 31, 1996 88
NOTE: All schedules, other than those indicated above, are omitted because of the absence of the conditions under which they are required or because the required information is included in the consolidated financial statements or the notes to the consolidated financial statements.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders Presidential Realty Corporation White Plains, New York
We have audited the accompanying consolidated balance sheets of Presidential Realty Corporation and subsidiaries (the "Company") as of December 31, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedules listed in the foregoing Table of Contents. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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, such consolidated financial statements present fairly, in all material respects, the financial position of Presidential Realty Corporation and subsidiaries at December 31, 1996 and 1995 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules listed in the foregoing Table of Contents, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects, the information set forth therein.
As described in Note 7, the Company changed its method of accounting for securities in 1994.
Deloitte & Touche LLP
Stamford, Connecticut March 10, 1997
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
Liabilities and Stockholders' Equity
See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. General - Presidential Realty Corporation ("Presidential" or the "Company"), a Real Estate Investment Trust ("REIT"), is engaged principally in the holding of notes and mortgages secured by real estate and in the ownership of income producing real estate.
B. Real Estate - Real estate is stated at cost. Generally, depreciation is provided on the straight-line method over the assets' estimated useful lives, which range from twenty to fifty years for buildings and leaseholds and from three to ten years for furniture and equipment. Maintenance and repairs are charged to operations as incurred and renewals and replacements are charged to accumulated depreciation. Management reviews the operations of each property on a monthly basis and inspects the properties on a periodic basis to determine if an impairment in value has occurred. If an impairment in value is judged under all of the circumstances to be other than temporary, management will write down the carrying value to its estimated fair value. The Company estimates fair value based on the best information available making whatever estimates, judgments and projections are considered necessary.
C. Mortgage Portfolio - Net mortgage portfolio is the net carrying value of notes receivable and represents the outstanding principal amounts of the notes reduced by discounts and/or deferred gains. Real estate is the primary form of collateral on all notes receivable. The fair value of the collateral is monitored on an ongoing basis. Such monitoring includes review of operating and occupancy reports and physical inspection of the property, as well as independent appraisals where warranted. If the value of the collateral appears insufficient to secure the net carrying value of the notes receivable, the Company would establish an allowance for possible loan losses or write down the loan to reflect the estimated fair value of the underlying collateral, net of estimated disposition costs.
The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan", effective January 1, 1995, and, accordingly, has classified loans that are within the scope of this statement as impaired loans. The principal effect on the Company of SFAS No. 114 was the elimination of the categories of loans classified as nonaccrual loans and loans in process of foreclosure. The adoption of SFAS No. 114 did not result in additional provisions for loan losses or changes in previously reported net earnings
due to the Company's policy of measuring loan impairment based on the fair value of the loan's underlying collateral.
D. Sale of Real Estate - Presidential complies with the provisions of SFAS No. 66, "Accounting for Sales of Real Estate". Accordingly, the gains on certain transactions are deferred and are being recognized on the installment method until such transactions have complied with the criteria for full profit recognition.
E. Discounts on Notes Receivable - Presidential assigned discounted values to long-term notes received from the sales of properties to reflect the difference between the stated interest rates on the notes and market interest rates at the time of acceptance. In addition, discounts on notes receivable include discounts received from the purchase of notes. Such discounts are being amortized using the interest method.
F. Principles of Consolidation - The consolidated financial statements include the accounts of Presidential Realty Corporation and its wholly owned subsidiaries. Additionally, the accompanying consolidated financial statements include 100% of the account balances of UTB Associates and PDL, Inc. and Associates Limited Co-Partnership ("Metmor Plaza Associates"), partnerships in which Presidential is the General Partner and owns a 66-2/3% interest and a 25% interest, respectively (see Note 6).
All significant intercompany balances and transactions have been eliminated.
G. Rental Income Recognition - Rental income is recorded on the accrual method. Contingent rents are recognized as income when determinable. Recognition of rental income is generally discontinued when the rental is delinquent for ninety days or more, or earlier, if management determines that collection is doubtful.
H. Earnings Per Common Share - Per share data is based on the weighted average number of shares of Class A and Class B common stock outstanding and common stock equivalents during each year. For the three years ended December 31, 1996, no dilution in per share earnings would have resulted from the exercise of the stock options referred to in Note 15.
I. Cash and Cash Equivalents - Cash and cash equivalents includes cash on hand, cash in banks and money market funds.
J. Benefits - The Company follows SFAS Nos. 87 and 106 in accounting for pension (see Note 16) and postretirement benefits (see Note 17), respectively.
K. Management Estimates - The consolidated financial statements have been prepared in accordance with generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheets and income and expense for the period. Actual results could differ from those estimates.
L. Environmental Liabilities and Expenditures - Accruals for environmental matters are recorded in operating expenses when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Accrued liabilities are exclusive of claims against third parties and are not discounted (see Note 11).
M. Recently Issued Accounting Standard - During 1995, SFAS No. 123 "Accounting for Stock-Based Compensation" was issued. The Company will comply with additional disclosures required by this statement but is not required to change its method of accounting for stock-based compensation. Additional disclosures are not required as no new options were granted in 1995 and 1996.
2. MORTGAGE PORTFOLIO
The Company's mortgage portfolio includes notes receivable - sold properties and notes receivable - related parties and includes both accrual and impaired loans.
The Company complies with the provision of SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", and, accordingly, has classified loans that are within the scope of this statement as impaired loans.
Notes receivable - sold properties consist of:
(1) Long-term purchase money notes from sales of properties previously owned by the Company. These purchase money notes have varying interest rates with balloon payments due at maturity. Also included in this category is the Fairfield Towers First Mortgage (discussed further below) which the Company purchased in the fourth quarter of 1996.
(2) Notes receivable from sales of cooperative apartment units. Substantially all of these notes were either received from Ivy Properties, Ltd. or its affiliates (collectively "Ivy") in connection with a settlement agreement between the Company and Ivy executed in November, 1991 (the "Settlement Agreement") or from
sales of foreclosed cooperative apartments received from Ivy pursuant to the Settlement Agreement (see Notes 4 and 19). These notes generally have market interest rates and the majority of these notes amortize monthly with balloon payments due at maturity.
Notes receivable - related parties are all due from Ivy and consist of:
(1) Purchase money notes resulting from sales of property or partnership interests to Ivy.
(2) Notes receivable relating to loans made by the Company to Ivy in connection with Ivy's cooperative conversion business.
The following table summarizes the components of the mortgage portfolio.
MORTGAGE PORTFOLIO - ------------------
MORTGAGE PORTFOLIO - ------------------
In June of 1996, the Company received principal prepayments on two of its long-term purchase money notes, the Hoboken, New Jersey property note in the amount of $1,188,787 and the Town House, Memphis, Tennessee property note in the amount of $1,000,000. As a result, the Company recognized income on the Town House note from the amortization of discount of $76,473 and gain on sale of $773,258.
