UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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, 2012

 

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: 001-08594

 

PRESIDENTIAL REALTY CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware		13-1954619
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

 

9 East 40^th Street, Suite 900

New York, NY 10016

(Address of Principal Executive Office)

 

Registrant’s Telephone Number, Including Area Code:  (914) 948-1300

 

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 x 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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer ¨	Accelerated filer  ¨
Non-accelerated filer ¨	Smaller reporting company x
(Do not check if a smaller reporting company)

 

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 latest practicable date:

 

As of November 14, 2012, there were 442,533 shares of Class A common stock and 3,217,147 shares of Class B common stock outstanding.  

 

 

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES 

 

Index to Form 10-Q

For the Quarterly Period Ended

September 30, 2012

 

		Page
Part I	Financial Information (Unaudited)
Item 1.	Financial Statements	3
	Consolidated Balance Sheets (Unaudited)	3
	Consolidated Statements of Operations (Unaudited)	4
	Consolidated Statements of Cash Flows (Unaudited)	5
	Notes to Consolidated Financial Statements (Unaudited)	6-20
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	28
Item 4.	Controls and Procedures	28
Part II	Other Information
Item 1.	Legal Proceedings	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 6.	Exhibits	29

 

 

PART I FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

										September 30,				December 31,
										2012				2011
										Unaudited				Audited
Assets
Real estate (Note 2)										$	1,089,840			$	1,085,909
Less: accumulated depreciation											451,659				414,805
Net real estate											638,181				671,104
Net mortgage portfolio											18,770				30,370
Prepaid expenses											144,936				304,417
Other receivables (net of valuation allowance of $6,724 in 2012 and  $5,592 in 2011)											19,817				14,428
Cash and cash equivalents											1,053,156				961,240
Assets related to discontinued operations											14,324,287				14,392,300
Other assets											40,380				-
Total Assets										$	16,239,527			$	16,373,859
Liabilities and Equity
Liabilities:
Liabilities related to discontinued operations										$	17,645,720			$	16,638,972
Mortgage payable											492,608				-
Accrued liabilities											164,896				150,120
Accounts payable											1,959				33,970
Other liabilities											637,205				622,991
Total Liabilities											18,942,388				17,446,053
Presidential Stockholders' Deficiency:
Common stock: par value $.00001 per share
		September 30, 2012				December 31, 2011
Class A											5				5
Authorized:			700,000				700,000
Issued:			471,633				471,633
Treasury:			29,100				29,100
Class B											37				37
Authorized:			999,300,000				10,000,000
Issued:			3,746,842				3,742,842
Treasury:			529,695				529,695
Additional paid-in capital											5,252,336				5,150,869
Accumulated deficit											(3,263,337	)			(1,966,911	)
Treasury stock (at cost)											(2,879,354	)			(2,879,354	)
Total Presidential stockholders'  (deficit) equity											(890,313	)			304,646
Noncontrolling interest (Note 6)											(1,812,548	)			(1,376,840	)
Total Deficit											(2,702,861	)			(1,072,194	)
Total Liabilities and Stockholders' Deficit										$	16,239,527			$	16,373,859

 

See notes to consolidated financial statements.

 

 

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

		THREE MONTHS ENDED SEPTEMBER 30,								NINE MONTHS ENDED SEPTEMBER 30,
		2012				2011				2012				2011
Revenues:
Rental		$	193,585			$	171,657			$	570,025			$	597,983
Interest on mortgages - notes receivable			617				10,571				9,037				200,488
Total			194,202				182,228				579,062				798,471
Costs and Expenses:
General and administrative			225,238				270,505				767,343				6,291,305
Stock Based Compensation			-				6,035				98,667				16,655
Pension plan termination			-				-				-				(408,086	)
Rental property:
Operating expenses			130,586				121,616				360,018				413,120
Interest and fees on mortgage debt			8,499				-				9,333				134
Real estate taxes			12,165				11,938				35,452				35,814
Depreciation on real estate			12,141				-				36,855				-
Amortization of mortgage costs			-				-				132				60
Total			388,629				410,094				1,307,800				6,349,002
Other Income (Loss):
Investment income			2,456				25,177				5,654				40,994
Gain on the sale of Consolidated note receivable			-				-				-				3,264,724
Equity in the loss from joint ventures (Note 3)			-				(313,640	)			-				(748,541	)
Loss from continuing operations			(191,971	)			(516,329	)			(723,084	)			(2,993,354	)
Discontinued Operations (Note 4):
Loss from discontinued operations			(436,277	)			(518,494	)			(1,009,050	)			(1,185,306	)
Total loss from discontinued operations			(436,277	)			(518,494	)			(1,009,050	)			(1,185,306	)
Net loss			(628,248	)			(1,034,823	)			(1,732,134	)			(4,178,660	)
Net loss from noncontrolling interest (Note 6)			172,066				237,969				435,708				563,860
Net loss attributable to Presidential		$	(456,182	)		$	(796,854	)		$	(1,296,426	)		$	(3,614,800	)
Earnings per Common Share attributable to Presidential (basic and diluted):
Loss from continuing operations		$	(0.05	)		$	(0.15	)		$	(0.20	)		$	(0.88	)
Discontinued Operations:
Loss from discontinued operations			(0.07	)			(0.08	)			(0.15	)			(0.18	)
Net Loss per Common Share - basic and diluted		$	(0.12	)		$	(0.23	)		$	(0.35	)		$	(1.06	)
Weighted Average Number of Shares Outstanding - basic and diluted			3,657,369				3,405,680				3,656,243				3,405,355

 

See notes to consolidated financial statements.

 

 

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED

 

		NINE MONTHS ENDED
		2012				2011
Net loss		$	(1,732,134	)		$	(4,178,660	)
Adjustments to reconcile net loss to net cash used in operating activities:
Net loss on securities held for sale			-				16,330
Net gain on sale of mortgage portfolio			-				(3,264,724	)
Realized loss on pension termination			-				3,967,627
Equity in the loss from joint ventures			-				748,541
Depreciation and amortization			36,855				-
Amortization of discounts on notes and fees			1,237				972
Stock Based compensation			98,667				-
Issuance of stock to directors and officers			2,800				16,955
Changes in assets and liabilities:
(Increase) decrease in:
Other receivables			(5,389	)			(73,105	)
Discontinued operations assets			68,013				744,321
Prepaid expenses, deposits in escrow and deferred charges			159,481				108,048
Other assets			-				23,673
Increase (decrease) in:
Accounts payable and accrued liabilities			(17,235	)			348,879
Defined benefit plan liability			-				(269,479	)
Contractual pension benefits			-				(2,851,665	)
Discontinued operations liabilities			1,006,748				183,081
Mortgage interest and fees			-				-
Other liabilities			14,214				13,931
Total adjustments			1,365,391				(286,615	)
Net cash used in operating activities			(366,743	)			(4,465,275	)
Cash Flows from Investing Activities:
Proceeds from sale of Consolidated notes receivable			-				5,339,718
Payments received on notes receivable			10,363				8,453
Payments disbursed for additions and improvements			(3,932	)			(153,540	)
Sale of securities available for sale			-				934,836
Net cash provided by investing activities			6,431				6,129,467
Cash Flows from Financing Activities:
Proceeds of mortgage refinancing			459,620				-
Principal payments on mortgage debt			(7,392	)			(15,237	)
Net cash provided by (used in) financing activities			452,228				(15,237	)
Net Increase in Cash and Cash Equivalents			91,916				1,648,955
Cash and Cash Equivalents, Beginning of Period			961,240				597,440
Cash and Cash Equivalents, End of Period		$	1,053,156			$	2,246,395
Supplemental cash flow information:
Interest paid in cash		$	9,333			$	268,467
Taxes paid		$	-			$	-

 

See notes to consolidated financial statements.

