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EX-21 - PRESIDENTIAL REALTY CORP/DE/v178687_ex21.htm
EX-32.1 - PRESIDENTIAL REALTY CORP/DE/v178687_ex32-1.htm
EX-31.2 - PRESIDENTIAL REALTY CORP/DE/v178687_ex31-2.htm
EX-31.1 - PRESIDENTIAL REALTY CORP/DE/v178687_ex31-1.htm
EX-32.2 - PRESIDENTIAL REALTY CORP/DE/v178687_ex32-2.htm
EX-10.31 - PRESIDENTIAL REALTY CORP/DE/v178687_ex10-31.htm
    
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-K

(MARK ONE) 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended  December 31, 2009
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-8594

PRESIDENTIAL REALTY CORPORATION

(Exact name of registrant as specified in its charter)

Delaware
 
13-1954619
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
180 South Broadway, White Plains, New York
 
10605
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code        914-948-1300
  
Securities registered pursuant to Section 12(b) of the Act:
  
 
 
Name of each exchange on
Title of each class
 
which registered
Class B Common Stock
 
NYSE AMEX LLC

Securities registered pursuant to Section 12(g) of the Act:

Class A Common Stock 

Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes ¨  No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.           Yes x   No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).              Yes ¨   No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨                Accelerated filer ¨

Non-accelerated filer ¨  (Do not check if a smaller reporting company)

Smaller reporting company  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ¨   No x

The aggregate market value of voting stock held by non-affiliates of the registrant based on the closing price of the stock at June 30, 2009 was $2,581,000.  The registrant has no non-voting stock.

The number of shares outstanding of each of the registrant’s classes of common stock as of March 24, 2010 was 442,533 shares of Class A common stock and 2,957,147 shares of Class B common stock.

Documents Incorporated by Reference:  The registrant’s definitive Proxy Statement for its Annual Meeting of Shareholders currently scheduled for June 16, 2010, which Proxy Statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the registrant’s fiscal year end of December 31, 2009, is incorporated by reference into Part III of this Form 10-K.

 
 

 

PRESIDENTIAL REALTY CORPORATION

TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS
1
       
PARI I
     
Item 1.
 
Business
1
Item 1A.
 
Risk Factors
11
Item 1B.
 
Unresolved Staff Comments
11
Item 2.
 
Properties
11
Item 3.
 
Legal Proceedings
15
Item 4.
 
Reserved
16
       
PART II
     
Item 5.
 
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
16
Item 6.
 
Selected Financial Data
17
Item 7.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
18
Item 7A.
 
Quantitative and Qualitative Disclosures about Market Risk
47
Item 8.
 
Financial Statements and Supplementary Data
47
Item 9.
 
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
47
Item 9A.
 
Controls and Procedures
48
Item 9B.
 
Other Information
49
       
PART III
     
Item 10.
 
Directors, Executive Officers and Corporate Governance
49
Item 11.
 
Executive Compensation
49
Item 12.
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
49
Item 13.
 
Certain Relationships and Related Transactions, and Director Independence
49
Item 14.
 
Principal Accounting Fees and Services
50
       
PART IV
     
Item 15.
 
Exhibits, Financial Statement Schedules
50
       
Table of Contents to Consolidated Financial Statements
56

 
 

 

Forward-Looking Statements

Certain statements made in this report that are not historical fact may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including the expectation of the Board of Directors that it will request the approval of the Company’s shareholders for the sale of all or substantially all of the Company’s assets and the adoption of a plan of liquidation. Such forward-looking statements include statements regarding the intent, belief or current expectations of the Company and its management and involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the following:

 
·
continuing generally adverse economic and business conditions, which, among other things (a) affect the demand for apartments, retail and office space at properties owned by the Company or which are security for loans made by the Company, (b) affect the availability and creditworthiness of prospective tenants and the rental rates obtainable at the properties, and (c) affect consumer demand for the products offered by the tenants at the malls owned by the joint venture in which the Company is a member, which adversely affects the operating results and valuations of such malls;
 
·
continuing adverse changes in the real estate markets, including a severe tightening of the availability of credit, which adversely affect the ability of the Company or the joint venture in which the Company is a member to sell, or refinance the mortgages on, their properties and which may also affect the ability of prospective tenants to rent space at these properties;
 
·
the risk that the Board of Directors may not seek shareholder approval of the sale of all or substantially all of the Company’s assets and the adoption of liquidation, and if such approval is sought, it is not obtained;
 
·
general risks of real estate ownership and operation;
 
·
governmental actions and initiatives;
 
·
environmental and safety requirements; and
 
·
failure to comply with continuing listing standards of the NYSE AMEX.

PART I

ITEM I.
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 owns interests in real estate, makes loans secured by interest in real estate and has investments in two joint ventures (one joint venture owns two shopping malls and the other joint venture owns an industrial complex).

 
1

 

Presidential self-manages the properties that it owns and the property owned by PDL, Inc. and Associates Limited Co-Partnership (the “Hato Rey Partnership”) in which the Company is the general partner and has a 60% partnership interest.  At December 31, 2009, the Company employed 17 people, of whom 11 are employed at the Company’s home office and 6 are employed at the individual property sites.  The Company does not manage any of the properties owned by the joint ventures in which it has invested.  Those properties are managed by an affiliate of the Company’s partner in the joint ventures.

The Company’s principal assets fall into the following categories:

(i)  Equity interests in rental properties.  Approximately 55% of the Company’s assets are equity interests in commercial and residential rental properties.  These properties have a carrying value of $16,595,998, less accumulated depreciation of $1,516,641, resulting in a net carrying value of $15,079,357 at December 31, 2009.  See Properties below.

(ii)  Notes receivable.  Approximately 10% of the Company’s assets consist of notes receivable, which are reflected on the Company’s Consolidated Balance Sheet at December 31, 2009 as “Net Mortgage Portfolio”.  The $2,917,134 aggregate principal amount of these notes has been reduced by $36,212 of discounts (which reflect the difference between the stated interest rates on the notes and the market interest rates at the time the notes were made).  See Notes 1-B, 1-C, 1-D and 3 of Notes to Consolidated Financial Statements.  Accordingly, the net carrying value of the Company’s “Net Mortgage Portfolio” was $2,880,922 at December 31, 2009, of which $2,816,665 (or approximately 10% of the Company’s assets) are loans due from entities affiliated with The Lightstone Group (“Lightstone”), which are controlled by David Lichtenstein.  All of the loans included in this category of assets were current at December 31, 2009.

(iii)  Joint ventures.  Approximately 9% of the Company’s assets consists of investments in and advances to joint ventures with entities affiliated with Lightstone.  The Company accounts for these investments using the equity method.  At December 31, 2009, investments in and advances to joint ventures were $2,595,603, all of which is related to the Las Piedras, Puerto Rico industrial complex.  See Investments in and Advances to Joint Ventures, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 4 of Notes to Consolidated Financial Statements.

(iv)  Securities available for sale.  At December 31, 2009, the Company held $3,614,113 in securities available for sale, which is approximately 13% of the Company’s assets.  Such securities consist primarily of notes and bonds issued by agencies of the United States government.  (See Investment Strategies, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 6 of Notes to the Consolidated Financial Statements.)

(v)  Cash and cash equivalents.  At December 31, 2009, the Company had $784,674 in cash and cash equivalents, which is approximately 3% of the Company’s assets.  (See Investment Strategies below.)

 
2

 

Between 2004 and 2006, the Company made a total of $27,373,410 of investments in and advances to joint ventures affiliated with Lightstone that owned and operated nine shopping mall properties.  At December 31, 2008, these investments in and advances to joint ventures had been reduced on the Company’s consolidated balance sheet by distributions received by the Company and by the Company’s share of the losses of the joint ventures to $1,511,887, and during 2009 the balance of the investment in the shopping mall joint ventures was further reduced by the Company’s share of joint venture losses to zero.

The Company was entitled to receive interest at the rate of 11% per annum on a total of $25,935,000 of mezzanine loans to, and $1,438,410 of its investment in, the joint ventures and recorded these payments when received as distributions in investments in and advances to joint ventures.  During 2008 and 2009, a number of defaults occurred with respect to the payment of interest due on these mezzanine loans and on the first mortgage loans secured by the properties owned by the joint ventures and the Company does not expect to recover any additional amounts of principal or interest on its mezzanine loans except as provided in the Settlement Agreement referred to in the next paragraph.

On February 27, 2009, in order to obtain some value for its interests in some of the joint ventures and two of the mezzanine loans, the Company entered into a Settlement Agreement with Lightstone and David Lichtenstein individually with respect to various claims that the Company had asserted against them in connection with the Company’s investments in and advances to the joint ventures described above (the “Settlement Agreement”).  The Settlement Agreement is described below under Investments and Advances to Joint Ventures and Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources – Joint Venture Mezzanine Loans and Settlement Agreement.

Under the Internal Revenue Code of 1986, as amended (the “Code”), a REIT that meets certain requirements is not subject to Federal income tax on that portion of its taxable income that is distributed to its shareholders, if at least 90% 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 paid regular quarterly cash distributions through December 31, 2008.  Total dividends paid by the Company in 2008 were $.56 per share.  The Company did not pay any dividends in 2009.

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 the Company will have cash available to pay sufficient dividends in order to maintain REIT status. The Company was not required to pay any dividends in 2009 and believes that it will not be required to pay dividends in 2010 to maintain its REIT status. See Qualification as a REIT, Item 5. - Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities and Note 13 of Notes to Consolidated Financial Statements.

 
3

 

During 2009, the Company was notified by the NYSE Amex (the “Exchange”) that its Class A and Class B shares were not in compliance with certain of the Exchange’s continued listing standards.  The Company determined that it could not comply with the listing standard applicable to its Class A (relating to a minimum aggregate market value of the publicly held Class A shares) and agreed to voluntarily delist such Class A shares.  The Company did, however, submit a plan to regain compliance with the Exchange’s continued listing standard with respect to its Class B shares by November 15, 2010.  On March 18, 2010, the Company received notification from the Exchange that its Class B shares are currently in compliance with the Exchange’s continued listing standards.  (See the Company’s Report on Form 8-K filed March 22, 2010 for further details.)

(b)  Investment Strategies

The Company’s general investment strategy has been to make investments in real property that offer attractive current yields with, in some cases, potential for capital appreciation.  However, in light of the current economic climate, its continuing losses from operations, the adverse results from its investments in joint ventures with Lightstone and the unavailability of financing on a reasonable basis, the Company is not making new investments at this time.

Management believes that the Company is too small to operate effectively, particularly as an independent public company, in today’s marketplace.  To that end, the Company has taken a number of steps and is considering others.  The Company is conserving its resources (cash of $784,674 and securities available for sale of $3,614,113 at December 31, 2009) so that funds are available to service its existing assets and to operate the Company until a strategic alternative can be effectuated that will maximize shareholder value.  As previously noted, the Company did not pay a dividend in 2009 and it is unlikely that it will declare a dividend in 2010, except as may be required to comply with applicable REIT requirements.

From time to time in the Company’s recent history, the Company has considered various strategic alternatives in an effort to maximize shareholder value, including a merger, consolidation or sale of all or substantially all of the Company’s assets in a single transaction followed by a liquidation of the Company.  While in the past no appropriate opportunity has been found, the Board of Directors and management continue to seek and consider potential strategic transactions.  Management is currently having ongoing discussions concerning possible strategic transactions with a number of different parties but no definitive agreement has been reached and no assurances can be given that the Company will be able to achieve such a transaction.  The Company is currently negotiating with several parties for the sale of its Building Industries Center property in White Plains, New York and subsequent to year end, the Company listed its Mapletree Industrial Center property in Palmer, Massachusetts for sale.  In addition, the Board of Directors expects to request the approval of its shareholders at its next Annual Meeting currently scheduled for June 16, 2010 for the sale of all or substantially all of the Company’s assets, and the adoption of a Plan of Liquidation of the Company.

In light of the above, the Company does not expect to make any new investments in real estate except that it is negotiating for the purchase of a 25% preferred equity ownership position in nine of the properties securing the $12,075,000 consolidated note (the “Consolidated Note”) that the Company received, among other things, in the Settlement Agreement.

 
4

 

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 that it may invest in any one type of asset or the percentage of securities of any one issuer that it may acquire.  The investment policy may, therefore, be changed by the Board of Directors of the Company without the concurrence of the holders of its outstanding stock.  However, to continue to qualify as a REIT, the Company must restrict its activities to those permitted under the Code.  See Qualification as a REIT.

(c) Investments in and Advances to Joint Ventures

During 2004 and 2005, the Company made investments in and loans to four joint ventures and received 29% ownership interests in these joint ventures. The joint ventures own nine shopping malls in seven states. The initial aggregate investment in the joint ventures (original principal amount of the loans made to and investments made in the joint ventures) was $27,038,410. The Company accounted for these investments and loans under the equity method because it exercises significant influence over, but does not control, these entities, which are controlled by Lightstone and David Lichtenstein. Investments are recorded at cost, as investments in and advances to joint ventures, and adjusted for the Company’s share of each venture’s income or loss and increased by cash contributions and decreased by distributions received (including interest payments on the loans). Real estate held by such entities is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, and is written down to its estimated fair value if an impairment is determined to exist. Starting in 2007, the shopping malls began to suffer from, among other things, competition from other shopping malls, the inability to attract new tenants and declining rental rates, which conditions worsened during the continuing economic downturn, and in 2008 and 2009, the joint ventures defaulted on the Presidential loans. In addition, in 2008, Lightstone defaulted on payments of interest due on the first mortgage loans on six of the mall properties and the holders of the first mortgages commenced foreclosure proceedings and appointed a receiver to operate those properties. In January, 2010, the mortgage on two more of the mall properties became due and is in default and the holder of the first mortgage has commenced foreclosure proceedings on those properties.

