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EX-31.1 - EXHIBIT 31.1 - GTJ REIT, Inc.exhibit311.htm
EX-32.1 - EXHIBIT 32.1 - GTJ REIT, Inc.exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - GTJ REIT, Inc.exhibit312.htm
EX-32.2 - EXHIBIT 32.2 - GTJ REIT, Inc.exhibit322.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
(Mark One)
 
[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2010 or
 
[  ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ________
 
Commission file number:  0001368757
 
GTJ REIT, INC.
(Exact name of registrant as specified in its charter)
 
MARYLAND
20-5188065
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
 
444 Merrick Road
Lynbrook, New York
11563
 
(Address of principal executive offices)
(Zip Code)
 
(516) 881-3535
(Registrant’s telephone number, including area code)
 
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
 
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 (§232.405 of this chapter) 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 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 “small reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
 
Large accelerated filer [  ]                 Accelerated filer [  ]              Non-accelerated filer [  ]                Smaller reporting company [X]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date: 13,529,131 shares of common stock as of November 5, 2010.
 
 

 

GTJ REIT, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2010
TABLE OF CONTENTS
 
 
 
 
 
2
 
 
2
 
 
2
 
 
3
 
 
4
 
 
5
 
 
6
 
 
30
 
 
41
 
 
41
 
 
42
 
 
42
 
 
42
 
 
42
 
 
42
 
 
42
 
 
42
 
 
42
 
43
 
 
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

 
1

 

 
GTJ REIT, INC. AND SUBSIDIARIES
(amounts in thousands, except share data)
 
 
   
September 30,
   
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
       
ASSETS
           
Real estate at cost:
           
    Land
  $ 88,584     $ 88,584  
    Buildings and improvements
    24,532       24,362  
      113,116       112,946  
   Less: accumulated depreciation and amortization
    (8,949 )     (8,136 )
   Net real estate held for investment
    104,167       104,810  
Cash and cash equivalents
    10,852       12,906  
Available for sale securities
    2,905       3,199  
Restricted cash
    978       1,066  
Accounts receivable, net
    4,550       5,944  
Other assets
    9,781       7,738  
Deferred charges, net
    3,459       1,855  
Assets of discontinued operation
    10       162  
Intangible assets, net
    2,042       2,736  
Machinery and equipment, net
    2,428       2,310  
   Total assets
  $ 141,172     $ 142,726  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Mortgage note payable
  $ 45,500     $ -  
Secured revolving credit facility
    -       43,215  
Accounts payable and accrued expenses
    503       799  
Unpaid losses and loss adjustment expenses
    2,123       2,236  
Other liabilities, net
    4,630       6,162  
     Total liabilities
    52,756       52,412  
Stockholders’ equity:
               
Preferred stock, $.0001 par value; 10,000,000 shares authorized  and none issued and outstanding
    -       -  
Common stock, $.0001 par value; 100,000,000 shares authorized; 13,529,131 and 13,472,281 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively
    1       1  
   Additional paid-in capital
    137,404       137,033  
   Cumulative distributions in excess of net income
    (49,386 )     (47,087 )
   Accumulated other comprehensive income
    397       367  
      Total stockholders’ equity
    88,416       90,314  
   Total liabilities and stockholders' equity
  $ 141,172     $ 142,726  
                 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 

 
2

 

GTJ REIT, INC. AND SUBSIDIARIES
For the Three and Nine Months Ended September 30, 2010 and 2009
(Unaudited, amounts in thousands, except share and per share data)
 
   
Three Months Ended, 
September 30,
   
Nine Months Ended, 
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Revenues:
                       
      Property rentals
  $ 3,357     $ 3,305     $ 10,012     $ 9,842  
      Outdoor maintenance and cleaning operations
    4,648       8,266       13,649       23,150  
         Total revenues
    8,005       11,571       23,661       32,992  
Operating expenses:
                               
      General and administrative expenses
    2,500       2,825       7,327       8,430  
      Equipment maintenance and garage expenses
    443       540       1,272       1,606  
      Transportation expenses
    338       521       1,033       1,481  
      Contract maintenance and station expenses
    2,147       3,859       6,236       9,313  
      Insurance and safety expenses
    530       665       1,296       1,876  
      Operating and highway taxes
    297       367       1,049       1,213  
      Other operating expenses
    255       248       749       751  
      Depreciation and amortization expense
    434       548       1,284       1,290  
         Total operating expenses
    6,944       9,573       20,246       25,960  
         Operating income
    1,061       1,998       3,415       7,032  
Other income (expense):
                               
Interest income
    64       127       243       252  
Interest expense
    (627 )     (461 )     (1,549 )     (1,406 )
Change in insurance reserves
    1       (41 )     (31 )     (228 )
Litigation reserve
    -       (1,713 )     -       (1,713 )
Other
    (5 )     (80 )     1       (106 )
       Total other income (expense):
    (567 )     (2,168 )     (1,336 )     (3,201 )
Income (loss) from continuing operations before income from
equity affiliates and income taxes
    494       (170 )     2,079       3,831  
Income from equity affiliates
    15       -       15       -  
Income (loss) before provision for income taxes
    509       (170 )     2,094       3,831  
Provision (benefit) for income taxes
    25       (20 )     50       1  
Income (loss) from continuing operations, net of income taxes
    484       (150 )     2,044       3,830  
Discontinued Operations:
                               
   Loss from discontinued operations, net of income taxes
    (8 )     (38 )     (23 )     (4 )
Net income (loss)
  $ 476     $ (188 )   $ 2,021     $ 3,826  
Income per common share - basic and diluted:
                               
        Income (loss) from continuing operations
  $ 0.04     $ (0.01 )   $ 0.15     $ 0.28  
        Income (loss) from discontinued operations
  $ (0.00 )   $ (0.00 )   $ (0.00 )   $ (0.00 )
        Net income (loss)
  $ 0.04     $ (0.01 )   $ 0.15     $ 0.28  
Weighted-average common shares outstanding - basic and diluted
    13,529,131       13,472,281       13,494,355       13,472,281  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
3

 

GTJ REIT, INC. AND SUBSIDIARIES
(Unaudited, amounts in thousands, except share and per share data)
 
 
  Preferred Stock
 Common Stock
         
 
Outstanding
Shares
Amount
 
Outstanding
Shares
   
               
             Amount
Additional-Paid-In-Capital
Cumulative Distributions in Excess of Net Income
Accumulated Other Comprehensive Income
Total Stockholders’ Equity
                 
Balance at January 1, 2010
               -
  $       -
 13,472,281
 $       1
$     137,033
   $     (47,087)
    $           367
$     90,314
                 
Distributions - common stock, $0.32 per share
               -
               -
                -
               -
                 -
          (4,320)
                -
          (4,320)
                 
Stock-based compensation
               -
               -
                -
               -
                371
                  -
                -
                371
                 
Issuance of restricted shares
-
-
56,850
-
-
-
-
-
 
Comprehensive income:
               
Net income
               -
               -
                -
               -
                 -
               2,021
                -
           2,021
         
 
     
Unrealized gain on available-for-sale securities, net
               -
               -
                -
               -
                 -
                   -
             30
              30
Total comprehensive income
               -
               -
                -
               -
                 -
                  -
                -
           2,051
Balance at September 30, 2010
               -
  $       -
 13,529,131
 $       1
 $    137,404
 $      (49,386)
 $            397
$     88,416
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
4

 

GTJ REIT, INC. AND SUBSIDIARIES
For the Nine Months Ended September 30, 2010 and 2009
(Unaudited, amounts in thousands, except share and per share data)
 
   
Nine Months Ended September 30,
 
   
2010
   
2009
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 2,021     $ 3,826  
Loss from discontinued operation
    23       4  
Income from continuing operations
    2,044       3,830  
Adjustments to reconcile net income from continuing operations to net cash
provided by operating activities
               
  Stock-based compensation
    371       95  
  Changes in insurance reserves
    (113 )     (161 )
  Provision for uncollectible receivables
    -       119  
  Depreciation and amortization
    1,129       1,001  
  Amortization of deferred financing costs
    154       152  
  Amortization of deferred charges
    78       76  
  Amortization of intangible assets
    695       776  
  Income from equity affiliates
    (15 )     -  
Changes in operating assets and liabilities:
               
   Accounts receivable
    1,393       (708 )
   Other assets
    (2,028 )     (1,940 )
   Deferred charges
    (1,837 )     (32 )
   Accounts payable and other liabilities
    (1,739 )     1,529  
Net cash provided by operating activities
    132       4,737  
CASH FLOWS FROM INVESTING ACTIVITIES:
               
   Assets acquired less liabilities assumed
    -       (442 )
   Purchases of property and equipment
    (605 )     (762 )
   Purchase of investments
    (278 )     (55 )
   Proceeds from sale of investments
    603       864  
   Restricted cash
    88       609  
Net cash (used in) provided by investing activities
    (192 )     214  
CASH FLOWS FROM FINANCING ACTIVITIES:
               
   Proceeds from mortgage note payable
    45,500       -  
   Repayment of secured revolving credit facility
    (43,215 )     -  
   Dividends paid
    (4,319 )     (3,233 )
   Earnings and profits distribution
    (89 )     -  
Net cash used in financing activities
    (2,123 )     (3,233 )
Cash flow provided by discontinued operations:
               
Operating activities
    129       560  
Net (decrease) increase in cash and cash equivalents
    (2,054 )     2,278  
Cash and cash equivalents at the beginning of period
    12,906       12,082  
Cash and cash equivalents at the end of period
  $ 10,852     $ 14,360  
Supplemental cash flow information:
               
Interest paid
  $ 1,394     $ 1,254  
Cash paid for taxes
  $ 64     $ 161  
Assumption of liabilities from assets acquired
  $ -     $ 505  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


 
5

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Unaudited)
 

 
Description of Business
 
GTJ REIT, Inc. (the “Company” or “GTJ REIT”) was incorporated in Maryland on June 23, 2006 to engage in any lawful act or activity including, without limitation, qualifying as a real estate investment trust (“REIT”) under Sections 856 through 860, or any successor sections of the Internal Revenue Code of 1986, as amended (the “Code”), for which corporations may be organized under Maryland General Corporation Law. The Company has focused primarily on the ownership and management of commercial real estate located in New York City and also has one property located in Farmington, Connecticut. In addition, the Company, through its taxable REIT subsidiaries, provides outdoor maintenance and shelter cleaning services to outdoor advertising companies and government agencies in New York, New Jersey, Arizona and California as well as electrical construction services to a broad range of commercial, industrial, institutional and governmental customers in New York, and beginning October 1, 2010, operates and manages parking garages located in New York City.
 
