Notes
to Unaudited Consolidated Financial Statements
1.
GENERAL INFORMATION
The
accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) for interim financial information, and with the rules and regulations
of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, these interim
financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In
the opinion of the Company, as defined below, these unaudited consolidated financial statements include all adjustments necessary
to present fairly the information set forth herein. All such adjustments are of a normal recurring nature. Results for interim
periods are not necessarily indicative of results to be expected for a full year.
These
unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements and
notes included in our latest Annual Report on Form 10-K filed with the SEC on March 30, 2017.
Power
REIT (the “Registrant” or the “Trust”, and together with its consolidated subsidiaries, “we”,
“us”, the “Company” or “Power REIT”, unless the context requires otherwise) is a Maryland-domiciled
real estate investment trust (a “REIT”) that holds, develops, acquires and manages real estate assets related to transportation
and energy infrastructure in the United States. Within the transportation and energy infrastructure sectors, Power REIT is focused
on making new acquisitions of real estate that are or will be leased to renewable energy generation projects, such as utility-scale
solar farms and wind farms, which have low or minimal technology risk.
The
Trust is structured as a holding company and owns its assets through four wholly-owned, special purpose subsidiaries that have
been formed in order to hold real estate assets, obtain financing and generate lease revenue. As of September 30, 2017, the Trust’s
assets consisted of approximately 112 miles of railroad infrastructure and related real estate which is owned by its subsidiary
Pittsburgh & West Virginia Railroad (“P&WV”) and approximately 601 acres of fee simple land leased to a number
of solar power generating projects with an aggregate generating capacity of approximately 108 Megawatts (“MW”). Power
REIT is actively seeking to expand its portfolio of real estate related to renewable energy generation projects and is pursuing
investment opportunities that qualify for REIT ownership within solar, wind, hydroelectric, geothermal, transmission and other
infrastructure projects.
During
the nine months ended September 30, 2017, the Trust paid a quarterly dividend of approximately $210,000 ($0.48375 per share per
quarter) on Power REIT’s 7.75% Series A Cumulative Redeemable Perpetual Preferred Stock.
The
Trust was formed as part of a reorganization and reverse triangular merger of P&WV that closed on December 2, 2011. P&WV
survived the reorganization as a wholly-owned subsidiary of the Trust.
The
Trust has elected to be treated for tax purposes as a REIT, which means that it is exempt from U.S. federal income tax if a sufficient
portion of its annual income is distributed to its shareholders, and if certain other requirements are met. In order for the Trust
to maintain its REIT qualification, at least 90% of its ordinary taxable annual income must be distributed to shareholders.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
These
unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in
the United States (“GAAP”).
POWER
REIT AND SUBSIDIARIES
Notes
to Unaudited Consolidated Financial Statements
Recent
Accounting Pronouncements
In
March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No 2016-09 “Compensation - Stock compensation” (Topic 718). The new guidance is intended to simplify some provisions
in stock compensation accounting, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements,
as well as classification in the statement of cash flows. This standard is effective for fiscal years and interim periods beginning
after December 15, 2016 and the adoption of this standard during the nine months ended September 30, 2017 did not have a material
impact on our consolidated financial statements.
In
May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes existing revenue recognition
guidance. The new guidance in ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods
or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for
those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue
and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized
from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with
Customers (Topic 606): Deferral of the Effective Date, to provide entities with an additional year to implement ASU 2014-09. As
a result, the guidance in ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, and interim
reporting periods within those years, using one of two retrospective application methods. We expect to adopt this standard when
effective, and the impact on our financial statements is not currently estimable.
In
February 2016, the FASB issued ASU No 2016-02 “Leases” (Topic 842). The standard requires companies that lease valuable
assets like aircraft, real estate, and heavy equipment to recognize on their balance sheets the assets and liabilities generated
by contracts longer than a year. The standard also requires companies to disclose in the footnotes to their financial statements
information about the amount, timing, and uncertainty for the payments they make for the lease agreements. This standard is effective
for fiscal years and interim periods beginning after December 15, 2018. Early adoption is permitted. We expect to adopt this standard
when effective, and the impact on our financial statements is not currently estimable.