By December 31, 2008, the Company’s carrying amount in three of the four joint ventures was reduced to zero.  In February, 2009, in order to address the loan defaults and various claims raised by the Company against Lightstone and Mr. Lichtenstein personally, the Company, Lightstone and Mr. Lichtenstein entered into a Settlement Agreement.  As a result of the Settlement Agreement, the Company relinquished its interest in the collateral for two of the loans having an outstanding principal balance of $18,100,000 and the related joint ventures, which the Company believed were of no value; obtained the assumption of  $10,000,006 of the loan balance by an affiliate of Mr. Lichtenstein; modified the terms of its $7,835,000 mezzanine loan with respect to one of the joint ventures and obtained a $500,000 personal guaranty with respect to that loan; and obtained a 50% ownership interest in the IATG joint venture described below.  Accordingly, at December 31, 2009, the Company has an interest in two joint ventures and accounts for these investments under the equity method of accounting.

 
5

 

The first investment is the Company’s mezzanine loan in the amount of $7,835,000 to a joint venture (“Lightstone II”) that is secured by ownership interests in the Brazos Mall in Lake Jackson, Texas and the Shawnee Mall in Shawnee, Oklahoma (the “Shawnee/Brazos Malls”).  In connection with this loan, the Company received a 29% ownership interest in Lightstone II. The loan matures in 2014 and has an interest rate of 11% per annum.  Since January 1, 2009, the interest payments due on the $7,835,000 loan have not been made and the loan is in default.  In addition, the first mortgage on the Shawnee/Brazos Malls matured on January 10, 2010 and was not paid.  The Company has been advised that Lightstone has been unable to refinance the first mortgage loan and is attempting to obtain an extension of the existing mortgage loan.  However, the holder of the first mortgage has commenced foreclosure proceedings and the Company believes that it will not be able to obtain any recovery on its mezzanine loan other than the recovery of $500,000 from David Lichtenstein on his limited guaranty received pursuant to the Settlement Agreement, which $500,000 was received in March, 2010.  As a result of the $500,000 guaranty payment received in March, 2010, at December 31, 2009, the Company recognized a $500,000 gain on settlement of joint venture loans in its consolidated financial statements and recorded a $500,000 receivable due from Mr. Lichtenstein on its consolidated balance sheet.  The $7,835,000 investment has been reduced by payments of interest (distributions received) and the Company’s share of the losses recorded from the joint venture.  As a result of the operating loss and impairment loss for the joint ventures in 2009, the balance of the Company’s investment in the Shawnee/Brazos Malls at December 31, 2009 was reduced to zero.

The second investment is a 50% ownership interest in IATG Puerto Rico, LLC (“IATG”), the Lightstone affiliate that owns The Las Piedras Industrial Complex, an industrial property located in Las Piedras, Puerto Rico consisting of approximately 68 acres of land and 380,800 square feet of rentable space contained in several buildings in the complex.  Pursuant to an independent appraisal of the property owned by IATG and based on that appraised value of $6,500,000, the Company estimated the value of its 50% ownership interest in the IATG property to be $3,250,000 and it had a carrying value of $2,595,603 as of December 31, 2009. The property is substantially vacant and the owners may attempt to sell the property.  Lightstone has agreed to advance funds to pay any negative cash flow from the operations of the property until a sale can be accomplished and has agreed that if it does not do so, it will transfer its remaining 49% interest in the property to Presidential.

In addition, as part of the Settlement Agreement, a total of $10,000,006 of $18,100,000 aggregate amount of defaulted mezzanine loans owed by various Lightstone entities were assumed by an affiliate of Lightstone that is the debtor on an existing loan from the Company in the outstanding principal amount of $2,074,994.  The total indebtedness was consolidated into a nonrecourse loan in the outstanding principal amount of $12,075,000 (the “Consolidated Note”) and is secured by all of the ownership interests in entities owning nine apartment properties (1,056 apartment units) located in Virginia (which had previously secured the $2,074,994 indebtedness) and 75% of the ownership interests in entities owning nine additional apartment properties (931 apartment units) located in Virginia and North Carolina.  The carrying value of the $12,075,000 Consolidated Note on the Company’s consolidated balance sheet is $2,074,994.

The Consolidated Note accrues interest at the rate of 13% per annum and is due on February 1, 2012.  All net cash flow from the eighteen apartment properties will be utilized to pay the interest accrued on the Consolidated Note and to the extent that there is not sufficient cash flow to pay all accrued interest, the unpaid interest will be deferred until the maturity of the Consolidated Note. The Company anticipates that a substantial portion of the annual interest will not be paid currently and will be deferred in accordance with the terms of the Consolidated Note.  The Company also anticipates that on the maturity date of the Consolidated Note, it is likely that the outstanding principal balance of the Consolidated Note plus any unpaid deferred interest thereon will exceed the value of the Company’s security therefore and, accordingly, since the Consolidated Note is a nonrecourse loan, the Company does not expect to obtain payment in full of the Consolidated Note on maturity.

 
6

 

For additional information about the history of the Company’s investment in and loans to the joint ventures controlled by Lightstone and the terms of the Settlement Agreement, see Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources –Joint Venture Mezzanine Loans and Settlement Agreement.

(d)  Loans and Investments

The following table sets forth information as of December 31, 2009 with respect to the mortgage loan portfolio resulting from the sale of properties or loans originated by the Company.

 
7

 

 
NET MORTGAGE PORTFOLIO

DECEMBER 31, 2009
 
                               
                           
Interest
 
                 
Net
       
Rate
 
     
Note
         
Carrying
 
Maturity
   
December 31,
 
Name of Property
   
Receivable
   
Discount
   
Value
 
Date
   
2009
 
                               
Virginia and North Carolina Apartment Properties
(1)
  $ 2,074,994     $ -     $ 2,074,994  
2012
     
13.00%
 
                                       
The Las Piedras Industrial Complex Las Piedras, Puerto Rico
(2)
    750,000       8,329       741,671  
2010
(a)  
None
 
                                       
Various Sold Co-op Apartments
      92,140 (b)     27,883       64,257  
Various
   
Various
 
                                       
Total Notes Receivable
    $ 2,917,134     $ 36,212     $ 2,880,922              

(a)
The Company is currently negotiating an extension of this loan or receipt of the underlying collateral.

(b)
Notes received from the sales of cooperative apartments.  Interest rates and maturity dates vary in accordance with the terms of each individual note.

 
8

 

(1) On February 27, 2009, the Company completed a Settlement Agreement with Lightstone and David Lichtenstein regarding various claims the Company had asserted against them.  Under the terms of the Settlement Agreement, an affiliate of Lightstone, which is the debtor on an existing loan from the Company in the outstanding principal amount of $2,074,994, assumed $10,000,006 of indebtedness under the $18,100,000 of mezzanine loans due from Lightstone.  The total indebtedness was consolidated into a nonrecourse loan in the outstanding principal amount of $12,075,000 (the “Consolidated Note”). The Consolidated Note is secured by all of the ownership interests in entities owning nine apartment properties (1,056 apartment units) located in Virginia (which had previously secured the $2,074,994 indebtedness) and 75% of the ownership interests in entities owning nine additional apartment properties (931 apartment units) located in Virginia and North Carolina.

 
The carrying value of the $12,075,000 Consolidated Note on the Company’s consolidated balance sheet is $2,074,994.  This is the same carrying value of the $2,074,994 note that was on the Company’s consolidated balance sheet prior to the consolidation of that note with the additional $10,000,006 indebtedness assumed by the affiliate of Lightstone pursuant to the Settlement Agreement. The Consolidated Note accrues interest at the rate of 13% per annum and is due on February 1, 2012.  (See Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources – Joint Venture Mezzanine Loans and Settlement Agreement and Note 3 of Notes to the Consolidated Financial Statements.)

(2) Under the terms of the Settlement Agreement, the Company also received a $750,000 non-interest bearing, nonrecourse note due on January 31, 2010, which is secured by a 25% ownership interest in IATG Puerto Rico, LLC (“IATG”) (in which the Company already owns a 50% interest), the Lightstone affiliate that owns The Las Piedras Industrial Complex, an industrial property located in Las Piedras, Puerto Rico.  The Company is currently negotiating an extension of this loan or receipt of the underlying collateral.  (See Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Joint Venture Mezzanine Loans and Settlement Agreement.)

(e)          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 90% 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 9 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 that are permitted under the Code and to restrict itself to the holding of assets that a REIT is permitted to hold.

 
9

 

No assurance can be given that the Company will continue to be taxed as a REIT; that the Company will have sufficient cash to pay dividends in order to maintain REIT status or that the Company will 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.

(f)           Relationship with Ivy Properties, Ltd.

The Company holds nonrecourse purchase money notes receivable from Ivy Properties, Ltd. and its affiliates (“Ivy”) relating to loans made to Ivy in connection with Ivy’s former cooperative conversion business, or as a result of a settlement of disputes between Ivy and the Company, all of which transactions and settlement negotiations occurred between 1989 and 1996.  At December 31, 2009, the notes receivable from Ivy had a carrying amount of zero and an outstanding principal balance of $4,770,050 (the “Ivy Consolidated Loan”).  These notes were received by the Company in 1991 in exchange for nonrecourse loans that had been previously written off by the Company.  Accordingly, these notes were recorded at zero except for a small portion of the notes that was adequately secured and was repaid in 2002.

Ivy is owned by Thomas Viertel, Steven Baruch and Jeffrey Joseph (the “Ivy Principals”), who are the sole partners of Pdl Partnership, which owns 198,735 shares of the Company’s Class A common stock. As a result of the ownership of these shares and 27,601 aggregate additional shares of Class A common stock owned individually by the Ivy Principals, Pdl Partnership and the Ivy Principals have beneficial ownership of an aggregate of approximately 51% 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.  In addition, these three officers own an aggregate of 211,477 shares of the Company’s Class B common stock.  Jeffrey Joseph is the Chief Executive Officer, the President and a Director of Presidential; Thomas Viertel is an Executive Vice President, the Chief Financial Officer and a Director of Presidential; and Steven Baruch is an Executive Vice President and a Director of Presidential.

Since 1996, the Ivy Principals have made payments on the Ivy Consolidated Loan 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 Messrs. Viertel and Baruch to carry on theatrical productions.  Amounts received by Presidential from Scorpio are applied to unpaid and unaccrued interest on the Ivy Consolidated Loan and recognized as income.  These amounts have been material in the past.  However, the profitability of theatrical productions is by its nature uncertain and management believes that any estimate of payments from Scorpio on the Ivy Consolidated Loan for future periods is too speculative to project.  During 2009 and 2008, Presidential received interest payments of zero and $146,750, respectively, on the Ivy Consolidated Loan.  Although, as stated above, management believes that any estimate of payments by Scorpio for future periods are too speculative to project, in light of the continuing material adverse effect of the current economic downturn on the theatrical production business, the Company does not expect to receive any payments on the Ivy Consolidated Loan in 2010.  The Ivy Consolidated Loan bears interest at a rate equal to the JP Morgan Chase Prime rate, which was 3.25% at December 31, 2009.  At December 31, 2009, the unpaid and unaccrued interest was $3,677,702 and such interest is not compounded.

 
10

 

Any transactions relating to or otherwise involving Ivy and the Ivy Principals were and remain subject to the approval by a committee of three members of the Board of Directors with no affiliations with the owners of Ivy.

For further historical information about the loan transactions with Ivy, reference is made to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

(g)          Competition

The real estate business is highly competitive in all respects.  In all phases of its business Presidential faces competition from companies with greater financial and other resources.  With fewer financial institutions offering loans under current market conditions, it will be more difficult for the Company to find sources of financing for its properties, such as the Hato Rey Center property, since it will be competing for available funds with other borrowers with greater financial resources.  To the extent that Presidential seeks to acquire additional properties or originate new loans, it will face competition from other potential purchasers or lenders with greater financial resources.

ITEM 1A.
RISK FACTORS

Not required for a smaller reporting company.

ITEM 1B.
UNRESOLVED STAFF COMMENTS

None.

ITEM 2.
PROPERTIES

As of December 31, 2009, the Company had an ownership interest in 592,000 square feet of commercial, industrial and professional space and four cooperative apartment units, all of which are carried on its balance sheet at $15,079,357 (net of accumulated depreciation of $1,516,641).  The Company has mortgage debt on two of these properties in the aggregate principal amount of $14,969,607.  The $14,924,629 mortgage on the Hato Rey Center property is nonrecourse to the Company, whereas the $44,978 Mapletree Industrial Center mortgage is recourse to Presidential.

At December 31, 2009, Presidential and PDL, Inc., a wholly owned subsidiary of Presidential, owned an aggregate 60% general and limited partner interest in the Hato Rey Partnership, which owns and operates the Hato Rey Center, an office building with 207,000 square feet of commercial space, located in Hato Rey, Puerto Rico.  The Company’s consolidated financial statements include 100% of the account balances of this partnership.

 
11

 

Presidential owns four cooperative apartment units.  Although it may from time to time sell individual or groups of these apartments, Presidential intends to continue to hold them as rental apartments.

As of December 31, 2009, the Company also has an ownership interest in one commercial property and one cooperative apartment unit that are classified as assets related to discontinued operations.  At December 31, 2009, the carrying value of these properties was $231,813 (net of accumulated depreciation of $1,199,567) and the mortgage debt related to one of these properties, which is recourse to Presidential, was $1,045,867.

The chart below lists the Company’s properties as of December 31, 2009.

 
12

 

REAL ESTATE

       
Average
   
Gross Amount of Real Estate
         
Net Amount of
                  
         
Vacancy
   
At December 31, 2009
   
Accumulated
   
Real Estate
   
Mortgage
            
         
Rate
         
Buildings
         
Depreciation
   
At
   
Balance
            
    
Rentable
 
Percent
         
and
         
December 31,
   
December 31,
   
December 31,
   
Maturity
 
Interest
 
Property
 
Space (approx.)
 