On March 29, 2007, the Company commenced operations upon the completion of the Reorganization described below. Effective July 1, 2007, the Company elected to be treated as a REIT under the Code and elected December 31st as its fiscal year end. Additionally, in connection with the Tax Relief Extension Act of 1999 (“RMA”), the Company is permitted to participate in activities outside the normal operations of the REIT so long as these activities are conducted in entities which elect to be treated as taxable subsidiaries under the Code subject to certain limitations.
 
At September 30, 2010, the Company owned seven properties containing a total of approximately 561,000 square feet of leasable area.
 
Reorganization
 
On July 24, 2006, the Company entered into an Agreement and Plan of Merger (the “Agreement”) with Triboro Coach Corp., a New York corporation (“Triboro”); Jamaica Central Railways, Inc., a New York corporation (“Jamaica”); Green Bus Lines, Inc., a New York corporation (“Green” and together with Triboro and Jamaica, collectively referred to as the “Bus Companies” and each referred to as a “Bus Company”); Triboro Acquisition, Inc., a New York corporation (“Triboro Acquisition”); Jamaica Acquisition, Inc., a New York corporation (“Jamaica Acquisition”); and Green Acquisition, Inc., a New York corporation (“Green Acquisition,” and together with Jamaica Acquisition and Triboro Acquisition collectively referred to as the “Acquisition Subsidiaries” and each referred to as an “Acquisition Subsidiary”). The transactions contemplated under the Agreement closed on March 29, 2007. The effect of the merger transactions was to complete a reorganization (“Reorganization”) of the ownership of the Bus Companies into the Company with the surviving entities of the merger of the Bus Companies with the Acquisition Subsidiaries becoming wholly-owned subsidiaries of the Company and the former shareholders of the Bus Companies becoming stockholders in the Company.
 
Under the terms of the Agreements, each share of common stock of each Bus Company’s issued and outstanding shares immediately prior to the effective time of the mergers, was converted into the right to receive the following shares of the Company’s common stock:
 
   
Each share of Green common stock was converted into the right to receive 1,117.429975 shares of the Company’s common stock.
       
   
Each share of Triboro common stock was converted into the right to receive 2,997.964137 shares of the Company’s common stock.
       
   
Each share of Jamaica common stock was converted into the right to receive 195.001987 shares of the Company’s common stock.
 
The Bus Companies, including their subsidiaries, owned a total of six rentable parcels of real property (all on a triple net basis), four of which are leased to the City of New York, one of which is leased to a commercial tenant, and one of which a portion is leased to a commercial tenant and the remainder, which was utilized by the Company’s discontinued paratransit business, and is available for lease. There was an additional property of negligible size which was not rentable. Prior to the Reorganization, the Bus Companies and their subsidiaries, collectively, operated a group of outdoor maintenance businesses and the discontinued paratransit business, which was acquired as part of the Reorganization.
 
 
6

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Unaudited)
 

1.    ORGANIZATION AND BASIS OF PREPARATION (Continued):
 
Following the completion of the Reorganization, on July 1, 2007, the Company elected to be treated as a REIT under the applicable provisions of the Code. In order to adopt a REIT structure, it was necessary to combine the Bus Companies and their subsidiaries under a single holding company. The Company is the holding company. The Company has formed three wholly-owned New York corporations and each of the Bus Companies merged with one of these subsidiaries to become wholly-owned subsidiaries of the Company. The mergers required the approval of the holders of at least 66 2/3% of the outstanding shares of common stock of each of Green, Triboro and Jamaica, voting separately and not as one class, which was obtained on March 26, 2007.
 
Based on third-party valuations of the real property, outdoor maintenance businesses, and the paratransit business (which was discontinued as of September 30, 2008), and considering the ownership of the same in whole or part by each of the Bus Companies, the Company was advised by an independent appraisal firm that the relative valuation of each of the Bus Companies (as part of GTJ REIT, Inc.) and in connection with the Reorganization was as follows: Green-42.088%, Triboro-38.287% and Jamaica-19.625%. Accordingly, under the Reorganization, 10,000,361 shares (including 361 fractional shares) of the Company’s common stock were distributed to the former shareholders of Green, Triboro, and Jamaica in exchange for their shares in the Bus Companies. Exclusive of fractional shares, 4,208,800 shares were distributed to the shareholders of Green, 3,828,700 shares to the shareholders of Triboro and 1,962,500 shares to the shareholders of Jamaica, in proportion to the outstanding shares held by such shareholders of each Bus Company, respectively.
 
As part of becoming a REIT, the Company was required, after the Reorganization, to make a distribution of the Bus Companies’ historical undistributed earnings and profits, calculated to be an estimated $62.1 million (see Note 10). The Company agreed to distribute up to $20.0 million in cash, and 3,775,400 shares of the Company’s common stock, valued at $11.14 per share solely for purposes of the distribution, calculated as follows:
 
Total value of the Bus Companies
 
$173,431,797
 
Assumed Earnings and Profits – Cash distribution
 
20,000,000
 
Total value after cash distribution
 
153,431,797
 
Assumed Earnings and Profits – Stock distribution
 
42,000,000
 
Total value after stock distribution
 
$111,431,797
 
Reorganization shares
 
10,000,000
 
Share Value Post Earnings and Profits distribution
 
$11.14
 
 
The Reorganization was accounted for under the purchase method of accounting as required by ASC No. 805. Because the Company has been formed to issue equity interests to effect a business combination, as required by ASC No. 805, one of the existing combining entities was required to be determined the acquiring entity. Under ASC No. 805, the acquiring entity is the combining entity whose owners as a group retained or received the larger portion of the voting rights in the combined entity. Immediately following the Reorganization, the former Green shareholders had a 42.088% voting and economic interest in the Company, the former Triboro shareholders had a 38.287% voting and economic interest in the Company, and the former Jamaica shareholders had a 19.625% voting and economic interest in the company. Additionally, under ASC No. 805, in determining the acquiring entity, consideration was given to which combining entity initiated the combination and whether the assets, revenues, and earnings of one of the combining entities significantly exceed those of the others.
 
Each stockholder elected to receive cash or stock, or a combination of both. If more than $20.0 million of cash was elected in the aggregate, cash distributed to each stockholder electing to receive some or all of his or her distribution in cash was to be reduced such that the aggregate cash distribution would total approximately $20.0 million and the balance of the distribution to each such stockholder will be made in the Company’s common stock.  The Company distributed approximately $19.8 million in cash and 3,775,400 shares of common stock (with a value of approximately $42.1 million). The undistributed cash balance of approximately $0.2 million is included in other liabilities in the condensed consolidated balance sheet at September 30, 2010. Green’s assets at December 31, 2006 totaled approximately $23.9 million as compared to Triboro’s assets of approximately $19.4 million, and Jamaica’s assets of approximately $10.2 million, and Green’s revenues on a going forward basis are expected to exceed that of Triboro and Jamaica. As a result of these facts, Green was deemed to be the accounting acquirer and the historical financial statements of the Company are those of Green.
 

 
7

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Unaudited)
 

1.    ORGANIZATION AND BASIS OF PREPARATION (Continued):
 
Under the purchase method of accounting, Triboro’s and Jamaica’s assets and liabilities were acquired by Green and have been recorded at their estimated fair value. Accordingly, under the Reorganization, 10,000,000 shares of the Company’s common stock were distributed (exclusive of 361 fractional shares), 4,208,800 shares to the shareholders of Green, 3,828,700 shares to the shareholders of Triboro and 1,962,500 shares to the shareholders of Jamaica, in such case in proportion to the outstanding shares held by such shareholders of each Bus Company, respectively.
 
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. The fair values are based on third-party valuations. The fair value of the net assets acquired for the remaining interest in GTJ, not previously owned by Green, exceeded the total consideration for the acquisition by approximately $6.0 million (of which an additional adjustment of  approximately $1.1 million was recorded at December 31, 2007 to adjust certain acquired deferred tax liabilities), resulting in negative goodwill. The excess negative goodwill was allocated on a pro rata basis and recorded as a reduction of long-lived assets.
 
The following table summarizes the allocation of the purchase price in the form of a condensed consolidated balance sheet reflecting the estimated fair values (after the allocation of negative goodwill) of the amounts assigned to each major asset and liability caption of the acquired entities at the date of acquisition (in thousands):
 
   
Triboro
   
Jamaica
   
Total
 
Issuance of stock
  $ 66,402     $ 34,035     $ 100,437  
                         
Cash and cash equivalents
  $ 6,126     $ 974     $ 7,100  
Restricted cash
    1,275       637       1,912  
Accounts receivable
    2,627       1,314       3,941  
Operating subsidies receivables
    1,752       941       2,693  
Deferred leasing commissions
    782       -       782  
Other assets
    2,682       1,549       4,231  
Securities available for sale
    1,668       593       2,261  
Real property and equipment
    55,038       30,919       85,957  
Machinery and equipment
    149       75       224  
Total assets
    72,099       37,002       109,101  
                         
Accounts payable and accrued  expenses
    741       371       1,112  
Revolving credit borrowings
    168       84       252  
Note payable
    666       333       999  
Income tax payable
    294       157       451  
Deferred tax liability
    248       124       372  
Unpaid losses and loss adjustment expenses
    1,736       868       2,604  
Other liabilities
    1,844       1,030       2,874  
Total liabilities
    5,697       2,967       8,664  
Fair value of net assets acquired
  $ 66,402     $ 34,035     $ 100,437  
 
On June 30, 2009, GTJ REIT, Inc. through its wholly-owned subsidiaries, Shelter Electric Maintenance Corp. and Shelter Electric Acquisition Subsidiary LLC, (collectively, “Shelter Electric”) entered into an asset purchase agreement (the “Asset Purchase Agreement”) with Morales Electrical Contracting, Inc. (“Morales”), a Valley Stream, New York based electrical construction company, pursuant to which Morales sold certain of its assets and assigned certain contracts and employees to Shelter Electric.
 
 
8

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Unaudited)
 

1.    ORGANIZATION AND BASIS OF PREPARATION (Continued):
 
Pursuant to the Asset Purchase Agreement, Shelter Electric purchased these assets, free and clear of all liens and other encumbrances, in consideration for the payment of approximately $1.0 million, consisting primarily of the satisfaction and payment of certain liabilities of Morales. The $1.0 million purchase price was allocated to identifiable intangible assets with approximately $0.3 million allocated to the contracts assumed, $0.4 million allocated to the non-compete agreement, $0.2 million allocated to customer relationships and $0.1 million allocated to goodwill. Shelter Electric has also provided a line of credit of up to approximately $0.6 million to Morales, through a Credit and Security Agreement to finance the completion of two contracts currently in progress at Morales. In addition, the former Vice President of Morales has been employed by Shelter to manage and expand the electrical construction operations. The employment is subject to usual and customary conditions and restrictive covenants.
 
On March 29, 2010, Shelter Electric invested approximately four hundred dollars in exchange for a 40% interest in a joint venture with Morales, a Minority Women Owned Business Enterprise (“MWBE”). The joint venture was formed to secure MWBE contracts for the purpose of providing electrical construction services.
 