 

 

 

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1.

Organization and Summary of Significant Accounting Policies

 

Organization

 

Presidential Realty Corporation (“Presidential” or the “Company”), is operated as a self-administrated, self-managed Real Estate Investment Trust (“REIT”). The Company is engaged principally in the ownership of income producing real estate and in the holding of notes and mortgages secured by real estate or interests in real estate. Presidential operates in a single business segment, investments in real estate related assets.

 

On November 8, 2011, we and PDL Partnership, a New York general partnership (“PDL Partnership”), the general partners of which were Jeffrey F. Joseph (a director and former officer), Steven Baruch (a former director and former officer) and Thomas Viertel (a former director and former officer), entered into a series of strategic transactions with some investors and Signature Community Investment Group LLC (together with its affiliates, “Signature”). Signature is owned by Nickolas W. Jekogian, III, the promoter of the stock transactions included in the strategic transactions.

 

The September 30, 2011 financial statements were reported on the liquidating basis of accounting. In connection with the November 8, 2011 strategic transactions, the Company’s financial statements are being reported on the going concern basis retroactively.

 

Basis of Presentation and Going Concern Considerations

 

For the nine months ended September 30, 2012, the Company had a loss from continuing operations. This combined with a history of operating losses and working capital deficit have been detrimental to our operations and could potentially affect our ability to meet our obligations and continue as a going concern. See Note 8 A4 of Notes to Consolidated Financial Statements. If the Company is required to pay any significant amounts under its guaranty related to our Hato Rey property, such a payment would also adversely impact our liquidity.  Our ability to continue as a going concern is dependent upon management’s successful execution of our business plan to achieve profitability, to increase working capital raising debt and or equity and a successful defense of the claims against the Company under its guaranty related to the Hato Rey property. The accompanying financial statements do not include any adjustments that may result from the outcome of this.

 

The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and the requirements of the Securities and Exchange Commission (“SEC”). The financial statements include all normal and recurring adjustments that are necessary for a fair presentation of the Company’s financial position and operating results.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information.  The results for such interim periods are not necessarily indicative of the results to be expected for the year.  In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation of the results for the respective periods have been reflected.  These consolidated financial statements and accompanying notes should be read in conjunction with the Company’s Form 10-K for the year ended December 31, 2011.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Presidential Realty Corporation and its wholly owned subsidiaries. Additionally, the consolidated financial statements include 100% of the account balances of PDL, Inc. and Associates Limited Co-Partnership (the “Hato Rey Partnership”). PDL, Inc. (a wholly owned subsidiary of Presidential and the general partner of the Hato Rey Partnership) and Presidential own an aggregate 60% general and limited partnership interest in the Hato Rey Partnership (see Note 6). All significant intercompany balances and transactions have been eliminated.

 

 

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1.

Organization and Summary of Significant Accounting Policies (Continued)

 

Investments in Joint Ventures

 

The Company has equity investments in joint ventures and accounts for these investments using the equity method of accounting. These investments are recorded at cost and adjusted for the Company’s share of each entity’s income or loss and adjusted for cash contributions or distributions. Real estate held by such entities is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, and would be written down to its estimated fair value if an impairment was determined to exist (see Note 3).

 

Rental Revenue Recognition

 

The Company acts as lessor under operating leases. Rental revenue is recorded on the straight-line basis from the later of the date of the commencement of the lease or the date of acquisition of the property subject to existing leases, which averages minimum rents over the terms of the leases. Certain leases require the tenants to reimburse a pro rata share of real estate taxes, utilities and maintenance costs. Recognition of rental revenue is generally discontinued when the rental is delinquent for ninety days or more, or earlier if management determines that collection is doubtful.

 

Allowance for Doubtful Accounts

 

The Company assesses the collectability of amounts due from tenants and other receivables, using indicators such as past-due accounts, the nature and age of the receivable, the payment history and the ability of the tenant or debtor to meet its payment obligations. Management’s estimate of allowances for doubtful accounts is subject to revision as these factors change. Rental revenue is recorded on the accrual method and rental revenue recognition is generally discontinued when the tenant in occupancy is delinquent for ninety days or more. Bad debt expense is charged for vacated tenant accounts and subsequent receipts collected for those receivables will reduce bad debt expense. As of September 30, 2012 and December 31, 2011, allowance for doubtful accounts for continuing operations relating to tenant obligations was $6,724 and $5,592, respectively.

 

Net Loss Per Share

 

Basic net loss per share data is computed by dividing net loss by the weighted average number of shares of Class A and Class B common stock outstanding (excluding nonvested shares) during each period. Diluted net loss per share is computed by dividing net loss by the weighted average shares outstanding, including the dilutive effect, if any, of nonvested shares. For the three and nine months ended September 30, 2012 and 2011, the weighted average shares outstanding as used in the calculation of diluted loss per share do not include 740,000 and 6,800, respectively, of outstanding stock options and restricted shares, respectively, as their inclusion would be antidilutive.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash on hand, cash in banks and money market funds.

 

Management Estimates

 

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated balance sheets and the reported amounts of income and expense for the reporting period. Actual results could differ from those estimates.

 

 

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1.

Organization and Summary of Significant Accounting Policies (Continued)

 

Discontinued Operations

 

The Company follows the guidance of the presentation and property, plant, and equipment Topics of the ASC, with respect to long-lived assets classified as held for sale. The ASC requires that the results of operations, including impairment, gains and losses related to the properties that have been sold or properties that are intended to be sold, be presented as discontinued operations in the statements of operations for all periods presented and the assets and liabilities of properties intended to be sold are to be separately classified on the balance sheet. Properties designated as held for sale are carried at the lower of cost or fair value less costs to sell and are not depreciated.

 

Accounting for Uncertainty in Income Taxes

 

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

 

Reclassifications

 

Certain items have been reclassified in the accompanying consolidated Financial Statements and Notes for prior periods. Deferred compensation of $593,750 was reclassified from accrued liabilities to other liabilities.

 

2.

Real Estate

 

Real estate included in continuing operations is comprised of the following:

 

		September 30,				December 31,
		2012				2011
Land		$	79,100			$	79,100
Buildings			960,714				956,783
Furniture and equipment			50,026				50,026
Total		$	1,089,840			$	1,085,909

 

Rental revenue from the Maple Tree property constituted virtually all of the rental revenue for the Company during the quarters ended September 30, 2012 and 2011.

 

 

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

3.

Investments in Joint Ventures

 

At September 30, 2012 and December 31, 2011, the Company’s only joint venture investment was IATG. The carrying amount of the joint venture was $0. At December 31, 2011, the occupancy rate at the property was approximately 16%. The property is managed by a Lightstone Group (“Lightstone”) affiliate and Lightstone agreed to advance funds to pay any negative cash flow from the operations of the property until a sale could be accomplished and has agreed that if it does not do so, on demand by the Company, it will transfer its remaining 49% interest in the property to Presidential. Lightstone has advised the Company that it will no longer advance funds for the operations of the property.

