GYRO Gyrodyne LLC

Item 2 . Management’s Discussion and Analysis of Financial Condition and Results of Oper a tions.

When we use the terms “Gyrodyne,” the “Company,” “we,” “us,” and “our,” we mean Gyrodyne, LLC and all entities owned or controlled by us, including non-consolidated entities, except where it is clear that the term means only the parent company, and except where the reference relates to periods prior to September 1, 2015 (i.e., prior to the consummation of the merger of Gyrodyne Company of America, Inc. and Gyrodyne Special Distribution, LLC with and into Gyrodyne, LLC) in which case the term relates to Gyrodyne Company of America, Inc. and all entities the owned or controlled by it. References to “common shares” in this report refer to Gyrodyne, LLC’s common shares representing limited liability company interests. References herein to our Quarterly Report are to this Quarterly Report on Form 10-Q for the nine -months ended September 30, 2016.

Cautionary Statement Concerning Forward- Looking Information. This Quarterly Report and the documents incorporated by reference into this Quarterly Report contain forward-looking statements about the Company within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements containing the words “believes,” “anticipates,” “estimates,” “expects,” “intends,” “plans,” “seeks,” “will,” “may,” “should,” “would,” “projects,” “continues” and similar expressions or the negative of these terms constitutes forward-looking statements that involve risks and uncertainties. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and they are included in this Quarterly Report for the purpose of invoking these safe harbor provisions. Such statements are based on current expectations and are subject to risks, uncertainties and changes in condition, significance, value and effect. The risks, uncertainties and changes in condition, significance, value and effect that could cause the Company’s actual results to differ materially from anticipated results include risks and uncertainties relating to the plan of liquidation, the risk that the proceeds from the sale of our assets may not be sufficient to satisfy our obligations to our current and future creditors and retention bonus plan participants, the risk of shareholder litigation relating to the tax liquidation, the plan of liquidation or the plan of merger and other unforeseeable expenses related to the proposed liquidation, the tax treatment of condemnation and property sale proceeds, the effect of economic and business conditions, risks inherent in the real estate markets of Suffolk and Westchester Counties in New York, Palm Beach County in Florida and Fairfax County in Virginia, the ability to obtain additional capital to develop the Company’s existing real estate and other risks detailed from time to time in the Company’s SEC filings. Except as may be required under federal law, we undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur.

Overview

On September 1, 2015, Gyrodyne, LLC, a New York limited liability company (“Gyrodyne”, the “Company” or the “Registrant”), announced the completion of the previously announced merger of Gyrodyne Company of America, Inc. (the “Corporation”) and Gyrodyne Special Distribution, LLC (“GSD”) with and into Gyrodyne (the “Merger”). Where applicable, references in this Report to the Company or the Registrant shall be deemed to be references to Gyrodyne as the successor to the Corporation.

The Merger was approved by the shareholders of the Corporation on August 20, 2015. Gyrodyne is the surviving company in the Merger, which terminated the existence of the Corporation and GSD. On September 1, 2015, trading of common shares of Gyrodyne commenced on the NASDAQ Stock Market under the symbol “GYRO”. The number of common shares outstanding in Gyrodyne following the merger is 1,482,680. The common shares of Gyrodyne have a new CUSIP number of 403829104.

 
The Corporation had previously approved the Merger on behalf of GSD and Gyrodyne in its capacity as managing member of GSD and Gyrodyne.

The Merger resulted in holders of common stock of the Corporation receiving approximately 22.6% (335,086 shares) of the common shares of Gyrodyne in the aggregate (.0904 common share of Gyrodyne per share of Corporation common stock), holders of shares in non-transferable notes issued by the Corporation receiving approximately 30.0% (444,804 shares) of the common shares of Gyrodyne in the aggregate (.024798 common share of Gyrodyne per $1.00 principal amount of the dividend notes issued in January and December 2014, together, in each case, with any interest thereon paid in kind in the form of additional notes), and holders of non-transferable interests in GSD receiving approximately 47.4% (702,790 shares) of the common shares of Gyrodyne in the aggregate (.473999 common share of Gyrodyne per GSD interest).  

The Merger completed the Corporation’s plan of tax liquidation under the Internal Revenue Code, even though the actual disposition of all of the properties had not yet occurred. The completion of the Corporation’s tax liquidation by means of the Merger removes the timing constraints associated with the tax liquidation and now provides Gyrodyne the opportunity to pursue without such constraints the opportunistic disposition of certain properties and the enhancement of the value of the Flowerfield and Cortlandt Manor properties, by pursuing various development or zoning/entitlement opportunities, which the Gyrodyne Board believes will improve the chances of obtaining better values for such properties. Gyrodyne expects that it will dissolve after it has completed the disposition of all of its real property assets, has applied the proceeds of such dispositions first to settle any claims, pending or otherwise, against Gyrodyne, and then has made liquidating distributions to holders of Gyrodyne common shares. We are unable to predict the precise nature, amount or timing of such distributions. The actual nature, amount and timing of all distributions will be determined by Gyrodyne in its sole discretion, and will depend in part upon the ability to convert our remaining assets into cash and pay and settle our remaining liabilities and obligations. Under Gyrodyne’s Amended and Restated Limited Liability Company Agreement, such dissolution may be effected upon the vote of holders of a majority of Gyrodyne common shares or, in the Board’s discretion and without any separate approval by the holders of Gyrodyne common shares, at any time the value of Gyrodyne’s assets, as determined by the Board in good faith, is less than $1,000,000.

Prior to the Merger, the Corporation was a self-managed and self-administered real estate investment trust (“REIT”) formed under the laws of the State of New York. The Corporation managed its business as one operating segment. Prior to December 30, 2013, the Corporation’s primary business was the investment in and the acquisition, ownership and management of a geographically diverse portfolio of medical office, industrial properties and the development of industrial and residential properties located in the Northeast region of the United States. On December 30, 2013, the Corporation distributed to its shareholders, as the non-cash portion of the special dividend announced on September 12, 2013 (the “Special Dividend”), all of the equity interests of its subsidiary Gyrodyne Special Distribution LLC, which owned 100% of the interests (through GSD’s subsidiaries) in the Corporation’s four real estate properties, subject to related mortgage debt in favor of Flowerfield Mortgage Inc. (“FMI”), also a subsidiary of the Corporation, with Flowerfield Properties, Inc. (“FPI”) having the contractual right to manage the business and properties of GSD. Based on management provisions set forth in GSD’s limited liability company agreement which designated sole management authority to the Corporation, the Corporation concluded that GSD was a variable interest entity and that GSD’s financial statements should be consolidated with the Corporation’s. Accordingly, we may use references to "we" or "our" to refer to the Company, the Corporation, taxable REIT subsidiary (“TRS”), FPI and GSD, and "the Company's properties" or "GSD's properties", or “TRS’s properties”, or “FPI’s properties” (or derivations thereof) interchangeably in this report as they relate to periods preceding August 31, 2015.

Substantially all of the properties are subject to leases in which the tenant reimburses the Company (GSD prior to the Merger) for a portion, all of or substantially all of the costs and/ or cost increases for utilities, insurance, repairs and maintenance, and real estate taxes. Certain leases provide that the Company is responsible for certain operating expenses.

The Company owns a 10.12% limited partnership interest in Callery Judge Grove, L.P. (the “Grove”), a limited partnership which in 2013 sold its only asset, an undeveloped Florida property (the “Grove Property”). Following the Merger, the interest continues to be owned indirectly through FPI, its wholly-owned subsidiary. FPI is a “C” corporation and therefore any income generated by FPI will be subject to a corporate level income tax. For further information see Footnote 15.

After giving effect to the Company’s dispositions of real properties through November 10, 2016, (see Footnote 8) the Company controls one remaining medical office park and four of fourteen buildings in a second medical office park, together comprising approximately 49,000 rentable square feet and a multitenant industrial park comprising approximately 130,000 rentable square feet. The Company also owns approximately 68 acres of property in St. James, New York, which includes the aforementioned industrial park which sits on ten of those acres. The medical office park in Cortlandt Manor, the block of four buildings in the Port Jefferson Professional Park and the Flowerfield Industrial Park and the undeveloped property are individually owned in single asset LLCs wholly owned by the Company.