In October, 1996, the Company acquired a $14,650,867 first mortgage secured by 1,017 condominium units at Fairfield Towers in Brooklyn, New York (the "Fairfield Towers First Mortgage"). The purchase price for the Fairfield Towers First Mortgage was $11,150,867, net of a $3,500,000 discount. The Company paid $2,500,867 in cash and obtained an $8,650,000 purchase money loan from Fleet Bank National Association ("Fleet") for the balance of the purchase price (see Note 9). The interest rate on the Fairfield Towers First Mortgage is 1% above Fleet's prime rate and the loan matures on October 30, 2006. Principal repayments are required to be made upon the sale of each condominium unit in an amount equal to substantially all of the net proceeds of sale. The Company also holds a subordinated note secured by the above condominium units (the "Fairfield Towers Second Mortgage").
Subsequent to December 31, 1996, the Company received prepayment of its $1,074,200 Cedarbrooke note receivable and modified its Woodland notes receivable, extending the maturity date from 2000 to 2005, with interest rates increasing in 2002 from 9% to 9.25%.
At December 31, 1996, all of the notes in the Company's mortgage portfolio are current with the exception of those notes which are classified as impaired loans in accordance with SFAS No. 114.
Two sold property loans, the Kent Terrace loan and the Fairfield Towers Second Mortgage, and one related party loan, the Overlook loan, were classified as impaired loans at December 31, 1995. In February, 1996, the Kent Terrace loan was reclassified to real estate as a result of the Company's foreclosure of its mortgage on the property and at December 31, 1996, the Fairfield Towers Second Mortgage and the Overlook loan remain classified as impaired loans. These two loans are in the aggregate amount of $16,227,241 and have a net carrying value of $1,404,764 after deducting discounts of $7,765,964 and deferred gains of $7,056,513. In accordance with SFAS No. 114, the Company has determined that no allowances for credit losses are required for these loans because the net carrying value of these loans is less than the fair value of the underlying collateral.
The Company recognizes income on these impaired loans only to the extent that such income is actually received. The average recorded investment in these loans during the years ended December 31, 1996 and December 31, 1995 were $16,510,530 and $17,986,237, respectively.
Kent Terrace
The Kent Terrace note, having an outstanding principal balance of $1,300,000 and a net carrying value of $329,212 after deducting a deferred gain of $970,788, was classified as an impaired loan at December 31, 1995. This note had been in default since October of 1994, and in February, 1996, the Company completed the foreclosure of its mortgage and became the owner of the 112 unit apartment property in Martinsburg, West Virginia. As a result, in 1996 the $329,212 net carrying value of the note and the related deferred interest of $338,190 have been reclassified to real estate (see Note 3).
Fairfield Towers
In the fourth quarter of 1996, the Company acquired the Fairfield Towers First Mortgage, having an outstanding principal balance of $14,650,867, for a purchase price of $11,150,867. In connection with the acquisition of the Fairfield Towers First Mortgage, which was to become due in December of 1996, the maturity date was extended to October 30, 2006. The Fairfield Towers First Mortgage, which is nonrecourse except for certain limited personal guarantees made by certain of the principals of the borrower, provides for principal repayments prior to maturity upon the sale of individual condominium units in an amount equal to substantially all of the net proceeds of sale (after payment of $2,916 per unit to the holder of a $422,500 lien on the property, $3,000 per unit to Presidential as holder of the Fairfield Towers Second Mortgage, $4,050 per unit on account of past due real estate taxes and $5,917 per unit to fund various obligations to the condominium association), which principal repayments have averaged approximately $27,000 per unit over the sale of the first 135 units. All accrued interest on this mortgage has been paid to date. However, there are approximately $4,800,000 of unpaid real estate taxes (including interest accrued thereon) owed by the owners of the property with respect to this property. Real estate taxes are now being paid by the owner in an amount equal to the currently accruing taxes and the unpaid balance is being reduced at the rate of $4,050 per unit as condominium units are sold and with an additional $200,000 per year from the cash flow of the property (see Note 22).
Presidential paid $2,500,867 of its $11,150,867 purchase price for the Fairfield Towers First Mortgage in cash and executed an $8,650,000 bank loan from Fleet for the balance. The bank loan is secured by a collateral assignment of the Fairfield Towers First Mortgage and, except for a guarantee of $1,000,000 of indebtedness, is nonrecourse to Presidential. All payments of principal received by Presidential under the Fairfield Towers First Mortgage will be utilized to make principal repayments on the Fleet bank loan. In addition, Presidential is making principal payments on the Fleet bank loan in amounts sufficient
to amortize it at a 9.25% interest rate over a 25 year term, with the entire outstanding principal balance due on October 30, 2001.
Presidential is also the holder of the Fairfield Towers Second Mortgage on the condominium units, which it received in 1984 when it sold the Fairfield Towers property to the present owner. This nonrecourse note has been in default since March of 1991. The Fairfield Towers Second Mortgage has been classified as an impaired loan in accordance with SFAS No. 114. At December 31, 1996, the note has a $14,659,841 outstanding principal balance and a net carrying value of $1,404,764, after a discount of $7,765,964 and a deferred gain of $5,489,113.
The cash flow from the rental operations of the condominium units is not sufficient to pay more than a nominal amount of the interest that is due on the Fairfield Towers Second Mortgage and, accordingly, pursuant to a modification agreement executed in December, 1992, $1,345,000 of unpaid interest was deferred and Presidential's basic interest on its loan was increased from 5.1% per annum to 6.75% per annum, which basic interest is also deferred unless there is sufficient cash flow from the rental operations of the property available for payment. While Presidential received $227,001 of interest payments on the Fairfield Towers Second Mortgage in 1996, it is possible that interest payments on the Fairfield Towers Second Mortgage will be substantially reduced in 1997 and subsequent years since cash flow from the rental operations of the property will be partially utilized to pay down the accrued real estate taxes. Until the Fairfield Towers First Mortgage is repaid in full, Presidential, as holder of the Fairfield Towers Second Mortgage, will continue to receive release payments of only $3,000 per unit upon the sale of each condominium apartment unit. However, after the Fairfield Towers First Mortgage is repaid, Presidential will receive substantially all of the net proceeds of sales of condominium units in repayment of the principal amount of the Fairfield Towers Second Mortgage and all unpaid interest thereon, including additional interest which is based on percentages of gross sales prices. By acquiring the Fairfield Towers First Mortgage at a $3,500,000 discount, Presidential believes that, in addition to obtaining a substantial return on the funds utilized to make the acquisition, it has protected its position as holder of the Fairfield Towers Second Mortgage since that position could have been adversely affected upon the maturity of the Fairfield Towers First Mortgage in December, 1996. Pursuant to the terms of the Fairfield Towers Second Mortgage, Presidential has implemented substantial restrictions relating to the operation and condominium conversion of the property and control of the funds generated from operations and sales.