 

On December 22, 2011, an action entitled Centro De Recaudacion de Ingresos Municipals against IATG Puerto Rico, LLC was filed in Estado Libre Asociado de Puerto Rico, Tribunal de Primera Instancia, Sala Superior de Hunacao in respect of approximately $7.7 million of unpaid interest, taxes and penalties owed by IATG Puerto Rico, LLC, the owner of Las Piedras Industrial Park in Las Piedras, Puerto Rico. We believe the value of the property is less than the amount of taxes owed. We own a 50% interest in the defendant. At December 31, 2011, the Company wrote down its investment of $771,110 in the property to zero. The Company has evaluated its potential liabilities and believes it has no liabilities with respect to IATG other than the complete loss of its investment in IATG Puerto Rico, LLC, which was reflected in the Company’s balance sheet at December 31, 2011 (see Note 8A3).

 

 

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The summary financial information for IATG is as follows:

 

		December 31,
		2011
Condensed balance sheet
Net real estate		$	5,156,600
Cash and cash equivalents			29,000
Accounts receivable			36,000
Deferred expenses			4,400
Prepaid expenses			84,000
		$	5,310,000
Note payable (1)		$	10,124,000
Other liabilities			3,269,000
Total liabilities			13,393,000
Members' deficit			(8,083,000	)
Total liabilities and members' deficit		$	5,310,000

 

(1) The note payable is payable to an affiliate of Lightstone and payment thereof is subordinate to the Company’s right to receive its share of any proceeds of a sale or refinancing.

 

 

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

		Year Ended December 31,				Nine Months Ended September 30,				Three Months Ended September 30,
		2011				2011				2011
Condensed statements of operations
Revenues		$	975,000			$	765,900			$	209,979
Interest on notes payable			(1,127,000	)			(831,736	)			(285,563	)
Other expenses			(1,480,000	)			(1,129,674	)			(355,310	)
Loss before depreciation and amortization			(1,632,000	)			(1,195,510	)			(430,894	)
Depreciation and amortization			(350,000	)			(301,571	)			(25,115	)
Net loss		$	(1,982,000	)		$	(1,497,081	)		$	(456,009	)

 

 

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

4.

Discontinued Operations

 

During the quarter ended March 31, 2012, the Company designated Hato Ray, Pres Matmor and PDL, Inc. as discontinued operations. All numbers have been adjusted retrospectively for the change.

The following table summarizes for the property discontinued: 

 

		Three Months				Three Months				Nine Months				Nine Months
		Ended				Ended				Ended				Ended
		September 30,				September 30,				September 30,				September 30,
		2012				2011				2012				2011
Revenue:
Rental		$	860,954			$	828,941			$	2,755,212			$	2,738,843
Expenses:
General and administrative			2,371				48,420				6,004				145,192
Rental property:
Operating expenses			714,851				490,963				1,859,873				1,590,720
Interest and fees on mortgage debt			502,028				609,263				1,661,279				1,501,654
Real estate taxes			78,742				78,743				236,227				324,171
Depreciation			-				115,723				-				345,829
Amortization of in place lease value			-				5,415				3,456				19,944
Total expenses			1,297,992				1,348,527				3,766,839				3,927,510
Investment income			761				1,092				2,577				3,361
Loss from discontinued operations		$	(436,277	)		$	(518,494	)		$	(1,009,050	)		$	(1,185,306	)

 

 

 

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

		September 30,				December 31,
		2012				2011
Assets related to discontinued operations:
Land		$	1,905,985			$	1,905,985
Buildings			13,829,390				13,829,390
Furniture and equipment			6,375				6,375
Less: accumulated depreciation			(2,087,424	)			(2,087,424	)
Net real estate			13,654,326				13,654,326
Other assets			669,961				737,974
Total assets related to discontinued operations		$	14,324,287			$	14,392,300
Liabilities related to discontinued operations:
Mortgage debt		$	14,484,138			$	14,484,138
Mortgage related interest and fees			2,412,506				1,431,672
Other liabilities			749,076				723,162
Total liabilities related to discontinued operations		$	17,645,720			$	16,638,972

 

During the quarter ended March 31, 2010, the Company designated its Mapletree Industrial Center in Palmer, Massachusetts as held for sale. As of November 8, 2011, the Company no longer considered Mapletree Industrial Center a discontinued operation. All numbers have been adjusted retrospectively for the change.

 

5.

Mortgage Debt

 

The Hato Rey Center mortgage debt is being recorded in discontinued operations. At September 30, 2012 and December 31, 2011, the principal balance was $14,484,138 on the Hato Rey Center property in Hato Rey, Puerto Rico. The loan is nonrecourse to the Company with standard carve outs. The first mortgage loan on the Hato Rey Center property is due on May 11, 2028, but provides that if it was not repaid on or before May 11, 2008, the interest rate on the loan was increased by two percentage points (to 9.38% per annum of which 2% per annum would be deferred until maturity). Since April 2011, the Company has not made any mortgage payments on the loan (See Note 8). In addition, the Company is accruing an additional 5% per annum as default interest and a 5% late payment fee. At September 30, 2012 and December 31, 2011, interest and other fees payable were $2,412,483 and $1,431,672, respectively, which were offset by escrow accounts maintained by Berkadia Commercial LLC, servicer of the loan. Because of the foreclosure action, The Hato Rey Center property was classified as a discontinued operation.

 

On June 8, 2012, we entered into a mortgage and line of credit for a combined total of $1,000,000 with Country Bank for Savings on the Mapletree Industrial Center. The Mortgage is for $500,000 at a 5% interest rate, for a term of 5 years. Thereafter the interest will adjust monthly equal to the bank’s Prime Rate, plus 1% with an interest rate floor of 5%, for a term of 15 years. We received $459,620 of net proceeds. The line of credit is for $500,000, with an interest rate of 1% over the bank’s Prime Rate. The line of credit is due on demand. Both mortgage and the line of credit are secured by the Mapletree Industrial Center, in Palmer, Massachusetts. The outstanding balance of the mortgage at September 30, 2012 was $492,608.

 

 

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

6.

Hato Rey Partnership

 

PDL, Inc. (a wholly owned subsidiary of Presidential) is the general partner of the Hato Rey Partnership. Presidential Matmor and PDL, Inc. have an aggregate 60% general and limited partner interest in the Hato Rey Partnership. The Company exercises effective control over the partnership through its ability to manage the affairs of the partnership in the ordinary course of business. Accordingly, the Company consolidates the Hato Rey Partnership in the accompanying consolidated financial statements.

 

The Hato Rey Partnership owns and operates the Hato Rey Center, an office building with 207,000 square feet of commercial space, located in Hato Rey, Puerto Rico. The Company advanced $2,670,000 to the partnership to be used for building improvements and for operations. The loan, which was advanced to the partnership, as needed, bears interest at the rate of 13% per annum, with interest and principal to be paid out of the positive cash flow from the property or upon a refinancing of the First Mortgage on the property. At September 30, 2012 and December 31, 2011, the loan balance was $2,670,000 and accrued interest amounted to $1,614,941 and $1,527,202, respectively. These amounts were eliminated in consolidation. Management does not believe the Company will collect any of the principal or interest owed the Company.

 

7.