Prior to the Merger, the Corporation operated as a REIT under Section 856(c) (1) of the Internal Revenue Code of 1986 as amended (the “Code”). As a REIT, the Corporation generally was not subject to federal and state income tax, provided that distributions were made to its shareholders equal to at least 90% of its REIT taxable income as defined under the Code. The Corporation was permitted to participate in certain activities from which it was previously precluded in order to maintain its qualifications as a REIT. However, these activities were required to be conducted in an entity that elected to be treated as a TRS under the Code. The Corporation had one TRS, FPI, which was subject to federal and state income tax on the income from these activities. FPI continues as a wholly-owned subsidiary of Gyrodyne LLC and any income generated by FPI will continues to be subject to corporate level taxes.

Pursuant to the Merger, all of the assets and liabilities of the Corporation and GSD were merged with and into and became assets and liabilities of Gyrodyne, LLC, but continue to be owned through single asset LLCs. In addition, the notes issued by the Corporation were redeemed with equity interests in Gyrodyne.

Plan of liquidation:

In adopting the Plan of Liquidation for federal income tax purposes, the Corporation’s Board also determined to pursue the actual disposition of our remaining assets in an orderly manner designed to obtain the best value reasonably available for such assets. The Merger on August 31, 2015 completed the liquidation of the Corporation for federal income tax purposes within the two year period from the adoption of the Plan of Liquidation, as provided by Section 562(b)(1)(B) of the Internal Revenue Code of 1986, as amended (the “Code”) even though the actual disposition of the properties within the same period had not necessarily occurred. Our Board believed that the prompt completion of the Tax Liquidation by means of the Merger while permitting a longer period to dispose of the remaining assets would help obtain better values by enabling the sales to take place without the potential timing constraints created by completing the Merger as promptly as practicable. In addition, the ability to extend the time of holding the properties would permit the Company to seek enhancements to the value of the Flowerfield and Cortlandt Manor properties by pursuing various development or zoning opportunities.

Properties sold:

Port Jefferson Professional Park .

During 2016, the Company closed on the purchase and sale agreements on five buildings (approximately 4,000 square feet each) in the Port Jefferson Professional Park as follows:

The Company has four remaining buildings within the same medical park, each of which are currently being actively marketed for sale.

Fairfax Medical Center .

On February 4, 2016 the Company’s wholly-owned subsidiary Virginia Healthcare Center, LLC, a Virginia limited liability company (“VHC”) entered into a Purchase and Sale Agreement (the “Agreement”) to sell the Fairfax Medical Center, subsequently amended, for a sales price of $14,315,000 to JAG Associates, L.L.C., a Virginia limited liability company (“JAG”). The material terms of the Agreement provided for: (i) an initial earnest money deposit in the amount of $250,000 payable by JAG to the escrow agent within five business days following the Effective Date that were applied to the purchase price at closing; (ii) an evaluation period that expired on April 11, 2016, during which time JAG had the right to terminate the Agreement by written notice to the Company, for any reason or no reason, prior to the expiration of the evaluation period, in which case JAG had the right to receive a refund of its initial $250,000 earnest money deposit; (iii) if the Agreement was not terminated on or prior to April 11, 2016, JAG was obligated to deliver an additional earnest money deposit to the escrow agent in the amount of $250,000, which together with the initial earnest money deposit were applied toward the purchase price at closing; (iv) unless JAG terminated the Agreement on or prior to April 11, 2016, the closing would occur on or before May 4, 2016. The Agreement also contained a master lease (2 year term for approximately 4,700 square feet) to VHC for approximately $210,000, payments due quarterly if certain vacancies were not re-tenanted. Prior to the sale, the Company marketed, and following the sale JAG continues to actively market the space, the success of which will directly reduce the master lease obligation. The Agreement also contained additional customary covenants, conditions, representations and warranties. On April 25, 2016, in response to the purchaser’s due diligence results, VHC and JAG amended the Agreement as follows:

On May 4th, 2016, VHC closed on the sale of the Fairfax Medical Center. Based on the aforementioned terms, VHC has a master lease obligation (guaranteed by the Company) on approximately 3,852 square feet for approximately $155,000 over the next two years with payments made quarterly less any new leases or expansions signed by the buyer, which obligations will terminate if the financial obligation is satisfied through leases to one or more third party tenants. Based on the leasing activity since the closing date and net of the first installment paid in August 2016 of $16,878, the Company estimates the obligation on the master lease has been reduced to approximately $50,600.

The Comparison of the Net sales proceeds to the fair value reported prior to entering the Purchase and Sale Agreement:

Land Development

The Company is considering various options to maximize the total distributions to our shareholders during the liquidation process. Prior to the Merger, GSD did not have sufficient liquidity to effectively pursue the highest and best use zoning/entitlements of the Cortlandt Manor and Flowerfield properties. Following the rights offering and Merger, the Company believes it possesses sufficient liquidity to maximize the value of Flowerfield and Cortlandt Manor through the pursuit of the highest and best use zoning/entitlements. During the first nine months of 2016, the Company incurred $770,000 of land development costs, of which approximately $210,000 was for the purchase of four acres of adjacent land and related closing costs. The Company believes the acquired land will significantly enhance the achievable density we are pursuing under the entitlement efforts. The Company estimates that it may incur approximately $3.15 million (inclusive of the $770,000 incurred during the nine months ended September 30, 2016) in total land development costs through 2018, to continue enhancement efforts, including the pursuit of entitlements inclusive of zoning changes and special permits.

The Company does not intend to develop the properties but rather to focus resources on positioning the properties to be sold with all entitlements necessary to achieve maximum pre-construction value. During the process of pursuing such entitlements, the Company may entertain offers from potential buyers who may be willing to pay prices for the properties that the Company finds more attractive from a timing or value perspective than completing the entitlement processes.  While the real estate market is dynamic and the economy is uncertain, the Company believes the return on the estimated investment of $3.15 million will serve to increase the estimated distributions versus selling the properties with their current zoning and entitlements.

Cortlandt Manor Development:

On March 15, 2016, the Town of Cortlandt Manor (the “Town”) adopted its 2016 Sustainable Comprehensive Plan (the “Plan”) of which one key strategy is the simultaneous creation of a Medical Oriented District (“MOD”). The purpose of the MOD is to expand the Town’s existing medical infrastructure and encourage economic development, including capital investment, job creation and housing options. The MOD allows for a continuum of care, i.e., independent living, assisted living and nursing care, within or in neighboring facilities by centralizing medical services and related activities. As a designated zoning district, the MOD could include hospital, ambulatory surgery, primary and urgent care, hospice, laboratories, social services, boutique hotels and a wide range of housing.

The Company’s 33,871 square foot Cortlandt Medical Center and its approximate twelve acres are located directly opposite New York Presbyterian’s Hudson Valley Hospital Center and within the boundaries of the MOD. The Company has committed resources toward both market research and feasibility studies in support of achieving entitlements to maximize the value of the property. For the past several months the Company and its planning consultants have been working closely with the Town to identify issues and solutions involved in creating the Plan and more specifically, the MOD. With the Plan and the MOD now approved, we believe the funds being expended by the Company in this effort will be justified through enhancing the value of this property as we move to its eventual disposition.

Flowerfield Development:

Similar to our efforts in the Town of Cortlandt, we are working closely with engineers and consultants on market research and related feasibility studies to identify how we can maximize Flowerfield’s value through a highest and best use approach. The Company has been in discussions with the Town of Smithtown to seek out potential real estate development projects identified by the market research and feasibility studies which may not currently fall within our “as of right to build” zoning. We are also exploring with the Town of Smithtown whether it would be amenable to certain entitlements, special permits, re-zoning or other concessions that would allow for any such development projects currently not permitted within existing development constraints. Such changes could eventually lead to a number of different development plans ranging from single family or age restricted housing to condominiums or other forms of real estate developments in support of the needs of an expanding Stony Brook University and its affiliated medical school and hospital.