In June, 1994, the owners of the property closed the first sales of apartment units pursuant to the conversion of the property to condominium ownership. Since June, 1994, a total of 135
condominium units have been sold, including 44 in 1996. The Company has received $340,159 in payments from sales of apartment units, which has reduced the original outstanding principal balance of the Fairfield Towers Second Mortgage from $15,000,000 to $14,659,841 at December 31, 1996. In addition, the Fairfield Towers First Mortgage in the original outstanding principal balance of $18,113,118 has been reduced by $3,462,251 to $14,650,867 at December 31, 1996. However, the Fairfield Towers Second Mortgage is still classified as an impaired loan and the Company recognizes interest income on this loan only to the extent that such interest is actually received (see Note 22).
Overlook Loan
The Overlook loan, which resulted from the sale of property to Ivy in 1984 and which has been in default since 1990, is classified as an impaired loan in accordance with SFAS No. 114. Effective April 1, 1995, the Company and Ivy modified the terms of the Overlook loan extending the maturity date from November 21, 1994 to December 31, 2003. In accordance with the modification, from April 1, 1995 through December 31, 1995, the loan bore interest at the rate of 5-1/2% per annum and from January 1, 1996 until maturity, the loan will bear interest at the rate of 6% per annum. The Overlook loan, which is a nonrecourse loan, continues to be secured by three second mortgages (the "Collateral Security") with face values totalling $1,617,400 at December 31, 1996. Interest is due and payable only to the extent of interest payments received by Ivy on the Collateral Security. To the extent that Ivy receives interest on the Collateral Security in excess of the interest due on the Overlook loan, Ivy is required to pay such amounts to Presidential to be applied by Presidential (a) first in reduction of any Deferred Interest (past due interest which has not been accrued for financial reporting purposes) and (b) then in reduction of the outstanding principal balance.
The net carrying value of the Overlook loan remains at zero at December 31, 1996. Any principal payments received on the loan will continue to be fully recognized as gain from sale. In its capacity as a secured creditor, the Company exercises significant control over, and receives the economic benefits from, the collateral securing the Overlook loan and, accordingly, the Company has no current plans to foreclose on its collateral for such loan.
The following table reflects the activity in impaired loans.
IMPAIRED LOANS - --------------
(1) In February, 1996, the Company completed the foreclosure of its $1,300,000 Kent Terrace mortgage and became the owner of the property. As a result, the net carrying value of the loan of $329,212, after a deferred gain of $970,788, and deferred interest of $338,190 were reclassified to real estate.
3. REAL ESTATE
Real estate is comprised of the following:
December 31, ------------ 1996 1995 ---- ---- Land $ 3,664,548 $ 3,615,176 Buildings and leaseholds 21,580,207 20,157,963 Furniture and equipment 124,650 98,479 ----------- ----------- Total real estate $25,369,405 $23,871,618 =========== ===========
As discussed in Note 2, Presidential foreclosed on its Kent Terrace mortgage and became the owner of the property in February, 1996. The Company intends to hold this property as a rental property and, accordingly, reclassified the $329,212 net carrying value of the loan plus deferred interest of $338,190 to real estate on its consolidated balance sheet.
During 1995, Presidential purchased from Ivy, three occupied cooperative apartments located in White Plains, New York for a purchase price of $10,000.
In November, 1994, the Company reached a settlement with its insurance company pursuant to which it received $3,300,000 in settlement of all property damage and lost rental claims resulting from a fire that destroyed approximately 20% of the rentable space at the Company's Mapletree Industrial Center in Palmer, Massachusetts. After payment of related costs and expenses and adjustment for lost rent, the net insurance proceeds available to the Company were $2,727,156. As a result of the insurance reimbursement, the carrying value of the Mapletree property was reduced to zero and the Company recognized $1,816,873 of income for financial reporting purposes in 1994.
4. FORECLOSED PROPERTIES
Presidential has received various properties in satisfaction of loans due to Presidential. These properties are reported as foreclosed properties on Presidential's consolidated balance sheets and are carried at the lower of cost or estimated fair value (net of estimated costs to sell). If the net carrying value of Presidential's loan had been in excess of the estimated fair value of the property when received by Presidential in satisfaction of its loan, Presidential would have recorded a loss on the transaction equal to the amount of such excess. Similarly, if at any time the estimated fair value of any foreclosed property declines below the then net carrying value of the property, the net carrying value would be written down to the
estimated fair value (or a valuation allowance would be recorded in an amount equal to the excess of the carrying value of the property over the current fair value) and Presidential would record a loss equal to the amount of the write-down or the allowance.
Net loss from operations of foreclosed properties is reported as a separate line item on the statement of operations, while net cash receipts from operations of foreclosed properties reduces the Company's carrying value of the foreclosed property.
At December 31, 1996, Presidential owns 53 cooperative apartment units which it had received in satisfaction of certain loans due Presidential. These cooperative apartment units are located at four locations: 330 W. 72nd St., New York, N.Y. (3 units); 6300 Riverdale Avenue, Bronx, N.Y. (8 units); Towne House, New Rochelle, N.Y. (39 units) and Sherwood House, Long Beach, N.Y. (3 units).
Cooperative apartment units at three of the above properties were received from Ivy in 1991 and 1992 in connection with the Settlement Agreement (see Note 19). The cooperative apartment units at Long Beach were received from Ivy in 1994 in payment of the outstanding loan on that property and other amounts due to Presidential pursuant to the Settlement Agreement.
In September, 1996, the Company sold the 5 remaining cooperative apartment units at Hastings Gardens, Hastings, N.Y. for a purchase price of $75,000 and recorded a gain from the sale of $22,490.
The following table presents the Company's foreclosed properties, loss from operations of foreclosed properties, gain (loss) from sales of foreclosed properties and number of units sold:
Foreclosed properties: - ----------------------
(1) The remaining Hastings Gardens cooperative apartment units were sold in September, 1996. (2) The remaining Hoboken apartment buildings were sold in June, 1994. (3) Includes an allocation for home office overhead.
5. LOAN IN PROCESS OF FORECLOSURE
In 1991, the owners of the Brookline Manor property defaulted on payments of interest on Presidential's equity portion of the wraparound mortgage note secured by this property, and as a result, Presidential commenced foreclosure proceedings.
Presidential's note wrapped around and was subordinate to a first mortgage which had an outstanding principal balance of $1,317,289 at January 31, 1992. Since January of 1992, no payments had been made on the first mortgage. The first mortgage was assigned by the mortgagee to the Department of Housing and Urban Development ("HUD"), and subsequently, HUD commenced its own foreclosure proceedings.
As a result, in 1994, the Company wrote off the $1,556,931 net carrying value of the loan in process of foreclosure and the related $1,317,289 mortgage debt, resulting in a bad debt expense of $67,200 and a loss from sales of properties and securities of $172,442.
6. MINORITY PARTNERS' INTEREST
Presidential is the General Partner of UTB Associates and Metmor Plaza Associates, partnerships in which Presidential has a 66-2/3% interest and a 25% interest, respectively. As the General Partner of these partnerships, Presidential exercises effective control over the business of these partnerships, and, accordingly, has included 100% of the account balances of these partnerships in the accompanying financial statements (see Note 1-F). The minority partners' interest reflects the minority partners' equity in the partnerships.