In
January 2016, the FASB issued ASU No 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”,
Financial Instruments - Overall (Subtopic 825-10). The new guidance is intended to improve the recognition and measurement of
financial instruments. This guidance requires that financial assets and financial liabilities must be separately presented by
measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements. This
guidance is effective for fiscal years and interim periods beginning after December 15, 2017. The standard includes a requirement
that businesses must report changes in the fair value of their own liabilities in other comprehensive income (loss) instead of
earnings, and this is the only provision of the update for which the FASB is permitting early adoption. We expect to adopt this
guidance when effective, and do not expect this guidance to have a significant impact on our financial statements.
Principles
of Consolidation
The
accompanying consolidated financial statements include Power REIT and its wholly-owned subsidiaries. All intercompany balances
have been eliminated in consolidation.
POWER
REIT AND SUBSIDIARIES
Notes
to Unaudited Consolidated Financial Statements
Fair
Value
Fair
value represents the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the
measurement date. The Trust measures its financial assets and liabilities in three levels, based on the markets in which the assets
and liabilities are traded and the reliability of the assumptions used to determine fair value.
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Level
1 – valuations for assets and liabilities traded in active exchange markets, or interest in open-end mutual funds that
allow a company to sell its ownership interest back at net asset value on a daily basis. Valuations are obtained from readily
available pricing sources for market transactions involving identical assets, liabilities or funds.
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Level
2 – valuations for assets and liabilities traded in less active dealer, or broker markets, such as quoted prices for
similar assets or liabilities or quoted prices in markets that are not active. Level 2 includes U.S. Treasury, U.S. government
and agency debt securities, and certain corporate obligations. Valuations are usually obtained from third party pricing services
for identical or comparable assets or liabilities.
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Level
3 – valuations for assets and liabilities that are derived from other valuation methodologies, such as option pricing
models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions.
Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or
liabilities
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In
determining fair value, the Trust utilizes valuation techniques that maximize the use of observable inputs and minimize the use
of unobservable inputs to the extent possible as well as considering counterparty credit risk.
The
carrying amounts of Power REIT’s financial instruments, including cash and cash equivalents, and accounts payable approximate
fair value because of their relatively short maturity. Long-term debt approximates fair value since the related rates of interest
approximate current market rates. The Company does not have any financial instruments that are required to be measured and recorded
at fair value on a recurring basis.
3.
LONG-TERM DEBT
On
November 6, 2015, PWRS completed a financing secured by the real property owned by PWRS (the “PWRS Bonds”). The PWRS
Bonds are secured by land owned by PWRS and have a total obligation of $10,150,000. The PWRS Bonds carry a fixed interest rate
of 4.34% and mature in 2034. The balance of the PWRS Bonds as of September 30, 2017 and December 31, 2016 is approximately $9,173,000
(net of approximately $376,000 of capitalized debt costs which are being amortized over the life of the financing) and $9,466,000
(net of approximately $393,000 of capitalized debt costs which are being amortized over the life of the financing) respectively.
On
July 5, 2013, PWSS borrowed $750,000 from a regional bank (the “PWSS Term Loan”). The PWSS Term Loan carries a fixed
interest rate of 5.0%, a term of 10-years and amortizes based on a twenty-year principal amortization schedule. In addition to
being secured by PWSS’ real estate assets, the term loan is secured by a parent guarantee from the Trust. The balance of
the PWSS Term Loan as of September 30, 2017 and December 31, 2016 is approximately $632,000 (net of approximately $16,000 of capitalized
debt costs which are being amortized over the life of the financing) and $650,000 (net of approximately $18,000 of capitalized
debt costs which are being amortized over the life of the financing), respectively.