2009
   
Land
   
Improvements
   
Total
   
2009
   
2009
   
2009
   
Date
 
Rate
 
                                                         
Commercial Buildings
                                                       
                                                         
Mapletree Industrial Center,  Palmer, MA
 
385,000 sq.ft.
    10.18 %   $ 79,100     $ 908,839     $ 987,939     $ 323,096     $ 664,843     $ 44,978    
June, 2011
    3.25 %
                                                                         
The Hato Rey Center, Hato Rey, PR
 
207,000 sq.ft.
    22.65 %     1,905,985       13,647,606       15,553,591       1,174,229       14,379,362       14,924,629  (1)  
May, 2028
    9.38 %
                                                                         
Residential
                                                                       
Individual Cooperative Apartments
                                                                       
                                                                         
Various Cooperative Apartments, NY & CT
 
4 Apt. Units
    0.00 %     10,897       43,571       54,468       19,316       35,152       -              
                                                                         
                $ 1,995,982     $ 14,600,016     $ 16,595,998     $ 1,516,641     $ 15,079,357     $ 14,969,607              
                                                                         
Real Estate of Discontinued Operations
                                                                       
                                                                         
Commercial Buildings
                                                                       
                                                                         
Building Industries Center,  White Plains, NY
 
23,500 sq.ft.
 
2.89
%   $ 61,328     $ 1,360,565     $ 1,421,893     $ 1,196,304     $ 225,589     $ 1,045,867  (2)  
June, 2010
    5.45 %
                                                                         
Residential
                                                                       
Individual Cooperative Apartments
                                                                       
                                                                         
Cooperative Apartment, Riverdale, NY
 
1 Apt. Unit
 
0.00
%     1,273       8,214       9,487       3,263       6,224       -              
                                                                       
                $ 62,601     $ 1,368,779     $ 1,431,380     $ 1,199,567     $ 231,813     $ 1,045,867              

(1) 
See The Hato Rey Center - Hato Rey, Puerto Rico below.

(2) 
This mortgage amortizes monthly with a balloon payment due at maturity.
In January, 2010, the maturity date of the mortgage was extended from March, 2010 to June, 2010.
In March, 2010, the mortgage was refinanced (see Other Matters below).

 
13

 

Mapletree Industrial Center – Palmer, Massachusetts

The Company is involved in an environmental remediation process for contaminated soil found on its property.  In 2006, the Company accrued a $1,000,000 liability, which was discounted by $145,546, and charged $854,454 to expense.  At December 31, 2009, the accrued liability balance was $388,971 and the discount balance was $118,535.  See Management’s Discussion and Analysis of Financial Condition and Results of Operations – Environmental Matters and Note 10 of Notes to Consolidated Financial Statements.

The Hato Rey Center – Hato Rey, Puerto Rico

In 2005 and 2006, tenants vacated 82,387 square feet of space to occupy their own newly constructed office buildings and Presidential commenced an aggressive program to lease the vacant space.  Since March, 2006 the vacancy rate at the property was reduced from 48% to a low of approximately 20% at January 31, 2009.  However, as a result of local economic conditions and higher than historical vacancy rates in the Hato Rey area, the vacancy rate has increased to 26% at December 31, 2009.

Over the last three years through September 30, 2009, Presidential has loaned $2,500,000 to the owning partnership to fund negative cash flow from the operations of the property during the periods of high vacancy rates and to pay the costs of a modernization program.  Interest accrued on the loan at the rate of 11% until May, 2008 and 13% thereafter, with interest and principal to be paid from the first positive cash flow from the property or upon a refinancing of the first mortgage on or sale of the property.  In July, 2009, the Company agreed to loan an additional $250,000 to the Hato Rey Partnership under the same terms as the $2,500,000 agreement.  At December 31, 2009, total advances under the loan were $2,608,000 and subsequent to December 31, 2009, the Company advanced an additional $62,000.  The $2,608,000 loan and the accrued interest in the amount of $823,786 have been eliminated in consolidation.

The first mortgage loan on the Hato Rey Center property is due on May 11, 2028 but provides that if it was not repaid on or before May 11, 2008, the interest rate on the loan would be increased by two percentage points (to 9.38% per annum of which 2% per annum is deferred until maturity) and all cash flow from the property, after payment of all operating expenses, will be applied to pay down the outstanding principal balance of the loan.  The Company did not repay the existing mortgage on May 11, 2008 and the mortgage provisions described above became applicable.  During 2008 and 2009, no funds were available from net cash flow to pay down the mortgage balance.  At December 31, 2009, the outstanding principal balance of the first mortgage loan was $14,924,629 and the deferred interest was $545,685.

The net amount of real estate of the Hato Rey Center of $14,379,362 at December 31, 2009, constitutes more than 10% of the assets of the Company.  The following additional information is provided for this property:

1)  The occupancy rate at the building at December 31, 2009 was 74% and included one tenant who occupied more than 10% of the building’s square footage.  This tenant is a Puerto Rico governmental agency that is responsible for the monitoring, evaluating and approval of college courses.  The tenant’s lease term is for five years expiring February 29, 2012 with a monthly base rent of $35,012 for the 22,113 square feet it occupies.

 
14

 

2)  In addition to governmental agencies, the Hato Rey Center is occupied by many professionals including accountants, attorneys, engineers and computer consultants.  The average effective annual rent per square foot at the building is $21.30.

3)  The following is a schedule of lease expirations at the Hato Rey Center for the next ten years:

   
Number of
   
Total
         
Percentage
 
   
Tenants Whose
   
Square
         
of Gross
 
   
Leases Will
   
Feet
   
Annual
   
Annual
 
   
Expire
   
Expiring
   
Rental
   
Rental
 
2010
    44       48,019     $ 1,022,454       33.50 %
2011
    29       28,729       601,193       19.69  
2012
    12       33,482       666,524       21.83  
2013
    3       26,837       577,437       18.92  
2014
    4       6,175       184,943       6.06  
2015-2019
 
None
   
None
   
None
   
None
 
      92       143,242     $ 3,052,551       100.00 %

4)  The federal tax basis at December 31, 2009 for the Hato Rey Center building and its improvements was $4,292,702.  Depreciation is provided on the straight-line method over the assets’ estimated useful lives, which is 31-1/2 years for the building and which range from 5 to 20 years for the improvements.

5)  The real estate tax rate is 8.83% and annual real estate taxes for the property were $357,177 for 2009, including $87,943 for a temporary special tax enacted by the government of Puerto Rico.  The Company does not expect any increases in real estate taxes as a result of any proposed building improvements.

Other Matters

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 with title generally insured for the benefit of the Company by reputable title insurance companies.

The mortgages on the Company’s properties have fixed rates of interest and amortize monthly with the exception of the Building Industries Center mortgage, which originally had a balloon payment of $1,038,086 due at maturity in March, 2010, and the Hato Rey Center mortgage described above.  In January, 2010, the maturity date of the Building Industries Center property mortgage was extended from March 1, 2010 to June 1, 2010 under the same terms.  In March, 2010, the Company obtained a new $1,250,000 mortgage on its Building Industries Center property and repaid the $1,038,086 outstanding balance of the prior mortgage.  The new mortgage bears interest at the rate of 6.25% per annum, requires monthly payments of principal and interest of $8,246 and has a balloon payment of $1,182,375 due at maturity on March 31, 2013.

ITEM 3.
LEGAL PROCEEDINGS

None.

 
15

 

ITEM 4.
RESERVED
 
PART II

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a)
The principal market for the Company’s Class B Common Stock is the NYSE AMEX LLC (ticker symbol PDLB).  The principal market for the Company’s Class A Common Stock was the NYSE AMEX LLC (ticker symbol PDLA) through September 3, 2009 and the over the counter market (ticker symbol PDNLA) thereafter.  The high and low prices for the stock on such principal exchanges for each quarterly period during the past two years, and the per share dividends declared per quarter, are as follows:

         
Dividends
 
   
Stock Prices
   
Paid Per
 
                           
Share on
 
   
Class A
   
Class B
   
Class A
 
   
High
   
Low
   
High
   
Low
   
and Class B
 
                               
Calendar 2008
                             
First Quarter
  $ 6.20     $ 4.40     $ 6.28     $ 4.50     $ .16  
Second Quarter
    5.55       4.95       6.10       4.47       .16  
Third Quarter
    5.40       4.30       6.50       4.40       .16  
Fourth Quarter
    4.61       2.95       4.95       0.84       .08  
                                         
Calendar 2009
                                       
First Quarter
  $ 2.72     $ 1.56     $ 2.25     $ 0.35     $ .00  
Second Quarter
    1.52       1.08       1.30       0.85       .00  
Third Quarter
    1.32       0.83       0.90       0.32       .00  
Fourth Quarter
    1.50       0.40       0.91       0.49       .00  

(b)
The number of record holders for the Company’s Common Stock at December 31, 2009 was 79 for Class A and 434 for Class B.

(c)
Under 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 90% 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 paid regular quarterly cash distributions through December 31, 2008.  In 2009, the Company did not pay any dividends.  No assurance can be given that the Company will 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 Item 1. - Business - Qualification as a REIT above.

(d)
The following table sets forth certain information as of December 31, 2009, relating to the Company’s 2005 Restricted Stock Plan, which was approved by security holders (the Company has no other equity compensation plans):

 
16

 

       
Number of
       
securities
       
remaining
       
available
       
for future
       
issuance
Number of
     
under equity
securities
     
compensation
to be issued
 
Weighted average
 
plans
upon exercise
 
exercise price of
 
(excluding
of outstanding
 
outstanding options,
 
securities
options, warrants
 
warrants and
 
reflected in
and rights
 
rights
 
column (a))
         
(a)
 
(b)
 
(c)
None
 
None
 
47,500
       
Class B
       
Common Shares

ITEM 6.                SELECTED FINANCIAL DATA

Not required for a smaller reporting company.

 
17

 

ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Presidential Realty Corporation is taxed for federal income tax purposes as a real estate investment trust.  Presidential owns real estate directly and through a partnership and joint ventures and makes loans secured by interests in real estate.

During the past three years, the downturn in the economy, higher unemployment and lack of consumer confidence have adversely affected the operating results of the shopping mall properties in which the Company has invested. These conditions, among others, have resulted in defaults in 2008 and 2009 on the three mezzanine loans made by the Company to joint ventures owning nine shopping mall properties and in defaults on the first mortgage loans secured by eight of these properties.  (See Liquidity and Capital Resources – Joint Venture Mezzanine Loans and Settlement Agreement below.)

In addition, the turmoil in the credit markets has made it very difficult for the Company and its joint venture partners to obtain refinancing of the mortgage loans on some of its properties on satisfactory terms. For example, the Company was unable to refinance the existing $14,924,629 first mortgage on its Hato Rey Center office building in May, 2008 when the terms of the mortgage anticipated repayment. As a result, while the mortgage is not in default, the annual interest rate was increased by 200 basis points (the payment of which is deferred until maturity) and the mortgagee is entitled to receive all net cash flow from the property to reduce the outstanding principal balance.  During 2008 and 2009, there was no net cash flow available to reduce the principal balance of the mortgage and no assurances can be given that there will be any net cash flow available in 2010.  (See Hato Rey Partnership below.)

The restrictive credit markets also adversely affect the ability of the Company and the joint ventures to sell properties owned by them on satisfactory terms because of the inability of prospective purchasers to obtain financing on satisfactory terms.

Presidential obtains funds for working capital and investment from its available cash and cash equivalents, from its securities available for sale, from operating activities, from refinancing of mortgage loans on its real estate equities or from sales of such equities, and from repayments on its mortgage portfolio. Management believes that, barring any unforeseen circumstances, the Company has sufficient liquidity and capital resources to carry on its existing business and to pay any dividends required to maintain REIT status until the Company can effectuate a plan of liquidation or enter into a strategic transaction.  However, in the current ongoing economic downturn, given our continuing decline in revenues, expected losses from continuing operations and negative cash flows from operating activities, management believes that Presidential might have insufficient liquidity and capital resources to operate in future years without sales of its assets.  (See Liquidity and Capital Resources below.)

 
18

 

Investments in and Advances to Joint Ventures

The Company has investments in and advances to joint ventures in two entities that are controlled by The Lightstone Group (“Lightstone”) and David Lichtenstein. The Company accounts for these investments under the equity method of accounting. At December 31, 2009, investments in and advances to joint ventures was $2,595,603.

The first investment is the Company’s mezzanine loan in the amount of $7,835,000 made to Lightstone II in 2005, which is secured by ownership interests in the Shawnee Mall and the Brazos Mall properties (“Shawnee/Brazos Malls”).  The Company is entitled to receive interest at the rate of 11% per annum on the mezzanine loan and recorded these interest payments as distributions in investments and advances to joint ventures.  In connection with this loan, the Company received a 29% ownership interest in Lightstone II. The loan was in good standing at December 31, 2008.  However, the borrower failed to make the interest payments due on January 1, 2009 and in subsequent months when the holder of the first mortgage on these properties began sweeping all cash flow from the properties and, accordingly, the Company’s loan receivable is in default.  The first mortgage on the properties became due on January 10, 2010 and has not been paid.  Lightstone has been unable to refinance the first mortgage indebtedness and is attempting to obtain an extension of the existing mortgage.  However, the holder of the first mortgage has commenced foreclosure proceedings and the Company believes that it is likely that the first mortgage will be foreclosed and the Company will not be able to obtain any recovery on its mezzanine loan other than the recovery of $500,000 from David Lichtenstein on his limited guaranty received pursuant to the Settlement Agreement referred to in the next paragraph.  In March, 2010, the Company received the $500,000 guaranty payment and, as a result, at December 31, 2009, the Company recognized a $500,000 gain on settlement of joint venture loans in its consolidated financial statements and recorded a $500,000 receivable due from Mr. Lichtenstein on its consolidated balance sheet.  At December 31, 2008, the balance of the Company’s investment in and advances to this joint venture was $1,511,887.  As a result of the operating loss and impairment loss from the Shawnee/Brazos Malls in 2009, the Company’s investment in and advances to the Shawnee/Brazos Malls was reduced to zero at December 31, 2009.