Included in the Company's mortgage debt is a mortgage note payable by the Metmor Plaza Associates partnership which is substantially in excess of the historical cost of the property. This was due to a refinancing of the original mortgage note on the building and subsequent distribution of these proceeds to the partners. This event resulted in a negative partnership interest for each partner and a negative minority partners' interest on the Company's books. The estimated fair value of the building is significantly greater than the mortgage debt and the minority partners' interest is expected to be recovered when the building is sold and the partnership is liquidated.
Subsequent to December 31, 1996, Presidential acquired an additional 1% interest in Metmor Plaza Associates for a purchase price of $60,000.
Minority partners' interest is comprised of the following:
December 31, ------------ 1996 1995 ---- ----
Metmor Plaza Associates $4,036,858 $4,218,947 UTB Associates (206,834) (247,899) ---------- ----------
Total minority partners' interest $3,830,024 $3,971,048 ========== ==========
7. SECURITIES AVAILABLE FOR SALE
The Company's investments are in marketable equity securities consisting of stocks of listed corporations. Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". The Company does not acquire securities for purposes of engaging in trading activities and, as a result, the Company's investments are classified as securities available for sale in accordance with this pronouncement. Disposition of such securities may be appropriate for either liquidity management or in response to changing economic conditions.
SFAS No. 115 requires that securities available for sale be reported at fair value with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders' equity until realized. The adoption of SFAS No. 115 resulted in the reversal of the lower of aggregate cost or market adjustment of $37,617 that had been recognized prior to the adoption of SFAS No. 115. This amount is reflected as a cumulative effect of change in accounting principle in the Company's consolidated statement of operations for the year ended December 31, 1994. SFAS No. 115 resulted in a $285,057 adjustment to stockholders' equity for the net unrealized loss on securities available for sale at December 31, 1994.
Net unrealized gain (loss) on securities available for sale decreased by $273,852 from a loss of $285,057 at December 31, 1994 to a loss of $11,205 at December 31, 1995 and then changed by $60,219 to a gain of $49,014 at December 31, 1996.
The cost and fair value of securities available for sale are as follows:
December 31, ------------ 1996 1995 ---- ----
Cost $926,194 $2,401,551 Gross unrealized gains 71,033 37,845 Gross unrealized losses (22,019) (49,050) -------- ----------
Fair value $975,208 $2,390,346 ======== ==========
Sales activity results for securities available for sale are as follows:
Year Ended December 31, ------------------------ 1996 1995 1994 ---- ---- ----
Gross sales proceeds $2,667,350 $147,200 $162,875 ========== ======== ========
Gross realized gains $ 12,975 $10,494 $ Gross realized losses (69,751) (1,002) (13,596) -------- ------- --------
Net realized gain (loss) $(56,776) $ 9,492 $(13,596) ======== ======= ========
Gains and losses on sales of securities are determined using the specific identification method.
8. MORTGAGE DEBT
All mortgage debt is secured by individual properties and is nonrecourse to the Company with the exception of the mortgage on the Mapletree Industrial Center property in Palmer, Massachusetts, which is guaranteed by Presidential.
In June, 1996, the Company completed the refinancing of the mortgage on its Mapletree Industrial Center property. The existing mortgage of $238,181 was repaid from the proceeds of a new $300,000 mortgage. The interest rate is 8.25% for the first year and will be adjusted annually to equal the Lender's prime rate. The mortgage matures in June, 2011 and requires monthly payments of principal and interest in the initial amount of $2,910.
Mortgage debt - wrap mortgage debt on sold properties in the amount of $5,613,041 at December 31, 1996 and $6,060,537 at December 31, 1995, relates to mortgage debt on properties sold by Presidential. Payments of principal and interest on these mortgages will be paid from the proceeds (principal and interest) on the wraparound notes receivable from the buyers of these properties. Interest income and interest expense related to wrap mortgages are shown as gross amounts in the consolidated statements of operations. These mortgages are nonrecourse to Presidential and are liens only against the individual properties.
Amortization requirements of all mortgage debt as of December 31, 1996, are summarized as follows:
FHA Insured Other Total Mortgages Mortgages ----- --------- --------- Year ending December 31:
1997 $ 1,053,553 $ 482,282 $ 571,271 1998 1,123,284 500,845 622,439 1999 11,123,296 520,177 10,603,119 2000 1,609,337 540,315 1,069,022 2001 728,888 561,296 167,592 2002 - 2029 16,488,148 6,168,615 10,319,533 ----------- ---------- ----------- TOTAL $32,126,506 $8,773,530 $23,352,976 =========== ========== ===========
Interest on mortgages is payable at annual rates, summarized as follows:
FHA Insured Other Total Mortgages Mortgages ----- --------- --------- Interest rates:
3% $ 2,504,569 $2,504,569 $ 5 1/4% 3,108,472 3,108,472 7% 2,884,821 2,884,821 7 7/16%-7 7/8% (1) 11,399,359 11,399,359 8 1/4%-8 1/2% 3,455,313 3,160,489 294,824 9%-10% 8,773,972 8,773,972 ----------- ---------- ----------- TOTAL $32,126,506 $8,773,530 $23,352,976 =========== ========== ===========
(1) The interest rate on this mortgage is a variable rate and the chart reflects the current rate at December 31, 1996.
9. NOTE PAYABLE TO BANK
The Company obtained an $8,650,000 bank loan in the fourth quarter of 1996 from Fleet bank in connection with the purchase of the Fairfield Towers First Mortgage (see Note 2). The note, which matures on October 30, 2001, is secured by a collateral assignment of the Fairfield Towers First Mortgage and, except for a guarantee by Presidential of $1,000,000 of the indebtedness, is nonrecourse to Presidential. The Company has the option of selecting each month among three interest rates: 1% over Fleet's prime rate; 3% in excess of a cost of funds rate set by the bank for a period of 90 days and 3% in excess of the LIBOR rate for a one, two or three month period. The note amortizes monthly based on a 9.25% interest rate for a 25 year term. In addition, upon
the sale of condominium units, the Company is required to make principal payments to Fleet in an amount equal to the amount of principal payments received by the Company on the Fairfield Towers First Mortgage. The outstanding note balance at December 31, 1996 was $8,642,600.
10. INCOME TAXES
Presidential elected to qualify as a Real Estate Investment Trust effective January 1, 1982 under Sections 856-860 of the Internal Revenue Code. Under those sections, a REIT which distributes at least 95% of its real estate investment trust taxable income to its shareholders each year by the end of the following year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders.
Upon filing the Company's income tax return for the year ended December 31, 1995, Presidential applied its available 1995 stockholders' distributions and elected to apply (under Section 858 of the Internal Revenue Code) all but approximately $735,000 of its 1996 stockholders' distributions to reduce its taxable income for 1995 to zero.