On
December 31, 2012, as part of the Salisbury land acquisition, PWSS assumed existing municipal financing (“Municipal Debt”).
The Municipal Debt has approximately 16 years remaining. The Municipal Debt has a simple interest rate of 5.0% that is paid annually,
with the next payment due February 1, 2018. The balance of the Municipal Debt as of September 30, 2017 and December 31, 2016 is
approximately $90,000 and $96,000 respectively.
POWER
REIT AND SUBSIDIARIES
Notes
to Unaudited Consolidated Financial Statements
4.
EQUITY AND LONG-TERM COMPENSATION
Summary
of Stock Based Compensation Activity – Options
The
summary of stock based compensation activity for the nine months ended September 30, 2017, with respect to the Trust’s stock
options, was as follows:
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Number of
Options
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Weighted
Average
Exercise Price
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Aggregate
Intrinsic Value
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Balance as of December 31, 2016
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106,000
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7.96
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-
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Plan Awards
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-
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-
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-
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Options Exercised
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-
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-
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-
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Balance as of September 30, 2017
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106,000
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7.96
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-
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Options vested at September 30, 2017
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106,000
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7.96
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-
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The
weighted average remaining term of the options is approximately 4.9 years.
Summary
of Plan Activity – Restricted Stock
The
summary of Plan activity for the nine months ended September 30, 2017, with respect to the Trust’s restricted stock, was
as follows:
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Number of
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Weighted
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Shares of
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Average
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Restricted
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Grant Date
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Stock
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Fair Value
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Balance as of December 31, 2016
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38,633
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5.31
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Plan Awards
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42,400
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6.89
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Restricted Stock Vested
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(24,150
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)
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6.15
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Balance as of September 30, 2017
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56,883
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6.13
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Stock-based
Compensation
During
the nine months of 2017, the Trust recorded approximately $149,000 of non-cash expense related to restricted stock and options
granted compared to approximately $142,000 for the first nine months of 2016. As of September 30, 2017 there was approximately
$349,000 of total unrecognized share-based compensation expense, which expense will be recognized through the first quarter of
2020, equating to a weighted average amortization period of approximately 1.5 years from the issuance date. The Trust does not
currently have a policy regarding the repurchase of shares on the open market related to equity awards and does not currently
intend to acquire shares on the open market.
POWER
REIT AND SUBSIDIARIES
Notes
to Unaudited Consolidated Financial Statements
Preferred
Stock Dividends
During
the first nine months of 2017, the Trust paid a total of approximately $210,000 of dividends to holders of Power REIT’s
Series A Preferred Stock.
5.
LEGAL PROCEEDINGS
As
previously disclosed in its public filings with the SEC, the Trust and its wholly-owned subsidiary P&WV have been involved
in litigation with NSC and NSC’s sub-lessee, Wheeling & Lake Erie Railroad (“WLE” and, together with NSC,
the “Litigants”) concerning matters arising under the Railroad Lease. The case was pending in Federal trial court
in Pittsburgh (the “Court”). The Litigants initiated the litigation against the Trust and P&WV in December 2011,
seeking, among other things, a declaratory judgment that NSC was not in default under the Railroad Lease.
P&WV,
as lessor, asserted counterclaims, seeking determinations that NSC was in default under the Railroad Lease for, among other things,
failing to reimburse P&WV for certain legal fees incurred by P&WV, failing to permit P&WV to inspect NSC’s books
and records as called for under the terms of the Railroad Lease and failing to pay other amounts that P&WV believes are due
and owing. P&WV also sought declarations from the Court (a) that NSC’s obligation to repay the indebtedness owed under
the Railroad Lease is not indefinite in duration, and (b) that the indebtedness owed to P&WV is due on demand with interest.
If P&WV was successful with certain of its counterclaims, it would have been able to terminate the Railroad Lease and demand
from NSC payment of the indebtedness.
