Critical Accounting Policies and Estimates.
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted inthe United States of America requires us to make estimates and assumptions in applying our critical accounting policies that affect the reported amounts of assets and liabilities and the disclosure (if any) 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. Our estimates and assumptions concern, among things, potential impairment of our other investments and other long-lived assets, uncertainties for Federal and state income tax and allowance for potential doubtful accounts. We evaluate those estimates and assumptions on an ongoing basis based on historical experience and on various other factors which we believe are reasonable under the circumstances. Note 1 of the consolidated financial statements, included elsewhere on this Form 10-K, includes a summary of the significant accounting policies and methods used in the preparation of the Company's consolidated financial statements. The Company believes the following critical accounting policies affect the significant judgments and estimates used in the preparation of the Company's consolidated financial statements:Marketable Securities . All unrealized gains and losses on the Company's investment portfolio are included in the Consolidated Statements of Income. Our investments in equity and debt marketable securities are carried at fair value and based on quoted market prices or other observable inputs. Marketable securities are subject to fluctuations in value in accordance with market conditions. Other Investments. The Company's other investments consist primarily of nominal equity interests in various privately held entities, including limited partnerships whose purpose is to invest venture capital funds in growth-oriented enterprises. The Company does not have significant influence over any investee and the Company's investment typically represents less than 5% of the investee's ownership. These investments generally do not meet the criteria of accounting under the equity method and are carried at cost less distributions and other than temporary unrealized losses. These investments do not have available quoted market prices, so we must rely on valuations and related reports and information provided to us by those entities for the purposes of determining other-than-temporary declines. These valuations are by their nature subject to estimates which could change significantly from period to period. The Company regularly reviews the underlying assets in its other investment portfolio for events, that may indicate the investment has suffered other-than-temporary decline in value including. These events include but are not limited to bankruptcies, closures and declines in estimated fair value. When a decline is deemed other-than-temporary, we permanently reduce the cost basis component of the investments to its estimated fair value, and the loss is recorded as a component of income from other investments. As such, any recoveries in the value of the investments will not be recognized until the investments are sold. We believe our estimates of each of these items historically have been adequate. However, due to uncertainties inherent in the estimation process, it is reasonably possible that the actual resolution of any of these items could vary significantly from the estimate and, accordingly, there can be no assurance that the estimates may not materially change in the near term. Real Estate. Land, buildings and improvements, furniture, fixtures and equipment are recorded at cost. Tenant improvements, which are included in buildings and improvements, are stated at cost. Expenditures for ordinary maintenance and repairs are expensed to operations as they are incurred. Renovations and/or replacements, which improve or extend the life of the asset are capitalized and depreciated over the shorter of their estimated useful lives, or the remaining lease term (if leased). Depreciation is computed utilizing the straight-line method over the estimated useful lives of ten to forty years for buildings and improvements and five to ten years for furniture, fixtures and equipment. Tenant improvements are amortized on a straight-line basis over the shorter of the term of the related leases or the assets useful life. The Company is required to make subjective assessments as to the useful lives of its properties for purposes of determining the amount of depreciation to reflect on an annual basis with respect to those properties. These assessments have a direct impact on the Company's net income. Should the Company lengthen the expected useful life of a particular asset, it would be depreciated over more years, and result in less depreciation expense and higher annual net income. Assessment by the Company of certain other lease related costs must be made when the Company has a reason to believe that the tenant will not be able to execute under the term of the lease as originally expected. The Company periodically reviews the carrying value of certain of its properties and long-lived assets in relation to historical results, current business conditions and trends to identify potential situations in which the carrying value of assets may not be recoverable. If such reviews indicate that the carrying value of such assets may not be recoverable, the Company will estimate the undiscounted sum of the expected future cash flows of such assets or analyze the fair value of the asset, to determine if such sum or fair value is less than the carrying value of such assets to ascertain if a permanent impairment exists. If a permanent impairment exists, the Company would determine the fair value by using quoted market prices, if available, for such assets, or if quoted market prices are not available, the Company would discount the expected future cash flows of such assets and would adjust the carrying value of the asset to fair value. Judgments as to impairments and assumptions used in projecting future cash flow are inherently imprecise. 9 Results of Operations:
For the years endedDecember 31, 2020 and 2019, the Company reported a net loss of approximately$1,052,000 ($1.04 per share) and net income of$270,000 ($0.27 per share), respectively. Revenues: Total revenues for the years endedDecember 31, 2020 and 2019 were approximately$78,000 and$75,000 , respectively. This is primarily comprised of rental revenue from the leasing of the corporate offices to the Adviser. Expenses:
Total expenses for the year ended
Operating expenses of rental and other properties decreased by approximately$69,000 (or 49%). This decrease was primarily due to non-recurring costs to remediate the Company'sMontpelier, Vermont property. The Company agreed to pay a fixed fee of$500,000 to a third-party local developer to implement the remediation plan. The Company's portion of the fixed fee is approximately 70%, or$350,000 of which$289,000 has been paid. The remediation work began inDecember 2019 and has been completed.