As a result of the default on the $7,835,000 mezzanine loan in 2009 and the defaults on $18,100,000 of mezzanine loans (which were also investments in and advances to joint ventures) in 2008, on February 27, 2009, the Company entered into a Settlement Agreement with Lightstone and Mr. Lichtenstein with respect to various claims that the Company had asserted against them in connection with the Company’s investments in and advances to the joint ventures (the “Settlement Agreement”).  The Settlement Agreement is described below under Liquidity and Capital Resources – Joint Venture Mezzanine Loans and Settlement Agreement.

The second investment, a 50% ownership interest in IATG Puerto Rico, LLC (“IATG”), the Lightstone affiliate that owns The Las Piedras Industrial Complex, an industrial property located in Las Piedras, Puerto Rico consisting of approximately 68 acres of land and 380,800 square feet of rentable space contained in several buildings in the complex, was received by the Company as part of the Settlement Agreement referenced above. Pursuant to an independent appraisal of the property owned by IATG and based on that appraised value of $6,500,000, the Company estimated the value of its 50% ownership interest in the IATG property to be $3,250,000 and the Company recorded a $3,250,000 investment in joint ventures on its consolidated balance sheet and recognized a $3,250,000 gain on the settlement of joint venture loans in its consolidated financial statements.

 
19

 

Real Estate Loans

During 2009, in connection with the Settlement Agreement with Lightstone and Mr. Lichtenstein, the Company consolidated an existing $2,074,994 note receivable into a larger $12,075,000 Consolidated Note (the “Consolidated Note”) and also received a $750,000 non-interest bearing note due from Mr. Lichtenstein (see Liquidity and Capital Resources – Joint Venture Mezzanine Loans and Settlement Agreement).

In addition, during 2009, the Company received repayment of its $75,000 loan receivable related to the sale of Cambridge Green in 2007.

Hato Rey Partnership

PDL, Inc. (a wholly owned subsidiary of Presidential) is the general partner of PDL, Inc. and Associates Limited Co-Partnership (the “Hato Rey Partnership”).  The Hato Rey Partnership owns and operates the Hato Rey Center, an office building in Hato Rey, Puerto Rico.

At December 31, 2008 and 2009, Presidential and PDL, Inc. owned an aggregate 60% general and limited partner interest in the Hato Rey Partnership.  The Company consolidates the Hato Rey Partnership in the Company’s consolidated financial statements.

On January 1, 2009, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810-10-65, which requires amounts attributable to noncontrolling interests to be reported separately.  For the year ended December 31, 2009, the Hato Rey Partnership had a loss of $661,640.  The consolidated financial statements reflect the separate disclosure of the noncontrolling interest’s share (40%) of the loss of $264,656.  Prior to the adoption of ASC 810-10-65, the partners constituting the noncontrolling interest in the Hato Rey Partnership had no basis in their investment and, as a result, the Company was required to record in its consolidated financial statements any losses attributable to the noncontrolling interest and the Company would have recorded any future earnings of the noncontrolling interest up to the amount of the losses previously recorded by the Company attributable to the noncontrolling interest.  For the year ended December 31, 2008, the Hato Rey Partnership had a loss of $481,352, of which $192,541 represented the noncontrolling interest share absorbed by the Company.

Discontinued Operations

In April, 2009, the Company completed the sale of Crown Court located in New Haven, Connecticut for a sales price of $3,604,083, with net cash proceeds of sale of $1,545,851.

In October, 2009, the Company sold a cooperative apartment unit located in Riverdale, New York for a sales price of $154,000, with net cash proceeds of sale of $145,738.

 
20

 

During the three months ended June 30, 2009 and the three months ended December 31, 2009, the Company designated another cooperative apartment in Riverdale, New York and the Building Industries Center property in White Plains, New York, respectively, as held for sale.

Securities Available for Sale

In May, 2009, the Company invested $4,431,622 of its available cash in notes and bonds issued by agencies of the United States government.  Primarily as a result of the sale of some of these investments, the Company held $3,614,113 of securities available for sale at December 31, 2009.

Critical Accounting Policies

In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”), management is required to make estimates and assumptions that affect the financial statements and disclosures. These estimates require difficult, complex and subjective judgments. Management has discussed with the Company’s Audit Committee the implementation of the critical accounting policies described below and the estimates required with respect to such policies.

Real Estate

Real estate is carried at cost, net of accumulated depreciation and amortization.  Additions and improvements are capitalized and repairs and maintenance are charged to rental property operating expenses as incurred.  Depreciation is generally provided on the straight-line method over the estimated useful life of the asset. The useful life of each property, as well as the allocation of the costs associated with a property to its various components, requires estimates by management. If management incorrectly estimates the allocation of those costs or incorrectly estimates the useful lives of its real estate, depreciation expense may be miscalculated.

The Company reviews each of its properties for impairment if events or changes in circumstances warrant. If impairment were to occur, the property would be written down to its estimated fair value.  The Company assesses the recoverability of its investment in real estate based on undiscounted cash flow estimates.  The future estimated cash flows of a property are based on current rental revenues and operating expenses, as well as the current local economic climate affecting the property.  Considerable judgment is required in making these estimates and changes in these estimates could cause the estimated cash flows to change and an impairment could occur. As of December 31, 2009, the Company’s net real estate was carried at $15,079,357.  During 2009, no impairment loss was recorded on any real estate owned by the Company.

Investments in Joint Ventures

The Company has equity investments in joint ventures and accounts for these investments using the equity method of accounting.  These investments are recorded at cost and adjusted for the Company’s share of each entity’s income or loss and adjusted for cash contributions or distributions.  Real estate held by such entities is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, and is written down to its estimated fair value if an impairment is determined to exist.  During 2009, impairment losses of approximately $20,854,000 were recorded by the joint ventures on two of these properties.

 
21

 

Assets and Liabilities Related to Discontinued Operations

Assets related to discontinued operations are carried at the lower of cost (net of accumulated depreciation and amortization) or fair value less costs to sell.  An operating property is classified as held for sale and, accordingly, as a discontinued operation when, in the judgment of management, a sale that will close within one year is probable. The Company discontinues depreciation and amortization when a property is classified as a discontinued operation.  At December 31, 2009, assets related to discontinued operations for the Building Industries Center property and a cooperative apartment unit were $231,813.  During 2009, no impairment charges were recorded for these properties.

Liabilities related to assets held for sale at December 31, 2009 consist of the $1,045,867 recourse mortgage debt on the Building Industries Center property (see Liquidity and Capital Resources - Discontinued Operations below).  Subsequent to year end, the Company obtained a new $1,250,000 mortgage on the Building Industries Center property and repaid the $1,038,086 outstanding balance of the prior mortgage.  The new mortgage has a three year term, but will be repaid in full upon the sale of the property.

Mortgage Portfolio

The Company evaluates the collectibility of both accrued interest and principal on its $2,917,134 mortgage portfolio to determine whether there are any impaired loans. If a mortgage loan was considered to be impaired, the Company would establish a valuation allowance equal to the difference between a) the carrying value of the loan, and b) the present value of the expected cash flows from the loan at its effective interest rate, or at the estimated fair value of the real estate collateralizing the loan. Although a loan modification could be an indicator of a possible impairment, the Company has in the past, and may in the future, modify loans for business purposes and not as a result of debtor financial difficulties.  Income on impaired loans is recognized only as cash is received.  At December 31, 2009, all loans were current as to payment of principal and interest according to their terms, as modified, and no loans have been classified as impaired.

Securities Available for Sale

Securities available for sale are reported at fair value in accordance with the Fair Value Measurements and Disclosures Topic of the ASC.  The valuation of securities available for sale was determined to be Level 1 financial assets within the valuation hierarchy in this topic, and is based on current market quotes received from financial sources that trade such securities. Unrealized gains and losses are reported as other comprehensive income or loss in the consolidated statement of stockholders’ equity until realized.  The Company evaluates these investments for other-than-temporary declines in value, and, if such declines were other than temporary, the Company would record a loss on the investments. Gains and losses on sales of securities are determined using the specific identification method.

The Company’s investments are in marketable equity and debt securities consisting primarily of notes and bonds of agencies of the federal government.  Disposition of such securities may be appropriate for either liquidity management or in response to changing economic conditions, so they are classified as securities available for sale. At December 31, 2009, securities available for sale were $3,614,113 and accumulated other comprehensive loss on securities available for sale was $14,535.

 
22

 

Rental Revenue Recognition

The Company recognizes rental revenue on the straight-line basis from the later of the date of the commencement of the lease or the date of acquisition of the property subject to existing leases, which averages minimum rents over the terms of the leases. Certain leases require the tenants to reimburse a pro rata share of real estate taxes, utilities and maintenance costs.

Allowance for Doubtful Accounts

Management assesses the collectibility of amounts due from tenants and other receivables, using indicators such as past-due accounts, the nature and age of the receivable, the payment history and the ability of the tenant or debtor to meet its payment obligations.  Management’s estimate of allowances for doubtful accounts is subject to revision as these factors change.  Rental revenue is recorded on the accrual method and rental revenue recognition is generally discontinued when the tenant in occupancy is delinquent for ninety days or more.  Bad debt expense is charged for vacated tenant accounts and subsequent receipts collected for those receivables will reduce bad debt expense. At December 31, 2009, other receivables, net of an allowance for doubtful accounts of $234,316, were $804,376. For the years ended December 31, 2009 and 2008, bad debt expense for continuing operations relating to tenant obligations was $134,516 and $41,595, respectively.

Pension Plans

The Company maintains a qualified Defined Benefit Pension Plan, which covers substantially all of its employees.  The plan provides for monthly retirement benefits commencing at age 65. The Company makes annual contributions that meet the minimum funding requirements and the maximum contribution levels under the Internal Revenue Code.  Net periodic benefit costs for the years ended December 31, 2009 and 2008 were $441,590 and $183,321, respectively.  The projected benefit obligation at December 31, 2009 was $9,456,810 and the fair value of the plan assets was $7,499,288. At December 31, 2009 and 2008, the discount rate used in computing the projected benefit obligation was 5.52% and 6.37%, respectively.  The expected long-term rate of return on plan assets was 7% for both years.  The Company was not required to make any contributions to the plan in 2009 for the 2008 tax year, but chose to make a contribution of $900,000.  As a result of the precipitous decline in the stock market in the second half of 2008 and the first quarter of 2009, which adversely affected the value of the assets in the Defined Benefit Pension Plan portfolio, the Company will be required by the rules governing the funding of pension plans to make contributions to the Defined Benefit Pension Plan in the approximate amount of $100,000 in 2010 and will be required to make additional contributions in subsequent years.  The Company may make contributions in excess of the required contributions if it believes it is prudent to do so.  Management and trustees regularly review the plan assets, the actuarial assumptions and the expected rate of return.  Changes in actuarial assumptions, interest rates or changes in the fair value of the plan assets can materially affect the benefit obligation, the required funding and the benefit costs.  At February 28, 2009, the Company froze the accrual of additional benefits under the Defined Benefit Pension Plan so that the benefits payable to participants will not be increased as a result of additional years of service or increased compensation levels after the freeze date.

 
23

 

In addition, the Company has contractual retirement agreements with certain active and retired officers providing for unfunded pension benefits.  The Company accrues on an actuarial basis the estimated costs of these benefits during the years the employee provides services.  The benefits generally provide for annual payments in specified amounts for each participant for life, commencing three years after retirement, with an annual cost of living increase.  Benefits paid for the years ended December 31, 2009 and 2008 were $73,303 and $216,660, respectively.  Benefit costs for the years ended December 31, 2009 and 2008 were $192,235 and $31,149, respectively. The projected contractual pension benefit obligation at December 31, 2009 was $524,854.  At December 31, 2009 and 2008, the discount rate used in computing the projected benefit obligation was 5.74% and 6.24%, respectively.  Changes in interest rates and actuarial assumptions, amendments to the plan and life expectancies could materially affect benefit costs and the contractual accumulated pension benefit obligation.

Fourth Floor Management Corp. Profit Sharing Plan

Fourth Floor Management Corp., a 100% owned subsidiary of Presidential Realty Corporation that manages the Company’s properties, maintains a profit sharing plan for substantially all of its employees.  The profit sharing plan provides for annual contributions up to a maximum of 5% of the employees annual compensation.  The Company made a $9,250 contribution to the plan in March, 2010 for the 2009 plan year and a $9,420 contribution to the plan in March, 2009 for the 2008 plan year.  Contributions are charged to general and administrative expense.

Income Taxes

The Company operates in a manner intended to enable it to continue to qualify as a Real Estate Investment Trust (“REIT”) under Sections 856 to 860 of the Code. Under those sections, 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 90% of its REIT taxable income (exclusive of capital gains) is so distributed.  As a result of its ordinary tax loss for 2009 there is no requirement to make a distribution in 2010.  In addition, no provision for income taxes was required at December 31, 2009.  If the Company fails to distribute the required amounts of income to its shareholders, or otherwise fails to meet the REIT requirements, it would fail to qualify as a REIT and substantial adverse tax consequences could result.  The Company believes that it will not be required to pay a dividend in 2010 to maintain its REIT status.