On August 13, 2010, the Company formed Shelter Parking Corp., a New York corporation, to operate and manage parking facilities in the New York tri-state area. On September 30, 2010, Shelter Parking Corp., through its wholly owned subsidiary, Shelter Parking Brevard, LLC, entered into a fifteen year lease agreement to operate a parking garage facility at 245 East 54th Street.
 
Basis of Presentation and Principles of Consolidation:
 
The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements, although management believes that the disclosures presented herein are adequate to make the accompanying unaudited consolidated interim financial statements presented not misleading.
 
The accompanying unaudited consolidated financial statements include the financial statements of the Company, its wholly-owned subsidiaries, and partnerships or other joint ventures. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All significant inter-company transactions and balances have been eliminated in consolidation.
 
The results of operations for the three and nine months ended September 30, 2010 are not necessarily indicative of results that may be expected for the entire year ending December 31, 2010. The accompanying unaudited consolidated interim financial statements should be read in conjunction with the Company’s audited consolidated annual financial statements and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
 
2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 
Use of Estimates:
 
The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, and related disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. All of these estimates reflect management’s best judgment about current economic and market conditions and their effects based on information available as of the date of these consolidated financial statements.  If such conditions persist longer or deteriorate further than expected, it is reasonably possible that the judgments and estimates could change, which may result in impairments of certain assets. Significant estimates include those related to uncollectible receivables, the useful lives of long lived assets including property and equipment and intangible assets, income taxes, contingencies, environmental matters, insurance liabilities and stock-based compensation.

 
 
9

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Unaudited)
 
2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

Reclassifications:
 
Certain prior period amounts have been reclassified to conform to the current year presentation.
 
Real Estate Investments:
 
Real estate assets are stated at cost, less accumulated depreciation and amortization. All costs related to the improvement or replacement of real estate properties are capitalized. Additions, renovations and improvements that enhance and/or extend the useful life of a property are also capitalized. Expenditures for ordinary maintenance, repairs and improvements that do not materially prolong the normal useful life of an asset are charged to operations as incurred.
 
Upon the acquisition of real estate properties, the fair values of the real estate purchased are allocated to the acquired tangible assets (consisting of land, buildings, and building improvements) and identified intangible assets and liabilities (consisting of above-market and below-market leases and in-place leases) in accordance with ASC No. 805. The Company utilizes methods similar to those used by independent  appraisers  in  estimating  the  fair  value  of  acquired  assets  and  liabilities. The fair value of the tangible assets of an acquired property considers the value of the property “as-if-vacant.” The fair value reflects the depreciated replacement cost of the asset. In allocating purchase price to identified intangible assets and liabilities of an acquired property, the values of above-market and below-market leases are estimated based on the differences between (i) contractual rentals and the estimated market rents over the applicable lease term discounted back to the date of acquisition utilizing a discount rate adjusted for the credit risk associated with the respective tenants and (ii) the estimated cost of acquiring such leases giving effect to the Company’s history of providing tenant improvements and paying leasing commissions, offset by a vacancy period during which such space would be leased. The aggregate value of in-place leases is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates over (ii) the estimated fair value of the property “as-if-vacant,” determined as set forth above.
 
Above and below market leases acquired are recorded at their fair values. The capitalized above-market lease values are amortized as a reduction of rental revenue over the remaining term of the respective leases and the capitalized below-market lease values are amortized as an increase to rental revenue over the remaining term of the respective leases. The value of in-place leases is based on the Company’s evaluation of the specific characteristics of each tenant’s lease. Factors considered include estimates of carrying costs during expected lease-up periods, current market conditions, and costs to execute similar leases. The values of in-place leases are amortized over the remaining term of the respective leases. If a tenant vacates its space prior to its contractual expiration date, any unamortized balance of the related intangible asset is expensed.
 
Depreciation and Amortization:
 
The Company uses the straight-line method for depreciation and amortization. Properties and property improvements are depreciated over their estimated useful lives, which range from 10 to 25 years. Furniture and fixtures, equipment, and transportation equipment are depreciated over estimated useful lives that range from 5 to 10 years. Tenant improvements are amortized over the shorter of the remaining non-cancellable term of the related leases or their useful lives.
 
 
10

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Unaudited)
 

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
 
Deferred Charges:
 
Deferred charges consist principally of leasing commissions (which are amortized ratably over the life of the related tenant leases) and financing costs (which are amortized over the terms of the respective debt agreements).
 
Asset Impairment:
 
The Company applies the guidance in ASC No. 360-10-05 to recognize and measure impairment of long-lived assets. Management reviews each real estate investment for impairment whenever events or circumstances indicate that the carrying value of a real estate investment may not be recoverable. The review of recoverability is based on an estimate of the future cash flows that are expected to result from the real estate investment’s use and eventual disposition. Such cash flow analyses includes factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and  other factors. If an impairment event exists due to the projected inability to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds estimated fair value. Management is required to make subjective assessments as to whether there are impairments in the value of its real estate holdings. These assessments could have a direct impact on net income, because an impairment loss is recognized in the period that the assessment is made.
 
When impairment indicators are present, investments in affiliated companies are reviewed for impairment by comparing their fair values to their respective carrying amounts. The Company makes its estimate of fair value by considering certain factors including discounted cash flow analyses. If the fair value of the investment has dropped below the carrying amount, management considers several factors when determining whether an other-than-temporary decline in market value has occurred, including the length of the time and the extent to which the fair value has been below cost, the financial condition and near-term prospects of the affiliated company, and other factors influencing the fair market value, such as general market conditions. There were no indicators of impairment at September 30, 2010.
 
Reportable Segments:
 
As of September 30, 2010, the Company primarily operated in three reportable segments: (i) Real Estate Operations, (ii) Outside Maintenance Operations (including shelter cleaning and electrical contracting), and (iii) Insurance Operations. Each segment’s operations are conducted throughout the U.S., with the exception of the Insurance Operations which is conducted in the Cayman Islands.
 
 
 
Real Estate Operations rent Company owned real estate located in New York and Connecticut.
     
 
 
Outside Maintenance, Shelter Cleaning Operations, and Electrical Contracting provide outside maintenance and shelter cleaning services to outdoor advertising companies and government agencies in New York, New Jersey, Arizona, and California, and electrical construction services to a broad range of commercial, industrial, institutional, and governmental customers in New York.
     
 
 
Insurance Operations assumes reinsurance of worker’s compensation, vehicle liability, and covenant liability of the Company and its affiliated companies from unrelated insurance companies based in the United States of America.
 
Revenue Recognition—Real Estate Operations:
 
The Company recognizes revenue in accordance with ASC No. 840-20-25, which requires that revenue be recognized on a straight-line basis over the term of the lease unless another systematic and rational basis is more representative of the time pattern in which the use benefit is derived from the leased property. For the three and nine months ended September 30, 2010, five tenants constituted approximately 66%, 16%, 12%, 5%, and 1% of rental revenue and for the three and nine months ended September 30, 2009, five tenants constituted approximately 67%, 17%, 12%, 3%, and 1% of rental revenue.
 

 
11

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Unaudited)
 

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
 
In those instances in which the Company funds tenant improvements and the improvements are deemed to be owned by the Company, revenue recognition will commence when the improvements are substantially completed and possession or control of the space is turned over to the tenant. When the Company determines that the tenant allowances are lease incentives, the Company commences revenue recognition when possession or control of the space is turned over to the tenant for tenant work to begin. The properties are being leased to tenants under operating leases. The excess revenue recognized over amounts due pursuant to the underlying leases amounted to approximately $6.4 million and $5.3 million at September 30, 2010 and December 31, 2009, respectively (see Note 4).
 
Property operating expense recoveries from tenants of common area maintenance, real estate, and other recoverable costs are recognized in the period that the related expenses are incurred.
 
Revenue Recognition—Outside Maintenance and Shelter Cleaning Operations:
 
Cleaning and maintenance revenue is recognized upon completion of the related service.
 
Revenue Recognition—Electrical Contracting Operations:
 
The Company recognizes revenues from long-term construction contracts on the percentage-of-completion method in accordance with ASC No. 605-35. Percentage-of-completion is measured principally by the percentage of costs incurred to date for each contract to the estimated total costs for such contract at completion. Contract costs include all direct costs related to the performance and completion of the contracts. Estimated losses on the long term construction contracts are recognized in the period in which such losses are determined.
 
Revenue Recognition—Insurance Operations:
 
Premiums are recognized as revenue on a pro-rata basis over the policy term. The portion of premiums that will be earned in the future are deferred and reported as unearned premiums.  No premiums were earned for the three and nine months ended September 30, 2010 and 2009.
 
Earnings Per Share Information:
 
In accordance with ASC No. 260-10-45, the Company presents both basic and diluted earnings per share. Basic earnings per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, where such exercise or conversion would result in a lower per share amount. The stock option awards were excluded from the computation of diluted earnings per share because the awards would have been antidilutive for the periods presented.
 
Discontinued Operations:

               The condensed consolidated financial statements of the Company present the operations of the Paratransit Operations as discontinued operations in accordance with ASC No. 205-20-55 for the three and nine months ended September 30, 2010 and 2009.
 
Cash and Cash Equivalents:
 
The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents.
 
 
12

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Unaudited)
 

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
 
Restricted Cash:
 
The Company has restricted cash held by AIG on behalf of the Company that is restricted by the insurance carrier for the purpose of the payment of insured losses.  At September 30, 2010, and December 31, 2009, the Company had restricted cash in the amount of $1.0 million and $1.1 million, respectively.
 
Accounts Receivable:
 
Accounts receivable consist of trade receivables recorded at the original invoice amounts, less an estimated allowance for uncollectible accounts. Trade credit is generally extended on a short-term basis; thus trade receivables generally do not bear interest. Trade receivables are periodically evaluated for collectibility based on past credit histories with customers and their current financial conditions. Changes in the estimated collectibility of trade receivables are recorded in the results of operations for the periods in which the estimates are revised. Trade receivables that are deemed uncollectible are offset against the allowance for uncollectible accounts. The Company generally does not require collateral for trade receivables.
 
Available for Sale Securities:
 
The Company accounts for debt and equity securities as available-for-sale securities in accordance with ASC No. 320-10-35. Management determines the appropriate classification of debt and equity securities at the time of purchase and reevaluates such designation as of each balance sheet date.
 
Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in accumulated other comprehensive income, a component of stockholders’ equity. Interest on securities is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in the accompanying condensed consolidated statements of income. The cost of securities sold is based on the specific identification method. Estimated fair value is determined based on quoted market prices.
 
Fair Value Measurement:
 
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measurements, a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies, is as follows:
 
Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.
 
Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
 
Level 3—Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
 
Income Taxes:
 
The Company is organized and conducts its operations to qualify as a REIT for federal income tax purposes. Accordingly, the Company is generally not subject to federal income taxation on the portion of its income that qualifies as REIT taxable income, to the extent that it distributes at least 90% of its taxable income to its stockholders and complies with certain other requirements as defined under Section 856 through 860 of the Code.
 

 
13

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Unaudited)
 

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
 
The Company also participates in certain activities conducted by entities which elected to be treated as taxable subsidiaries under the Code. As such, the Company is subject to federal, state and local taxes on the income from these activities. The Company accounts for income taxes under the asset and liability method, as required by the provisions of ASC No. 740-10-30. Under this method, deferred tax assets and liabilities are established based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.  The Company provides a valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not.
 
ASC No. 740-10-65 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC No. 740-10-65, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC No. 740-10-65 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of September 30, 2010 and December 31, 2009, the Company does not have a liability for unrecognized tax positions.
 
Comprehensive Income:
 
The Company follows the provisions of ASC No. 220-10-45, which sets forth rules for the reporting and display of comprehensive income and its components. ASC No. 220-10-45 requires unrealized gains or losses on the Company’s available-for-sale securities to be included in accumulated other comprehensive income, net of taxes and as a component of stockholders’ equity.
 
Environmental Matters:
 
Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. These accruals are adjusted periodically as assessment and remediation efforts progress or as additional technical or legal information become available.
 
Environmental costs are capitalized if the costs extend the life of the property, increase its capacity, and/or mitigate or prevent contamination from future operations. Environmental costs are also capitalized in recognition of legal asset retirement obligations resulting from the acquisition, construction and/or normal operation of a long-lived asset. Costs related to remedial investigation and feasibility studies, environmental contamination treatment and cleanup are charged to expense. Estimated future incremental operations, maintenance, and management costs directly related to remediation are accrued when such costs are probable and estimable (see Notes 6 and 13).
 
Insurance Liabilities:
 
The liability for losses and loss-adjustment expenses includes an amount for claims reported and a provision for adverse claims development. The liability for claims reported is based on management’s best estimates, while the liability for adverse claims development is based on independent actuarial reports. While management believes that the estimated liabilities are adequate, the ultimate liabilities may be in excess of or less than the amounts recorded. It is reasonably possible that the expectations associated with these amounts could change in the near-term (within one year). The effect of such changes could be material to the condensed consolidated financial statements. The methods for making such estimates and for establishing the resulting liabilities are continually reviewed, and any adjustments are reported in current earnings.
 
Concentrations of Credit Risk:
 
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash equivalents, which from time-to-time exceed the Federal depository insurance coverage. Cash balances are insured by the Federal Deposit Insurance Corporation up to $250,000 through December 31, 2013.
 
 
14

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Unaudited)
 

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
 
Investment in Equity Affiliates:
 
The Company invests in joint ventures that are formed to perform electrical construction services. These investments are recorded under either the equity or cost method of accounting. Under the equity method of accounting, the Company records its share of the net income and losses from the underlying operations and any other-than-temporary impairment on these investments on a single line item in the Condensed Consolidated Statements of Income as income or losses from equity affiliates.
 
Variable Interest Entities:
 
The Company accounts for variable interest entities (“VIEs”) in accordance with ASC No. 810-10-50, which requires a VIE to be consolidated by its primary beneficiary. The primary beneficiary is the party that absorbs a majority of the VIE’s anticipated losses and/or a majority of the expected returns and has a controlling financial interest in the VIE. A company is deemed to have a controlling financial interest in a VIE if it has the power to direct the activities that most significantly affect the VIE’s economic performance and it has the obligation to absorb losses, or right to receive benefits, that could be significant to the VIE.
 
The Company evaluates its investments in equity affiliates to determine whether they are VIEs. The Company evaluates (1) the sufficiency of the fair value of the entities’ equity investments at risk to absorb losses, (2) that as a group the holders of the equity investments at risk have (a) the direct or indirect ability through voting rights to make decisions about the entities’ significant activities, (b) the obligation to absorb the expected losses of the entity and their obligations are not protected directly or indirectly, (c) the right to receive the expected residual return of the entity and their rights are not capped, (3) substantially all of the entities’ activities do not involve or are not conducted on behalf of an investor that has disproportionately fewer voting rights in terms of its obligation to absorb the expected losses or its right to receive expected residual returns of the entity, or both.

As of September 30, 2010, the Company has one investment which was made to a VIE with an aggregate carrying amount of $0.8 million. For the VIE identified, the Company is not the primary beneficiary and as such the VIE is not consolidated in the Company’s financial statements. The Company accounts for this investment under the equity method of accounting.
 
Stock-Based Compensation:
 
The Company has a stock-based compensation plan, which is described in Note 10. The Company accounts for stock based compensation in accordance with ASC No. 718-30-30, which establishes accounting for stock-based awards exchanged for employee services. Under the provisions of ASC No. 718-10-35, share-based compensation cost is measured at the grant date, based on the fair value of the award, and is expensed against earnings at the grant date (for the portion that vests immediately) or ratably over the respective vesting periods.
 
Recently Issued Accounting Pronouncements:
 
In February 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-09, “Subsequent Events: Amendments to Certain Recognition and Disclosure Requirements,” which provides updated guidance on subsequent events and removes the requirement to disclose the date through which subsequent events have been evaluated for SEC filers. This guidance became effective upon issuance and its adoption did not have an effect on the Company’s condensed consolidated financial statements.
 
In January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures: Improving Disclosures about Fair Value Measurements,” which requires disclosure of details of significant asset or liability transfers in and out of Level 1 and Level 2 measurements within the fair value hierarchy and inclusion of gross purchases, sales, issuances, and settlements in the rollforward of assets and liabilities valued using Level 3 inputs within the fair value hierarchy. The guidance also clarifies and expands existing disclosure requirements related to the disaggregation of fair value disclosures and inputs used in arriving at fair values for assets and liabilities using Level 2 and Level 3 inputs within the fair value hierarchy. This guidance became effective for interim and annual reporting periods beginning after December 15, 2009, except for the gross presentation of the Level 3 rollforward, which is required for annual reporting periods beginning after December 15, 2010 and for interim periods within those years. The adoption of this guidance did not have an effect on the Company’s condensed consolidated financial statements.

 
15

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Unaudited)
 

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
 
In January 2010, the FASB issued ASU No. 2010-01, “Equity: Accounting for Distributions to Shareholders with Components of Stock and Cash – a consensus of the FASB Emerging Issues Task Force,” which clarifies the treatment of the stock portion of a distribution to shareholders that allows the election to receive cash or stock. This guidance became effective for interim and annual reporting periods ending after December 15, 2009. The adoption of ASU No. 2010-01 did not have an effect on the Company’s condensed consolidated financial statements.
 
3.    AVAILABLE FOR SALE SECURITIES:
 
The Company accounts for debt and equity securities as available-for-sale securities in accordance with ASC No. 320-10-35. Management determines the appropriate classification of debt and equity securities at the time of purchase and reevaluates such designation as of each balance sheet date. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in accumulated other comprehensive income, a component of stockholders’ equity. Interest on securities is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in the accompanying consolidated statement of income.
 
The following is a summary of available-for-sale securities at September 30, 2010 and December 31, 2009 (in thousands):
 
   
Available-for-Sale Securities
September 30, 2010
 
Face Value
   
Amortized Cost
   
Unrealized Gains
   
Estimated Fair Value
                       
Equity securities
  $ -     $ -     $ 292     $ 292
Money market fund
    801       801       -       801
U.S. Treasury/U.S. Government debt  securities
    1,726       1,731       81       1,812
Total available-for-sale securities
  $ 2,527     $ 2,532     $ 373     $ 2,905
 
   
Available-for-Sale Securities
December 31, 2009
 
Face Value
   
Amortized Cost
   
Unrealized Gains
   
Estimated Fair Value
                       
Equity securities
  $ -     $ -     $ 267     $ 267
Money market fund
    897       897       -       897
U.S. Treasury/U.S. Government debt  securities
    1,953       1,960       75       2,035
Total available-for-sale securities
  $ 2,850     $ 2,857     $ 342     $ 3,199
                               
 
Accumulated other comprehensive income for the nine months ended September 30, 2010 and year ended December 31, 2009 includes net unrealized holding gains of approximately $30,000 and $75,000, respectively. No amounts were reclassified from other comprehensive income to income for the three and nine months ended September 30, 2010, or for the year ended December 31, 2009.
 
 
16

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Unaudited)
 
 
3.    AVAILABLE FOR SALE SECURITIES (Continued):
 
The following is a summary of the contractual maturities of U.S. Government Debt Securities as of September 30, 2010:
 
   
Amortized Cost
 
Estimated Fair Value
Due in:
       
2010
 
 $                   125
 
 $                   125
2011 – 2015
 
        1,167
 
       1,223
2016 – 2020
 
340
 
359
2021 and later
 
        99
 
       105
Total
 
 $                1,731
 
$                   1,812
 
4.    OTHER ASSETS:
 
Other assets consist of the following (in thousands):
   
September 30,
   
December 31,
   
2010
   
2009
           
Prepaid expenses
  $ 800     $ 273
Prepaid and refundable income taxes
    86       90
Rental income in excess of amount billed
    6,388       5,324
Costs in excess of billings
    541       1,116
Investment in equity affiliates
    15       -
Notes receivable
    1,331       594
Other assets
    620       341
    $ 9,781     $ 7,738
               
 
5.    UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES:
 
The liability for losses and loss adjustment expenses in connection with certain previous insurance claims at September 30, 2010 and December 31, 2009 is summarized as follows (in thousands):
 
   
September 30,
2010
 
December 31,
2009
 
       
Reported claims
  $ 1,976     $ 1,973  
Provision for incurred but not reported claims
    147       263  
    $ 2,123     $ 2,236  
 
Management is responsible for estimating the provisions for outstanding losses. An actuarial study was independently completed and estimated that at December 31, 2009, the total outstanding losses at an expected level, are between approximately $1,135,000 and $1,407,000. In their analysis, the actuaries have used industry based data which may or may not be representative of the Company's ultimate liabilities.
 
In the opinion of management, the provision for losses and loss-adjustment expenses is adequate to cover the expected ultimate liability under the insurance policies written. However, consistent with most companies with similar operations, the Company’s estimated liability for claims is ultimately based on management's expectations of future events. It is reasonably possible that the expectations associated with these amounts could change in the near term (that is, within one year) and that the effect of such changes could be material to the condensed consolidated financial statements.
 