General and administrative expenses for the year ended
Interest expense for the year ended
Other Income:
Net realized and unrealized (losses) gains from investments in marketable securities:
Net (loss) gain from investments in marketable securities, including marketable
securities distributed by partnerships in which the Company owns minority
positions, for the years ended
2020
2019
Net realized (loss) gain from sales of marketable securities
93,000 236,000
Total net (loss) gain from investments in marketable securities
Net realized loss from sales of marketable securities consisted of approximately$177,000 of losses net of$61,000 of gains for the year endedDecember 31, 2020 . The comparable amounts in fiscal year 2019 were approximately$108,000 of gains net of$66,000 of losses. Consistent with the Company's overall current investment objectives and activities, the entire marketable securities portfolio is classified as trading (as defined byU.S generally accepted accounting principles). Unrealized gains or losses from marketable securities are recorded as other income in the Consolidated Statements of Income. Investment gains and losses on marketable securities may fluctuate significantly from period to period in the future and could have a significant impact on the Company's net earnings. However, the amount of investment gains or losses on marketable securities for any given period has no predictive value and variations in amount from period to period have no practical analytical value.
Investments in marketable securities give rise to exposure resulting from the volatility of capital markets. The Company attempts to mitigate its risk by diversifying its marketable securities portfolio.
Equity (loss) gain in residential real estate partnerships:
For the year ended
For the year endedDecember 31, 2019 the Company recorded a gain of approximately$4,000 representing our portion of interest income earned on funds invested inMurano At Three Oaks Associates LLC (Fort Myers, Florida ) prior to commencement of development. 10
Income from other investments is summarized below (excluding other than temporary impairment losses):
2020
2019
Partnerships owning real estate and related investments (a)
49,000
113,000
Venture capital funds - technology businesses 17,000
-
Investment in 49% owned affiliate and other (c) (15,000 )
25,000
Total income from other investments$ 303,000
$ 806,000
(a) The gains in 2020 and 2019 consist of various cash distributions primarily
from investments owning real estate and related investments and diversified
businesses which made cash distributions from the sale or refinancing of
operating companies or properties. During the year ended
we received cash distributions from other investments of approximately
partnership which sold the remaining of its two rental apartments in
sold in
the second apartment building). In 2020, we received a total of approximately
included a
residential mortgage and regular quarterly 8% preferred returns of
approximately
a partnership which sold its sole asset, a multifamily residential property
located inAustin, Texas .
(b) Also, in 2020, we received approximately
diversified fund in which we had no remaining basis and the distribution was
recorded in income. The remaining gains from real estate and related
investments were from distributions made in excess of our carrying value. The
gains in 2019 primarily consists of
fund and cash distributions from various investments in partnerships owning
diversified businesses which made cash distributions in excess of their
carrying value.
(c) The increased net loss in 2020 as compared to 2019 from the Company's 49%
owned affiliate,
interest income earned by TGIF due to lower loan balances outstanding and
lower interest rates. In 2020 and 2019 TGIF declared and paid a cash dividend
of which the Company's portion was approximately
dividends were recorded as reduction in the investment carrying value as required under the equity method of accounting for investments. InAugust 2020 , one of our other investments in a real estate partnership with a carrying value of$221,000 filed an initial public offering and began trading on the NYSE onAugust 13, 2020 . We have reclassified that investment to marketable securities, and as ofDecember 31, 2020 has an unrealized loss of approximately$54,000 . Also as previously reported, in the first quarter of 2019 the Company's$300,000 investments in a private insurance company publicly registered all shares and began trading on the NASDAQ onMarch 29, 2019 . Accordingly, we have transferred this investment to marketable securities. As ofDecember 31, 2020 , this investment had an unrealized loss of approximately$41,000 .
Other than temporary impairment ("OTTI") losses from other investments:
For year endedDecember 31, 2020 , we have recognized a total of approximately$407,000 in impairment valuation adjustments. We recorded a total of$232,000 in OTTI adjustments representing the complete write down relating to an investment in a small business investment company licensed by theSmall Business Administration in which we originally invested$300,000 in 2007 and had received distributions to date of$68,000 . The other OTTI adjustment in 2020 was for$175,000 for an investment in a$2 billion global fund which invests in oil exploration and production in which we committed$500,000 (plus recallable distributions) inSeptember 2015 . To date we have funded$658,000 and have received$206,000 in distributions from this investment. The write down was based on net asset value reported by the sponsor and takes into consideration the current disruptions in the oil markets because of the economic fall out of the pandemic. The adjusted carrying value in this investment as of December
31, 2020 is$277,000 .