In the region surrounding Flowerfield, Stony Brook University serves as an economic engine through capital investment and growth in employment, including high paying positions in the fields of science and medicine. However, adequate housing, both on and off campus, remains a challenge. While construction is nearing completion on the University’s campus for additional dormitory rooms, our initial research indicates further supply is needed at several levels - undergraduate, graduate, physician, interns, family and visiting professors. In addition, unlike many universities around the country, Stony Brook lacks a campus-focused center around which many university-related social and professional activities are conducted. Other development options for the Flowerfield property might be along the lines of a continuum of care or stand-alone assisted living or nursing facilities, which we believe would be in demand given Long Island’s senior community’s increasing needs for such services. Although there can be no assurances, we believe these investments intended to enhance Flowerfield’s value will result in higher sale proceeds, similar to our expenditures intended to enhance Cortlandt Manor’s potential value.

Competition among industrial and medical office rental properties on Long Island and Cortlandt Manor, New York is intense. Furthermore, the Company also competes in the development of industrial, medical office and residential property where the competition is equally intense. Numerous commercial property owners compete with the Company in attracting tenants. Many are substantially larger than the Company.

Market Outlook

Real estate pricing is generally influenced by market interest rates. However, prices and rates do not move simultaneously; rather, prices generally lag behind interest rate adjustments for a period of time. An uptick in lending rates usually translates into lower cash returns for investors who use leverage to buy investment properties. On the other hand, rising interest rates also suggest that the economy is improving, which in turn could lead to higher demand for commercial property, and potentially higher rental rates. Today’s economic environment remains characterized by historically low interest rates which continue to compress capitalization rates for commercial properties. Furthermore, previously owned home sale prices continue to recover and new home construction continues at a pace that restricts supply. Commercial property prices have nearly recovered and or surpassed the 2007 pre-recession values in many sectors. During 2015, a majority of analysts believed that the economy was slowly moving from recovery status toward an expansionary cycle. On December 16, 2015, the Federal Open Market Committee of the Federal Reserve (the “FOMC” or the “Committee”) announced an increase in the federal funds rate by 25 basis points. The anticipation of this first increase in the federal funds rate since 2006 has been a primary source of much volatility in equity markets for real estate companies. Shortly after the FOMC meeting in late 2015, global market volatility and economic recoveries significantly deteriorated. Furthermore, the degradation in the energy industry and perhaps the commodities markets as a whole, which are yet to fully recover, have put further pressure on both global markets and the US economy. Furthermore, the June United Kingdom decision to withdraw from the European Union could have a prolonged economic impact on the US economy. These factors and others have contributed to FOMC statements following the March 2016 FOMC meeting suggesting that the FOMC has softened its views on the pace of the recovery, if any, the pace of further interest rate hikes in 2016, if any, and in fact whether further stimulus may be needed to address the economic stresses on the U.S. economy. Following the July FOMC meeting, FOMC statements indicate a consensus that the economy is more stable and that near term risks on the outlook have diminished. However, while the FOMC has reported that economic activity has expanded at a moderate rate, it also stated that a few risks remain and will continue to monitor inflation indicators and the global economic and financial developments.

Following the September FOMC meeting, FOMC statements indicated that "inflation has moved somewhat since earlier this year". Furthermore, the FOMC stated that while the case for a raise in interest rates is strengthening, they want to see "some further evidence" of economic progress before raising interest rates. Such statements indicate they could move to raise interest rates at the next FOMC meeting scheduled for December 2016. Such statements further suggest that the FOMC has strengthened its views on the pace of the recovery, the pace of further interest rate hikes, and in fact whether any further stimulus may be needed to address the economic stresses on the U.S. economy.

Federal regulators and U.S. government policy can have a major impact on our business. The U.S. Federal Reserve is a major participant in, and its actions significantly impact, the commercial real estate debt markets. For example, quantitative easing, a bond buying program implemented by the U.S. Federal Reserve to keep long-term interest rates low and stimulate the U.S. economy, has had the effect of reducing the difference between short-term and long-term interest rates. On October 29, 2014, however, the FOMC of the Federal Reserve Board announced an end to quantitative easing signaling that the Federal Reserve believed the U.S. economy was growing at a measured but sustained pace and that the need for continued stimulus diminished. These actions and Federal Reserve comments suggest that the Federal Reserve will eventually return to a normalized monetary policy. In December 2015, the FOMC raised the federal funds rate from the zero to one quarter percent target to a target of one quarter to one half percent. Furthermore, the FOMC gave indications that it may raise the rate in quarter point increments up to four times during 2016. However, the FOMC announced on March 16, 2016 that there will be no change in the target range for the federal funds rate , maintaining it at one quarter to one half percent. A second increase in March, following the initial increase in December, was widely expected by analysts after the December 2015 meeting, but expectations quickly changed in light of weak economic data that accumulated in the first quarter. The FOMC attributed its March decision to continuing progress in U.S. economic conditions but concerns about risks posed by global economic and financial developments. Any increase in real time rates could cause a disruption in the commercial lending market which could adversely affect the real estate industry, our real estate operations and or the value of any achievable real estate sales proceeds.

Following the FOMC meeting in April 2016, the FOMC decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation. Furthermore, the FOMC is continuing its policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy further supports accommodative financial conditions as it serves to help support maintaining low long term interest rates.

The property management industry is directly affected by the economy and the commercial real estate market in particular. Our business may be affected by the market for medical office, residential and industrial properties as well as the general financial and credit markets and other market or economic challenges experienced by the U.S. economy or real estate industry as a whole. As a result, our business could be impacted by general economic, financial and industry conditions, including (1) obtaining financing to renovate our current real estate holdings and or pursue the re-zoning efforts on the undeveloped property, (2) difficulty in consummating property transactions, (3) increased challenges in re-leasing space, and (4) potential risks stemming from late rental receipts, tenant defaults, or bankruptcies.

As a result of the economic downturn that began in the second half of 2007, demand for medical office, industrial, retail space and undeveloped property declined nationwide due to bankruptcies, downsizing, layoffs and cost cutting. Real estate transactions and development opportunities remain lessened in many markets compared to the period prior to the current economic downturn and capitalization rates rose. While the economy has improved, particularly the real estate industry, the recovery has been slow and not equally experienced across the United States. As a result, the cost and availability of credit during the downturn was, and if down markets return will again be, adversely affected by illiquid credit markets and wider credit spreads. Economic weakness and uncertainty during the prior downturn led many lenders and institutional investors to reduce and, in some cases, cease to provide funding to borrowers. In light of the slow recovery, the adverse impact on commercial lending may continue which could adversely affect the net proceeds from the sale of any properties we currently manage.

The aforementioned economic and industry trends may adversely impact our financial condition and our estimated net assets in liquidation because of the adverse impact they may have on the liquidity and financial condition of tenants and on the perception of investment opportunity on the part of potential real estate property purchasers. Our business may also be adversely affected by local economic conditions, as substantially all of our revenues are derived from our properties located in Westchester and Suffolk Counties in New York and, prior to the sale on May 4 ^th , 2016, Fairfax County in Virginia. Our current portfolio, net of sales through November 10, 2016, consists primarily of medical office and industrial buildings comprising approximately 179,000 rentable square feet, and lacks the diversity of larger portfolios. If negative economic conditions return or even deteriorate, the Company’s estimated net assets in liquidation could be adversely effected, which could reduce our estimated distributions.

Brexit

The United Kingdom referendum was held on Thursday, June 23, 2016 in which 53% of the people in the UK voted to leave (“Brexit”) the European Union (“EU”) as compared to 47% who voted to remain in the European Union. The referendum turnout was 71.8%, with more than 30 million people voting. It was the highest turnout in a UK-wide vote since the 1992 general election. England voted strongly for Brexit (The word Brexit has become used as a shorthand way of saying the UK leaving the EU - merging the words Britain and exit to get Brexit), by 53.4% to 46.6%, as did Wales, with Leave getting 52.5% of the vote and Remain 47.5%. Scotland and Northern Ireland both backed staying in the EU. Scotland backed Remain by 62% to 38%, while 55.8% in Northern Ireland voted Remain and 44.2% Leave.