 
17

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Unaudited)
 
 
6.    OTHER LIABILITIES:
 
Other liabilities consist of the following (in thousands):
 
   
September 30,
   
December 31,
 
   
2010
   
2009
 
             
Accrued dividends
  $ 1,082     $ 1,078  
Accrued earnings and profits distribution
    163       253  
Accrued professional fees
    217       245  
Accrued wages
    133       201  
Accrued vacation
    156       131  
Accrued environmental costs
    776       1,082  
Accrued litigation settlement costs
    -       445  
Deposit liability
    32       42  
Deferred tax liability
    23       23  
Prepaid rent
    381       378  
Contract billings in excess of costs
    416       927  
Liabilities associated with former bus operations
    853       853  
Other
    398       504  
    $ 4,630     $ 6,162  
                 
7.    COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS:
 
   
September 30,
2010
   
December 31,
2009
 
Costs on contracts in progress
  $ 1,428     $ 924  
Estimated earnings
    341       192  
      1,769       1,116  
Less: billings to date
    (1,644 )     (927 )
    $ 125     $ 189  
 
The excess of billings over revenues earned to date and revenues earned to date over billings are included in the accompanying condensed consolidated balance sheets as of:
 
   
September 30,
2010
   
December 31,
2009
 
Costs and estimated earnings in excess of billings on uncompleted contracts
  $ 541     $ 1,116  
Billings in excess of costs and estimated earnings on uncompleted contracts
    (416 )     (927 )
    $ 125     $ 189  

 
 
18

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Unaudited)
 

8.    MORTGAGE NOTE PAYABLE:
 
Hartford Loan Agreement:
 
On July 1, 2010, two indirect subsidiaries of the Company, 165-25 147th Avenue, LLC and 85-01 24th Avenue, LLC (collectively, the “Borrower”) entered into a Fixed Rate Term Loan Agreement (the “Hartford Loan Agreement”) with Hartford Life Insurance Company, Hartford Life and Accident Insurance Company and Hartford Life and Annuity Insurance Company (collectively, the “Lenders”) pursuant to which the Lenders made a term loan to Borrower in the aggregate principal amount of $45,500,000 (the “Loan”).  The Loan was evidenced by certain promissory notes, executed simultaneously therewith, payable to the order of (i) Hartford Life Insurance Company in the stated amount of $25,000,000; (b) Hartford Life and Accident Insurance Company in the stated principal amount of $10,500,000; and (c) Hartford Life and Annuity Insurance Company in the stated principal amount of $10,000,000 (collectively, the “Notes”).  The proceeds from the Loan were used to satisfy in full the Company’s obligations under the ING Loan Agreement.
 
The obligations under the Hartford Loan Agreement are secured by, among other things, a first priority mortgage lien and security interest on certain (a) improved real estate commonly known as 165-25 147th Avenue, Laurelton, Queens, New York and 85-01 24th Avenue, East Elmhurst, Queens, New York  (collectively, the “Real Estate”), and (b) personal property and other rights of the Borrower, all as more specifically described in that certain Consolidated, Amended and Restated Mortgage, Security Agreement and Fixture Filing dated as of July 1, 2010 (the “Mortgage”) and that certain Assignment of Leases and Rents dated as of July 1, 2010 among the Lenders and the Borrower, and other ancillary documents. The outstanding principal balance of the Loan shall bear interest at the fixed rate of 5.05% per annum.  The Borrower is required to make monthly payments of interest only in the amount of $191,479. The principal is payable on the maturity date, July 1, 2017.
 
9.    SECURED REVOLVING CREDIT FACILITY:
 
ING Loan Agreement:
 
On July 2, 2007, the Company entered into a three year loan agreement, dated as of June 30, 2007 (the “ING Loan Agreement”), among certain direct and indirect subsidiaries of the Company, namely, Green Acquisition, Inc., Triboro Acquisition, Inc., Jamaica Acquisition, Inc., 165-25 147th Avenue, LLC, 49-19 Rockaway Beach Boulevard, LLC, 85-01 24th Avenue, LLC, 114-15 Guy Brewer Boulevard, LLC, (collectively, the “Borrowers”); and ING USA Annuity and Life Insurance Company; ING Life Insurance and Annuity Company; Reliastar Life Insurance Company; and Security Life of Denver Insurance Company (collectively, the “Lenders”). Pursuant to the terms of the ING Loan Agreement, the Lenders provided multiple loan facilities in the amounts and on the terms and conditions set forth in the ING Loan Agreement. The aggregate of all loan facilities under the ING Loan Agreement could not exceed $72.5 million. On July 2, 2007, the Borrowers made an initial term loan draw down of $17.0 million on the facility. In addition to the initial term loan, in October 2007, the Lenders collectively made a mortgage loan of $1.0 million and advanced an additional $2.0 million to the Borrowers. In February 2008, there was an additional draw under the facility of approximately $23.2 million. Interest on the loans was paid monthly. The interest rate on both the initial draw-down and mortgage loan was fixed at 6.59% per annum and the interest rate on the additional draw floated at a spread over one month LIBOR, 1.75% at June 30, 2010. In addition, there was a one-tenth of one percent non-use fee on the unused portion of the facility.
 
The loan facilities were collateralized by: (1) an Assignment of Leases and Rents on four bus depot properties (the “Depots”) owned by certain of the Borrowers and leased to the City of New York, namely (a) 49-19 Rockaway Beach Boulevard; (b) 165-25 147th Avenue; (c) 85-01 24th Avenue and (d) 114-15 Guy Brewer Boulevard; (2) Pledge Agreements under which (i) GTJ REIT pledged its 100% stock ownership in each of: (a) Green Acquisition; (b) Triboro Acquisition, and (c) Jamaica Acquisition, (ii) Green Acquisition pledged its 100% membership interest in each of (a) 49-19 Rockaway Beach Boulevard, LLC and (b) 165-25 147th Avenue, LLC, (iii) Triboro Acquisition pledged its 100% membership interest in 85-01 24th Avenue, LLC, and (d) Jamaica Acquisition pledged its 100% membership interest in 114-15 Guy Brewer Boulevard, LLC, and (3) a LIBOR Cap Security Agreement under which GTJ Rate Cap LLC, a wholly owned subsidiary of the Company, pledged its interest in an interest rate cap transaction evidenced by the Confirmation and ISDA Master Agreement, dated as of December 13, 2006, with SMBC Derivative Products Limited. The Company had assigned its interest in the interest rate cap to GTJ Rate Cap LLC prior to entering into the ING Loan Agreement. The $1.0 million mortgage loan was secured by a mortgage in the amount of $250,000 on each of the Depots collectively. On July 1, 2010, the outstanding balance of approximately $43.2 million under the ING Loan Agreement was repaid in full.
 
 
19

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Unaudited)
 
10.    STOCKHOLDERS’ EQUITY:
 
Common Stock:
 
The Company is authorized to issue 100,000,000 shares of common stock, $.0001 par value per share. The Company has authorized the issuance of up to 15,564,454 shares of the Company’s common stock in connection with the Reorganization and the earnings and profits distribution of which 13,472,281 had been issued as of December 31, 2009. On June 17, 2010, the Company issued 56,850 restricted shares of common stock under its stock incentive plan. As of September 30, 2010, a total of 13,529,131 shares have been issued by the Company (see Note 1).
 
Preferred Stock:
 
The Company is authorized to issue 10,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors.
 
Dividend Distributions:
 
The following table presents dividends declared by the Company on its common stock from January 1, 2010 through September 30, 2010:
 
Declaration
 
Year / Quarter
 
Record
 
Payment
 
Dividend
Date
 
Ended
 
Date
 
Date
 
Per Share
                 
January 4, 2010
 
December 31, 2009
 
January 15, 2010
 
January 22, 2010
 
 $      0.08
March 22, 2010
 
March 31, 2010
 
March 31, 2010
 
April 15, 2010
 
 $      0.08
June 17, 2010
 
June 30, 2010
 
June 30, 2010
 
July 15, 2010
 
 $      0.08
August 11, 2010
 
September 30, 2010
 
September 30, 2010
 
October 15, 2010
 
 $      0.08
 
Stock Based Compensation:
 
On June 11, 2007, the Board of Directors approved the Company’s 2007 Incentive Award Plan (the “Plan”).  The effective date of the Plan was June 11, 2007, subject to stockholder approval. The stockholders of the Company approved the Plan on February 7, 2008.
 
The Plan covers directors, officers, key employees and consultants of the Company. The purposes of the Plan are to further the growth, development, and financial success of the Company and to obtain and retain the services of the individuals considered essential to the long term success of the Company.
 
The Plan may provide for awards in the form of restricted shares, incentive stock options, non-qualified stock options and stock appreciation rights. The aggregate number of shares of common stock which may be awarded under the Plan is 1,000,000 shares. These shares were registered on September 23, 2010. As of September 30, 2010, the Company had 688,150 shares available for future issuance pursuant to awards under the Plan.
 
On February 7, 2008, 55,000 options were granted to non-employee directors and vested immediately and 200,000 options were granted to key officers of the Company and have a three year vesting period.  All options expire ten years from the date of grant.
 
 
20

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Unaudited)
 
10.    STOCKHOLDERS’ EQUITY (Continued):
 
The fair value of each option grant is estimated on the date of grant using the Black-Scholes Option Pricing Model. The fair value of options granted on February 7, 2008 was $1.90 per share. The following assumptions were used for the options granted:
 
Risk free interest rate:
   3.39%
Expected dividend yield:
   3.59%
Expected life of option in years:
   7.94
Expected volatility: (1)
 21.00%
 
The following table presents the activity of options outstanding under the Plan for the nine months ended September 30, 2010:
 
Options
 
Number of Options
   
Weighted-Average and Exercise Price Per Share
   
Weighted-Average Grant Date Fair Value Per Share
Outstanding at December 31, 2009
    255,000     $ 11.14     $ 1.90
Granted
    -       -       -
Exercised
    -       -       -
Forfeited /Expired
    -       -       -
Outstanding at September 30, 2010 (2)
    255,000     $ 11.14     $ 1.90
Options vested and exercisable at September 30, 2010
    255,000     $ 11.14     $ 1.90
                       
All outstanding and exercisable options have a remaining contractual life of approximately 7.4 years.
 

 
(1)
Although the Company is subject to the reporting requirements of the Securities and Exchange Commission, the Company’s stock is not listed on an exchange and there is no readily available market for the stock. Therefore, the Company is not able to determine the historical volatility of its common stock. As a result, the volatility was estimated from the historical volatilities of the common stock of the exchange traded comparable firms of both REITs and operating companies similar to the Company’s taxable REIT subsidiaries.
   
(2)
The aggregate intrinsic value, which represents the difference between the price of the Company’s common stock at September 30, 2010 and the related exercise price of the underlying options, was $0 for outstanding options and exercisable options as of September 30, 2010.
 
 
As of September 30, 2010, there was approximately $42,000 of unamortized stock compensation related to nonvested stock option grants awarded under the Plan.  The remaining unamortized expense is expected to be recognized over the next four months.  For the three and nine months ended September 30, 2010, stock compensation expense relating to these stock option grants was approximately $32,000, $95,000, compared to $32,000, and $94,000, respectively, for the three and nine months ended September 30, 2009.
 