Income Taxes

 

Presidential has elected to qualify as a Real Estate Investment Trust under the Internal Revenue Code. A REIT which distributes at least 90% of its real estate investment trust taxable income to its shareholders each year by the end of the following year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders.

 

ASC 740 prescribes a more likely than not recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken. If the Company’s tax position in relation to a transaction was not likely to be upheld, the Company would be required to record the accrual for the tax and interest thereon. As of September 30, 2012, the tax years that remain open to examination by the federal, state and local taxing authorities are the 2009 – 2011 tax years and the Company was not required to accrue any liability for those tax years.

 

For the year ended December 31, 2011, the Company had a tax loss of approximately $8,500,000 ($2.47 per share), which is comprised of an ordinary loss of approximately $8,210,000 ($2.38 per share) and a capital loss of approximately $294,000 ($0.09 per share).

 

For the nine months ended September 30, 2012, the Company had a tax loss of approximately $1,035,000 ($0.28) per share), which is comprised of an ordinary loss.

 

8.

Commitments, Contingencies and Related parties

 

A.

Commitments and Contingencies

 

1)

Except as described in item 4 below, Presidential is not a party to any material legal proceedings. The Company may from time to time be a party to routine litigation incidental to the ordinary course of its business.

 

2)

In the opinion of management, all of the Company’s properties are adequately covered by insurance in accordance with normal insurance practices.

 

 

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

3) On December 22, 2011, an action entitled Centro De Recaudacion de Ingresos Municipals against IATG Puerto Rico, LLC was filed in Estado Libre Asociado de Puerto Rico, Tribunal de Primera Instancia, Sala Superior de Hunacao in respect of approximately $7.7 million of unpaid interest, taxes and penalties owed by IATG Puerto Rico, LLC, the owner of Las Piedras Industrial Park in Las Piedras, Puerto Rico. We believe the value of the property is less than the amount of taxes owed. We own a 50% interest in the defendant. The Company has evaluated its potential exposure and has concluded that the Company is not responsible for any of the debts or liabilities of IATG Puerto Rico and that the Company’s only exposure is the complete loss of its investment. At December 31, 2011, the Company wrote off its investment in the property.

 

4) On April 4, 2012, a mortgage foreclosure action was filed in the Court of First Instance, San Juan Superior Part, in the Commonwealth of Puerto Rico to foreclose on the Company’s Hato Rey property. The action is entitled U.S. Bank National Association, as trustee, as successor-in-interest to Bank of America, National Association, as trustee for the Registered Holders of GS Mortgage Securities Corporation II, Commercial Mortgage Pass-Through Certificates, Series 1998-C1, acting by and through Berkadia Commercial Mortgage LLC in its capacity as special servicer pursuant to the pooling and servicing agreement dated October 11, 1998 against PDL, Inc. & Associates, Limited Co-partnership; PDL, Inc., Presidential Realty Corporation; Lester Cohen and F.D. Rich Company of Puerto Rico, Inc. The complaint seeks a judgment against the Hato Rey Partnership in the amount of not less than $19,512,591, consisting of i) $14,484,138 in principal, ii) $1,119,406 in accrued interest, iii) $685,985 in default interest, iv) $48,371 in late charges, v) $1,424,691 in deferred interest and vi) $1,750,000 in liquidated damages as well as additional interest and default charges which continue to accrue under the mortgage loan on the Hato Rey property and foreclosure of the mortgage notes in order to sell the Hato Rey property and apply the proceeds of sale against the indebtedness. The Company’s wholly owned subsidiary, PDL, Inc., is the general partner of the partnership and the Company’s wholly owned subsidiary, Presidential Matmor Corporation, is a limited partner of the partnership.

 

The complaint also seeks judgments against PDL, Inc., the Company, Lester Cohen and F.D. Rich Company of Puerto Rico, Inc., with liability among them to be allocated 1%, 45%, 9% and 45%, respectively, under the terms of certain guarantees issued by them in connection with the mortgage loans, for alleged physical waste to the Property and, the costs of certain repairs to the property of not less than $1,100,000 and the reasonable legal costs and expenses in connection with the enforcement of the loan documents.

 

In 1998, at the time the mortgage loan was made, F.D. Rich Company was a limited partner of the partnership. In April 2006, Presidential Matmor acquired the limited partnership interest in the partnership owned by F.D. Rich. In connection with the acquisition of that interest, the parties executed a release and indemnification agreement which provides, among other things, that the Company and Presidential Matmor agree to indemnify F.D. Rich against any liability under the guaranty.

 

The guarantees provide that the guarantors will pay the lender any loss, damage, cost, expense, liability, claim or other obligation incurred by the lender arising out of fraud, intentional material misrepresentation, willful misconduct, physical waste committed on the subject property, failure to pay any valid taxes and assessments to the extent rents from the property are sufficient to pay such taxes, mechanics liens, materialmen’s liens or other liens which could create liens superior to the mortgage lien, reasonable legal costs and expenses incurred by lender in connection with litigation or other legal proceedings to enforce the loan, the breach of any material representation, covenant and warranty under the related environmental and hazardous substance indemnification agreement, misapplication or conversion of any insurance proceeds, awards or other amounts received in connection with condemnation of all or a portion of the property or any rents following an event of default and any security deposits not delivered to the lender.

 

 

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The lender has not asserted any claims against the Company other than those asserted under the guarantees as referenced above. The Company believes that the likelihood that the Company will be held liable for the claims asserted under the guarantees is remote.

 

B.

Related Parties

 

Property Management Agreement

 

On November 8, 2011, the Company and Signature entered into a Property Management Agreement pursuant to which the Company has retained Signature as the exclusive managing and leasing agent for the Company’s Mapletree Industrial Center property in Palmer, Massachusetts (the “Mapletree Property”). Signature shall manage the Mapletree Property in accordance with specific management guidelines and leasing guidelines and shall meet specific reporting requirements and vendor insurance requirements. Signature will receive compensation of 5% of monthly rental income actually received from tenants at the Mapletree Property. The Company will reimburse Signature for all reasonable expenses incurred by Signature in performance of its duties under the Property Management Agreement that are either in accordance with the annual budget or which have been approved in writing by the Company. Such expense shall include, but not be limited to, Signature’s costs of the salaries, benefits and appropriate and prudent training for Signature’s employees who are engaged solely in management or operation of the Mapletree Property, but excluding certain expenses that will be borne by Signature, as specified in the Property Management Agreement. The Property Management Agreement has a term of one year and will be automatically renewable for one year terms until it is terminated by either party upon written notice. For the three and nine months ended September 30, 2012, the Company incurred management fees of $6,416 and $24,144, respectively.

 

Asset Management Agreement

 

On November 8, 2011, the Company and Signature entered into an Asset Management Agreement pursuant to which the Company engaged Signature to oversee the Company’s Mapletree Property and an office building at Hato Rey, Puerto Rico (the “Properties”). Signature’s duties include leasing, marketing and advertising, financing, construction and dispositions of the Properties. Signature will receive a construction fee for any major renovations or capital projects, subject to the approval of the Company’s Board of Directors, an asset management fee of 1.5% of the monthly gross rental revenues collected for the Properties (provided that the monthly fee for the Hato Rey property will be accrued and not paid until the receipt of mortgage proceeds on the Mapletree Property), a finance fee of 1% on any debt placement, and a disposition fee of 1% on the sale of any assets, as specified in the Asset Management Agreement. The Asset Management Agreement has a term of one year and will be automatically renewable for one year terms until it is terminated by either party upon written notice. For the three and nine months ended September 30, 2012, the Company incurred an asset management fee of $10,291 and $34,953, respectively.