For the UK to leave the EU it has to invoke an agreement called Article 50 of the Lisbon Treaty and then negotiate the process to exit. Prime Minister Cameron announced his resignation and will leave the decision to invoke Article 50 to its successor; Effective July 13, 2016, Theresa May was appointed prime minister after which she voiced her commitment to delivering the will of the British people to leave the European Union. Following her appointment, in response to questions, the prime minister explained that the UK would need some time to prepare for the process of negotiating the UK exit and hopes that these could be conducted in a constructive and positive spirit. Until such exit, the UK will continue to abide by EU treaties and laws, but not take part in any decision-making, as it negotiates a withdrawal agreement and the terms of its relationship with the now 27 nation bloc.

The political, cultural, economic and financial ramifications triggered by Brexit are speculative at best as no member nation has ever exited the European Union. However, the event and the process to exit the European Union could have an adverse impact on the US economy, and Gyrodyne in particular. Gyrodyne’s has limited real estate diversification as the as the remaining properties are located in Smithtown and Port Jefferson New York and Cortlandt Manor New York. Therefore, any prolonged adverse impact to the US economy and the New York suburban market in particular could affect the real estate market in which Gyrodyne operates. Furthermore, Gyrodyne is in the process of selling its real estate. In the event Brexit adversely affects the market, it could have a negative impact ranging from occupancy and rental rate per square foot to the timing of sales and the sales value achievable. In the short term, the impact of Brexit has been a global flight to quality which has driven interest rates down in the United States, potentially extending growth in the real estate market. However, availability of credit appears to be tightening partially resulting from concern over the potential ramifications stemming from Brexit and any potential future Federal Reserve rate hike.

Health Care Industry

In March 2010, the Patient Protection and Affordable Care Act and the Healthcare and Education Reconciliation Act of 2010 (together, the “Healthcare Legislation”) were signed into law. The complexities and ramifications of the Healthcare Legislation are significant, and will be implemented in a phased approach that began in 2010 and will conclude in 2018.

The Health Care Legislation has affected medical office real estate due to the direct impact on the tenant base. At this time, the full effects of the Healthcare Legislation and its impact on our business, our revenues and financial condition and those of our tenants are not yet known. We believe that the Healthcare Legislation is causing medical professionals to review their real estate options which include remaining status quo, increasing tenant space to address a higher volume of patients, combining practices with other professionals as well as becoming hospital employees rather than continuing independent practices of medicine. Our business is being impacted by factors including (1) difficulty transitioning doctors to longer term leases, (2) difficulty maintaining or raising rental rates, (3) increased challenges in re-leasing space and (4) difficulty transitioning tenants into larger spaces, all of which individually or collectively can impact sales values and the timing of such sales.

As of September 30, 2016 the average effective rental revenue per square foot adjusted for tenant improvements was $16.99 compared to $19.52 on December 31, 2015. The Company defines the effective revenue per square foot as the annual rate per square foot stated in the lease reduced by the average annual tenant improvement allowance provided for in such leases. Excluding properties sold through September 30 ^th 2016, the average effective rate at December 31, 2015 was $16.95.

Business Strategy

On December 30, 2013, the Corporation distributed to its shareholders all of the equity interests of GSD, which owned 100% of the interests in the Corporation’s four real properties, subject to related mortgage debt in favor of Flowerfield Mortgage Inc., a subsidiary of the Corporation, with the Corporation having the contractual right to manage the business and properties of GSD. The board of directors also approved the Plan of Merger, subject to the approval of shareholders of the Corporation holding at least two-thirds of the outstanding shares, pursuant to which the Corporation and GSD would be merged with and into Gyrodyne, LLC with the Corporation’s shareholders, holders of GSD equity interests and holders of interests in the Notes all exchanging their respective interests for equity interests in Gyrodyne, LLC. On September 25, 2014, the Corporation announced the 2014 Annual meeting and the previously postponed special meeting to vote on the proposed merger would be held coextensively on December 5, 2014 at Flowerfield Celebrations, Mills Pond Road, Saint James, New York 11780, at 11:00 a.m., Eastern Time. The Corporation was advised by its proxy solicitor, MacKenzie Partners, that with approximately 45% of the outstanding shares voted by delivery of proxy cards, approximately 97% of such shares were voted in favor of the Merger.  Despite the overwhelming percentage of received votes in favor of the Merger not enough shares were voted to reach the two-thirds majority needed under New York law.  Accordingly, on November 4, 2014, the Corporation announced that the Corporation’s special meeting originally scheduled for August 14, 2014 and previously postponed to August 27, 2014 and then again to December 5, 2014, was further postponed. Given the small size of holdings of many shareholders of the Corporation and the nature of various holders, the Corporation believed many holders may not have paid enough attention to the Merger to exercise their right to vote in 2014. The Corporation and its advisors continued to analyze potential options in the best interests of the Corporation and its shareholders, which may have included enhancements designed to facilitate the ability to complete the merger transaction. As further discussed above under the “Strategic Process” heading, on March 6, 2015, the Corporation filed a registration statement on Form S-1 with the SEC for a rights offering to its existing shareholders. The Corporation commenced the rights offering to facilitate the vote of two-thirds of the outstanding shares needed under New York law to approve the previously-announced proposed merger of the Corporation and Gyrodyne Special Distribution, LLC (“GSD”) with and into Gyrodyne, LLC, as well as raise equity capital in a timely and cost-effective manner while providing all of the Corporation’s shareholders the opportunity to participate.

On June 22, 2015, the Corporation announced that it received subscriptions for approximately 7,044,894 shares, greatly exceeding the maximum shares offered of 2,224,020. The rights offering resulted in 2,224,020 common shares issued on June 26, 2015 and net proceeds received (after expenses) of $5,606,190 (Gross proceeds of $6,116,055 less direct expenses of the rights offering of $509,865). 

The Corporation also announced on June 22, 2015 that its previously postponed special meeting of shareholders at which shareholders would be asked to authorize the previously announced merger of the Corporation and GSD with and into Gyrodyne LLC would be held on August 20, 2015. More than 99% of votes cast at the special meeting voted in favor of the transaction, representing more than 76% of all outstanding shares. The Merger closed on August 31, 2015 and Gyrodyne, LLC common shares began trading on NASDAQ on September 1, 2015. The Merger completes the plan of liquidation for purposes of the Internal Revenue Code, and resulted in holders of common stock of the Corporation receiving approximately 22.6% (335,086 shares) of the common shares of Gyrodyne, LLC in the aggregate (.0904 common share of Gyrodyne, LLC per share of the Corporation’s common stock), holders of non-transferable Notes receiving approximately 30.0% (444,804 shares) of the common shares of Gyrodyne, LLC in the aggregate (.024798 common share of Gyrodyne, LLC per $1.00 principal amount of the Dividend Notes issued in January and December 2014, together, in each case, with any interest thereon paid in kind in the form of additional Notes), and holders of non-transferable interests in GSD receiving approximately 47.4% (702,790 shares) of the common shares of Gyrodyne, LLC in the aggregate (.47399 common share of Gyrodyne, LLC per GSD interest).

We continue to focus our business strategy on maximizing the intrinsic value per share through aligning our operating and investment strategy with our goal of executing on a tax efficient liquidity event or series of tax efficient liquidity events. During the third quarter of 2015 we completed within the two year deadline, the tax plan of liquidation by completing the merger of GSD and the Corporation with and into Gyrodyne, LLC, thereby ensuring the prior 2013 and 2014 distributions and future distributions were and will continue in a tax efficient manner. The remaining strategy involves a balance between preserving capital and improving the market value of the real estate portfolio as the Company works towards accomplishing its overall plan to dissolve. The Company plans to dissolve after disposing all of its real property assets, applying the proceeds of such dispositions first to settle any claims, pending or otherwise, against Gyrodyne, and making liquidating distributions to holders of Gyrodyne common shares. To accomplish this, the Company’s intends to:

The completion of the Corporation’s tax liquidation by means of the Merger removes the timing constraints associated with the tax liquidation and now provides Gyrodyne the opportunity to pursue without such constraints the opportunistic disposition of certain properties and the enhancement of the value of the Flowerfield, and Cortlandt Manor properties, by pursuing various development or zoning/entitlement opportunities, which the Gyrodyne Board believes will improve the chances of obtaining better values for such properties. Gyrodyne expects that it will dissolve after it has completed the disposition of all of its real property assets, has applied the proceeds of such dispositions first to settle any claims, pending or otherwise, against Gyrodyne, and then has made liquidating distributions to holders of Gyrodyne common shares. We are unable to predict the precise nature, amount or timing of such distributions.