On June 17, 2010, the Company issued an aggregate of 56,850 restricted shares of common stock, with a value of approximately $398,000, under the Plan. A total of 13,950 of these shares, with a value of approximately $98,000, were granted to non-management members of the Board of Directors, and vested immediately. The remaining 42,900 shares, with a value of approximately $300,000, were granted to certain executives of the Company, and vest ratably over a four year period. One fourth of the 42,900 shares granted to each of the executives were vested as of the grant date and one fourth will vest each year on the following dates: January 1, 2011, January 1, 2012, and January 1, 2013. Dividends paid on restricted shares are recorded as dividends on shares of the Company’s common stock whether or not they are vested. In accordance with ASC No. 718-10-35, the Company measures the compensation costs for these shares as of the date of the grant and the expense is recognized in earnings, at the grant date (for the portion that vest immediately) or ratably over the respective vesting periods. For the three and nine months ended September 30, 2010 stock compensation expense relating to the restricted stock granted on January 1, 2010, was approximately $34,000 and $276,000, respectively.  As of September 30, 2010, there was approximately $122,000 of unamortized stock compensation related to restricted stock.
 
 
21

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Unaudited)
 
 
10.    STOCKHOLDERS’ EQUITY (Continued):
 
Special Distribution of Earnings and Profits
 
On August 20, 2007, the Board of Directors of the Company declared a special distribution of accumulated earnings and profits on the Company’s common stock of $6.40 per share of common stock, payable in $20,000,000 of cash and 3,775,400 of the Company’s common stock.  For the purposes of the special distribution, the Company’s common stock was valued at $11.14 per share, as indicated in the proxy statement/prospectus dated February 9, 2007 filed with the Securities and Exchange Commission and disseminated to the stockholders of the Bus Companies in connection with the March 26, 2007 special joint meeting of the stockholders of the Bus Companies at which meeting such stockholders voted on a reorganization of those companies with and into the Company.  The special distribution aggregated approximately $62,060,000.  The holders of the Company’s shares, and the holders of shares of the Bus Companies, as of the close of business on August 20, 2007, the record date for the special distribution (the “Holders”), were eligible for the special distribution.  The Holders were required to make an election as to the amount of the Company’s shares and/or cash the Holders wished to receive as their respective portions of the special distribution. Holders were advised, due to the limitation of the aggregate amount of cash available for the special distribution, that their actual distribution might not be in the proportion of cash and the Company’s shares they elected, but could be based on a proration of the available cash after all elections (i.e. not on a first come-first served basis). The Company calculated the proportion of cash and the Company’s shares that were distributed to the Holders based upon the Holder’s election and the amount of cash available for the special distribution.
 
As of September 30, 2010, cash of approximately $19.8 million and 3,775,400 shares of the Company’s common stock have been distributed to the Holders. The remaining payable balance of approximately $0.2 million is included in other liabilities in the accompanying condensed consolidated balance sheet at September 30, 2010.
 
11.    EARNINGS PER SHARE:
 
In accordance with ASC No. 260-10-45, basic earnings per common share (“Basic EPS”) is computed by dividing the net income by the weighted-average number of common shares outstanding. Diluted earnings per common share (“Diluted EPS”) is computed by dividing net income by the weighted-average number of common shares and dilutive common share equivalents and convertible securities then outstanding. There were no common share equivalents for any of the periods presented in the Company’s consolidated statements of income.
 
The following table sets forth the computation of basic and diluted per share information (in thousands, except share and per share data):
 
   
Three Months Ended
   
Nine Months Ended
 
 
September 30,
   
September 30,
 
 
2010
   
2009
   
2010
   
2009
Numerator:
                     
  Net income (loss)
  $ 476     $ (188 )   $ 2,021     $ 3,826
                               
Denominator:
                             
  Weighted average common shares outstanding - basic and diluted
    13,529,131       13,472,281       13,494,355       13,472,281
                               
Basic and Diluted Per Share Information:
                             
  Net income per share - basic and diluted
  $ 0.04     $ (0.01 )   $ 0.15     $ 0.28
                               
 
 
22

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Unaudited)
 
12.    RELATED PARTY TRANSACTIONS:
 
Douglas A. Cooper, an officer and director of the Company and the nephew of Jerome Cooper (Chairman of the Board), is a managing partner of Ruskin, Moscou, Faltischek, P.C. (“RMF”), and has acted as counsel to the Company since 1998. Fees incurred by the Company to RMF as of and for the three and nine months ended September 30, 2010, were $88,000, $235,000, respectively, compared to $145,000, and $403,000, for the three and nine months ended September 30, 2009, respectively.
 
Paul A. Cooper is an officer and director of the Company and is the son of Jerome Cooper (Chairman of the Board). In April, 2005, Lighthouse 444 Limited Partnership (“Lighthouse”), the owner of the building at 444 Merrick Road, Lynbrook, NY, and of which Paul A. Cooper is a general partner, leased 5,667 square feet of office and storage space to the Bus Companies for a term of five years at an annual rent of approximately $160,000 for the first year, increasing to approximately $177,000 for the fifth year. In connection with this lease, there was a $231,000 expenditure (allowance) by the landlord for leasehold improvements. The Company began occupying the space in January 2006. In March 2008, Lighthouse leased an adjoining 3,545 square feet of space to the Company expiring August 31, 2010, at an annual rent of approximately $106,000, which replaced 2,500 square feet of space covered by the prior lease having annual rent of $37,000. In January 2010, the Company executed an extension option under the lease agreement for an additional five year term until August 31, 2015.
 
Stanley Brettschneider, an officer of the Company’s taxable REIT subsidiaries, is the father of the majority owner of Varsity Bus Co., Inc. (“Varsity”) a tenant at one of the Company’s rental properties. Varsity entered into a lease which terminates in 2010 and is subject to four 5 year options to extend the term of the lease in each case at a rent equal to 90% of market rental of the leasehold at the time of the extension. In December 2009, Varsity executed one of the extension options under the lease through August 2015. Rent for the first year under the lease extension, which begins on September 1, 2010, will be approximately $833,000 and will be subject to increase in accordance with the lease agreement for the remaining four years. Varsity also utilizes some of the Company’s computer systems for a monthly fee. In addition, Mr. Brettschneider is a compensated employee of Varsity Bus Co., Inc.
 
Michael Kessman, the Chief Accounting Officer of the Company, provides accounting services to Varsity.  In addition, Mr. Kessman is also a member of Varsity’s Board of Directors.
 
13.    COMMITMENTS AND CONTINGENCIES:
 
Legal Matters:
 
Appraisal Proceedings
 
On March 26, 2007, there was a joint special meeting of the shareholders of the Bus Companies. The business considered at the meeting was the merger of: Green with and into Green Acquisition, Inc.; Triboro with and into Triboro Acquisition, Inc.; and Jamaica with and into Jamaica Acquisition, Inc. Appraisal rights were perfected by shareholders of the Bus Companies who would have received approximately 303,480 shares of the Company’s common stock to be issued following the mergers. The mergers were carried out on March 29, 2007. Consequently, the Company made good faith offers to such shareholders based on the value of the Company’s common share of $7.00 per share, eighty percent (80%) of which was advanced to them. On May 25, 2007, Green Acquisition, Triboro Acquisition and Jamaica Acquisition, commenced appraisal proceedings in Nassau County Supreme Court, as required by the New York Business Corporation Law. Eight of the shareholders (the “Claimants”) who sought appraisal rights (the others had either settled or withdrawn their demands) have answered the petition filed in connection with the appraisal proceeding and moved for pre-trial discovery. The Claimants would have received approximately 241,272 shares of the Registrant’s common stock following the mergers of the Bus Companies. Collectively, the Claimants have been paid $1,351,120 (80%) pursuant to the Company’s good faith offer and would be entitled to an additional sum of approximately $338,000 if the good faith offer was paid in full. A hearing in this matter, which is the equivalent of a trial, commenced on November 10, 2008. The hearing was completed in January 2009. The Court ordered the parties to submit post-trial memoranda prior to its consideration and ruling on the petition. The claimants were seeking sums substantially in excess of the Company’s good faith offer. On September 29, 2009, a decision in the appraisal proceeding involving certain former shareholders of Green Bus Lines, Inc., Triboro Coach Corporation and Jamaica Central Railways, Inc. (collectively, the “Bus Companies”) was issued by the New York State Supreme Court, Nassau County and on November 7, 2009 a judgment was entered related to the decision.  In the Court’s decision, the Court determined that the equivalent of the fair value of the respondents’ shares in the Bus Companies immediately prior to the consummation of the Reorganization was equal to $11.69 per share of GTJ REIT common stock.  This decision resulted in additional payments due respondents in the aggregate amount of approximately $1.5 million which was paid on November 19, 2009. In addition, the Court awarded respondents 50% of their reasonable professional fees and costs, which amounted to approximately $0.5 million and was paid on January 6, 2010. Respondents were also awarded interest with respect to the unpaid amount due for the fair value of their shares in the Bus Companies from the valuation date to the payment date. The interest amounted to approximately $0.3 million and was paid on November 19, 2009. In addition to the above, two shareholders have been paid an aggregate of $435,457 pursuant to the good faith offer, and were not involved in the proceeding described above. These shareholders would have received approximately 62,208 shares.
 
 
23

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Unaudited)
 

13.    COMMITMENTS AND CONTINGENCIES (Continued):
 
The Company is involved in several lawsuits and other disputes which arose in the ordinary course of business; however, management believes that these matters will not have a material adverse effect, individually or in the aggregate, on the Company's financial position or results of operations.
 
Environmental Matters:
 
The Company’s real property has had activity regarding removal and replacement of underground storage tanks. Upon removal of the old tanks, any soil found to be unacceptable was thermally treated off site to burn off contaminants. Fresh soil was brought in to replace earth which had been removed. There are still some levels of contamination at the sites, and groundwater monitoring programs have been put into place at certain locations. In July 2006, the Company entered into an informal agreement with the New York State Department of Environmental Conservation (“NYSDEC”) whereby the Company has committed to a three-year remedial investigation and feasibility study (the “Study”) for all site locations. In conjunction with this informal agreement, the Company has retained the services of an environmental engineering firm to assess the cost of the Study. The Company’s initial engineering report had an estimated cost range with a low-end of the range of approximately $1.4  million and a high-end range estimate of approximately $2.6 million, which provided a “worst case” scenario whereby the Company would be required to perform full remediation on all site locations. While management believes that the amount of the study and related remediation is likely to fall within the estimated cost range, no amount within that range can be determined to be the better estimate. Therefore, management believes that recognition of the low-range estimate was appropriate.
 