Accounting for Uncertainty in Income Taxes

The Company complies with the requirements of the recognition of current and deferred income tax accounts, including accrued interest and penalties in accordance with ASC 740-10-25.  If the Company’s tax positions in relation to certain transactions were examined and were not ultimately upheld, the Company would be required to pay an income tax assessment and related interest.  Alternatively, the Company could elect to pay a deficiency dividend to its shareholders in order to continue to qualify as a REIT and the related interest assessment to the taxing authorities.

 
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Results of Operations

2009 vs 2008

Financial Highlights from Consolidated Statements of Operations:

   
Year Ended December 31,
 
   
2009
   
2008
 
             
Revenues
  $ 5,512,276     $ 6,031,977  
                 
Loss from continuing operations
  $ (543,052 )   $ (4,067,204 )
                 
Discontinued Operations:
               
Income (loss) from discontinued operations
    (66,901 )     149,302  
Net gain from sales of discontinued operations
    3,329,480       2,892,258  
                 
Total income from discontinued operations
    3,262,579       3,041,560  
                 
Net income (loss)
    2,719,527       (1,025,644 )
                 
Add: Net loss from noncontrolling interest
    264,656    
-
 
                 
Net Income (Loss) attributable to Presidential Realty Corporation
  $ 2,984,183     $ (1,025,644 )

Continuing Operations:

Revenues decreased by $519,701 primarily as a result of decreases in interest income on mortgages-notes receivable and interest income on mortgages-notes receivable-related parties, partially offset by an increase in rental revenues.

Rental revenues increased by $35,119 due to increased rental revenues at the Hato Rey Center property of $76,181, partially offset by a $42,967 decrease in rental revenues at the Mapletree Industrial Center property.

Interest on mortgages-notes receivable decreased by $426,735 primarily as a result of repayments of $5,585,000 on notes receivable during 2008.  Interest income and amortization of discounts on those notes was $586,671 during the 2008 period.  This decrease was partially offset by an increase of $82,666 in interest received on the Consolidated Note and the $77,671 amortization of discount on the $750,000 note receivable received in the Settlement Agreement (see Liquidity and Capital Resources – Joint Venture Mezzanine Loans and Settlement Agreement below).

Interest on mortgages-notes receivable-related parties decreased by $146,750 as a result of a decrease of $146,750 in payments of interest received on the Ivy Consolidated Loan.  Payments received on the Ivy Consolidated Loan fluctuate because they are based on the cash flow of Scorpio Entertainment, Inc. (see Liquidity and Capital Resources – Ivy Consolidated Loan below).

 
25

 

Costs and expenses increased by $1,000,316 primarily due to increases in general and administrative expenses, interest on mortgage debt, real estate tax expense and depreciation expense.  These increases were partially offset by a decrease in amortization of in-place lease values and mortgage costs.

General and administrative expenses increased by $871,266 primarily as a result of the impact of the reversal in 2008 of $817,580 of interest expense accrued in accordance with the ASC Income Tax Topic 740-10-25, which deals with uncertainty in income taxes and the recognition of current and deferred income tax accounts including accrued interest and penalties.  The Company had previously accrued interest expense relating to certain tax positions for which the Company may have been required to pay a deficiency dividend. In September, 2008, the statute of limitations with respect to these tax positions expired and, accordingly, the accrued liability was reversed and general and administrative expenses were reduced by such reversal.  The Company has no other tax positions requiring an interest accrual in 2009.

The increase in general and administrative expenses without the $817,580 impact of the 2008 reversal of the accrued interest discussed above, was $53,686. This increase was primarily a result of increases in pension plan expenses of $377,676 and professional fees of $125,867, which were partially offset by decreases in salary expense of $423,794.  The decrease in salary expense was primarily a result of a $407,825 decrease in salary expense accrued pursuant to an amendment of an executive employment agreement which would require payments upon the retirement of the executive.

Interest on mortgage debt increased by $56,381 primarily as a result of a $107,977 increase in mortgage interest expense on the Hato Rey Center property first mortgage.  The terms of the existing first mortgage provided for a 2% per annum increase in the interest rate beginning on May 12, 2008, which increase is due at maturity.  This increase was partially offset by a $48,254 decrease in the amortization of discount on mortgage payable.

Real estate tax expenses increased by $90,586 primarily as a result of an increase of $87,943 in real estate tax expense at the Hato Rey Center property.

Depreciation on real estate increased by $41,435 primarily as a result of a $38,886 increase in depreciation on the Hato Rey Center property.

Amortization of in-place lease values and mortgage costs decreased by $84,048 as a result of a $61,286 decrease in the amortization of in-place lease values and a $22,762 decrease in the amortization of mortgage costs.  In-place lease values were recorded in connection with the partial step acquisition of the Hato Rey Partnership in prior years and amortize over the remaining terms of the leases.

Other income increased by $5,044,169 primarily as a result of a $4,479,289 gain recorded upon the settlement of certain joint venture loans to David Lichtenstein and Lightstone.  In addition, in the fourth quarter of 2009, the Company recognized $185,000 of other income from the sale of an easement at its Mapletree Industrial Center property in Palmer, Massachusetts.  Other income also increased in 2009 as a result of the $1,000,000 write-off of the Company’s investment in Broadway Partners Fund A II in 2008.  These increases were partially offset by the $597,599 increase in the loss from joint ventures, which included the loss of $654,397 from the investment in IATG and the $56,798 decrease in the loss from the investments in the nine malls.  (See Liquidity and Capital Resources – Joint Venture Mezzanine Loans and Settlement Agreement and Investments in and Advances to Joint Ventures below.)

 
26

 

Loss from continuing operations decreased by $3,524,152 from $4,067,204 in 2008 to $543,052 in 2009.  The $3,524,152 decrease in loss in 2009 was a result of the $4,479,289 gain recorded upon the settlement of some joint venture loans with David Lichtenstein and Lightstone and the nonrecurring write-off in 2008 of $1,000,000 of other investments.  These decreases were partially offset by a $426,735 decrease in interest income on mortgages-notes receivable, an increase of $871,266 in general and administrative expenses and a $597,599 increase in the loss from joint ventures.

Discontinued Operations:

In 2009, the Company had four properties that were classified as discontinued operations: the Crown Court property in New Haven, Connecticut (which consists of 105 apartment units and 2,000 square feet of commercial space), the Building Industries Center property in White Plains, New York (which consists of 23,500 square feet of commercial space), and two cooperative apartment units in Riverdale, New York. The Crown Court property was designated as held for sale in September, 2008. This property was owned subject to a long-term net lease with an option to purchase the property in April, 2009 for a purchase price of $1,635,000 over the outstanding principal mortgage balance at the date of the exercise of the option. On April 1, 2009, the Company completed the sale of the Crown Court property. The net proceeds of sale were $1,545,851 and the gain from sale for financial reporting purposes was $3,208,336. During the fourth quarter of 2009, the Company began to market the Building Industries Center property for sale and designated it as held for sale. In addition, two cooperative apartment units in Riverdale, New York were designated as held for sale during 2009. On October 15, 2009, the Company completed the sale of one of these apartment units for a sales price of $154,000. The gain from sale for financial reporting purposes was $121,144 and the net proceeds of sale were $145,738.

In 2008, the Company had two other properties that were classified as discontinued operations.  The Towne House property in New Rochelle, New York and a cooperative apartment unit in New Haven, Connecticut were sold during the quarter ended September 30, 2008.

The following table compares the total income from discontinued operations for the years ended December 31, 2009 and 2008 for properties included in discontinued operations:

 
27

 

   
2009
   
2008
 
             
Income (loss) from discontinued operations:
           
             
Building Industries Center, White Plains, NY
  $ (101,673 )   $ (96,439 )
Cooperative apartment unit, New Haven, CT
    -       854  
Cooperative apartment units, Riverdale, NY
    (9,696 )     (4,737 )
Crown Court, New Haven, CT
    44,468       161,209  
Towne House, New Rochelle, NY
    -       88,415  
                 
Income (loss) from discontinued operations
    (66,901 )     149,302  
                 
Net gain from sales of discontinued operations:
               
Cooperative apartment unit, New Haven, CT
    -       85,759  
Cooperative apartment unit, Riverdale, NY
    121,144       -  
Crown Court, New Haven, CT
    3,208,336       -  
Towne House, New Rochelle, NY
    -       2,806,499  
                 
Net gain from sales of discontinued operations
    3,329,480       2,892,258  
                 
Total income from discontinued operations
  $ 3,262,579     $ 3,041,560  

Balance Sheet

December 31, 2009 vs December 31, 2008

Net real estate decreased by $396,407 primarily as a result of the $225,589 reclassification in 2009 of net real estate related to the Building Industries Center property from net real estate to assets related to discontinued operations.  The Building Industries Center property at the beginning of the year had a carrying value of $1,403,571, less accumulated depreciation of $1,168,225, resulting in a net carrying value of $235,346.  In addition, the Company sold one cooperative apartment unit, which decreased net real estate by $24,594.  The Company also purchased additions and improvements to its properties of $332,510 and recorded depreciation of $480,534.

Net mortgage portfolio increased by $631,719 primarily as a result of the $750,000 note receivable from the Settlement Agreement with David Lichtenstein and Lightstone in February of 2009 (see Liquidity and Capital Resources – Joint Venture Mezzanine Loans and Settlement Agreement below).  The note was recorded at its fair value of $664,000 ($750,000 note receivable less a discount of $86,000).  The carrying value of the note at December 31, 2009 was $741,671 as a result of $77,671 of amortization of discount for the period.  This increase was partially offset by the $75,000 principal repayment the Company received on its loan receivable relating to the Cambridge Green sale in 2007.

Investments in and advances to joint ventures increased by $1,083,716 as a result of the $3,250,000 investment recorded for the Company’s 50% ownership interest in IATG, which the Company received from the Settlement Agreement with Lightstone (see Liquidity and Capital Resources – Joint Venture Mezzanine Loans and Settlement Agreement below), partially offset by the $2,166,284 loss from the joint ventures.

 
28

 

Assets related to discontinued operations decreased by $159,666, primarily as a result of the sale of the Crown Court property, partially offset by the classification of the Building Industries Center property as a discontinued operation.

Other receivables increased by $341,897 primarily as a result of a $500,000 receivable due from Mr. Lichtenstein, partially offset by a $73,389 decrease in net tenant accounts receivable and an $88,768 decrease in miscellaneous receivables.

Cash and cash equivalents decreased by $5,199,876 primarily as a result of the $4,431,622 purchase of securities available for sale.

Securities available for sale increased by $3,604,465 as a result of the $4,431,622 purchase of securities available for sale, partially offset by the $804,985 sale of securities and the $22,172 decrease in the fair value of the securities.  The Company utilized the $804,766 proceeds from the sale of securities to make a $903,918 cash contribution to the Company’s defined benefit plan.  See Liquidity and Capital Resources below.

Other assets decreased by $174,977 primarily as a result of decreases of $47,070 in deferred charges and $56,888 for the amortization of in-place lease values.  In addition, accumulated depreciation on non-rental property increased by $42,711.

Mortgage debt decreased by $1,422,678 primarily due to the reclassification of the $1,045,867 Building Industries Center mortgage debt to liabilities related to discontinued operations.

Liabilities related to discontinued operations decreased by $1,033,104 primarily as a result of the sale of the Crown Court property, partially offset by the reclassification of the mortgage debt of the Building Industries Center to discontinued operations.

Contractual pension and postretirement benefits liabilities decreased by $880,222 primarily due to an $842,792 decrease in the contractual pension benefit obligation as a result of the death of a participant in 2009.  In addition, there was a $37,430 decrease in the contractual postretirement benefits obligation.

Defined benefit plan liability decreased by $295,617 primarily as a result of the $903,918 Company contribution made in the third quarter of 2009.  This decrease was partially offset by the $441,590 net periodic benefit cost for the defined benefit plan.

Accrued liabilities decreased by $202,863 primarily as a result of the decrease of $511,990 in the accrual for environmental expenses and the discount thereon.  This decrease was partially offset by an increase of $326,470 in accrued mortgage interest expense, of which $339,993 pertains to the deferred mortgage interest accrued for the mortgage on the Hato Rey Center.

Other liabilities decreased by $231,058 primarily as a result of a $102,746 decrease in deferred commission income, a $47,019 decrease in deferred rental income and a $30,400 decrease in tenant security deposit liabilities.

 
29

 

During 2009, the Company awarded 3,000 shares of the Company’s Class B common stock to three independent directors of the Company as partial payment of directors’ fees for the 2009 year.  These shares were issued from the Company’s 2005 Restricted Stock Plan (the “2005 Plan”).  Stock granted to directors is fully vested on the grant date and stock granted in prior years to officers and employees are vesting at 20% per year.  Notwithstanding the vesting schedule, the officers and employees are entitled to receive distributions, if any, on the total number of shares awarded. The issued shares are valued at the market value of the Class B common stock at the grant date. The following is a summary of the shares issued in 2009 and the expense related to the shares vested in 2009.

 
30

 

 
                     
2009
 
   
Unvested
                     
Unvested
   
Class B
                   
   
Shares
         
Market
         
Shares
   
Common
                   
   
at
   
Shares
   
Value at
   
Shares
   
at
   
Stock - Par
   
Additional
             
Date of
 
December
   
Issued
   
Date of
   
Vested
   
December
   
Value $.10
   
Paid -in
   
Directors'
   
Salary
 
Issuance
 
31, 2008
   
in 2009
   
Grant
   
in 2009
   
31, 2009
   
Per Share
   
Capital
   
Fees
   
Expense
 
                                                           
Aug., 2005 (1)
    4,000           $ 7.51       2,000       2,000                          
Aug., 2005 (1)
    400             9.04       200       200                          
Jan., 2006
    9,000             7.40       4,500       4,500           $ 33,300           $ 33,300  
Dec., 2006
    3,900             7.05       1,300       2,600             9,165             9,165  
Dec., 2007
    2,000             5.80       500       1,500             2,900             2,900  
Jan., 2009
            3,000       1.61       3,000             $ 300       4,530     $ 4,830          
                                                                         
      19,300       3,000               11,500       10,800     $ 300     $ 49,895     $ 4,830     $ 45,365  

(1) 
These shares were part of 11,000 shares granted in 2004 and 2005 and issued in 2005.  The Company recorded salary expense of $9,040 in 2005 and $75,100 in 2004. In 2005, when the shares were issued, the Company recorded additions to Class B common stock of $1,100 and $83,040 to additional paid-in capital.