Sales of properties, by Gyrodyne could take the form of individual sales of assets, sales of groups of assets organized by business, type of asset or otherwise, a single sale of all or substantially all of the assets, or some other form of sale. The assets may be sold to one or more purchasers in one or more transactions over a period of time.

A sale of substantially all of the assets of the Company would require shareholder approval under New York law. However, in the event of the sale of individual properties, it is not required or anticipated that any shareholder votes will be solicited. The prices at which the various assets may be sold depends largely on factors beyond our control, including, without limitation, the condition of financial markets, the availability of financing to prospective purchasers of the assets, regulatory approvals, public market perceptions, and limitations on transferability of certain assets.

We cannot give any assurance on the timing of the ultimate sale of all of the Company’s properties. Assuming the completion of the liquidation of the Company takes until the end of 2018, and giving effect to its estimated cash flow from operation of its existing properties until their sale, the Company expects Gyrodyne would have a cash balance of approximately $28 million, prior to any future dividend distributions. Such cash would equate to future liquidating distribution of $18.89 per share based on Gyrodyne having 1,482,680 common shares outstanding. These estimated distributions do not include any additional value that the Company believes it can derive from the investments it is making to maximize the value on the Flowerfield and Cortlandt Manor properties. While the real estate market is dynamic and the economy is volatile, the Company believes the internal rate of return from the estimated investment of $3.15 million on enhancement efforts will improve the estimated distributions versus selling the real estate under its current zoning and entitlements. In addition, while it could be argued that approximately $1 million of land development costs are for environmental impact and other infrastructure studies that can be utilized by a potential buyer, such value was not included in the fair value of the real estate disclosed in the statement of net assets. For a further discussion see the 2015 Form 10-K annual report filed on March 31, 2016 and the supplement to the definitive proxy filed on July 1, 2015 and the definitive proxy filed on July 1, 2014 including the section titled “The Estimated Distribution to Shareholders (including Estimated Distribution to holders of Gyrodyne, LLC interests)”, which is located on pages 67 through 69.

The statement of net assets is based on certain estimates. Uncertainties as to the precise value of our non-cash assets, which exclude any estimated additional value achievable from the costs incurred to pursue the maximum value on the Flowerfield and Cortlandt Manor properties through certain land development efforts (mainly restricted to researching highest and best use and the pursuit of certain related entitlements, special permits and or zone changes) and the ultimate amount of our liabilities make it impracticable to predict the aggregate net value ultimately distributable to shareholders in a liquidation. Land development costs, claims, liabilities and expenses from operations, including operating costs, salaries, income taxes, payroll and local taxes, legal, accounting and consulting fees and miscellaneous office expenses, will continue to be incurred during the business plan of liquidation, which may include certain enhancement efforts. While certain professional fees, such as legal expenses and the fees of outside financial advisors remained high during 2015, they were mainly incurred to support and complete the Corporation’s tax plan of liquidation via the Merger. The Company believes the legal and related consulting fees, excluding advisory fees to support the land development effort, will be significantly reduced going forward. Nevertheless, expenses incurred in pursuing the Company’s business plan will reduce the amount of assets available for ultimate distribution to shareholders, and, while a precise estimate of those expenses cannot currently be made, management and our Board believe that available cash and amounts received on the sale of assets will be adequate to provide for our obligations, liabilities, expenses and claims (including contingent liabilities) and to make cash distributions to shareholders. However, no assurances can be given that available cash and amounts received on the sale of assets will be adequate to provide for our obligations, liabilities, expenses and claims and to make cash distributions to shareholders. If such available cash and amounts received on the sale of assets are not adequate to provide for our obligations, liabilities, expenses and claims, distributions of cash and other assets to our shareholders will be reduced and could be eliminated.

Transaction Summary for the period January 1 through September 30, 2016

The following summarizes our significant transactions and other activity during the nine-months ended September 30, 2016.

Acquisition Activity

In March 2016, the Company acquired a four acre undeveloped lot for $210,000, including related costs which the company believes is synergistic to maximizing the value on one of its properties.

The Company has four remaining buildings within the same medical park which are currently being actively marketed for sale.

Fairfax Medical Center .

On February 4, 2016 the Company’s wholly-owned subsidiary Virginia Healthcare Center, LLC, a Virginia limited liability company (“VHC”) entered into a Purchase and Sale Agreement (the “Agreement”) to sell the Fairfax Medical Center, subsequently amended, for a sales price of $14,315,000 to JAG Associates, L.L.C., a Virginia limited liability company (“JAG”). The material terms of the Agreement provided for: (i) an initial earnest money deposit in the amount of $250,000 payable by JAG to the escrow agent within five business days following the Effective Date that were applied to the purchase price at closing; (ii) an evaluation period that expired on April 11, 2016, during which time JAG had the right to terminate the Agreement by written notice to the Company, for any reason or no reason, prior to the expiration of the evaluation period, in which case JAG had the right to receive a refund of its initial $250,000 earnest money deposit; (iii) if the Agreement was not terminated on or prior to April 11, 2016, JAG was obligated to deliver an additional earnest money deposit to the escrow agent in the amount of $250,000, which together with the initial earnest money deposit were applied toward the purchase price at closing; (iv) unless JAG terminated the Agreement on or prior to April 11, 2016, the closing would occur on or before May 4, 2016. The Agreement also contained a master lease (2 year term for approximately 4,700 square feet) to VHC for approximately $210,000, payments due quarterly if certain vacancies were not re-tenanted. Prior to the sale, the Company marketed, and following the sale JAG continues to actively market the space, the success of which will directly reduce the master lease obligation. The Agreement also contained additional customary covenants, conditions, representations and warranties. On April 25, 2016, in response to the purchaser’s due diligence results, VHC and JAG amended the Agreement as follows:

On May 4th, 2016, VHC closed on the sale of the Fairfax Medical Center. Based on the aforementioned terms, VHC has a master lease obligation (guaranteed by the Company) on approximately 3,852 square feet for approximately $155,000 over the next two years with payments made quarterly less any new leases or expansions signed by the buyer, which obligations will terminate if the financial obligation is satisfied through leases to one or more third party tenants. Based on the leasing activity since the closing date and net of the first installment paid in August 2016 of $16,878, the Company estimates the obligation on the master lease has been reduced to approximately $50,600.

The Comparison of the Net sales proceeds to the fair value reported prior to entering the Purchase and Sale Agreement:

Class Action Litigation

On August 14, 2015, the parties to the Action entered into a Stipulation of Settlement (the "Settlement") providing for the settlement of the Action, subject to the Court's approval.  Under the Settlement, Gyrodyne supplemented its Proxy Statement on August 17, 2015 with certain supplemental disclosures, and agreed that any sales of its properties would be effected in arm's-length transactions at prices at or above their most recent appraised values.  The plaintiff, on behalf of itself and the members of the putative class it represents, agreed to release and dismiss with prejudice all claims that had or could have been asserted in the Action or in any other forum against the defendants in the case (the Corporation, the members of the board of directors, GSD and Gyrodyne) (the “Defendants”) and their affiliates and agents arising out of or relating to the merger and the other transactions alleged by plaintiff in its complaint, as supplemented.  On April 8, 2016, the Court entered a Final Order and Judgment approving the Settlement. By order of the same date, the Court also granted plaintiff’s application for an award of attorney’s fees and reimbursement of expenses in the amount of $650,000. The Company paid the award in full in April 2016 and received a refund from its D&O carrier of approximately $399,000 (the balance in excess of the $1 million deductible on its D&O policy).