For the year ended December 31, 1996, the Company had taxable income (before distributions to stockholders) of approximately $2,316,000 ($.65 per share), which included approximately $1,441,000 ($.41 per share) of capital gains. This amount will be reduced by the 1996 distributions that were not utilized in reducing the Company's 1995 taxable income and by any eligible 1997 distributions that the Company may elect to utilize as a reduction of its 1996 taxable income.
As previously stated, in order to retain REIT status, Presidential is required to distribute 95% of its REIT taxable income (exclusive of capital gains). Presidential will apply the available 1996 distributions (approximately $.20 per share) and will be required to pay additional distributions of not less than $0.03 per share in 1997 to maintain REIT status, which it intends to do. In addition, although no assurances can be given, it is the Company's present intention to distribute all of its 1996 taxable income during 1996 and 1997 so that it will not have to pay Federal income taxes for 1996. Therefore, no provision for income taxes has been made at December 31, 1996.
Presidential has, for tax purposes, reported the gain from the sale of certain of its properties using the installment method.
11. COMMITMENTS AND CONTINGENCIES
The Company has incurred environmental costs for environmental site investigations and the related response action outcome for
potentially hazardous drums found at three sites on its Mapletree Industrial Center property in Palmer, Massachusetts. As of December 31, 1996, the response action outcome and cleanup at the first and second disposal sites have been completed. The site investigation at the third disposal site has been completed and as a result, in the third quarter of 1996, the Company accrued an additional $120,500 of environmental costs to complete further site investigations and cleanup costs at this site. This work is scheduled to be accomplished over the next four years. For 1996, 1995 and 1994, the amounts charged to operations for environmental costs were $129,129, $83,536, and $17,758, respectively. Actual costs incurred may vary from these estimates due to the inherent uncertainties involved.
12. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of its mortgage portfolio, cash and cash equivalents, and securities available for sale.
The Company's mortgage portfolio consists of long-term notes receivable collateralized by real estate located in five states (primarily New York, Connecticut and Ohio). At December 31, 1996, the aggregate principal amount of these notes was $63,726,134 with a net carrying value (after the deduction of discounts and deferred gains) of $28,388,917. The real estate securing these notes, consisting primarily of moderate income apartment properties and, to a lesser extent, cooperative apartment units, has at a minimum an estimated fair value equal to the net carrying value of the notes. The value of the collateral is monitored by the Company on an ongoing basis. If the Company were to determine that the value of the collateral for a particular loan is insufficient to secure the net carrying value of the loan, the Company would reduce the net carrying value of the note receivable to reflect the estimated fair value of the underlying collateral.
Included in the Company's mortgage portfolio are the Fairfield Towers First Mortgage and the Fairfield Towers Second Mortgage in the aggregate principal amount of $29,310,708 with a net carrying value of $12,584,312 after deduction of discounts and deferred gain of $16,726,396. The Fairfield Towers First Mortgage in the outstanding principal amount of $14,650,867 was purchased by the Company in the fourth quarter of 1996 for a purchase price of $11,150,867. All payments due under the terms of this first mortgage are current. The Fairfield Towers Second Mortgage in the outstanding principal amount of $14,659,841 was received by the Company in 1984 when it sold the Fairfield Towers property to the present owner. The Fairfield Towers Second Mortgage has been in default since 1991, is classified as an impaired loan and
income on this loan is only recorded to the extent that such income is actually received. The mortgages are secured by 1,017 condominium units at Fairfield Towers in Brooklyn, New York and, in addition, the Fairfield Towers First Mortgage is also secured by certain limited personal guarantees made by certain of the principals of the borrower. There are approximately $4,800,000 of unpaid real estate taxes (including interest accrued thereon) owed by the owners of the property (see Notes 2 and 22).
The mortgage portfolio also includes notes receivable due from a related party, Ivy, with a net carrying value of $830,226 at December 31, 1996.
The Company generally maintains its cash in money market funds with high credit quality financial institutions. Periodically, the Company may invest in time deposits with such institutions. Although the Company may maintain balances at these institutions in excess of the FDIC insurance limit, the Company has not experienced any losses.
The Company also invests its funds in marketable equity securities available for sale. Such investments are reflected on the Company's consolidated balance sheet at their fair value.
13. COMMON STOCK
The Class A and Class B common stock of Presidential have identical rights except that the holders of Class A common stock are entitled to elect two-thirds of the Board of Directors and the holders of Class B common stock are entitled to elect one-third of the Board of Directors.
Other than as described in Note 15, no shares of common stock of Presidential are reserved for officers, employees, warrants or other rights.
14. DISTRIBUTIONS ON COMMON STOCK
For income tax purposes, distributions paid on common stock are allocated as follows:
Total Taxable Taxable Year Distribution Ordinary Income Capital Gain
1996 $0.60 $0.50 $0.10 1995 0.60 0.31 0.29 1994 0.60 0.32 0.28
15. STOCK OPTION PLANS
In July, 1987, Presidential adopted a Nonqualified Stock Option Plan (the "Plan"). The Plan provided that options to purchase up to 320,000 shares of Presidential's Class B authorized but unissued common stock could be granted prior to July 1, 1992 to certain key employees at exercise prices equal to the market value on the date the option was granted. Options granted have a maximum expiration period of five years. At December 31, 1994, there were options for 7,500 shares (granted in 1990) outstanding at an exercise price of $6.00 per share, which options expired on June 1, 1995. No options have been granted, exercised or cancelled under this plan for the three years ended December 31, 1996 with the exception of the expiration of the 7,500 shares referred to above. No further options can be granted under this plan.
In 1993, the Company adopted a Nonqualified Stock Option Plan (the "1993 Stock Option Plan"). The 1993 Stock Option Plan provides that options to purchase up to 250,000 shares of the Company's Class B common stock may be issued prior to December 31, 1998 to the Company's key employees at exercise prices equal to the market value on the date the option is granted. On November 17, 1993, options to purchase 60,000 shares were granted to three employees at an exercise price of $6.125 per share. Pursuant to the employees' contracts, options to purchase (i) a total of 20,000 shares may only be exercised on or after January 1, 1995, (ii) a total of an additional 20,000 shares may only be exercised on or after January 1, 1996 and (iii) a total of an additional 20,000 shares may only be exercised on or after January 1, 1997. All of the options expire on November 17, 1999. No other options have been granted, exercised or cancelled under this plan from inception to December 31, 1996.
Number of Weighted Average 1993 Stock Option Plan Shares Option Price ---------------------- --------- ---------------- Options outstanding at December 31, 1994, 1995 and 1996 60,000 $6.125 ====== ======
Exercisable: December 31, 1994 None ======
December 31, 1995 20,000 ======
December 31, 1996 40,000 ======
16. PENSION PLANS
Defined Benefit Plan
Effective January 1, 1994, the Company adopted a noncontributory defined benefit pension plan, which covers substantially all of its employees. The plan provides monthly retirement benefits commencing at age 65. The monthly benefit is equal to the sum of (1) 6.5% of average monthly compensation multiplied by the total number of plan years of service (up to a maximum of 10 years),
plus (2) .62% of such average monthly compensation in excess of one-twelfth of covered compensation multiplied by the total number of plan years of service (up to a maximum of 10 years). The Company makes annual contributions that meet the minimum funding requirements and the maximum contribution limitations under the Internal Revenue Code.