 

Sublease

 

The Company subleases their executive office space under a month to month lease with Signature for a monthly rental payment of $433 or $5,200 per year. Either party may terminate the sublease upon 30 days prior written notice. For the three and nine months ended September 30, 2012, the Company incurred approximately $1,300 and $3,900, respectively, in rent expense.

 

 

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

9.

Stock Options

 

In connection with the November 8, 2011 strategic transactions, the Company issued 740,000 options at an exercise price of $1.25. A total of 148,000 shares vested six months after the grant date. At September 30, 2012, the aggregate intrinsic value was $0. The remaining options vest upon the achievement of performance milestones. Options vesting on the achievement of performance milestones will not be recognized as compensation until such milestones are deemed probable of achievement. The Company recorded stock- based compensation expense of $0 and $98,667 for the three and nine months ended September 30, 2012. At September 30, 2012, the Company had approximately $426,000 of unrecognized compensation expense related to unvested share-based compensation awards that will be expensed upon the achievement of performance milestones.

 

10.

Common Stock and Preferred stock

 

On August 15, 2012, the stockholders approved an increase to the number of authorized shares of common stock from 10,700,000 to 1,050,000,000, consisting of: (a) 700,000 shares of Class A common stock; (b) 999,300,000 shares of Class B common stock (c) 50,000,000 shares of preferred stock. They also approved the reduction to the par value for all classes of the Company’s common stock from $0.10 to $0.00001 per share. All shares have been restated accordingly.

 

On August 15, 2012, the stockholders approved the designation of 50,000,000 shares of authorized preferred stock, par value $0.00001, as a class of “blank check” preferred stock so as to enable our board of directors to prescribe the series and the number of the shares of each series of preferred stock and the voting powers, designations, preferences, limitations, restrictions and relative rights of the shares of each series of preferred stock.

 

On August 15, 2012, the stockholders approved the 2012 Incentive Plan (the “2012 Plan”) which reserves 1,000,000 shares of Class B common stock for distribution to executive officers (including executive officers who are also directors), employees, directors, independent agents, consultants and attorneys in accordance with the 2012 Plan’s terms. The 2012 Plan provides for the grant of any or all of the following types of awards (collectively, “Awards”): (a) stock options and (b) restricted stock. Awards may be granted singly, in combination, or in tandem, as determined by the Compensation Committee. The maximum number of shares of Class B common stock with respect to which incentive stock options may be granted to any one individual in any calendar year shall not exceed $100,000 in fair market value as determined at the time of grant. If any outstanding Award is canceled, forfeited, delivered to us as payment for the exercise price or surrendered to us for tax withholding purposes, shares of Class B common stock allocable to such Award may again be available for Awards under the 2012 Plan.

 

In August 2012, the Company issued 4,000 shares of Class B common stock as part of the directors’ compensation which was valued at $2,800.

 

11.

Contractual Pension and Postretirement Benefits

 

Presidential had employment contracts with several active and retired officers and employees. These contracts provided for annual pension benefits and other postretirement benefits such as health care benefits. The contractual benefit plans were not funded. The pension benefits generally provided for annual payments in specified amounts for each participant for life, commencing three years after retirement, with an annual adjustment for an increase in the consumer price index. The Company accrued on an actuarial basis the estimated costs of these benefits during the years the employee provided services. The Company used a December 31 measurement date for the contractual benefit plans. The plan was terminated during 2011 and no future obligation existed at December 31, 2011.

 

 

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The following tables summarize the actuarial costs of the contractual pension and postretirement benefits:

 

		Contractual Pension				Contractual Pension				Contractual Postretirement				Contractual Postretirement
		Benefit				Benefit				Benefits				Benefits
		Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2011				2011				2011				2011
Components of net periodic benefit cost:
Amortization of prior service cost		$	-			$	-			$	-			$	4,591
Amortization of actuarial gain							(40,650	)			-				(412,677	)
Net periodic benefit income		$	-			$	(40,650	)		$	-			$	(408,086	)

 

12.

Defined Benefit Plan

 

The Company had a noncontributory defined benefit pension plan, which covered substantially all of its employees. The plan provided monthly retirement benefits commencing at age 65. Effective February 28, 2009, the Company “froze” or suspended future benefit accruals under the plan. On November 5, 2010, the Company notified participants of its intention to terminate the plan in a standard termination with a proposed termination date of January 7, 2011. In order to terminate the plan and pay the distributions required, the Company fully funded a total of $3,320,932 to the plan, and no further funding is required. The plan was totally liquidated during 2011 and no future pension obligation existed at December 31, 2011.

 

The termination resulted in the Company recognizing a one-time non-cash expense of $4,439,735 associated with recognizing unamortized actuarial losses.

 

13.

Profit Sharing Plan

 

Fourth Floor Management Corp., a 100% owned subsidiary of Presidential Realty Corporation that managed all the Company’s properties, had a profit sharing plan which covered substantially all of its employees. The plan provided for annual contributions up to a maximum of 5% of the employees’ annual compensation. The Company made a $9,076 contribution to the plan in March 2011 for the 2010 plan. The plan was terminated in 2011 and no future liability exists.

 

 

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

14.          Estimated Fair Value of Financial Instruments

 

Estimated fair values of the Company’s financial instruments as of September 30, 2012 and December 31, 2011 were determined using available market information and various valuation estimation methodologies. Considerable judgment was required to interpret the effects on fair value of such items as future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. The estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a errant market exchange. Also, the use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair values.

 

		September 30, 2012								December 31, 2011
		(Amounts in thousands)								(Amounts in thousands)
		Net Carrying				Estimated				Net Carrying				Estimated
		Value (1)				Fair Value				Value (1)				Fair Value
Assets:
Cash and cash equivalents		$	1,053			$	1,053			$	1,187			$	1,187
Notes Receivable			19				23				30				38
Liabilities:
Mortgage debt			500				500				14,484				14,558

 

(1) Net carrying value is net of valuation reserves and discounts where applicable.

 

The fair value estimates presented above were based on pertinent information available to management as of September 30, 2012 and December 31, 2011.

 

Fair value methods and assumptions were as follows:

 

Cash and Cash Equivalents – The estimated fair value approximated carrying value, due to the short maturity of these investments.

 

Notes Receivable – The fair value of notes receivable was estimated by discounting projected cash flows using current rates for similar notes receivable.

 

Mortgage Debt – The fair value of mortgage debt was estimated by discounting projected cash flows using current rates for similar debt.