The
indebtedness is the cumulative result of amounts received by NSC from its dispositions of P&WV property, additional rental
amounts due and other sums that NSC owes to P&WV but which NSC has elected, under its interpretation of the Railroad Lease,
to pay by increasing its indebtedness to P&WV rather than by providing P&WV with cash. According to records maintained
by NSC pursuant to the Railroad Lease and provided by NSC to P&WV, as of December 31, 2012 the indebtedness owed to P&WV
was approximately $16,600,000. NSC has not provided a more recent update of the indebtedness amount. The indebtedness has not
been included in P&WV’s balance sheets prepared under GAAP, because of the dispute as to when it is due. Similarly,
certain additional rental amounts that NSC disputes are due on a current basis, and which have historically been treated as indebtedness,
have not been included in P&WV’s income statements or balance sheets prepared under GAAP; however, these additional
rent amounts have historically been recorded as taxable income on P&WV’s tax returns.
The
parties made certain supplements to their respective claims and counterclaims. In August 2013, P&WV filed a second supplement
to its counterclaims following the Litigants’ disclosure of previously undisclosed dispositions of P&WV property. P&WV
was seeking a ruling that additional amounts are owed to it as a result of these dispositions and, accordingly, asserted new counterclaims,
including claims of fraud and conversion. Based on the information available at the time P&WV supplemented its claims, P&WV
estimated that the additional amounts owed to it exceeded $8 million, not including potential interest and damages. P&WV also
supplemented its counterclaim for additional rental amounts due in order to include the reimbursement of its legal expenses related
to the litigation. In response to P&WV’s second supplement to its counterclaims, in January 2014 the Litigants amended
their pleadings to add additional claims against both P&WV and the Trust. The Litigants’ additional claims sought additional
declarations from the Court that the Litigants have not defaulted on or violated the terms of the Railroad Lease.
POWER
REIT AND SUBSIDIARIES
Notes
to Unaudited Consolidated Financial Statements
On
September 13, 2013, the Trust filed a motion for summary judgment seeking dismissal of all of the claims against it primarily
based on the fact that the Trust is not a party to the Lease. On January 15, 2014, the Court heard oral arguments from the parties
on the Trust’s motion. On October 16, 2013, the Litigants filed a motion seeking leave to supplement their claims to include:
(i) nominal damages, (ii) enjoinment of Power REIT from taking actions in breach of the Lease Agreement, (iii) the withdrawal
of NSC’s consent to the additional share by PWV; and (iv) the undoing of the reverse triangular merger. On June 19, 2014,
the court denied the Trust’s motion but also denied Plaintiff’s motion seeking leave to supplement their claims with
the exception of granting the motion to seek nominal damages.
On
September 8, 2014, P&WV filed a Motion for Summary Judgment and on October 22, 2014, the Litigants filed an opposition to
such motion and on November 5, 2014, P&WV filed a Reply to NSC and WLE’s opposition to such motion. On September 8,
2014, the Litigants filed a Motion for Summary Judgment and on October 22, 2014, P&WV filed an opposition to such motion and
on November 5, 2014, the Litigants filed a reply to P&WV’s opposition to such motion. On December 16, 2014, the court
held oral argument on both of the motions for Summary Judgment.
On
April 22, 2015, the court denied P&WV’s motion for summary judgment and granted the Litigants’ summary judgment
motion thereby dismissing all of P&WV’s claims. During the week of August 3, 2015, a trial was conducted on the two
remaining claims of the Litigants against P&WV and Power REIT. On December 29, 2015, the Court issued a ruling with respect
to the remaining claims that were the subject of the trial. In the ruling, the Court found in favor of Power REIT on all claims
brought against it by NSC and WLE. In addition, the Court also found in favor of P&WV with respect to claims brought against
P&WV by WLE. However, the Court did find in favor of NSC against P&WV for certain of its claims (fraud and breach of contract)
and awarded nominal damages of $1.00. In connection with NSC’s demand for punitive damages, the Court ruled that NSC was
not entitled to punitive damages.