Periodic pension costs are reflected in general and administrative expenses in the Company's consolidated statements of operations.
Net periodic pension cost included the following components:
Year Ended December 31, ----------------------- 1996 1995 1994 ---- ---- ---- Service cost-benefits earned during the year $279,493 $254,681 $257,318 Interest cost on projected benefit obligation 37,379 18,012 Return on plan assets (65,817) (32,068) Net amortization and deferrals 21,885 14,453 -------- -------- -------- Net periodic pension cost $272,940 $255,078 $257,318 ======== ======== ========
The following sets forth the plan's funded status and amount recognized in the Company's consolidated balance sheets:
December 31, ------------ 1996 1995 ---- ---- Actuarial present value of accumulated benefit obligation: Vested $363,241 $209,931 Non-Vested 396,295 249,815 -------- --------
Total accumulated benefit obligation 759,536 459,746
Additional amount due to future pay increases 33,098 64,251 -------- --------
Total projected benefit obligation 792,634 523,997
Less: fair value of plan assets 794,735 483,020 -------- --------
Plan assets less (greater) than projected benefit obligation (2,101) 40,977 Unrecognized net gain 102,898 22,791 -------- --------
Pension liability recognized in accrued expenses in the consolidated balance sheet $100,797 $ 63,768 ======== ========
Plan assets consisted of the following: December 31, ------------ 1996 1995 ---- ---- Cash and cash equivalents $ 51,570 $ 35,417
Securities available for sale 743,165 447,603 -------- --------
Total plan assets $794,735 $483,020 ======== ========
The assumptions used in determining net periodic pension cost and funded status information for 1996, 1995 and 1994 were 7% for the discount rate, 7% for the expected long-term rate of return on assets, and 5% for average increase in compensation.
Additionally, the Company had sponsored a 401(k) defined contribution plan for all eligible employees. The plan permitted both pretax and after-tax employee contributions. The Company has not made any contributions to this plan. Such plan was terminated on July 31, 1996.
Executive Pension Plan
Presidential has employment contracts with several active and retired key officers and employees. Such contracts are being accounted for as constituting pension agreements. The contracts generally provide for annual benefits in specified amounts for each participant for life, commencing upon retirement, with an annual adjustment for an increase in the consumer price index. Presidential complies with the provisions of SFAS No. 87, "Employers' Accounting for Pensions". The principal assumption used in the accounting was a discount rate of 7% in 1996 and 1995 and 7-1/2% in 1994. Periodic pension costs are reflected in general and administrative expenses in the Company's consolidated statement of operations.
Net periodic pension cost included the following components:
Year Ended December 31, ----------------------- 1996 1995 1994 ---- ---- ---- Service cost-benefits earned during the year $ 13,856 $ 10,911 $ 9,077 Interest cost on projected benefit obligation 189,213 187,093 200,376 Net amortization 65,956 34,157 32,685 -------- -------- --------- Net periodic pension cost $269,025 $232,161 $242,138 ======== ======== ========
Presidential has elected not to fund expenses accrued under these contracts. The following sets forth the pension liability included in Presidential's consolidated balance sheets:
December 31, ------------ 1996 1995 ---- ----
Projected benefit obligation $2,885,486 $2,883,135 Unrecognized net gain (loss) (1,205,171) (1,081,438) Unrecognized prior service cost 35,797 40,162 ---------- ---------- Pension liability recognized in the consolidated balance sheets $1,716,112 $1,841,859 ========== ==========
17. POSTRETIREMENT BENEFITS
Presidential has employment contracts with several active and retired key officers and employees which provide for postretirement benefits other than pensions (such as health care benefits). The Company complies with the provision of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions". SFAS No. 106 requires the Company to accrue the estimated cost of retiree benefit payments during the years the employee provides services.
The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation at the adoption date (January 1, 1993) was 13% for participants age 65 and over and 15% for participants under age 65, decreasing linearly each successive year until it reaches 6% in 2002, after which it remains constant. A one-percentage point increase in the assumed health care cost trend rate for each year subsequent to adoption would increase the accumulated postretirement benefit obligation and net postretirement health care cost by approximately 5%. The assumed discount rate used in determining the accumulated postretirement benefit obligation was 7%.
The accumulated postretirement benefit obligation and recorded liability, none of which has been funded, was as follows:
December 31, ------------ 1996 1995 ---- ---- Accumulated postretirement benefit obligation: Retirees $288,172 $323,452 Fully eligible plan participants 138,482 129,422 Other active plan participants 108,530 95,952 -------- --------
Total accumulated postretirement benefit obligation 535,184 548,826
Unrecognized net gain 57,269 68,490 -------- --------
Accumulated postretirement benefit liability $592,453 $617,316 ======== ========
Postretirement benefit cost included the following components:
Year ended December 31, ----------------------- 1996 1995 1994 ---- ---- ----
Service cost - benefits earned $ 5,861 $ 5,478 $ 5,120 Interest cost on accumulated postretirement benefit obligation 36,520 37,359 38,518 Net amortization (8,459) (9,504) (8,860) ------- ------- ------- Postretirement benefit cost $33,922 $33,333 $34,778 ======= ======= =======
18. DIVIDEND REINVESTMENT AND SHARE PURCHASE PLAN
Presidential initiated a Dividend Reinvestment and Share Purchase Plan (the "Plan") effective April 12, 1988. Under the Plan, stockholders may reinvest cash dividends and make optional cash payments to purchase Class B common stock without incurring any brokerage commission or service charge. Additionally, the price of Class B common stock purchased with reinvested cash dividends will be discounted by 5% from the average of the high and low market prices of the five days immediately prior to the dividend payment date, as reported on the American Stock Exchange.
Class B Common Shares issued under the Plan are summarized below:
Net Proceeds Shares Received ------ ------------ Total shares issued at December 31, 1994 259,018 $1,808,024 Shares issued during the year ended December 31, 1995 19,019 118,343 ------- ---------- Total shares issued at December 31, 1995 278,037 1,926,367 Shares issued during the year ended December 31, 1996 22,694 131,677 ------- ---------- Total shares issued at December 31, 1996 300,731 $2,058,044 ======= ==========
19. RELATED PARTY TRANSACTIONS
Ivy Properties, Ltd. and various affiliated companies (collectively "Ivy") are owned by Thomas Viertel, Steven Baruch and Jeffrey Joseph (the "Ivy Principals"), who are also the sole partners of Pdl Partnership, which since 1991 has owned 198,735 shares of the Company's Class A common stock. From 1985 through 1991, these 198,735 shares of Class A common stock were owned by BJV Partnership, another partnership wholly owned by the Ivy Principals. As a result of the ownership of the 198,735 shares of Class A common stock described above and 24,601 additional shares of Class A common stock owned in the aggregate individually by the Ivy Principals, Pdl Partnership and the Ivy
Principals have, and BJV Partnership and the Ivy Principals had, beneficial ownership of an aggregate of approximately 47% of the outstanding shares of Class A common stock of the Company, which class of stock is entitled to elect two-thirds of the Board of Directors of the Company. By reason of such beneficial ownership, the Ivy Principals are in a position substantially to control elections of the Board of Directors of the Company.