Pursuant to the Settlement, the Defendants agreed that Gyrodyne would sell the “Contributed Properties” (defined therein as the Company’s St. James, Cortlandt Manor, Fairfax and Port Jefferson properties) at the prices resulting from arms’ length negotiations and at or above the appraised value for the Contributed Properties obtained by the Company in 2014. The 2014 appraised values of the Contributed Properties in the aggregate were approximately $100,000 higher than the 2013 aggregate appraised values for such properties.

See Part II, Item I, “Legal Proceedings”, below.

Investments 

During the nine months ended September 30, 2016, the Company continued to hold investments in hybrid mortgage backed securities with AA and AAA ratings fully guaranteed by US government agencies (the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation). The Company received principal payments during the nine months ended September 30, 2016 of $643,609 from these investments. The portfolio is currently generating a yield of approximately 2%.

Leasing 

During the nine months ended September 30, 2016, the Company executed twenty-five lease renewals and two expansions encompassing approximately 30,000 and 1,800 square feet, respectively and approximately $549,000 and $54,000, respectively in annual revenue. Furthermore, nine new leases were signed comprising 12,000 square feet and $206,000 in annual revenue.

The new lease and lease renewals/expansions signed during the nine months ended September 30, 2016 included tenant allowances and rent abatements of approximately $226,000 and $19,000, respectively which were associated with total lease commitments of approximately $823,000. The Company incurred approximately $19,000 in lease commissions during the first nine months ended September 30, 2016. Following the sale of the Virginia Healthcare Center on May 4, 2016, the Company is only responsible for $29,000 and $10,000 of the tenant allowances and rent abatements, respectively associated with $362,000 of lease commitments. Additionally, as part of the sale agreement the Company satisfied in full, its obligation for approximately $24,000 of tenant allowances that relate to the Virginia Healthcare Center.

Lease terminations/defaults

There were eight terminations during the nine month period ended September 30, 2016, comprising approximately 9,000 square feet and approximately $174,000 in annual revenue.

The continued economic volatility for small businesses and medical practices has impacted property management firms, including the Company’s ability to renew leases at comparable rates if at all, without providing either rent abatements or comparable other lease incentives. Rental revenues were $739,050, $708,439, $1,210,479 and $1,207,289 for the three-months ended September 20, June 30, 2016, March 31, 2016 and December 31, 2015, respectively. The quarter over quarter decreases are mainly due to the sales of the Virginia Healthcare Center and the 6 buildings in the Port Jefferson Professional Park that closed between December 30, 2015 and September 30, 2016. The increase in revenue from the medical park in the third quarter is mainly due to one high credit risk tenant, the revenue of which is reported on a cash basis when paid supplemented by non-cash revenue reductions in the second quarter affiliated with long term receivables that were sold with the underlying assets. The revenue during the quarter ended December 31, 2015 relating to these properties was $385,350 and $179,697, respectively. Although the Company successfully avoided significant portfolio wide rental revenue degradation, the Company sees continuing challenges to maintain both rental rates and occupancy during the slow economic recovery. The below table reflects the Company’s rental revenue at its industrial park vs. the combined rental revenue of its medical parks and the related occupancy rate and effective rental rate of each.

Our leasing activity has resulted in total lease commitments as of September 30, 2016 and December 31, 2015 of $6,030,045 and $16,044,572, respectively. The reduction was mainly due to the sale of the Fairfax Medical Center in May 2016 and the sale of five buildings in the Port Jefferson Professional Park during the first nine months of 2016. The Fairfax Medical Center and the five buildings in the Port Jefferson Professional Park contributed lease commitments of approximately $8.3 million and $1.5 million, respectively at December 31, 2015. There were twenty-five renewals during the period along with nine new leases, with the resulting annual revenue commitment partially offset by eight terminations during the period. During the first nine months the Company provided tenant incentives of approximately $245,000. However, the economy continues to be challenging and, to compete effectively with other local landlords, the Company may offer aggressive tenant improvements in exchange for signing medium and long term lease commitments.

Included in the leasing activity above is one new lease, one expansion and one termination relating to the Fairfax Medical Center that was sold on May 4, 2016. Tenant incentives relating to this property were $205,000 of which the Company is only responsible for $24,000, half which have been settled, and the remaining incentives are the responsibility of the purchaser of the Fairfax Medical Center.

Retention bonus plan

As a result of the determination by the Corporation’s board of directors in September 2013 that it was in the best interests of the Corporation and its shareholders to pursue the actual disposition of the its remaining assets, the Company’s properties have been and will continue to be managed and marketed in an orderly manner designed to obtain the best value reasonably available for such assets. Accordingly, in May 2014, the Corporation’s board of directors approved a Retention Bonus Plan designed to recognize the nature and scope of the responsibilities related to such business plan, to reward and incent performance in connection therewith, to align the interests of directors, executives and employees with our shareholders and to retain such persons during the term of such plan. The Retention Bonus Plan provides for bonuses to directors, officers and employees determined by the gross sales proceeds from the sale of each property and the date of sale.

The Retention Bonus Plan provides for a bonus pool that would be funded upon the sale of each of the Company’s properties with an initial amount equal to 5% of the specified appraised value of such properties (set forth in the Plan), so long as the gross selling price of the property is equal to or greater than 100% of its appraised value as designated in the bonus plan. The aggregate amount of the 2013 appraisals for the Company’s properties was utilized by the Company to help set the aggregate valuation of the real estate that was included in the non-cash dividend distributed on December 30, 2013. Additional funding of the bonus pool would occur on a property-by-property basis when the gross sales price of a property is in excess of its appraised value as follows: 10% on the first 10% of appreciation, 15% on the next 10% of appreciation and 20% on appreciation greater than 20%. Furthermore, if a specified property is sold on or before a designated date to be specified in the Retention Bonus Plan, an additional amount equal to 2% of the gross selling price of such property also would be funded into the bonus pool.

The bonus pool is distributable in the following proportions to the named participants in the bonus plan for so long as they are directors or employees of the Company: 15% for the Chairman, 50% for the directors other than the Chairman (10% for each of the other five directors) and 35% (the “Employee Pool”) for the Company’s executives and employees. Such share of the bonus pool is earned only upon the completion of the sale of a property at a gross selling price equal to or greater than its appraised value and is paid to the named beneficiaries of the Retention Bonus Plan or their designees within 60 days of the completion of such sale or, if later, within 60 days of receipt of any subsequent post-completion installment payment related to such sale. All allocations to individual beneficiaries of the Employee Pool shall be determined by the board of directors of the Company in consultation with its President.

On May 24, 2016, the Company amended its Retention Bonus Plan to provide that land development costs incurred on a property since the date of the 2013 appraisal will be added to the appraised value of the property in calculating appreciation (gross sales price minus appraised value) for the purpose of determining the bonus pool. The foregoing change was approved in order to better align the interests of the participants in the Retention Bonus Plan with those of the shareholders. The amendment also provides that each of the ten buildings in the Port Jefferson Professional Park will be treated as a “property”, so that a participant’s right to bonus payment on the sale of a Port Jefferson building will vest on, and payments to the bonus pool may be made shortly following, the closing of the sale of that building. As originally adopted, all ten buildings in the Port Jefferson Professional Park were treated as one property, so that a participant departing prior to the sale of all ten buildings would forfeit bonus on all ten buildings. The reason for this original designation was that, at the time of adoption, the board of directors believed that Gyrodyne’s entire Port Jefferson property would be sold as one block, not as individual buildings. Subsequent to adoption, the Gyrodyne board came to believe that the sale of individual buildings would generate the greatest aggregate values and thus would be in the best interests of the Company and its shareholders.

The value of the real estate reported in the Statement of Net Assets as of September 30, 2016 does not include the appreciation that may result from the estimated land development costs. As a result, fair value as reported does not exceed the adjusted appraised value under the Retention Bonus Plan and accordingly the Company has not included any retention bonuses on the sale of the Cortlandt Manor or Flowerfield Properties in the estimated costs in excess of receipt. However, if the Company concludes in future periodic filings that the value of the real estate exceeds the minimum value required to pay bonuses under the retention bonus plan (whether due to appreciation of the underlying real estate and/or a reduction in estimated land development costs), then the Company will report the updated estimated real estate value and the estimated bonuses related to the value of the Cortlandt Manor and/or Flowerfield Properties in accordance with the provisions of the retention bonus plan.