 
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Accumulated other comprehensive loss decreased by $790,413 primarily as a result of a $961,724 adjustment for the contractual pension benefits, partially offset by an adjustment of $166,711 for the defined benefit plan.  The adjustment for contractual pension benefits was due to the death of a participant in 2009, as discussed above.

Liquidity and Capital Resources

(a)    General

Presidential obtains funds for working capital and investment from its available cash and cash equivalents, from securities available for sale, from operating activities, from refinancing of mortgage loans on its real estate equities or from sales of such equities, and from repayments on its mortgage portfolio.

From time to time in the Company’s recent history, the Company has considered various strategic alternatives in an effort to maximize shareholder value, including a merger, consolidation or sale of all or substantially all of the Company’s assets in a single transaction followed by a liquidation of the Company.  While in the past no appropriate opportunity has been found, the Board of Directors and management continue to seek and consider potential strategic transactions.  Management is currently having ongoing discussions concerning possible strategic transactions with a number of different parties but no definitive agreement has been reached and no assurances can be given that the Company will be able to achieve such a transaction.  The Company is currently negotiating with several parties for the sale of its Building Industries Center property in White Plains, New York and subsequent to year end, the Company listed its Mapletree Industrial Center property in Palmer, Massachusetts for sale.  In addition, the Board of Directors expects to request the approval of its shareholders at its next Annual Meeting currently scheduled for June 16, 2010 for the sale of all or substantially all of the Company’s assets and the adoption of a Plan of Liquidation of the Company.

Based on the above, management believes that, barring any unforeseen circumstances, the Company has sufficient liquidity and capital resources to carry on its existing business and to pay any dividends required to maintain REIT status until the Company can effectuate a plan of liquidation or enter into a strategic transaction as described above.  Except as discussed herein, management is not aware of any other trends, events, commitments or uncertainties that will have a significant effect on liquidity.

In the fourth quarter of 2008, the Company reduced its dividend from $.16 per share to $.08 per share.  The decision of the Board of Directors of the Company to reduce the Company’s dividend at that time recognized, among other things, the adverse economic conditions currently affecting real estate markets, the then existing defaults on two of the Company’s loans to affiliates of David Lichtenstein, the Company’s inability to refinance the Hato Rey Center office building mortgage and the desirability of conserving the Company’s cash resources under these circumstances.  For these reasons, the Company did not declare a dividend in 2009 and does not expect to declare one in 2010.

 
32

 

To the extent that payments received on its mortgage portfolio or payments received from sales are taxable as capital gains, the Company has the option to distribute the gain to its shareholders or to retain the gain and pay Federal income tax on it.  The Company does not have a specific policy as to the retention or distribution of capital gains.  The Company’s dividend policy regarding capital gains for future periods will be based upon many factors including, but not limited to, the Company’s present and projected liquidity, its desire to retain funds available to pay operating expenses or for additional investment, and its ability to reduce taxes by paying dividends.

At December 31, 2009, Presidential had $784,674 in available cash and cash equivalents, a decrease of $5,199,876 from the $5,984,550 available at December 31, 2008.  This decrease in cash and cash equivalents was due to cash used in operating activities of $2,571,046, cash used in investing activities of $2,226,025, and by cash used in financing activities of $402,805.

In May, 2009, the Company invested $4,431,622 of its cash in securities available for sale.  Securities available for sale consist primarily of notes and bonds issued by agencies of the United States government maturing at dates ranging from 2010 through 2013 with interest rates ranging from 1.625% to 5.125%.  The Company purchased these notes and bonds to utilize its cash to earn higher interest rates while retaining substantial liquidity in its investments.  The balance of securities available for sale at December 31, 2009 was $3,614,113.

(b) Joint Venture Mezzanine Loans and Settlement Agreement

During 2004 and 2005, the Company made investments in and loans to four joint ventures and received 29% ownership interests in these joint ventures.  The initial aggregate investment in the joint ventures (original principal amount of the loans made to and the investments in the joint ventures) was $27,038,410.  The Company accounted for these investments and loans under the equity method because it exercises significant influence over, but does not control, these entities, which are controlled by The Lightstone Group (“Lightstone”) and David Lichtenstein.  The joint ventures own nine shopping malls in seven states.

The first investment, the Martinsburg Mall in Martinsburg, West Virginia, was purchased in September, 2004, by PRC Member LLC, a limited liability company which was originally wholly owned by the Company.  The Company made a $1,438,410 investment in PRC Member, LLC and PRC Member LLC obtained a mezzanine loan from Lightstone in the amount of $2,600,000, which was secured by a pledge of ownership interests in the entity that owned the Martinsburg Mall.  The loan was due to mature on September 27, 2014, and the interest rate on the loan was 11% per annum.  Lightstone Member LLC (“Lightstone I”) managed the property and David Lichtenstein received a 71% ownership interest in PRC Member LLC, and the Company owned the remaining 29% ownership interest.

In September, 2004, the Company made a $8,600,000 mezzanine loan to Lightstone I in connection with the acquisition by Lightstone I of four shopping malls, namely the Shenango Valley Mall in Hermitage, Pennsylvania; the West Manchester Mall in York, Pennsylvania; the Bradley Square Mall in Cleveland, Tennessee and the Mount Berry Square Mall in Rome, Georgia (the “Four Malls”).  The loan was secured by the ownership interests in the entities that owned the Four Malls and the Martinsburg Mall and the Company received a 29% ownership interest in the Four Malls.  The loan was due to mature on September 27, 2014 and the interest rate on the loan was 11% per annum.

 
33

 

In December, 2004, the Company made a $7,500,000 mezzanine loan to Lightstone Member II LLC (“Lightstone II”) in connection with the acquisition by Lightstone II of the Brazos Mall in Lake Jackson, Texas and the Shawnee Mall in Shawnee, Oklahoma (the “Shawnee/Brazos Malls”).  The loan is secured by the ownership interests in the entities that own the Shawnee/Brazos Malls and the Company received a 29% ownership interest in these entities.  The loan matures on December 23, 2014 and the interest rate on the loan is 11% per annum.  In June, 2006, the Company made an additional $335,000 mezzanine loan to Lightstone II.  The loan was added to the original $7,500,000 loan and has the same interest rate and maturity date as the original loan.

In July, 2005, the Company made a $9,500,000 mezzanine loan to Lightstone Member III LLC (“Lightstone III”) in connection with the acquisition by Lightstone III of the Macon Mall in Macon, Georgia and the Burlington Mall in Burlington, North Carolina (the “Macon/Burlington Malls”).  The loan was secured by the ownership interests in the entities that owned the Macon/Burlington Malls and the Company received a 29% ownership interest in these entities.  The loan was due to mature on June 30, 2015 and the interest rate on the loan was 11% per annum.

Starting in 2007, the shopping malls began to suffer from among other things, competition from other and, in some circumstances, newer shopping malls, the inability to attract new tenants and declining rental rates, which conditions worsened during the continuing economic downturn, and in 2008 and 2009, the joint ventures defaulted on the Presidential loans.

In February, 2008, Lightstone III defaulted on payments of interest due under the Company’s $9,500,000 loan related to the Macon/Burlington Malls.  Lightstone III also defaulted on payments of interest due on the first mortgage loan covering the properties and the holder of the first mortgage loan commenced foreclosure proceedings and appointed a receiver to operate the properties.  The Company believed that the outstanding principal balance of the first mortgage loan substantially exceeded the then current value of the Macon/Burlington Malls and that it was unlikely that the Company would be able to recover any interest or any principal on its mezzanine loan from the collateral that it held as security for the loan.

In October, 2008, Lightstone I defaulted on the payment of interest due under the Company’s $8,600,000 mezzanine loan relating to the Four Malls and also did not make the payments of the preferential return of 11% per annum due on the Company’s $1,438,410 investment in the Martinsburg Mall.  Lightstone I also defaulted on payments of interest due under the first mortgage loan covering the Martinsburg Mall and three of the Four Malls (Bradley Square, Mount Berry Square and Shenango Valley) on and after August 1, 2008 and the holder of the first mortgage loan commenced foreclosure proceedings and appointed a receiver to operate the properties.  At that time, the Company believed that the outstanding principal balance of the first mortgage loan substantially exceeded the current value of the mortgaged properties and that it was unlikely that the Company would be able to recover any amount of its mezzanine loan in the amount of $8,600,000 and investment in the amount of $1,438,410 from the collateral that it held as security for its mezzanine loan and investment.  Accordingly a portion of the mezzanine loan indebtedness was assumed by another Lightstone entity pursuant to the Settlement Agreement with Lightstone.  As of December 31, 2009, the mortgagee had not completed the foreclosure of its mortgage and the properties continue to be operated by a receiver.

 
34

 

The Company’s mezzanine loan in the amount of $7,835,000 to Lightstone II secured by interests in the Shawnee Mall and the Brazos Mall was in good standing at December 31, 2008.  However, in January, 2009, the holder of the first mortgage loan exercised its right (exercisable because the cash flow from the properties did not satisfy a required debt service coverage ratio) to retain all cash flow from the properties (after payment of all operating expenses but before payment of interest on the Company’s mezzanine loan) as additional security for the repayment of the first mortgage loan and Lightstone II failed to make the interest payments due on the Company’s mezzanine loan on January 1, 2009 and on the first day of subsequent months.  The first mortgage loan on the properties became due on January 10, 2010 and has not been paid.  Lightstone has been unable to refinance the first mortgage loan indebtedness and is attempting to obtain an extension of the existing mortgage loan.  However, the holder of the first mortgage loan has commenced foreclosure proceedings and the Company believes that it is likely that the first mortgage loan will be foreclosed and the Company will not be able to obtain any recovery on its mezzanine loan other than the recovery of $500,000 from David Lichtenstein on his limited guaranty received pursuant to the Settlement Agreement.

Subsequent to the defaults under the $9,500,000 and $8,600,000 mezzanine loans, the Company asserted various claims against Lightstone and Mr. Lichtenstein personally with respect to such loans and on February 27, 2009 completed a settlement and executed a Settlement Agreement with respect to such claims.  Under the Settlement Agreement:

(1) $5,000,003 of the indebtedness under the $9,500,000 mezzanine loan and $5,000,003 of the indebtedness under the $8,600,000 mezzanine loan were assumed by an affiliate of Lightstone which is the debtor on an existing loan from the Company in the outstanding principal amount of $2,074,994.  The total indebtedness was consolidated into a nonrecourse loan in the outstanding principal amount of $12,075,000 (the “Consolidated Note”) and is secured by all of the ownership interests in entities owning nine apartment properties (1,056 apartment units) located in Virginia (which had previously secured the $2,074,994 indebtedness) and 75% of the ownership interests in entities owning nine additional apartment properties (931 apartment units) located in Virginia and North Carolina.

The Consolidated Note accrues interest at the rate of 13% per annum and is due on February 1, 2012.  All net cash flow from the eighteen apartment properties will be utilized to pay the interest accrued on the Consolidated Note and to the extent that there is not sufficient cash flow to pay all accrued interest, the unpaid interest will be deferred until the maturity of the Consolidated Note. The Company anticipates that a substantial portion of the annual interest will not be paid currently and will be deferred in accordance with the terms of the Consolidated Note.  The Company also anticipates that it is likely that on the maturity date of the Consolidated Note, the outstanding principal balance of the Consolidated Note plus any unpaid deferred interest thereon will exceed the value of the Company’s security therefore and, accordingly, since the Consolidated Note is a nonrecourse loan, the Company does not expect to obtain payment in full of the Consolidated Note on maturity.

 
35

 

(2) The Company obtained a 50% ownership interest in IATG, the Lightstone affiliate that owns The Las Piedras Industrial Complex, an industrial property located in Las Piedras, Puerto Rico and consisting of approximately 68 acres of land and 380,800 square feet of rentable space contained in several buildings in the complex.  The property is substantially vacant and the owners may attempt to sell the property.  Lightstone has agreed to advance funds to pay any negative cash flow from the operations of the property until a sale can be accomplished and has agreed that if it does not do so, it will transfer its remaining 49% interest in the property to Presidential.

(3) The Company received at closing $250,000 in cash and a note from Mr. Lichtenstein in the amount of $750,000 payable without interest due on January 31, 2010.  Mr. Lichtenstein is not personally liable for payment of the $750,000 note, but the note is secured by a 25% ownership interest in the Las Piedras property.  The Company is currently negotiating an extension of this loan or receipt of the underlying collateral.

(4) The Company received a personal guaranty from Mr. Lichtenstein that the Company will receive all accrued interest on the Company’s $7,835,000 mezzanine loan (relating to the Shawnee/Brazos Malls) through the date of repayment and $500,000 of the principal amount of the loan, which personal guaranty is limited to $500,000.  As part of the settlement, the Company agreed to modify its right to receive repayment in full of the $7,835,000 loan before Mr. Lichtenstein receives any return on his capital contributions to the borrowing entity to the following extent: the Company will receive the first net proceeds of any sale or refinancing of the Shawnee/Brazos Malls in an amount equal to all accrued and unpaid interest and $2,000,000 of principal; Mr. Lichtenstein will receive the next $1,000,000 of any such net sale or refinancing proceeds; the Company will receive the next $1,000,000 of any such net proceeds and any additional net proceeds shall be paid 50% to the Company and 50% to Mr. Lichtenstein.  Mr. Lichtenstein’s $500,000 guaranty, which was secured by his remaining interest in IATG, was paid to the Company in March, 2010 and the security for the guaranty was released.  As a result of the $500,000 guaranty payment received in March, 2010, at December 31, 2009, the Company recognized a $500,000 gain on settlement of joint venture loans in its consolidated financial statements and recorded a $500,000 receivable due from Mr. Lichtenstein on its consolidated balance sheet.