Thomas Viertel is the son of Joseph Viertel, a Director and a former President of Presidential, and the nephew of Robert E. Shapiro, Chairman of the Board of Directors and a former President of Presidential. Steven Baruch is the cousin of Robert E. Shapiro and Joseph Viertel.
From 1979 to 1989, Presidential made loans to Ivy in connection with Ivy's cooperative conversions of apartment properties in the New York metropolitan area. In 1981, UTB Associates, a partnership controlled by Presidential, sold an apartment property to Ivy in return for purchase money notes. In addition, in 1984, Presidential sold to Ivy its 50% partnership interest in the partnership which owned Overlook Gardens, a 308 unit apartment complex in Alexandria, Virginia for a purchase money note.
Prior to January 1, 1990, Ivy had never defaulted on any of its loans from Presidential. During 1989 and 1990 the sales market for cooperative apartments in the New York metropolitan area deteriorated and as a result in 1990 and 1991 Ivy defaulted on certain of its outstanding loans from Presidential. In early 1990, Ivy began negotiations with Presidential with respect to a workout of the loans then in default. Because of the relationships described above between the Ivy Principals and Presidential, the negotiations with Ivy were conducted on behalf of Presidential by a committee of three members of the Board of Directors with no affiliations with the Ivy Principals (the "Independent Committee") and an officer of Presidential who was not affiliated with the Ivy Principals. On November 14, 1991, Presidential and Ivy consummated a Settlement Agreement with respect to various outstanding loans to Ivy, which was approved unanimously by the Board of Directors of Presidential.
In connection with the Settlement Agreement, Presidential received, among other things, a number of vacant and occupied cooperative apartment units in the New York metropolitan area and certain third party promissory notes held by Ivy. Presidential received these assets in exchange for (i) the satisfaction of all of Ivy's recourse debt to Presidential and certain of its nonrecourse debt to Presidential with respect to which Presidential held first priority security interests and (ii) the release by Presidential of certain subordinate security interests in collateral securing some of the defaulted loans.
Most of Ivy's remaining nonrecourse debt to Presidential was consolidated, on modified terms, into two nonrecourse loans (collectively, the "Consolidated Loans") which were collateralized by substantially all of Ivy's remaining business assets with respect to which Presidential either did not previously have any security interest or had a junior security interest (collectively, the "Consolidated Collateral"). The terms of the Settlement Agreement permit Ivy to use the proceeds of each sale of Consolidated Collateral to (1) pay existing indebtedness of Ivy to its bank and trade creditors and certain operating expenses and (2) create and fund specified reserves to provide for payment of future obligations and potential liabilities. At December 31, 1996, the Consolidated Loans have an outstanding principal balance of $4,886,837 and a net carrying value of $116,787. Since, as permitted by the terms of the Consolidated Loans, most of Ivy's assets have been sold with the sales proceeds used to pay other recourse obligations of Ivy, Presidential does not expect to recover any material amount on the Consolidated Loans in excess of their net carrying value.
In 1996 Presidential and the Ivy Principals agreed to a modification of the Settlement Agreement to provide that the Ivy Principals will make payments on the Consolidated Loans in an amount equal to 25% of the operating cash flow (after provision for certain reserves) of Scorpio Entertainment, Inc. ("Scorpio"), a company owned by the Ivy Principals which acts as a producer of theatrical productions. This agreement, and Presidential's decision not to exercise an option (which it had received as part of the original Settlement Agreement) to acquire the capital stock of Scorpio, was made pursuant to the unanimous determination of the Independent Committee that such actions were in the best interests of Presidential. Presidential does not expect to receive any material payments on the Consolidated Loans in 1997.
All outstanding loans to Ivy at December 31, 1996 (see table below) are in good standing except for the Overlook loan. In connection with the Settlement Agreement, Ivy agreed to give Presidential upon request a deed or assignment in lieu of foreclosure to the various assets held by Presidential as security for the Overlook loan. In 1995, the terms of the Overlook loan were modified, including the interest rate and the maturity date (see Note 2). Management believes that it holds sufficient collateral to protect its interests in the loans that remain outstanding to Ivy to the extent of the net carrying value of these loans.
Presidential received interest of $242,225, $223,520 and $259,990 from Ivy during 1996, 1995 and 1994, respectively, on the loans referred to above.
In addition, in 1996, 1995 and 1994, Presidential recognized $6,626, $8,952 and $18,150, respectively, of income representing the amortization of discounts on notes receivable. (See Note 1-E).
Jeffrey Joseph is the President and a Director of Presidential, Thomas Viertel is an Executive Vice President and the Chief Financial Officer of Presidential and Steven Baruch is an Executive Vice President of Presidential.
Any transactions relating to the implementation of the terms of the Settlement Agreement, or otherwise involving the Ivy Principals, are subject to the approval of the Independent Committee.
All outstanding loans to Ivy are set forth in the table below:
MORTGAGE PORTFOLIO: NOTES RECEIVABLE - RELATED PARTIES
(1) This loan has been in default since 1990 and is classified as an impaired loan.
(2) The Consolidated Loans have a net carrying value of $116,787 and an outstanding principal balance of $4,886,837.
20. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective December 31, 1995, the Company adopted SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" which requires that the Company disclose estimated fair values for certain financial instruments. Estimated fair values are as of December 31, 1996 and 1995, and have been determined using available market information and various valuation estimation methodologies. Considerable judgement is required to interpret the effects on fair value of such items as future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. The estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. Also, the use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair values.
The following table summarizes the estimated fair values of financial instruments:
FINANCIAL INSTRUMENTS - ---------------------
(1) Net carrying value is net of discounts and deferred gains where applicable.
The fair value estimates presented above are based on pertinent information available to management as of December 31, 1996 and 1995. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued since December 31, 1996 and, therefore, current estimates of fair value may differ significantly from the amounts presented above.
Fair value methods and assumptions are as follows:
Cash and Cash Equivalents - The estimated fair value is based on current rates for similar assets.
Securities Available for Sale - The fair value of securities available for sale is estimated based on quoted market prices or dealer quotes, if available. If a quote is not available, fair value is estimated using quoted market prices for similar securities.
Notes Receivable - The fair value of notes receivable has been estimated by discounting projected cash flows using current rates for similar notes receivable. The fair value of impaired notes receivable - sold properties having a net carrying value of $1,404,764 at December 31, 1996 and $1,733,976 at December 31, 1995, are not included in the above table because it is not practical to reasonably assess the timing of the cash flows or the credit adjustment that would be applied in the marketplace for such notes receivable.