 

15. Accumulated Other Comprehensive Loss

 

The Company’s other comprehensive income (loss) consists of the changes in the net unrealized gain (loss) on securities available for sale and the adjustments to the pension liabilities and the postretirement benefits liability, if any. There was no accumulated other comprehensive income (loss) at September 30, 2012 and December 31, 2011. Thus, comprehensive income (loss), which consists of net loss plus or minus other comprehensive income, is as follows:

  

 

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2012				2011				2012				2011
Net loss		$	(628,248	)		$	(1,034,823	)		$	(1,732,134	)		$	(4,178,660	)
Other comprehensive loss
Net unrealized loss on securities available for sale			-				(14,213	)			-				(24,636	)
Adjustment for contractual postretirement benefits			-				-				-				(3,967,627	)
Comprehensive loss			(628,248	)			(1,049,036	)			(1,732,134	)			(8,170,923	)
Comprehensive loss attributable to noncontrolling interest			172,066				237,969				435,708				563,860
Comprehensive loss attributable to Presidential Realty Corporation		$	(456,182	)		$	(811,067	)		$	(1,296,426	)		$	(7,607,063	)

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

This report contains statements that do not relate to historical facts, but are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to analyses and other information based on forecasts of future results and estimates of amounts not yet determinable. These statements may also relate to future events or trends, our future prospects and proposed development or business strategies, among other things. These statements can generally (although not always) be identified by their use of terms and phrases such as anticipate, appear, believe, continue, could, estimate, expect, indicate, intend, may, plan, possible, predict, project, pursue, will, would and other similar terms and phrases, as well as the use of the future tense. Forward-looking statements in this Quarterly Report on Form 10-Q speak only as of the date hereof, and forward looking statements in documents incorporated by reference speak only as of the date of those documents. Unless otherwise required by law, we undertake no obligation to publicly update or revise these forward-looking statements, whether as a result of new information, future events or otherwise.

 

Examples of forward-looking statements in this report include, but are not limited to, the following categories of expectations about:

 

	·	Our ability to implement plans for growth;
	·	Our ability to finance the acquisition of new real estate assets;
	·	Our ability to manage growth;
	·	Our ability to generate operating liquidity;
	·	Our ability to attract and maintain tenants for our rental properties;
	·	The demand for rental properties and the creditworthiness of tenants;
	·	The continuing adverse conditions in the real estate markets, which affect the ability of the Company or the joint venture in which the Company is a member to sell the properties, or refinance the mortgages on their properties and which may also affect the ability or willingness of prospective tenants to rent space at these properties;
	·	Governmental actions and initiatives;
	·	Financial results for 2012 and beyond, environmental and safety requirements;
	·	The form, timing and/or amount of dividend distributions in future periods; and
	·	The outcome of any litigation.

 

Overview

 

Presidential Realty Corporation (“Presidential”) is a Delaware corporation organized in 1983 to succeed to the business of a company of the same name which was organized in 1961 to succeed to the business of a closely held real estate business founded in 1911. Since 1982, we have elected to be treated as a real estate investment trust (“REIT”) for Federal and State income tax purposes. We own, directly or indirectly, interests in real estate and interests in entities which own real estate.

 

On November 8, 2011, we and PDL Partnership, a New York general partnership (“PDL Partnership”), the general partners of which are Jeffrey F. Joseph (a director and former officer), Steven Baruch (a former director and former officer) and Thomas Viertel (a former director and former officer), entered into a series of strategic transactions with the investors identified below and Signature Community Investment Group LLC (together with its affiliates, “Signature”). Signature is owned by Nickolas W. Jekogian, III, the promoter of the stock transactions included in the strategic transactions. The strategic transactions were as follows:

 

	·	The termination of our plan of liquidation;
	·	The acquisition by BBJ Family Irrevocable Trust of 177,013 shares of our Class A common stock, representing 40% of the outstanding Class A common stock, from PDL Partnership at a purchase price of $1.00 per share;

 

 

 

 

	·	Our sale of 250,000 newly issued shares of Class B common stock at a purchase price of $1.00 per share;
	·	Amendments to the relevant employment agreements relating to payments upon termination of employment for Steven Baruch, Jeffrey F. Joseph and Thomas Viertel;
	·	The resignation of Steven Baruch, Thomas Viertel and Mortimer M. Caplin as directors;
	·	The appointment of Nickolas W. Jekogian, III, Alexander Ludwig and Jeffrey Rogers as directors;
	·	Effective as of immediately following the filing of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, the resignations of all of our officers and the appointment of Mr. Jekogian as the Chairman and Chief Executive Officer and Mr. Ludwig as the President, Chief Operating Officer and Principal Financial Officer;
	·	The declaration of a special dividend of $0.35 per share on the Class A and Class B common stock;
	·	Our entry into a property management agreement with Signature to be the exclusive managing and leasing agent for our Mapletree Industrial Center property and an asset management agreement with Signature to provide oversight of our Mapletree Industrial Center property and the Hato Rey Center property;
	·	Our entry into executive employment agreements with Nickolas W. Jekogian, III and Alexander Ludwig;
	·	The grant of non-qualified stock options to acquire 370,000 shares of Class B Common Stock at a price of $1.25 per share to each of Messrs. Jekogian and Ludwig; and
	·	Our assignment of the Ivy Consolidated Loan to an individual employed in the theater industry, for $100,000.

 

We outsource the management of the Mapletree Industrial Center to Signature Community Management. We manage the Hato Ray Center which is owned by PDL, Inc. and Associates Limited Co-Partnership (the “Hato Rey Partnership”) in which we are the general partner and have a 60% partnership interest.

 

Following the transaction, new management has instituted significant cost saving measures that have reduced our annual operating costs from historical levels. These include, among other things, moving our executive offices, reducing staff, compensation and outsourcing accounting and property management. New management has instituted cost savings measures designed to reduce our annual operating costs in 2012 by approximately $2,000,000 compared to our operating expenses in 2011.  These reductions include approximately $150,000 in reduced rent as a result of relocating our executive offices; approximately $1,800,000 in reduced compensation and employee benefit expenses as a result of reduction in administrative employees and executives and termination of the Deferred Benefit Plan; and approximately $50,000 from reductions in administrative overhead expenses including telephone, internet, and office equipment.

 

Instability in the credit markets and declining operating performance on certain assets has made it very difficult for the Company to obtain refinancing of the mortgage loans on some of its properties. The first mortgage on the Hato Rey Center is in default and the loan has been accelerated. We have not been able to restructure the loan with the existing lender. On April 4, 2012, a mortgage foreclosure action was filed in the Court of First Instance, San Juan Superior Part, in the Commonwealth of Puerto Rico to foreclose on the Hato Rey property. If the property is sold in foreclosure, we do not believe the proceeds of the sale will be sufficient to pay the mortgage debt in full. (See Hato Rey Partnership below and Note 8 to the Notes to the Financial Statements.)

 

 

We wrote down our investment in the IATG Joint Venture to zero at December 31, 2011. The taxing authorities in Puerto Rico have commenced a proceeding against the Las Piedras property for non-payment of approximately $7.7 million in taxes.

 

We obtain funds for working capital and investment from our available cash and cash equivalents. Due to the foreclosure action and claims against the Company related to its guaranty given in connection with the mortgage on the Hato Rey Property, the current ongoing economic downturn, our continuing decline in revenues, expected losses from continuing operations and negative cash flows from operating activities, management believes that we might have insufficient working capital for the next twelve months (See Liquidity and Capital Resources below).

 

On June 8, 2012, we closed on a mortgage and line of credit for a combined total of $1,000,000 with Country Bank for Savings on the Mapletree Industrial Center. The mortgage is for $500,000 at a 5% interest rate, for a term of 5 years. Thereafter the interest will adjust monthly equal to the bank’s Prime Rate, plus 1% with an interest rate floor of 5%, for a term of 15 years. We received $459,620 of net proceeds. The line of credit is for $500,000, with an interest rate of 1% over the bank’s Prime Rate. The line of credit is due on demand. Both the mortgage and the line of credit are secured by the Mapletree Industrial Center, in Palmer, Massachusetts.