As of September 30, 2010, and December 31, 2009, included in other liabilities in the accompanying condensed consolidated balance sheet (Note 6) is the estimated liability for remediation costs of approximately $0.8 million and $1.1 million, respectively. The Company is not aware of any claims or remediation requirements from any local, state or federal government agencies. These properties are in a commercial zone and are still used as transit depots, including maintenance of vehicles.
 
Paratransit Operations:
 
In February 2008, the Company was notified by the New York City Transit Authority (the “Authority”) that a Request for Proposal to renew the Company’s existing paratransit service contract after September 30, 2008 would not be considered by the Authority. As a result of this action by the Authority, the Company exited the Paratransit Operations business on September 30, 2008, and accordingly, the results have been presented as discontinued operations on the Company’s consolidated financial statements for all periods presented.
 
14.  INVESTMENT IN EQUITY AFFILIATES:
 
Joint Ventures
 
The Company invests in joint ventures that are formed to perform electrical construction services. These investments are recorded under either the equity or cost method of accounting as appropriate. The Company records its share of the net income and losses from the underlying operations and any other-than-temporary impairment on these investments on a single line item in the Condensed Consolidated Statements of Income as income or losses from equity affiliates.
 
 
24

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Unaudited)
 
14.  INVESTMENT IN EQUITY AFFILIATES (Continued):
 
In March 2010, the Company invested approximately four hundred dollars in exchange for a 40% interest in a consolidated joint venture with Morales Electrical Contracting, Inc. which is a minority women owned business enterprise that provides electrical construction services.
 
For the three and nine months ended September 30, 2010, the Company recorded its share of income of approximately $15,000 for this equity investment. During the nine months ended September 30, 2010, the Company also recognized $22,000 in management fees and $21,000 in interest on its working capital advances. As of September 30, 2010, the Company has a receivable of approximately $0.5 million related to working capital advances to fund construction projects.
 
Variable Interest Entities
 
The Company accounts for variable interest entities (“VIEs”) in accordance with ASC No. 810-10-50, which requires a VIE to be consolidated by its primary beneficiary. The primary beneficiary is the party that absorbs a majority of the VIE’s anticipated losses and/or a majority of the expected returns and has a controlling interest in the VIE. A company is deemed to have a controlling financial interest in a VIE if it has the power to direct the activities that most significantly affect the VIE’s economic performance and it has the obligation to absorb losses, or right to receive benefits, that could be significant to the VIE.
 
When evaluating whether the Company is the primary beneficiary of a VIE, and must therefore consolidate the entity, the Company performs a qualitative analysis that considers the design of the VIE, the nature of the Company’s involvement and the variable interests held by other parties. If that evaluation is inconclusive as to which party absorbs a majority of the entity’s expected losses or residual returns or whether or not a controlling interest exists, a quantitative analysis is performed to determine who is the primary beneficiary.
 
The Company evaluates its investments in equity affiliates to determine whether they are VIEs. The Company evaluates (1) the sufficiency of the fair value of the entities’ equity investments at risk to absorb losses, (2) that as a group the holders of the equity investments at risk have (a) the direct or indirect ability through voting rights to make decisions about the entities’ significant activities, (b) the obligation to absorb the expected losses of the entity and their obligations are not protected directly or indirectly, (c) the right to receive the expected residual return of the entity and their rights are not capped, (3) substantially all of the entities’ activities do not involve or are not conducted on behalf of an investor that has disproportionately fewer voting rights in terms of its obligation to absorb the expected losses or its right to receive expected residual returns of the entity, or both.
 
As of September 30, 2010, the Company has one investment which was made to a VIE entity with an aggregate carrying amount of $0.8 million. For the VIE identified, the Company is not the primary beneficiary and as such the VIE is not consolidated in the Company’s financial statements. The Company accounts for this investment under the equity method.
 
15.    FAIR VALUE:
 
Fair Value of Financial Instruments:
 
ASC No. 825-10-50 requires disclosure of the estimated fair value of an entity’s assets and liabilities considered to be financial instruments. ASC No. 825-10-65 requires the Company to disclose in the notes of its interim financial statements as of the second quarter of 2009, as well as its annual financial statements, the fair value of all financial instruments as required ASC No. 825-10-50. ASC No. 825-10-65 applies to all financial instruments within the scope of ASC No. 825-10-50.
 
 
25

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Unaudited)
 
15.    FAIR VALUE (Continued):
 
Fair value estimates are dependent upon subjective assumptions and involve significant uncertainties resulting in variability in estimates with changes in assumptions. The following table summarizes the carrying values and the estimated fair values of financial instruments as of September 30, 2010, and December 31, 2009, (in thousands):
 
   
September 30, 2010
   
December 31, 2009
   
Carrying
   
Estimated
   
Carrying
   
Estimated
Financial assets:
 
Value
   
Fair Value
   
Value
   
Fair Value
    Cash and cash equivalents
  $ 10,852     $ 10,852     $ 12,906     $ 12,906
        Available-for-sale securities
    2,905       2,905       3,199       3,199
        Restricted cash
    978       978       1,066       1,066
        Accounts receivable, net
    4,550       4,550       5,944       5,944
Financial liabilities:
                             
    Secured revolving credit facility
  $ 45,500     $ 45,500     $ 43,215     $ 43,215
 
Fair Value Measurement:
 
The Company determines fair value in accordance ASC No. 820-10-05 for financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements.
 
Fair value is defined as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date.  Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity.
 
Assets and liabilities disclosed at fair values are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC No. 820-10-35 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:
 
 
Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
     
 
Level 2 — Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life. Level 2 inputs include quoted market prices in markets that are not active for an identical or similar asset or liability, and quoted market prices in active markets for a similar asset or liability.
     
 
Level 3 — Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. These valuations are based on significant unobservable inputs that require a considerable amount of judgment and assumptions. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
 
Determining which category an asset or liability falls within the hierarchy requires significant judgment and the Company evaluates its hierarchy disclosures each quarter.
 
 
26

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Unaudited)
 
15.    FAIR VALUE (Continued):
 
The Company measures certain financial assets and financial liabilities at fair value on a recurring basis, including available-for-sale securities and derivative financial instruments. The fair value of these financial assets and liabilities was determined using the following inputs as of September 30, 2010.
 
           
Fair Value Measurements
 
   
Carrying
 
Fair
 
Using Fair Value Hierarchy
 
   
Value
 
Value
 
Level 1
 
Level 2
 
Level 3
 
                       
Financial assets:
                     
   Available-for-sale securities
 
$2,905
 
$2,905
 
$2,905
 
 $         -
 
 $         -
 
 
Available-for-sale securities:  Fair values are approximated on current market quotes received from financial sources that trade such securities.
 
16.    SEGMENTS:
 
Segment Information
 
In accordance with ASC No. 280-10, the Company has established that its reportable segments are Real Estate Operations, Outside Maintenance, and Insurance Operations as of September 30, 2010. These operating segments, whose operations are reported in the tables below, are segments of the Company for which separate financial information is available and operating results are evaluated regularly by executive management in determining how to allocate resources and assessing performance. The accounting policies of these segments are the same as those described in the Summary of Significant Accounting Policies (see Note 2). In connection with the discontinued operations of the Paratransit business, the operating results of the Paratransit business are classified as discontinued operations and, as such, are not reflected in the operating segments reported in the table below.
 
The Company primarily operates in three reportable segments: (i) Real Estate Operations, (ii) Outside Maintenance Operations (including shelter cleaning and electrical contracting), and (iii) Insurance Operations. Each segment’s operations are conducted throughout the U.S., with the exception of the Insurance Operations which is conducted in the Cayman Islands.
 
Real Estate Operations rent Company-owned real estate located in New York and Connecticut.
 
Outside Maintenance, Shelter Cleaning Operations, and Electrical Contracting provide outside maintenance and cleaning services to outdoor advertising companies and governmental agencies in New York, New Jersey, Arizona, and California and electrical construction services to a broad range of commercial, industrial, institutional, and governmental customers in New York.
 
Insurance Operations assumes reinsurance of worker's compensation, vehicle liability, and covenant liability of the Company and its affiliated Companies from unrelated insurance companies based in the United States of America.
 
The summarized segment information (excluding discontinued operations), as of and for the three and nine months ended September 30, 2010 and 2009 are as follows (in thousands):
 

 
27

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Unaudited)
 

 
16.    SEGMENTS (Continued):
 
Three Months Ended September 30, 2010
                             
   
Real Estate Operations
   
Outside Maintenance Operations
   
Insurance Operations
   
Eliminations
   
Total
 
                               
Operating revenue
  $ 3,357     $ 4,750     $ -     $ (102 )   $ 8,005  
Operating expenses
    1,114       5,796       34       -       6,944  
Operating income (loss)
    2,243       (1,046 )     (34 )     (102 )     1,061  
Other income (expense)
    (699 )     28       2       102       (567 )
Income (loss) from continuing operations before income from equity affiliates and income taxes
    1,544       (1,018 )     (32 )     -       494  
Income from equity affiliates
    -       15       -       -       15  
Income (loss) before provision for income taxes
    1,544       (1,003 )     -       -       509  
Provision for income taxes
    6       19       -       -       25  
Income (loss) from continuing operations
  $ 1,538     $ (1,022 )   $ (32 )   $ -     $ 484  
Capital expenditures
  $ 11     $ 96     $ -     $ -     $ 107  
Depreciation and amortization
  $ 326     $ 108     $ -     $ -     $ 434  
Total assets (1)
  $ 172,241     $ 10,417     $ 1,714     $ (43,210 )   $ 141,162  
 
 
Three Months Ended September 30, 2009
                                       
   
Real Estate Operations
   
Outside Maintenance Operations
   
Insurance Operations
   
Eliminations
   
Total
 
                                         
Operating revenue
  $ 3,305     $ 8,368     $ -     $ (102 )   $ 11,571  
Operating expenses
    1,053       8,486       34       -       9,573  
Operating income (loss)
    2,252       (118 )     (34 )     (102 )     1,998  
Other income (expense)
    (2,245 )     11       (36 )     102       (2,168 )
Income (loss) from continuing operations before income from equity affiliates and income taxes
    7       (107 )     (70 )     -       (170 )
Income from equity affiliates
    -       -       -       -       -  
Income (loss)  before provision for income taxes
    7       (107 )     (70 )     -       (170 )
(Benefit) for income taxes
    -       (20 )     -       -       (20 )
Income (loss) from continuing operations
  $ 7     $ (87 )   $ (70 )   $ -     $ (150 )
Capital expenditures
  $ 234     $ 118     $ -     $ -     $ 352  
Depreciation and amortization
  $ 346     $ 202     $ -     $ -     $ 548  
Total assets (2)
  $ 170,554     $ 14,472     $ 2,754     $ (42,653 )   $ 145,127  
                                         
 
 
28

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Unaudited)
 