The carrying value on the Company’s consolidated financial statements of the $7,835,000 mezzanine loan and the Company’s minority interest in the entity owning the Shawnee/Brazos Malls was zero and $1,511,887 at December 31, 2009 and 2008, respectively.

While under existing market conditions it is difficult to place a value on the assets and collateral received from Lightstone and Mr. Lichtenstein in settlement of the Company’s claims against them, management believes that the settlement was in the best interests of the Company taking into account the nature of the Company’s claims and the cost and unpredictability of litigation and collection of any judgment that might have been obtained.

The defaults in payment of the Company’s $9,500,000 mezzanine loan to Lightstone III, the $8,600,000 mezzanine loan to Lightstone I, and the $7,835,000 mezzanine loan to Lightstone II have had and continues to have a material adverse affect on the Company’s business, financial condition, results of operations and prospects.

The principal effects of the transactions resulting from the Settlement Agreement on the Company’s consolidated financial statements in 2009, are as follows:

 
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(i)  The carrying value of the $12,075,000 Consolidated Note on the Company’s consolidated balance sheet is $2,074,994. This is the same carrying value of the $2,074,994 note that was on the Company’s consolidated balance sheet prior to the consolidation of this note with the additional $10,000,006 indebtedness received in the Settlement Agreement.  The $10,000,006 additional portion of the note was received in partial settlement of the $9,500,000 and $8,600,000 mezzanine loans, which had a net carrying value of $0 on the Company’s consolidated balance sheet. Accordingly, there was no significant adjustment on the Company’s consolidated balance sheet in 2009 as a result of the receipt of the Consolidated Note. No gain or loss was recorded on the Company’s consolidated financial statements in connection with the consolidation of the $2,074,994 and $10,000,006 indebtedness and the substitution of the collateral for the $10,000,006 indebtedness.

(ii) The 50% membership interest in IATG obtained by the Company was recorded on the Company’s consolidated balance sheet at its fair value of $3,250,000 and a gain on the settlement of the joint venture loans in the amount of $3,250,000 was recognized on the Company’s consolidated financial statements.

(iii) The $750,000 non-interest bearing, nonrecourse note due on January 31, 2010, which is secured by an additional 25% ownership interest in IATG, was recorded on the Company’s consolidated balance sheet at its fair value of $664,000 ($750,000 note receivable less a discount on the note receivable of $86,000) and a gain on the settlement of the joint venture loans in the amount of $664,000 was recognized on the Company’s consolidated financial statements.  The Company is currently negotiating an extension of this loan or receipt of the underlying collateral.

In March, 2009, the Company’s preliminary estimate of the fair value of the 50% ownership interest in IATG was $1,500,000 and its preliminary estimate of the fair value of the $750,000 note was $200,000. The Company recorded a $1,500,000 investment in joint ventures and a $200,000 note receivable on its consolidated balance sheet and recognized a gain on settlement of joint venture loans of $1,700,000 in its consolidated financial statements at March 31, 2009.

The Company based the preliminary estimated fair value of its interest in the IATG property on information available to it at the time.  During the quarter ended June 30,2009, the Company obtained an independent appraisal of the property owned by IATG and based on the appraised value of $6,500,000, the Company has adjusted the preliminary estimate of the value of its 50% ownership interest in the IATG property from $1,500,000 to $3,250,000 and its preliminary estimate of the $750,000 note receivable from $200,000 to $664,000.  Accordingly, in June, 2009, the Company recorded an additional $1,750,000 in investments in joint ventures and an additional $464,000 for the note receivable on its consolidated balance sheet and recognized an additional gain of $2,214,000 on the gain on settlement of joint venture loans in its consolidated financial statements.  While management believes that the $6,500,000 appraised value of the IATG property is a reasonable value, there can be no assurance that if and when the property is sold, it can be sold for its appraised value.

(iv) At December 31, 2009, the Company recorded a $500,000 receivable due from Mr. Lichtenstein on its consolidated balance sheet and recognized a $500,000 gain on settlement of joint venture loans in its consolidated financial statements.

 
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In summary, as a result of the Settlement Agreement, in 2009 the Company recorded assets of $4,414,000 on the Company’s consolidated balance sheet (a $500,000 receivable, a $750,000 note receivable less an $86,000 discount on the note receivable and a $3,250,000 investment in joint ventures) and recorded a $4,414,000 gain on the settlement of joint venture loans in its consolidated financial statements.  The Company also received a net cash payment of $65,289 ($250,000 less $184,711 of expenses for the settlement), which was also recorded in gain on settlement of joint venture loans in its consolidated financial statements.  In addition, for the period ended December 31, 2009, the Company recognized in interest income $77,671 of the amortization of discount recorded on the note receivable.

The $12,075,000 Consolidated Note accrues interest at the rate of 13% per annum.  The Company believes that the monthly interest due on the $2,074,994 portion of the note will be paid in accordance with the terms of the note and therefore, the Company accrues the interest due on this portion of the note.  However, at this point in time, the Company cannot determine how much of the interest due on the $10,000,006 portion of the note will be paid and, accordingly, such interest is recorded on a cash basis as interest is received.  For the year ended December 31, 2009, the Company received the $230,785 of interest payments that were due on the $2,074,994 portion of the note.  In addition, the Company received interest payments of $82,666 on the $10,000,006 portion of the note.  At December 31, 2009, the deferred and unaccrued interest on the $10,000,006 portion of the note was $1,029,557.

(c) Mortgage Loans Payable

The first mortgage on the Building Industries Center property in White Plains, New York was due on March 1, 2010 with an outstanding principal balance of $1,038,086.  In January, 2010, the maturity date of the Building Industries Center property mortgage was extended from March 1, 2010 to June 1, 2010 under the same terms, including a 5.45% per annum interest rate.  In March, 2010, the Company obtained a new $1,250,000 mortgage on its Building Industries Center property and repaid the $1,038,086 outstanding balance of the prior mortgage.  The new mortgage bears interest at the rate of 6.25% per annum, requires monthly payments of principal and interest of $8,246 and has a balloon payment of $1,182,375 due at maturity on March 31, 2013.

As described under “Hato Rey Partnership” below, the first mortgage on the Hato Rey Center property provides that all cash flow from the property, after payment of all operating expenses, will be utilized to repay the outstanding principal of the first mortgage loan on the property.  In addition, the Company has loaned the partnership which owns the Hato Rey Center property a total of $2,608,000 through December 31, 2009 (which loan may be increased to up to $2,750,000), which loans bears interest at the rate of 13% per annum with such interest and principal to be paid from the first positive cash flow from the property or upon a refinancing of the first mortgage on the property.  Since all cash flow will be devoted to repayment of the first mortgage, the Company does not expect to receive payment of any interest or principal on the loan to the partnership until the first mortgage is refinanced.  While the property generates sufficient cash flow to support a refinancing of the first mortgage under ordinary market conditions, in light of the current restrictive credit market, the Company does not expect to be able to refinance the first mortgage in 2010.

 
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(d) Insurance

The Company carries comprehensive liability, fire, extended coverage, rental loss and acts of terrorism insurance on all of its properties.  Management believes that all of its properties are adequately covered by insurance.  In 2009, the cost for this insurance was approximately $250,000.  The Company has renewed its insurance coverage for 2010 and the Company estimates that the premium costs will be approximately $248,000 for 2010.  Although the Company has been able to obtain terrorism coverage on its properties in the past, this coverage may not be available in the future.

(e) Ivy Consolidated Loan

Presidential holds two nonrecourse notes (the “Ivy Consolidated Loan”), which it received in 1991 from Ivy Properties, Ltd. and its affiliates (“Ivy”).  At December 31, 2009, the Ivy Consolidated Loan has an outstanding principal balance of $4,770,050 and a net carrying value of zero. Pursuant to existing agreements between the Company and the Ivy principals, the Company is entitled to receive, as payments of principal and interest on the Ivy Consolidated Loan, 25% of the cash flow of Scorpio Entertainment, Inc. (“Scorpio”), a company owned by two of the Ivy principals (Steven Baruch, Executive Vice President and a Director of Presidential, and Thomas Viertel, Executive Vice President, Chief Financial Officer and a Director of Presidential) to carry on theatrical productions.  Amounts received by Presidential from Scorpio will be applied to unpaid and unaccrued interest on the Ivy Consolidated Loan and recognized as income.  These amounts have been material in the past.  However, the profitability of theatrical production is by its nature uncertain and management believes that any estimate of payments from Scorpio on the Ivy Consolidated Loan for future periods is too speculative to project.  Presidential received payments of $0 in 2009 and $146,750 in 2008 of interest income on the Ivy Consolidated Loan.  Although, as stated above, management believes that any estimate of payments by Scorpio for future periods are too speculative to project, in light of the continuing material adverse effect of the current economic downturn on the theatrical production business, the Company does not expect to receive any payments on the Ivy Consolidated Loan in 2010.  The Ivy Consolidated Loan bear interest at a rate equal to the JP Morgan Chase Prime rate, which was 3.25% at December 31, 2009.  At December 31, 2009, the unpaid and unaccrued interest was $3,677,702 and such interest is not compounded.

(f) Operating Activities

Cash from operating activities includes interest on the Company’s mortgage portfolio, net cash received from rental property operations and distributions received from joint ventures.  In 2009, cash received from interest on the Company’s mortgage portfolio was $618,317.  Net cash received from rental property operations was $593,026.  Net cash received from rental property operations is before additions and improvements and mortgage amortization.  In 2009, the Company did not receive any distributions from the joint ventures.

(g) Investing Activities

Presidential holds a portfolio of mortgage notes receivable.  During 2009, the Company received principal payments of $122,533 on its mortgage portfolio.

 
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In 2009, the Company received $1,545,851 of net proceeds from the sale of its Crown Court property and $145,738 from the sale of a cooperative apartment unit in Riverdale, New York.

During 2009, the Company invested $478,580 in additions and improvements to its properties, including $386,976 for the Hato Rey Center.  It is projected that additions and improvements in 2010 will be approximately $389,000, including $283,000 for the Hato Rey Center.

In May, 2009, the Company invested $4,431,622 in securities available for sale.  The Company purchased notes and bonds issued by agencies of the United States government in order to utilize its cash to earn higher interest rates while retaining substantial liquidity in its investments.

During the quarter ended September 30, 2009, the Company received $804,766 of proceeds from the sales of securities.  The Company utilized these cash proceeds and operating cash to make a $903,918 contribution to the Company’s underfunded defined benefit plan.

(h) Financing Activities

The Company’s indebtedness at December 31, 2009, consisted of mortgage debt of $14,969,607 for continuing operations and $1,045,867 for discontinued operations.  The mortgage debt is collateralized by individual properties.  The $14,924,629 mortgage on the Hato Rey Center property is nonrecourse to the Company, whereas the $44,978 Mapletree Industrial Center mortgage is recourse to Presidential.  The $1,045,867 mortgage on the Building Industries Center property, which is classified as a discontinued operation, is recourse to the Company.  In addition, some of the Company’s mortgages provide for Company liability for damages resulting from specified acts or circumstances, such as for environmental liabilities and fraud.  Generally, mortgage debt repayment is serviced with cash flow from the operations of the individual properties.  During 2009, the Company made $401,818 of principal payments on mortgage debt.

The mortgages on the Company’s properties are at fixed rates of interest and will fully amortize by periodic principal payments, with the exception of the Building Industries Center mortgage, which had a balloon payment due of $1,038,086, which was repaid in March, 2010, from the proceeds from the new mortgage (see Mortgage Loans Payable above), and the Hato Rey Center mortgage.  The $14,924,629 Hato Rey Center mortgage matures in May, 2028, and had a fixed rate of interest of 7.38% per annum until May, 2008; thereafter the interest rate increased by 2% (which additional 2% is deferred until maturity) and additional repayments of principal will be required from net cash flows from operations of the property (see Hato Rey Partnership below).

Discontinued Operations

For the years ended December 31, 2009 and 2008, income from discontinued operations includes the Crown Court property, the Building Industries Center property and two cooperative apartment units in Riverdale, New York.  The Crown Court property was designated as held for sale during the three months ended September 30, 2008 and sold in April, 2009.  The Building Industries Center property was designated as held for sale during the three months ended December 31, 2009.  The two cooperative apartment units were designated as held for sale during 2009 and one was sold in October, 2009.  In addition, income from discontinued operations for the year ended December 31, 2008, included the Towne House property in New Rochelle, New York and another cooperative apartment unit in New Haven, Connecticut.

 
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During the quarter ended December 31, 2009, the Company began to market the Building Industries Center property for sale and designated it as held for sale.  The Company expects to sell the property within one year for net proceeds in excess of its carrying value.  The carrying value of the property at December 31, 2009 was $225,589, net of accumulated depreciation of $1,196,304.  The property is also subject to a first mortgage with an outstanding balance of $1,045,867 at December 31, 2009 (see Mortgage Loans Payable above).

The Crown Court property was owned subject to a long-term net lease with an option to purchase the property in April, 2009 for a purchase price of $1,635,000 over the outstanding principal mortgage balance at the date of the exercise of the option.  On April 1, 2009, the Company completed the sale of the Crown Court property.  The net proceeds of sale were $1,545,851 and the gain from sale for financial reporting purposes was $3,208,336.