There were no OTTI losses for the year ended
Income or loss from other investments may fluctuate significantly from period to period in the future and could have a significant impact on the Company's net earnings. However, the amount of investment gain or loss from other investments for any given period has no predictive value and variations in amount from period to period have no practical analytical value.
Interest, dividend and other income
Interest, dividend and other income for the year ended
11
(Provision for) benefit from income taxes:
The Company qualifies as a real estate investment trust and distributes its taxable ordinary income to stockholders in conformity with requirements of the Internal Revenue Code and is not required to report deferred items due to its ability to distribute all taxable income. In addition, net operating losses can be carried forward to reduce future taxable income but cannot be carried back. Distributed capital gains on sales of real estate as they relate to REIT activities are not subject to taxes; however, undistributed capital gains may be subject to corporate tax. The provision for income taxes for the year endedDecember 31, 2020 was approximately$24,000 and is primarily attributable to deferred tax expense relating to CII. The provision for income taxes for the year endedDecember 31, 2019 was approximately$29,000 and was primarily attributable to deferred tax benefit relating to CII.
As ofJanuary 1, 2020 , the Company, excluding its taxable REIT subsidiary, CII, is expected to have a tax net operating loss carryover (NOL) of approximately$470,000 .
The Company's 95%-owned taxable REIT subsidiary, CII, files a separate income tax return and its operations are not included in the REIT's income tax return.
For CII, the Company follows the liability method of accounting for income taxes. Under this method, deferred tax liabilities and assets are recognized for the expected future tax consequences of temporary differences between the carrying amount and the tax basis of assets and liabilities at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. As a result of timing differences associated with the carrying value of other investments, unrealized gains and losses of marketable securities, depreciable assets and the future benefit of a net operating loss, as ofDecember 31, 2020 , and 2019 the Company has recorded a net deferred tax liability of$107,000 and$77,000 , respectively. As ofJanuary 1, 2020 , CII has an estimated NOL of approximately$1.16 million which for deferred tax purposes has been fully reserved due to CII historically having tax losses. Effect of Inflation.
Inflation affects the costs of maintaining the Company's investments.
Liquidity, Capital Expenditure Requirements and Capital Resources.
The Company's material commitments primarily consist of a note payable to the Company's 49% owned affiliate,T.G.I.F. Texas, Inc. ("TGIF") of approximately$650,000 due on demand (see Item 13. Certain Relationships and Related Transactions and Director Independence), and contributions committed to other investments of approximately$653,000 due upon demand including recallable distributions. The$9.9 million in margin payable as ofDecember 31, 2019 was related to the purchase of US T-bills at year end. The T-bills were sold inJanuary 2020 and the related margin was repaid. The purchase of T-bills at each fiscal quarter end is for the purposes of qualifying for the REIT asset test. No further purchases of T-bills were required afterSeptember 30, 2020 . The funds necessary to meet the other obligations are expected from the proceeds from the sales of investments, distributions from investments and available cash and equivalents ($4.9 million atDecember 31, 2020 ). A summary of the Company's contractual cash obligations atDecember 31, 2020 is as follows: Payments Due by Period Contractual Less than 1 1 - 3 4 - 5 After 5 Obligations Total year years years years Note payable$ 650,000 $ 650,000 - - - Other investments commitments 653,000 653,000 - - - Total$ 1,303,000 $ 1,303,000 - - -
The timing of amounts due under commitments for other investments is determined by the managing partners of the individual investments.
Material Changes in Operating, Investing and Financing Cash Flows.
The Company's cash flows are generated primarily from its dividends, interest and sales proceeds of marketable securities, distributions from investments
and borrowings. 12
For the year endedDecember 31, 2020 , net cash used in operating activities was approximately$1,155,000 , primarily consisting of net loss before income taxes and other income of approximately$1,159,000 , plus interest, dividends and other income of approximately$322,000 , less decreases in accruals and accounts payable of approximately$384,000 . For the year endedDecember 31, 2020 , net cash provided by investing activities was approximately$1,496,000 . This consisted primarily of$1 million collection of loan due from purchaser of Grove Isle,$200,000 collection of loan participation, net proceeds from sales and redemptions of marketable securities of$1,345,000 , distributions from other investments of$750,000 and distribution from affiliate of$221,000 . These sources of funds were partially offset by uses of cash consisting primarily of$1,080,000 in purchases of marketable securities,$414,000 of contributions to other investments and$385,000 of improvements to ourMontpelier, Vermont property. For the year endedDecember 31, 2020 , net cash used in financing activities was approximately$10,840,000 , consisting of$9,917,000 in repayment of margin payable relating to the quarter end purchases ofU.S. T-bills,$507,000 dividend paid,$350,000 principal payment on note due to affiliate and$66,000 in purchase of treasury shares.
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