16.    SEGMENTS (Continued):
 
Nine Months Ended September 30, 2010
                             
   
Real Estate Operations
   
Outside Maintenance Operations
   
Insurance Operations
   
Eliminations
   
Total
 
                               
Operating revenue
  $ 10,012     $ 13,955     $ -     $ (306 )   $ 23,661  
Operating expenses
    3,483       16,663       100       -       20,246  
Operating income (loss)
    6,529       (2,708 )     (100 )     (306 )     3,415  
Other income (expense)
    (1,765 )     146       (23 )     306       (1,336 )
Income (loss) from continuing operations before income from equity affiliates and  income taxes
    4,764       (2,562 )     (123 )     -       2,079  
Income from equity affiliates
    -       15       -               15  
Income (loss) before provision for income taxes
    4,764       (2,547 )     (123 )     -       2,094  
Provision for income taxes
    17       33       -       -       50  
Income (loss) from continuing operations
  $ 4,747     $ (2,580 )   $ (123 )   $ -     $ 2,044  
Capital expenditures
  $ 222     $ 382     $ -     $ -     $ 604  
Depreciation and amortization
  $ 973     $ 311     $ -     $ -     $ 1,284  
Total assets (1)
  $ 172,241     $ 10,417     $ 1,714     $ (43,210 )   $ 141,162  
 
 
Nine Months Ended September 30, 2009
                                       
   
Real Estate Operations
   
Outside Maintenance Operations
   
Insurance Operations
   
Eliminations
   
Total
 
                                         
Operating revenue
  $ 9,842     $ 23,456     $ -     $ (306 )   $ 32,992  
Operating expenses
    3,430       22,412       118       -       25,960  
Operating income (loss)
    6,412       1, 044       (118 )     (306 )     7,032  
Other income (expense)
    (3,296 )     1       (212 )     306       (3,201 )
Income (loss) from continuing operations before income from equity affiliates and income taxes
    3,116       1,045       (330 )     -       3,831  
Income from equity affiliates
    -       -       -       -       -  
Income (loss) before provision for income taxes
    3,116       1,045       (330 )     -       3,831  
Provision for income taxes
    1       -       -       -       1  
Income (loss) from continuing operations
  $ 3,115     $ 1,045     $ (330 )   $ -     $ 3,830  
Capital expenditures
  $ 545     $ 217     $ -     $ -     $ 762  
Depreciation and amortization
  $ 968     $ 322     $ -     $ -     $ 1,290  
Total assets (2)
  $ 170,554     $ 14,472     $ 2,754     $ (42,653 )   $ 145,127  
                                         
 
(1) Does not include assets of the discontinued Paratransit operation totaling $10
(2) Does not include assets of the discontinued Paratransit operation totaling $166

 
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This report contains statements that we believe to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements give our current expectations or forecasts of future events.  Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “project,” or “continue,” or similar words or the negative thereof.  From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public.  Any or all of our forward-looking statements in this report and in any public statements we make could be materially different from actual results.  They can be affected by assumptions we might make or by known or unknown risks or uncertainties.  Consequently, we cannot guarantee any forward-looking statements.  Investors are cautioned not to place undue reliance on any forward-looking statements.  Investors should also understand that it is not possible to predict or identify all such factors and should not consider the potential risks and uncertainties set forth herein and in our Report on Form 10-K for the year ended December 31, 2009 as being exhaustive, and new factors may emerge that could affect our business. We assume no obligation, and disclaim any duty, to update the forward-looking statements in this report. Past performance is no guaranty of future results. You should read the following discussion in conjunction with the condensed consolidated financial statements and notes appearing elsewhere in this filing.
 
Executive Summary:
 
We are a fully integrated, self-administered and self-managed Real Estate Investment Trust (“REIT”), engaged in the acquisition, ownership, and management of real properties. We currently own seven rentable parcels of real property, four of which are leased to the City of New York, two of which are leased to commercial tenants (all six on a triple net basis), and one of which a portion is leased to a commercial tenant and the remainder, which was utilized by the Company’s discontinued paratransit business, is available for lease. There is an additional property of negligible size which is not rentable. Additionally, in connection with the Tax Relief Extension Act of 1999 (“RMA”), we are permitted to participate in activities outside the normal operations of the REIT so long as these activities are conducted in entities which elect to be treated as taxable subsidiaries under the Internal Revenue Code, as amended (the “Code”), subject to certain limitations. In addition, we own a group of outdoor maintenance businesses. We will consider other investments through taxable REIT subsidiaries should suitable opportunities arise.
 
We continue to seek opportunities to acquire stabilized properties. To the extent it is in the interests of our stockholders, we will seek to invest in a diversified portfolio of real properties within our geographic area that will satisfy our primary investment objectives of providing our stockholders with stable cash flow, preservation of capital and growth of income and principal without taking undue risk. Because a significant factor in the valuation of income-producing property is the potential for future income, we anticipate that the majority of properties that we will acquire will have both the potential for growth in value and provide for cash distributions to stockholders.
 
Accounting Pronouncements:
 
               See Note 2, “Recently Issued Accounting Pronouncements,” in the Notes to the Condensed Consolidated Financial Statements contained in Part I, Item 1. “Financial Statements” of this Form 10-Q for a detailed discussion regarding recently issued accounting pronouncements.
 
Critical Accounting Policies:
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that could affect the reported amounts in our consolidated financial statements. Actual results could differ from these estimates. Please refer to the section of our Annual Report on Form 10-K for the year ended December 31, 2009, entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Significant Accounting Estimates and Critical Accounting Policies” for a discussion of our critical accounting policies. During the nine months ended September 30, 2010, there were no material changes to these policies. Set forth below is a summary of the accounting policies that management believes are critical to the preparation of the consolidated financial statements included in this report.

 
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Revenue Recognition-Real Estate Operations:
 
We recognize revenue in accordance with ASC No. 840-20-25, which requires that revenue be recognized on a straight-line basis over the term of the lease unless another systematic and rational basis is more representative of the time pattern in which the use benefit is derived from the leased property. In those instances in which we fund tenant improvements and the improvements are deemed to be owned by us, revenue recognition will commence when the improvements are substantially completed and possession or control of the space is turned over to the tenant. When we determine that the tenant allowances are lease incentives, we commence revenue recognition when possession or control of the space is turned over to the tenant for tenant work to begin. The properties are being leased to tenants under operating leases. Minimum rental income is recognized on a straight-line basis over the term of the lease.
 
Property operating expense recoveries from tenants of common area maintenance, real estate and other recoverable costs are recognized in the period the related expenses are incurred.
 
Revenue Recognition--Outside Maintenance and Shelter Cleaning Operations:
 
Cleaning and maintenance revenue is recognized upon completion of the related service.
 
Revenue Recognition—Electrical Contracting Operations:
 
We recognize revenues from long-term construction contracts on the percentage-of-completion method in accordance with ASC No. 605-35. Percentage-of-completion is measured principally by the percentage of costs incurred to date for each contract to the estimated total costs for such contract at completion. Contract costs include all direct costs related to the performance and completion of the contracts. Estimated losses on the long term construction contracts are recognized in the period in which such losses are determined.
 
Accounts Receivable:
 
Accounts receivable consist of trade receivables recorded at the original invoice amounts, less an estimated allowance for uncollectible accounts. Trade credit is generally extended on a short-term basis; thus trade receivables generally do not bear interest. Trade receivables are periodically evaluated for collectibility based on past credit histories with customers and their current financial conditions. Changes in the estimated collectibility of trade receivables are recorded in the results of operations for the period in which the estimate is revised. Trade receivables that are deemed uncollectible are offset against the allowance for uncollectible accounts. We generally do not require collateral for trade receivables.
 
Real Estate Investments:
 
Real estate assets are stated at cost, less accumulated depreciation and amortization. All costs related to the improvement or replacements of real estate properties are capitalized. Additions, renovations and improvements that enhance and/or extend the useful life of a property are also capitalized. Expenditures for ordinary maintenance, repairs and improvements that do not materially prolong the normal useful life of an asset are charged to operations as incurred.
 
Upon the acquisition of real estate properties, the fair value of the real estate purchased is allocated to the acquired tangible assets (consisting of land, buildings and building improvements) and identified intangible assets and liabilities (consisting of above-market and below-market leases and in-place leases) in accordance with ASC No. 805. We utilize methods similar to those used by independent appraisers in estimating the fair value of acquired assets and liabilities. The fair value of the tangible assets of an acquired property considers the value of the property “as-if-vacant.” The fair value reflects the depreciated replacement cost of the asset. In allocating purchase price to identified intangible assets and liabilities of an acquired property, the value of above-market and below-market leases is estimated based on the differences between (i) contractual rentals and the estimated market rents over the applicable lease term discounted back to the date of acquisition utilizing a discount rate adjusted for the credit risk associated with the respective tenants and (ii) the estimated cost of acquiring such leases giving effect to our history of providing tenant improvements and paying leasing commissions, offset by a vacancy period during which such space would be leased. The aggregate value of in-place leases is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates over (ii) the estimated fair value of the property “as-if-vacant,” determined as set forth above.
 

 
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Above and below market leases acquired are recorded at their fair value. The capitalized above-market lease values are amortized as a reduction of rental revenue over the remaining term of the respective leases and the capitalized below-market lease values are amortized as an increase to rental revenue over the remaining term of the respective leases. The value of in-place leases is based on our evaluation of the specific characteristics of each tenant’s lease. Factors considered include estimates of carrying costs during expected lease-up periods, current market conditions, and costs to execute similar leases. The value of in-place leases are amortized over the remaining term of the respective leases. If a tenant vacates its space prior to its contractual expiration date, any unamortized balance of the related intangible asset is expensed.
 
Asset Impairment:
 
We apply the provisions of ASC No. 360-10-05 to recognize and measure impairment of long-lived assets. Management reviews each real estate investment for impairment whenever events or circumstances indicate that the carrying value of a real estate investment may not be recoverable. The review of recoverability is based on an estimate of the future cash flows that are expected to result from the real estate investment’s use and eventual disposition. These cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If an impairment event exists due to the projected inability to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds estimated fair value. Management is required to make subjective assessments as to whether there are impairments in the value of its real estate properties. These assessments have a direct impact on net income, because an impairment loss is recognized in the period that the assessment is made.
 
Fair Value Measurements:
 
We determine fair value in accordance with ASC No. 820-10-05 for financial assets and liabilities. ASC No. 820-10-05 defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements.
 
Fair value is defined as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity.
 
Assets and liabilities disclosed at fair value are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC No. 820-10-35 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:
 
 
Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
     
 
Level 2 — Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life. Level 2 inputs include quoted market prices in markets that are not active for an identical or similar asset or liability, and quoted market prices in active markets for a similar asset or liability.
     
 
Level 3 — Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. These valuations are based on significant unobservable inputs that require a considerable amount of judgment and assumptions. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
 
Determining which category an asset or liability falls within the hierarchy requires significant judgment and we evaluate its hierarchy disclosures each quarter.

 
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