Payments made during the nine months ended September 30, 2016 under the Retention Bonus Plan relating to the sales of 5 buildings in the Port Jefferson Professional Park and the Virginia Healthcare Center were as follows:

Subsequent Events

Leasing- Subsequent to September 30, 2016, the Company signed one lease extension and one lease expansion encompassing approximately 2,400 square feet and approximately $37,000 in annual revenue. There were no terminations.

Subsequent to September 30, 2016, there were Retention Bonus payments made as follows:

Critical Accounting Policies

Liquidation Basis of Accounting - The condensed consolidated financial statements for periods prior to September 1, 2015 were prepared on the going concern basis of accounting, which contemplates realization of assets and satisfaction of liabilities in the normal course of business. Upon the effectiveness of the merger, the Company adopted the liquidation basis of accounting, effective September 1, 2015. This basis of accounting is considered appropriate when, among other things, liquidation of the Company is imminent.

Under the liquidation basis of accounting the consolidated balance sheet, consolidated statement of operations and the consolidated statement of cash flows are no longer presented (except for periods prior to the adoption of the liquidation basis of accounting). The consolidated statement of net assets in liquidation and the consolidated statement of changes in net assets in liquidation are the principal financial statements presented under the liquidation basis of accounting.

Under the liquidation basis of accounting, all of the Company’s assets have been stated at their estimated net realizable value and are based on current contracts, estimates and other indications of sales value net of estimated selling costs.  All liabilities of the Company, including those estimated costs associated with implementing the Plan of Liquidation, have been stated at their estimated settlement amounts.  These amounts are presented in the accompanying statement of net assets in liquidation.  These estimates will be periodically reviewed and adjusted as appropriate.  There can be no assurance that these estimated values will be realized.  Such amounts should not be taken as an indication of the timing or amount of future distributions or our actual dissolution.  The valuation of assets at their net realizable value and liabilities at their anticipated settlement amount represent estimates, based on present facts and circumstances, of the net realizable value of the assets and the costs associated with carrying out the Plan of Liquidation.  The actual values and costs associated with carrying out the Plan of Liquidation are expected to differ from amounts reflected in the accompanying financial statements because of the Plan’s inherent uncertainty.  These differences may be material.  In particular, the estimates of our costs will vary with the length of time necessary to complete the Plan of Liquidation, which is currently anticipated to be the end of 2018.  Accordingly, it is not possible to predict with certainty the timing or aggregate amount which may ultimately be distributed to common interest holders and no assurance can be given that the distributions will equal or exceed the estimate presented in the accompanying statement of net assets in liquidation.

Management’s discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The condensed consolidated financial statements of the Company include accounts of the Company and all majority-owned and controlled subsidiaries. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the Company's condensed consolidated financial statements and related notes. In preparing these financial statements, management has utilized information available including its past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments of certain amounts included in the condensed consolidated financial statements, giving due consideration to materiality. On a regular basis, we evaluate our assumptions, judgments and estimates. However, application of the critical accounting policies below involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. In addition, other companies may utilize different estimates, which may impact comparability of the Company's results of operations to those of companies in similar businesses. We believe there have been no material changes to the items that we disclosed as our critical accounting policies under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K for the year ended December 31, 2015.

Principles of consolidation - The accompanying condensed consolidated financial statements include the accounts of Gyrodyne LLC and all majority owned subsidiaries.

The Company consolidates its wholly-owned subsidiaries, partnerships and joint ventures which it controls (i) through voting rights or similar rights or (ii) by means other than voting rights if the Company is the primary beneficiary of a variable interest entity ("VIE"). Prior to the Merger, GSD was the only VIE and was included in the consolidated financial statements. As a result of the Merger, GSD merged with and into Gyrodyne, LLC, accordingly, effective with such merger, there is no longer a VIE.

Investments in affiliates in which the Company has the ability to exercise significant influence, but not control, are accounted for under the equity method. Investment interests in excess of 5% in limited partnerships are accounted for under the equity method. All consolidated subsidiaries are wholly owned. All inter-company balances and transactions have been eliminated. With the exception of the investment in the Grove, which has a carrying value of $0, there were no investments accounted for under the equity method for the two months ended August 31, 2015. The equity method of accounting is not applicable to the financial statements prepared under the liquidation basis of accounting.

Effective with the Merger, the Company adopted the liquidation basis of accounting effective September 1, 2015. As a result, any costs incurred and income received since then will be included in the condensed consolidated statements of changes in net assets in liquidation. During the nine months ended September 30, 2016, net liquidation value increased by $491,628. The change was mainly due to the increase in the value of the Company’s investments and real estate of $110,138 and $221,000, respectively, supplemented by the increase in the remeasurement of assets and liabilities in liquidation of $160,490. In May 2016 and August 2016, the Company declared non-recurring special dividends of $9.25 per share ($13,714,790) and $1.50 per share ($2,224,020). This resulted in a decrease in net assets in liquidation for the nine months ended September 30, 2016 of $15,447,182 to $28,008,395.

Discussion of the Statement of Net Assets

The Merger was effective as of August 31, 2015. The completion of the Corporation’s tax liquidation by means of the Merger removed the timing constraints associated with the tax liquidation and provided Gyrodyne the opportunity to pursue without such constraints the opportunistic disposition of certain properties and the enhancement of the value of Flowerfield and Cortlandt Manor, by pursuing various development or zoning opportunities, which the Gyrodyne Board believes will improve the chances of obtaining better values for such properties. Gyrodyne expects that it will dissolve after it has completed the disposition of all of its real property assets, has applied the proceeds of such dispositions first to settle any claims, pending or otherwise, against Gyrodyne, and then has made liquidating distributions to holders of Gyrodyne common shares. Therefore beginning September 1, 2015, the Company reports its financial results on the Statement of Net Assets and the Statement of Changes in Net Assets, both of which track the Company’s estimated remaining liquidating distributions. Assuming the forecasted liquidation of Gyrodyne is completed by the end of 2018, and giving effect to the estimated cash flow from operations of its existing properties until their sale, the Company expects Gyrodyne would have a cash balance of approximately $28 million, prior to any future dividend distributions. 

The cash balance at the end of the liquidation period (currently estimated to be December 31, 2018), excluding any interim distributions, is estimated based on the September 30, 2016 combined cash balance and marketable securities of $8.7 million plus adjustments for the following items which are estimated through December 31, 2018:

The following table summarizes the estimates to arrive at the Net Assets in Liquidation as of September 30, 2016 (dollars are in millions).

Discussion of Changes in Net Assets

 The completion of the Corporation’s tax liquidation by means of the Merger removes the timing constraints associated with the tax liquidation and now provides Gyrodyne the opportunity to pursue without such constraints the opportunistic disposition of certain properties and the enhancement of the value of Flowerfield and Cortlandt Manor, by pursuing various development or zoning opportunities, which the Gyrodyne Board believes will improve the chances of obtaining better values for such properties. Gyrodyne expects that it will dissolve after it has completed the disposition of all of its real property assets, has applied the proceeds from such dispositions and from the liquidation of other assets first to settle any claims, pending or otherwise, against Gyrodyne, and then has made liquidating distributions to holders of Gyrodyne common shares. Therefore, the Statement of Changes in Net Assets contains fair value adjustments to the August 31, 2015 ending going concern equity to arrive at liquidating value. In addition and separately stated are the changes in the Statement of Net Assets for the period September 1, 2015 through December 31, 2015. For a further discussion of these adjustments see the Company’s 2015 Form 10-K annual report – Management Discussion and analysis – “Statement of Changes in Net Assets”. The changes in the Statement of Net Assets for the period January 1, 2016 through September 30, 2016 are discussed below:

^(a) The net increase in value of $221,000 is attributable to an increase in value from the sale agreements of two buildings in the Port Jefferson Professional Park and the increase in value from the sale agreement of the Virginia Healthcare Center at $206,000 and $15,000, respectively, in excess of the estimated value at December 31, 2015. The combined net increase of $221,000 represents the net increase in value of the real estate compared to that which was reported in the Statement of Net Assets at December 31, 2015.