 

On August 15, 2012, we held an annual meeting of stockholders at which the stockholders re-elected the board of directors; approved an amendment to our Certificate of Incorporation to increase the number of authorized Class B shares of common stock; authorized a class of blank check preferred stock; reduced the par value of all authorized shares; ratified the appointment of our auditors; and ratified our 2012 equity incentive plan.

 

Critical Accounting Policies

 

For the nine months ended September 30, 2012, the Company had a loss from continuing operations. This combined with a history of operating losses and working capital deficit have been detrimental to our operations and could potentially affect our ability to meet our obligations and continue as a going concern. See Note 8 A4 of Notes to Consolidated Financial Statements. If the Company is required to pay any significant amounts under its guaranty related to our Hato Rey property, such a payment would also adversely impact our liquidity.  Our ability to continue as a going concern is dependent upon management’s successful execution of our business plan to achieve profitability, to increase working capital raising debt and or equity and a successful defense of the claims against the Company under its guaranty related to the Hato Rey property. The accompanying financial statements do not include any adjustments that may result from the outcome of this.

 

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

 

Real Estate

 

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

 

Rental Revenue Recognition

 

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

 

 

Discontinued operations

 

Hato Rey Partnership: PDL, Inc. (a wholly owned subsidiary of Presidential) is the general partner of the Hato Rey Partnership. Presidential Matmor the Company’s wholly owned subsidiary and PDL, Inc. have an aggregate 60% general and limited partner interest in the Hato Rey Partnership. The Company exercises effective control over the partnership through its ability to manage the affairs of the partnership in the ordinary course of business. Accordingly, the Company consolidates the Hato Rey Partnership in the accompanying consolidated financial statements.

 

The Hato Rey Partnership owns and operates the Hato Rey Center, an office building with 207,000 square feet of commercial space, located in Hato Rey, Puerto Rico.

 

On April 4, 2012, a mortgage foreclosure action was filed in the Court of First Instance, San Juan Superior Part, in the Commonwealth of Puerto Rico to foreclose on the Company’s Hato Rey property. The action is entitled U.S. Bank National Association, as trustee, as successor-in-interest to Bank of America, National Association, as trustee for the Registered Holders of GS Mortgage Securities Corporation II, Commercial Mortgage Pass-Through Certificates, Series 1998-C1, acting by and through Berkadia Commercial Mortgage LLC in its capacity as special servicer pursuant to the pooling and servicing agreement dated October 11, 1998 against PDL, Inc. & Associates, Limited Copartnership; PDL, Inc., Presidential Realty Corporation; Lester Cohen and F.D. Rich Company of Puerto Rico, Inc. The complaint seeks a judgment against the Hato Rey Partnership in the amount of not less $19,512,591, consisting of approximately i) $14,484,138 in principal, ii) $1,119,406 in accrued interest, iii) $685,985 in default interest, iv) $48,371 in late charges, v) $1,424,691 in deferred interest and v1) $1,750,000 in liquidated damages as well as additional interest and default charges which continue to accrue under the mortgage loan on the Hato Rey property and foreclosure of the mortgage notes in order to sell the Hato Rey property and apply the proceeds of sale against the indebtedness. The complaint also seeks judgments against PDL, Inc., the Company, Lester Cohen and F.D. Rich Company of Puerto Rico, Inc., with liability among them to be allocated 1%, 45%, 9% and 45% respectively, under the terms of certain guarantees issued by them in connection with the mortgage loans, for alleged physical waste to the Property, the costs of certain repairs to the property of not less than $1,100,000 and the reasonable legal costs and expenses in connection with the enforcement of the loan documents.

 

Due to the foreclosure action during the period ended March 31, 2012 the Company classified the Hato Ray Center Property in Hato Rey, Puerto Rico as a discontinued operation.

 

Income Taxes

 

We operate in a manner intended to enable us to continue to qualify as a Real Estate Investment Trust under Sections 856 to 860 of the Code. Under those sections, a REIT which meets certain requirements is not subject to Federal income tax on that portion of its taxable income which is distributed to its shareholders, if at least 90% of its REIT taxable income (exclusive of capital gains) is so distributed. As a result of its ordinary tax loss for 2011 there is no requirement to make a distribution in 2012. In addition, no provision for income taxes was required at September 30, 2012. If the Company fails to distribute the required amounts of income to its shareholders, or otherwise fails to meet the REIT requirements, it would fail to qualify as a REIT and substantial adverse tax consequences could result. We believe that we will not be required to pay a dividend in 2012 to maintain our REIT status.

 

 

Results of Operations

 

Results of operations for the three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011:

 

		Three Months Ended								Nine Months Ended
		2012				2011				2012				2011
Revenue		$	194,202			$	182,228			$	579,062			$	798,471
Operating expenses			130,586				121,616				360,018				413,120
Loss from continuing operatings			(191,971	)			(516,329	)			(723,084	)			(2,993,354	)
Discontinued operations:
Loss from discontinued operations			(436,277	)			(518,494	)			(1,009,050	)			(1,185,306	)
Net loss			(628,248	)			(1,034,823	)			(1,732,134	)			(4,178,660	)
Net loss from noncontrolling interest			172,066				237,969				435,708				563,860
Net loss attributable to Presidential
Realty Corporation		$	(456,182	)		$	(796,854	)		$	(1,296,426	)		$	(3,614,800	)

 

Continuing Operations:

 

For the three months ended September 30, 2012 as compared to September 30, 2011, revenues increased by $11,974 as a result of an increase in rental income of $21,928, offset by a decrease in interest income of $9,954. For the nine months ended September 30, 2012 compared to September 30, 2011, revenue decreased $219,409 as a result of a decrease in rental income of $27,958 and interest income of $191,451. The majority of the decrease in interest income was due to the sale of the Consolidated Note in early 2011.

 

 

For the three months ended September 30, 2012 as compared to September 30, 2011, operating costs and expenses increased by $8,970 primarily related to approximate increases of $12,000 in management fees related to the Property Management and Asset Management Agreements, $3,000 in commission expense, $2,200 in general expense, offset by decreases of $11,000 in salary expense allocated amongst the properties, and $10,000 in insurance expense. For the nine months ended September 30, 2012 as compared to September 30, 2011, operating costs and expenses decreased $53,102 primarily related to an approximate decrease of $6,000 in utility costs, $15,000 in lower snow plowing costs, a $41,000 reduction in salary expense allocated amongst the properties, and a decrease in insurance expense of $25,000, offset by an increase in management fees of $24,000 and general expense of $4,000.

 

For the three months ended September 30, 2012 as compared to September 30, 2011, general and administrative expenses decreased by $45,267 due to the reduction in salaries of approximately $100,000, insurance expense of $4,000, rent expense of $40,000, offset by $100,000 of bad debt recovery related to our assignment of the Ivy Consolidated Loan. For the nine months ended September 30, 2012 as compared to September 30, 2011, administrative expenses decreased by approximately $5,500,000 due to the reduction in salaries of approximately $573,000, professional fees of $50,000, rent expense of $113,000, pension cost of $4,500,000 and various overhead costs, offset by $100,000 of bad debt recovery related to our assignment of the Ivy Consolidated Loan. Included in general and administrative expense for the nine months ended September 30, 2012 is $150,000 of accrued salaries for Nicholas W. Jekogian that is deferred in accordance with his employment agreement. In addition, we recorded $30,000 of insurance expense related to a directors and officer’s tail policy purchased in connection with the strategic transactions. 