Mortgage Debt on Properties Owned, Wrap Mortgage Debt and Note Payable to Bank - The fair value of mortgage debt on properties owned, wrap mortgage debt and note payable to bank has been estimated by discounting projected cash flows using current rates for similar debt.
21. QUARTERLY FINANCIAL INFORMATION - UNAUDITED (Amounts in thousands, except earnings per common share)
Income Before Net Gain from Sales of Properties and Securities and Earnings Year Cumulative Effect of Per Ended Change in Accounting Common December 31 Revenues Principle Net Income Share - ----------- -------- -------------------- ---------- --------
- ---- First $3,270 $410 $ 435 $0.12 Second 3,249 584 1,415 0.40 Third 3,085 270 304 0.09 Fourth 3,335 459 414 0.12
- ---- First $2,963 $371 $ 398 $0.11 Second 2,975 502 505 0.15 Third 3,148 496 504 0.14 Fourth 3,085 505 538 0.15
22. SUBSEQUENT EVENTS
At December 31, 1996, there were approximately $4,800,000 of unpaid real estate taxes (including interest accrued thereon) owed by the owners of the property with respect to the Fairfield Towers condominium units securing Presidential's First and Second Mortgages (see Note 2). Approximately $3,000,000 of this amount arose prior to the condominium conversion of the property and was covered by a deferred payment agreement with the City of New York which required payments as condominium units were sold. However, as a result of the slower than projected pace of sales, the term of the deferred payment agreement expired. Subsequent to December 31, 1996, the Company advanced $600,000 to the owner to be used to pay a portion of the unpaid taxes and interest. The $600,000 advance was added to the $14,650,867 indebtedness secured by the Fairfield Towers First Mortgage and the interest rate will be the same as the interest rate on the Fairfield Towers First Mortgage. The holder of the $8,650,000 bank note (Fleet) has agreed to advance to Presidential $600,000 to reimburse it for its $600,000 advance. The owner is in the process of negotiating a new deferment agreement with the City of New York. However, no assurances can be given that the owner will be successful in negotiating a satisfactory deferment agreement with the City of New York, and if a satisfactory agreement is not obtained, a continuing default in the payment of real estate taxes could adversely affect the success of the condominium conversion at Fairfield Towers and the value of Presidential's First and Second Mortgages.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES - ------------------------------------------------
VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 SCHEDULE II - --------------------------------------------------------------------------------
(1) Represents the discount received on the purchase of the Fairfield Towers First Mortgage. (2) Represents amortization of discount on mortgages and notes using the interest method. (3) Includes a write-off of discount of $10,224 on some notes due to payoffs on the notes. (4) Includes a write-off of discount of $22,133 on some notes due to payoffs on the notes. (5) Includes a write-off of discount of $10,896 on some notes due to payoffs on the notes. (6) The Hoboken, NJ, foreclosed property, for which this valuation allowance applies, was sold in June, 1994.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES - ------------------------------------------------
REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996 SCHEDULE III - --------------------------------------------------------------------------------
* Apartments
** Cooperative Apartment Shares
(1) In 1994, as a result of the fire insurance settlement on the Mapletree property, $1,375,575 of cost for building and improvements and $465,292 of accumulated depreciation were written off against the insurance proceeds. The $79,100 cost for the land remained in real estate. Subsequent costs capitalized are for additions since 1995. (2) In 1996, the Company wrote off this undeveloped land.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES - ------------------------------------------------
REAL ESTATE AND ACCUMULATED DEPRECIATION SCHEDULE III DECEMBER 31, 1996 (CONCLUDED) - -------------------------------------------------------------------------------
(3) The aggregate cost of real estate for Federal income tax purposes is $24,459,240 at December 31, 1996.
(4) The reconciliations of the total cost of real estate at the beginning of each year with the total cost at the end of each year are as follows:
(5) The reconciliations of the accumulated depreciation at the beginning of each year with the total shown at the end of each year are as follows:
(6) Write-off of undeveloped land.
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES - ------------------------------------------------- MORTGAGE LOANS ON REAL ESTATE DECEMBER 31, 1996 SCHEDULE IV - --------------------------------------------------------------------------------
CARRYING PRINCIPAL AMT. OF LOANS AMOUNT OF SUBJECT TO DELINQUENT DESCRIPTION MORTGAGE (1) PRINCIPAL OR INTEREST - ------------------------------- ------------ ----------------------- First Mortgages: Apartment buildings: Columbus, OH $ 3,258,150 $ Brooklyn, NY 11,179,548 Hartford, CT 1,112,995
Sold Co-op Apartments: Flushing, NY (8 notes) 218,608 New York, NY (3 notes) 136,949 New Rochelle, NY (26 notes) 718,956 Riverdale, NY (3 notes) 31,176 Bronx, NY (2 notes) 38,660 Long Beach, NY (3 notes) 40,626 Rye, NY (2 notes) 132,847 Hastings, NY (2 notes) 17,876 ------------ -------------- Total First Mortgage Loans 16,886,391 ------------ -------------- Junior Mortgages: Apartment buildings: Bronx, NY 934,982 Brooklyn, NY 1,404,764 Des Moines, IA 199,128 New Haven, CT 5,225,938 White Plains, NY 2,504,569 Wichita, KS 402,919 ------------ -------------- Total Junior Mortgage Loans 10,672,300 ------------ -------------- Total Mortgage Loans $27,558,691 $ ============ ==============
PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES - ------------------------------------------------ MORTGAGE LOANS ON REAL ESTATE SCHEDULE IV DECEMBER 31, 1996 (CONCLUDED) - --------------------------------------------------------------------------------
(1) Carrying value is net of discounts and deferred gains. The aggregate net carrying value of this portfolio for tax purposes at December 31, 1996, is $22,647,000. (2) Interest is paid on this note at the rate of 6% per annum through July 31, 1999 and a rate of not less than 7.5% per annum through maturity. In connection with the modification of the note in 1994, the borrower paid a fee of $628,863 in order to increase the effective interest rate on the note to 8.5% per annum through July 31, 1999. (3) Varying amounts in 1998 and 1999. Balloon of $6,000,000 due in 2001. (4) This note was purchased by the Company in the fourth quarter of 1996 at a discount of $3,500,000. The interest rate, currently 9.25%, is a variable rate equal to 1% above the prime rate. (5) Entire principal due at Final Maturity Date. (6) In December, 1995, the borrower excercised its option to extend the maturity date of the notes from 1995 to 2000. Subsequent to December 31, 1996, the maturity dates of these loans were further extended to 2005. The interest rate is 9% per annum through December 31, 2002 and 9.25% per annum thereafter. The notes are amortizing monthly, based on a 20 year term at the above rates, and have balloon payments of $1,136,621 due at maturity. (7) Principal amortization each year with a balloon payment in the year of maturity. (8) Principal amortization each year through maturity. (9) The maturity dates of these notes may be extended at the option of the buyer for periods ranging up to ten years. (10) Varying amounts to 1999 and balloon of $13,328,421 due in 1999. (11) Varying amounts to 1998 and balloon of $3,259,897 due in 1998.