^(b) On May 26, 2016, the Company declared a non-recurring special cash dividend on the Company’s common shares of limited liability company interests of $9.25 per share, payable June 15, 2016 to shareholders of record at the close of business on June 6, 2015. The special dividend consisted of proceeds from the sale of the Fairfax Medical Center and the sale of two buildings in the Port Jefferson Professional Park. NASDAQ set the ex-dividend date as June 16, 2016. On August 29, 2016 the Company declared another non-recurring special cash dividend on the Company’s common shares of limited liability company interests of $1.50 per share, payable September 15, 2016 to shareholders of record at the close of business on September 9, 2016. The special dividend consisted of proceeds from the recent sale of three buildings in the Port Jefferson Professional Park.

LIQUIDITY AND CAPITAL RESOURCES 

Cash Flows : As we pursue our plan to sell our properties opportunistically, including certain enhancement efforts, we believe that a main focus of management is to effectively manage our statement of net assets in liquidation through cash flow management of our tenant leases, maintaining or improving occupancy, and pursuing and recycling capital.

As the Company executes on the sale of assets, it will no less than annually, review its capital needs and declare and distribute dividends of any excess cash, accordingly. Upon completion of these activities, if successful, Gyrodyne will distribute the remaining cash to its shareholders and then proceed to complete the dissolution of the Company, delist its shares from NASDAQ and terminate its registration and reporting obligations under the Securities Exchange Act of 1934, as Amended (the “Exchange Act”). Gyrodyne is required to make adequate provisions to satisfy its known and unknown liabilities which could substantially delay or limit its ability to make future distributions to shareholders. The process of accounting for liabilities, including those that are currently unknown or whose amounts are uncertain may involve difficult valuation decisions which could adversely impact the amount or timing of any future distributions.

We generally finance our operations and acquisitions through cash on hand.

As of September 30, 2016, the Company had cash and cash equivalents totaling approximately $4.2 million and investments in U.S. guaranteed hybrid mortgage backed securities of approximately $4.5 million. The Company anticipates that the combination of its current cash balance and cash flow from its operations will be adequate to fund the Plan of Liquidation and dissolution over the next twelve months. The Company has approximately $8.7 million comprised of cash and investments in mortgage backed securities which will be partially used to fund the pursuit of the highest and best use of its Flowerfield and Cortlandt Manor properties while simultaneously pursuing the business plan of liquidation. The Company estimated and reported in the Statement of Net Assets total gross cash proceeds from the sale of its assets of approximately $28.9 million. Assuming the completion of the liquidation of Gyrodyne takes until the end of 2018, and based on its current cash balance and giving effect to its estimated cash flow from operation of its existing properties until their sale, the Company expects Gyrodyne would have a cash balance of approximately $28 million, prior to any future dividend distributions. Such cash would equate to future liquidating distribution of $18.89 per share based on Gyrodyne LLC, having 1,482,680 common shares outstanding.

In addition to these ongoing requirements, the continued economic challenges for small businesses, including the lack of available credit to many of our tenant classes who are small businesses and the uncertainty facing medical tenants brought about by the 2010 Federal health care reform legislation, could adversely affect our operating results and accordingly the estimated cash proceeds from the plan of liquidation.

Beginning in the second half of 2007, the residential mortgage and capital markets began showing signs of stress, primarily in the form of escalating default rates on sub-prime mortgages, declining residential home values and increasing inventory nationwide. This “credit crisis” spread to the broader commercial credit markets and has reduced the availability of financing. During 2013 interest rates on residential and commercial mortgages began to show signs of rising; however volatility in the economic recovery has generated mixed signals on when long term rates will settle on an upward trajectory and in recent months have actually reversed direction. The inability for the economy to rebound from the prior recession reflecting the fragile underpinnings of the economy, combined with the impact of the Healthcare Legislation has resulted in an extensive reduction in occupancy rates and related rental rates across residential, commercial and medical office properties. In certain cases the Company has addressed these challenges to date through various tenant incentives which resulted in the Company’s current market rents and related occupancy rates.

The Company has invested in medical office buildings, an asset class that has been facing challenges, partially attributable to the Patient Protection and Affordable Care Act and the Healthcare and Education Reconciliation Act of 2010 (together, the “Healthcare Legislation”). If the conditions triggered by the healthcare legislation continue, our portfolio may experience lower occupancy and effective rents, which would result in a corresponding decrease in net income, funds from operations and cash flows.   The Company experienced a reduction in lease commitments to $6.0 million at September 30, 2016 compared to $16.0 million at December 31, 2015. The reduction was mainly due to the sale of the Fairfax Medical Center in May 2016 and the sale of five medical office buildings in the Port Jefferson Professional Park which contributed lease commitments of approximately $8.3 million and $1.5 million respectively at December 31, 2015. The Company continues to face a competitive leasing environment which may adversely impact its ability to grow its lease commitments.

LIMITED PARTNERSHIP INVESTMENT  

The Company owns a 10.12% limited partnership interest in Callery Judge Grove, L.P. (the “Grove”), a limited partnership which in 2013 sold its only assets, an undeveloped Florida property located in Palm Beach County, Florida (the “Grove Property”), which is the subject of a plan for mixed-use development.

On March 18, 2011, the Grove’s lender, Prudential Industrial Properties, LLC ("Prudential"), commenced a foreclosure action against the Grove. On September 19, 2013, the Grove Property was sold, the foreclosure lawsuit was dismissed and the Grove’s debt to Prudential was repaid. At December 31, 2014 and 2013, the Company’s interest in the Grove was held in a taxable REIT subsidiary of the Company with $0 value. The purchaser of the Grove Property, Minto Group, formally refers to the development project as Westlake.

As of December 31, 2013, the Company had a $1,315,000 deferred tax liability related to the Grove, which represented taxable losses not yet recorded pursuant to the equity method of accounting. Following certain taxable gains received in 2014 but not yet recorded, the Company reversed the deferred tax liability in total in 2014 and recorded a current tax liability of approximately $618,000 (which was paid in the second quarter of 2015) and a tax benefit of $697,000.

While the Company did not receive any distribution in connection with the sale of the Grove Property in 2013, the purchase and sale agreement provided that the Grove had the right to receive certain payments on the sale of single family residential units constructed on the property or on the sale of the property itself. Gyrodyne has been informed by the Grove’s managing partner that the purchaser of the Grove Property, Minto Group, transferred the property to an affiliate which triggered an appraisal process that resulted in the payment of a fee by Minto to the Grove of $1,968,750. The Grove’s managing partner also informed Gyrodyne that the fee along with some of its existing cash will be utilized to pay back in full debt obligations owed to certain limited partners in the amount of $2.7 million. In light of the foregoing, Gyrodyne believes that the Grove may not receive any additional payments from Minto beyond the aforementioned $1,968,750. Inasmuch as the Grove’s obligations to certain limited partners exceed the payment it received from Minto, it is unclear what amount, if any, Gyrodyne could expect to receive in any final liquidating distribution from the Grove, which may not occur until 2017 at the earliest. The amount of distributions, if any, ultimately received by Gyrodyne will depend on the Grove’s assets, liabilities and expenses that must be settled prior to any distributions to the Grove’s limited partners.

The Grove does not have an audit, review or compilation of its financial statements, therefore, the Company is challenged to determine the collectability of any income generated by the Grove. As a result, the Company will not recognize income from the Grove and will not include in the statement of net assets any potential distributions from the Grove until the earlier of when cash distributions are received or upon receiving financial data that substantiates its results of operations.

The Grove investment is a distressed asset operating in a distressed environment where an orderly transaction is not available. The facts and circumstances of the Grove make it unreasonable to present a fair value utilizing a Level 3 methodology, the lowest methodology which allows for broad assumptions. Therefore, in accordance with the exception rules for distressed assets that are thinly traded/lack of marketability, the Company is not presenting a fair value for its investment in the Grove. Prior to the Merger, the Company accounted for the investment under the equity method. As of September 30, 2016 and December 31, 2015, the carrying value of the Company’s investment was $0.