 

Stock based compensation was $98,667 during the nine months ended September 30, 2012 due to the options expense related to the strategic transactions.

 

For the three and nine months ended September 30, 2012 as compared to September 30, 2011, real estate tax expense remained comparative period over period.

 

For the three months ended September 30, 2012 as compared to September 30, 2011, other income and expense decreased by approximately $291,000 primarily as a result of an approximate decrease in interest income of $22,000 due to the decrease in cash and short term investments and a $313,000 loss on the IATG joint venture. For the nine months ended September 30, 2012 as compared to September 30, 2011, other income and expense decreased by approximately $2,550,000 primarily as a result of an approximate $3,300,000 gain recognized on the sale of the Consolidated Note, offset by a $748,541 loss on the IATG joint venture, and a decrease in investment income of $35,000.

 

For the three and nine months ended September 30, 2012 as compared to September 30, 2011, the loss from continuing operations decreased by approximately $324,000 and $2,270,000 primarily as a result of the decrease in pension cost of approximately $4,000,000 offset by a gain on the sale of the Consolidated Note of $3,264,724, in addition to significant cost reductions from salaries, rent and related overhead expenses.

 

Balance Sheet

 

September 30, 2012 compared to December 31, 2011

 

Net real estate decreased by $32,923 primarily as a result of depreciation expense recorded during the nine months ended September 30, 2012.

 

 

Net mortgage portfolio decreased by $11,600 primarily as a result of payments received during the nine months ended September 30, 2012.

 

Assets related to discontinued operations decreased by $68,013 primarily due to an increase in prepaid expenses of $75,099, offset by a decrease in other assets of $7,827, other receivables of $40,978, and cash of $150,564.

 

Prepaid expenses decreased by $159,481 primarily due to the amortization of insurance.

 

Accrued liabilities increased by $14,776 primarily as a result of accrued officer salaries of $150,000 due to Nicholas W. Jekogian which is deferred in accordance with his employment agreement, offset by a decrease in accrued professional fees of $76,154 and environmental expense of $34,070. Effective February 2012 the environmental remediation on the Palmer property was completed.

 

Liabilities related to discontinued operations increased by $1,006,748 primarily due to an increase in mortgage interest and fees of $980,834, offset by a decrease in other liabilities of $91,575 and accounts payable of $149,965.

 

Accounts payable decreased $32,011 during the nine months ended September 30, 2012 due to lower operating costs.

 

Other liabilities remained consistent from period to period.

 

Liquidity and Capital Resources

 

We obtain funds for working capital and investment from our available cash and cash equivalents.

 

For the nine months ended September 30, 2012, the Company had a loss from continuing operations. This combined with a history of operating losses and working capital deficit have been detrimental to our operations and could potentially affect our ability to meet our obligations and continue as a going concern. See Note 8 A4 of Notes to Consolidated Financial Statements. If the Company is required to pay any significant amounts under its guaranty related to our Hato Rey property, such a payment would also adversely impact our liquidity.  Our ability to continue as a going concern is dependent upon management’s successful execution of our business plan to achieve profitability, to increase working capital raising debt and or equity and a successful defense of the claims against the Company under its guaranty related to the Hato Rey property. The accompanying financial statements do not include any adjustments that may result from the outcome of this uncertainty.

 

At September 30, 2012, we had $1,053,156 in available cash and cash equivalents, an increase of $91,916 from the $961,240 available at December 31, 2011. This increase in cash and cash equivalents was due to cash used in operating activities of $366,743 offset by the refinancing of Maple Tree Industrial Center of $459,620. In addition we have a $500,000 line of credit, which is available for working capital needs.

 

Operating Activities

 

Cash from operating activities includes interest on the Company’s mortgage portfolio and net cash received from rental property operations. For the nine months ended September 30, 2012, cash received from interest on the Company’s mortgage portfolio was $10,363. Net cash received from rental property operations was approximately $200,175. Net cash received from rental property operations is before additions and improvements and mortgage amortization.

 

 

Off-Balance Sheet Arrangements

 

The Company does not have any off-balance sheet arrangements that have, or are reasonably likely to have, a material effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

While we are not required as a smaller reporting company to comply with this Item 3, we are providing the following general discussion of qualitative market risk.

 

Our financial instruments consist primarily of notes receivable and mortgage notes payable. Substantially all of these instruments bear interest at fixed rates, so our cash flows from them are not directly impacted by changes in market rates of interest. However, changes in market rates of interest impact the fair values of these fixed rate assets and liabilities. We generally hold our notes receivable until maturity or prepayment and repay our notes payable at maturity or upon sale of the related properties, and, accordingly, any fluctuations in values do not impact our earnings, balance sheet or cash flows. We also have investments in securities available for sale, which are reported at fair value. We evaluate these instruments for other-than-temporary declines in value, and, if such declines were other than temporary, would record a loss on the investments. We do not own any derivative financial instruments or engage in hedging activities.

 

Item 4. Controls and Procedures

 

(a)

Evaluation of Disclosure Controls and Procedures

 

The Company, under the supervision and with the participation of its management, including its principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, herein referred to as the Exchange Act) as of the end of the period covered by this report. The purpose of disclosure controls is to ensure that information required to be disclosed in our reports filed with or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed to ensure that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC filings and ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms.

 

(b)

Changes in Internal Control over Financial Reporting

 

The principal executive officer and principal financial officer also conducted an evaluation of internal control over financial reporting, herein referred to as internal control, to determine whether any changes in internal control occurred during the three months ended September 30, 2012 that may have materially affected or which are reasonably likely to materially affect internal control. Based on that evaluation, there has been no change in the Company’s internal control during the three months ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The Company and the Hato Rey Partnership have filed an answer to the complaint in the action brought by the mortgage lender to foreclose on the Hato Rey property. The answer admits to the default under the mortgage and that the lender is entitled to foreclose on the property but denies any liability under the guarantee. The Company has also made a motion to dismiss the portion of the complaint based upon the guarantee.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

On August 6, 2012, the Company issued an aggregate of 4,000 shares of Class B common stock, valued at $2,800, to its directors as compensation.

 

 

Item 6. Exhibits

 

31.1

Certification of Chief Executive Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

 

31.2

Certification of Principal Financial Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

 

32.1

Certification of Chief Executive Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2

Certification of Principal Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

	101 .INS	XBRL Instance Document
	101 .SCH	XBRL Taxonomy Schema
	101 .CAL	XBRL Taxonomy Calculation Linkbase
	101 .DEF	XBRL Definition Linkbase
	101 .LAB	Taxonomy Label Linkbase
	101 .PRE	XBRL Taxonomy Presentation Linkbase

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 14th day of November, 2012.

 

	PRESIDENTIAL REALTY CORPORATION
	By:	/s/ Nickolas W. Jekogian
		Nickolas Jekogian
		Chief Executive Officer and Chairman of the Board
	By:	/s/ Alexander Ludwig
		Alexander Ludwig
		President, Chief Operating Officer and Principal Financial Officer