The Company owns a small portfolio of cooperative apartments located in New York and Connecticut.  These apartments are held for the production of rental income and generally are not marketed for sale.  However, from time to time, the Company will receive purchase offers for some of these apartments or decide to market specific apartments and will make sales if the purchase price is acceptable to management.

During the three months ended March 31, 2009, the Company designated a cooperative apartment unit in Riverdale, New York as held for sale and on October 15, 2009 completed the sale for this unit for a sales price of $154,000.  The net proceeds of sale were $145,738 and the gain from sale for financial reporting purposes was $121,144.

During the three months ended June 30, 2009, the Company designated another cooperative apartment unit in Riverdale, New York as held for sale.  The Company expects to sell the unit within one year for net proceeds in excess of its carrying value.  The carrying value of the unit at December 31, 2009 was $6,224, net of accumulated depreciation of $3,263.

In September, 2008, the Company sold a package of 42 cooperative apartment units at Towne House located in New Rochelle, New York for a sales price of $3,450,000.  The net proceeds of sale were $3,343,187 and the gain from sale for financial reporting purposes was $2,806,499.

In July, 2008, the Company sold one cooperative apartment unit located in New Haven, Connecticut for a sales price of $122,000.  The net proceeds of sale were $113,990 and the gain from the sale for financial reporting purposes was $85,759.

The following table summarizes income for the properties sold or held for sale:

 
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Year Ended December 31,
 
   
2009
   
2008
 
Revenues:
           
Rental
  $ 498,549     $ 1,318,018  
                 
Rental property expenses:
               
Operating expenses
    244,194       558,515  
Interest on mortgage debt
    94,626       207,837  
Real estate taxes
    194,703       326,025  
Depreciation on real estate
    28,298       65,577  
Amortization of mortgage costs
    3,948       11,698  
Total
    565,769       1,169,652  
                 
Other income:
               
Investment income
    319       936  
                 
Income (loss) from discontinued operations
    (66,901 )     149,302  
                 
Net gain from sales of discontinued operations
    3,329,480       2,892,258  
                 
Total income from discontinued operations
  $ 3,262,579     $ 3,041,560  

Investments in and Advances to Joint Ventures

At December 31, 2008, the Company had investments in and advances to four joint ventures which owned and operated nine shopping malls located in seven states.  These investments in and advances to joint ventures were made to entities controlled by David Lichtenstein and Lightstone.  As a result of the February 27, 2009 Settlement Agreement, the Company now has investments in and advances to joint ventures in two entities that are controlled by Mr. Lichtenstein and Lightstone. The Company accounts for these investments using the equity method.

The first investment is the Company’s mezzanine loan in the amount of $7,835,000 to Lightstone II which is secured by ownership interests in the Shawnee/Brazos Malls.  In connection with this loan, the Company received a 29% ownership interest in Lightstone II. The loan matures in 2014 and has an interest rate of 11% per annum.  Since January 1, 2009, the interest payments due on the $7,835,000 loan have not been made and the loan is in default.  In addition, the first mortgage on the Shawnee/Brazos Malls matured on January 10, 2010 and the holder of the first mortgage has commenced foreclosure proceedings.  (See Joint Venture Mezzanine Loans and Settlement Agreement above.)  The $7,835,000 investment has been reduced by payments of interest (distributions received) and the Company’s share of the losses recorded from the joint venture.  As a result of the operating loss and impairment loss for the joint ventures in 2009, the balance of the Company’s investment in the Shawnee/Brazos Malls at December 31, 2009 was reduced to zero.

The second investment is a 50% ownership interest in IATG, the Lightstone affiliate that owns The Las Piedras Industrial Complex, an industrial property located in Las Piedras, Puerto Rico and consisting of approximately 68 acres of land and 380,800 square feet of rentable space contained in several buildings in the complex.

 
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The Company’s estimate of the fair value of its 50% ownership interest in IATG is $3,250,000 and the Company recorded a $3,250,000 investment in joint ventures on its consolidated balance sheet and recognized a gain on settlement of joint venture loans of $3,250,000 in its consolidated financial statements (see Joint Venture Mezzanine Loans and Settlement Agreement above).

Activity in investments in and advances to joint ventures for the year ended December 31, 2009 is as follows:

               
Equity
       
               
in the
       
               
Loss
       
   
Balance at
         
from
   
Balance at
 
   
December 31,
         
Joint
   
December 31,
 
   
2008
   
Investments
   
Ventures
   
2009
 
                         
Shawnee/Brazos Malls (1)
  $ 1,511,887     $ -     $ (1,511,887 )   $ -  
IATG (2)
    -       3,250,000       (654,397 )     2,595,603  
    $ 1,511,887     $ 3,250,000     $ (2,166,284 )   $ 2,595,603  

Equity in the (loss) income from joint ventures is as follows:

     
Year Ended December 31,
 
     
2009
   
2008
 
               
Shawnee/Brazos Malls
(1)   $ (1,511,887 )   $ (1,843,970 )
IATG
(2)     (654,397 )     -  
Martinsburg Mall
(3)     -       151,396  
Four Malls
(4)     -       33,903  
Macon/Burlington Malls
(5)     -       89,986  
      $ (2,166,284 )   $ (1,568,685 )

(1) Interest due to the Company at the rate of 11% per annum on the outstanding $7,835,000 loan from the Company to Lightstone II is included in the calculation of the Company’s share of the loss from joint ventures for the Shawnee/Brazos Malls.  At December 31, 2009, the Company’s investment in the Shawnee/Brazos Malls was reduced to zero as a result of the Company’s share of the loss from operations and an impairment loss recorded on the value of the properties.  The Company’s share of these losses was limited to the extent of the Company’s investment in and advances to the joint venture.

(2) The fair value of the Company’s 50% ownership interest in IATG is $3,250,000.  The Company also recorded its 50% share of the loss from IATG for the ten month period ended December 31, 2009.

(3) In 2007, the Company’s basis of its investment in the Martinsburg Mall was reduced by distributions and losses to zero.  Any subsequent distributions received from the Martinsburg Mall were recorded in income.

 
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(4) Interest income earned by the Company at the rate of 11% per annum on the outstanding $8,600,000 loan from the Company to Lightstone I was included in the calculation of the Company’s share of the income (loss) from joint ventures for the Four Malls.  In the second quarter of 2008, the Company’s basis of its investment in the Four Malls was reduced by distributions and losses to zero.  Any subsequent distributions received from the Four Malls were recorded in income.

(5) In 2007, the Company’s basis of its investment in the Macon/Burlington Malls was reduced by distributions and losses to zero.  Any subsequent distributions received from the Macon/Burlington Malls were recorded in income.

The Lightstone Group is controlled by David Lichtenstein.  At December 31, 2009, in addition to Presidential’s investments of $2,595,603 in these joint ventures with entities controlled by Mr. Lichtenstein, Presidential has two loans that are due from entities that are controlled by Mr. Lichtenstein in the aggregate outstanding principal amount of $12,825,000, with a net carrying value of $2,816,665.

The $5,412,268 net carrying value of investments in and advances to joint ventures with entities controlled by Mr. Lichtenstein and loans outstanding to entities controlled by Mr. Lichtenstein constitute approximately 20% of the Company’s total assets at December 31, 2009.

Hato Rey Partnership

At December 31, 2009, the Company has an aggregate 60% general and limited partnership interest in the Hato Rey Partnership.  The Hato Rey Partnership owns and operates the Hato Rey Center, an office building in Hato Rey, Puerto Rico.

In 2005 and 2006, tenants vacated 82,387 square feet of space to occupy their own newly constructed office buildings and Presidential commenced an aggressive program to lease the vacant space.  Since March, 2006 the vacancy rate at the property was reduced from 48% to a low of approximately 20% at January 31, 2009.  However, as a result of local economic conditions and higher than historical vacancy rates in the Hato Rey area, the vacancy rate has increased to 26% at December 31, 2009.

Over the last three years through September 30, 2009, Presidential has loaned $2,500,000 to the owning partnership to fund negative cash flow from the operations of the property during the periods of high vacancy rates and to pay the costs of a modernization program.  Interest accrued on the loan at the rate of 11% until May, 2008 and 13% thereafter, with interest and principal to be paid from the first positive cash flow from the property or upon a refinancing of the first mortgage on or sale of the property.  In July, 2009, the Company agreed to loan an additional $250,000 to the Hato Rey Partnership under the same terms as the $2,500,000 agreement.  At December 31, 2009, total advances under the loan were $2,608,000 and subsequent to December 31, 2009, the Company advanced an additional $62,000.  The $2,608,000 loan and the accrued interest in the amount of $823,786 have been eliminated in consolidation.

 
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The Company had expected to refinance the existing first mortgage on the building in the second quarter of 2008, when the terms of the existing mortgage were to be automatically modified to increase the interest rate thereon, but the combination of the slower than anticipated rent up and the turmoil in the lending markets made a refinancing unfeasible.  The modification of the terms of the existing mortgage provided for an increase in its interest rate by 2% per annum (from 7.38% to 9.38%) and that payment of the additional 2% will be deferred until the maturity date of the mortgage in 2028.  In addition, the modification provides that all net cash flow from the property will be utilized to repay the outstanding principal of the mortgage loan, which will be prepayable without penalty.  The Company intends to refinance this mortgage when occupancy rates at the property have further improved and lending markets have returned to a more normal state.  The management of Presidential believes that the vacancy rate at the property can continue to be reduced over the next few years.  However, until the first mortgage is refinanced, the Company will not receive any cash payments on its loan to the partnership since principal and interest on the Company’s loan are payable only out of operating cash flow or refinancing or sale proceeds and, under the terms of the modified mortgage, all net cash flow will be utilized to reduce principal on the first mortgage. During 2009, there was no net cash flow available to reduce the principal on the first mortgage.

Contractual Commitments

The Company’s significant contractual commitments are its liabilities under mortgage debt and employment agreements, which are payable as follows:

   
Mortgage
   
Employment
       
   
Debt(1)
   
Agreements
   
Total
 
                   
Year ending December 31:
                 
2010
  $ 375,916     $ 976,740     $ 1,352,656  
2011
    388,221       976,740       1,364,961  
2012
    398,803       819,930       1,218,733  
2013
    432,755       422,270 (2)     855,025  
2014
    466,270       434,930       901,200  
Thereafter
    12,907,642       447,980       13,355,622  
                         
TOTAL
  $ 14,969,607     $ 4,078,590     $ 19,048,197  

(1) Mortgage debt bears interest at fixed rates varying from 3.25% to 9.38% per annum (see Note 7 of Notes to Consolidated Financial Statements).

(2) Employment agreements will expire in 2012 and contain provisions for three years of consulting fees thereafter.

The Company also has contractual commitments for pension and postretirement benefits.  The contractual pension benefits generally provide for annual payments in specified amounts for each participant for life, commencing three years after retirement, with an annual adjustment for an increase in the consumer price index.  The contractual benefit plans are not funded.  For the year ended December 31, 2009, the Company paid $73,303 for pension benefits and $19,210 for postretirement benefits.  The Company expects that payments for these contractual benefits will be approximately $16,138 in 2010.

 
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Environmental Matters

Mapletree Industrial Center – Palmer, Massachusetts
 
The Company is involved in an environmental remediation process for contaminated soil found on this property.  The land area involved is approximately 1.25 acres.  Since the most serious identified threat on the site is to songbirds, the proposed remediation consisted of removing all exposed metals and a layer of soil. The Company estimated that the costs of the cleanup will not exceed $1,000,000.  In accordance with the provisions of ASC Contingencies Topic, in the fourth quarter of 2006, the Company accrued a $1,000,000 liability which was discounted by $145,546 and charged $854,454 to expense.  The discount rate used was 4.625%, which was the interest rate on 10 year Treasury Bonds.  At December 31, 2009, the accrued liability balance was $388,971 and the discount balance was $118,535 for a net accrued liability of $270,436.

The remediation must comply with the requirements of the Massachusetts Department of Environmental Protection (“MADEP”) and during the three months ended March 31, 2009, the Company obtained the consent of MADEP to a specific plan of remediation.  The Company has commenced the remediation work and expects to complete it by June, 2010.  While the final cost of the remediation work has not been finally determined, management believes that it will be less than the balance of the net accrued liability at December 31, 2009.

Actual costs incurred may vary from these estimates due to the inherent uncertainties involved. The Company believes that any liability in excess of amounts accrued 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.

Recent Accounting Pronouncements

In June, 2009, the FASB issued ASC Topic 105, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162”.  This standard establishes the FASB ASC as the primary source of authoritative generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) are also sources of authoritative GAAP for SEC registrants.  This standard and the ASC became effective for interim and annual periods ending after September 15, 2009.  The ASC supersedes all existing non-SEC accounting and reporting standards and the FASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts.  Instead, the FASB will issue Accounting Standards Updates, which will serve only to: (a) update the ASC; (b) provide background information about the guidance; and (c) provide the basis for conclusions on the change(s) in the ASC.  The Company’s adoption of this standard and the ASC during the quarter ended September 30, 2009 did not have a material effect on the Company’s consolidated financial statements.  All accounting references have been updated, and therefore Statement of Financial Accounting Standards (“SFAS”) references have been replaced with ASC references except for SFAS references that have not been integrated into the codification.

In December, 2007, the FASB issued ASC 810-10-65, “Noncontrolling Interests in Consolidated Financial Statements”, which requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and noncontrolling interest.  This standard became effective on January 1, 2009.  The Company’s adoption of this standard resulted in additional disclosures in the Company’s consolidated financial statements, including the reporting of a net loss attributable to a noncontrolling interest of $264,656 for the year ended December 31, 2009.

 
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