On
January 26, 2016, Power REIT and P&WV filed a Notice of Appeal to appeal the matter to the United States Court of Appeals
for the Third Circuit. On April 28, 2016, Power REIT and P&WV filed its appellate brief. On June 27, 2016, NSC and WLE filed
their reply brief. On August 10, 2016, Power REIT and P&WV filed a reply brief at which point the appeal was fully briefed. On August 29, 2017, the appellate court rendered its ruling affirming the ruling from the lower court
in its entirety. Power REIT has not included a loss contingency associated with the outcome of the case since it believes
all expenses related to the litigation have been accounted for in the financial statements contained herein. Power REIT and P&WV
retained the firm of Keker & Van Nest LLP as lead counsel related to the appeal.
P&WV
has provided key court filings in the litigation on its website (www.pwreit.com) under a tab called “P&WV Litigation
Update” which is under the “Investor Relations” tab. The provided documents and accompanying supporting documents
are not comprehensive or complete and the full case docket is available from the Public Access to Court Records (PACER) website.
Power REIT encourages interested parties to review all the public filings available on PACER and to review the risks and disclosures
in Power REIT’s Annual Report filed on Form 10-k and other documents filed from time to time with the Securities and Exchange
Commission (SEC).
During
the nine months ended September 30, 2017 and 2016, P&WV incurred litigation related expenses of approximately $125,000 and
$486,000, respectively. As of September 30, 2017, P&WV had incurred a total of approximately $3.67 million of cumulative expenses
related to the litigation. P&WV believed that the costs associated with the litigation are reimbursable by NSC under the Railroad
Lease as additional rent, but the court ruled against it and the appellate court upheld this ruling.
POWER
REIT AND SUBSIDIARIES
Notes
to Unaudited Consolidated Financial Statements
As
of the date of this filing, NSC has continued to make its quarterly base rental payments ($228,750 per quarter). Based on the
outcome of the litigation, the indebtedness described above that P&WV has accrued is deemed uncollectable and will be written
off for tax purposes (it has not been reflected on P&WV’s financial statements which are consolidated into Power REIT’s
financial statements). The indebtedness will be tracked by P&WV on an annual basis since, based on the outcome of the litigation,
it effectively serves as a termination fee that is due upon termination of the lease for any purpose including default or failure
to renew.
6.
RELATED PARTY TRANSACTIONS
The
Trust and its subsidiaries have hired Morrison Cohen, LLP (“Morrison Cohen”) as their legal counsel with respect to
general corporate matters and the litigation with NSC. The spouse of the Trust’s Chairman, CEO, Secretary and Treasurer
is a partner at Morrison Cohen. During the nine months ended September 30, 2017, Power REIT (on a consolidated basis) did not
pay any legal fees and costs to Morrison Cohen in connection with various legal matters, including the litigation with NSC.
A
wholly-owned subsidiary of HBP provides the Trust and its subsidiaries with office space at no cost. Effective September 2016,
the Board of Directors approved reimbursing an affiliate of HBP $1,000 per month for administrative and accounting support based
on a conclusion that it would pay more for such support from a third party. A total of $9,000 was paid pursuant to this arrangement
during the nine months ended September 30, 2017.
Under
the Trust’s Declaration of Trust, the Trust may enter into transactions in which trustees, officers or employees have a
financial interest, provided however, that in the case of a material financial interest, the transaction is disclosed to the Board
of Trustees or the transaction shall be fair and reasonable. After consideration of the terms and conditions of the retention
of Morrison Cohen described herein, the independent trustees approved the hiring of Morrison Cohen as counsel, determining such
arrangement to be fair and reasonable and in the interest of the Trust.
7.
SUBSEQUENT EVENTS
On
October 31, 2017, the Registrant declared a quarterly dividend of $0.48375 per share on Power REIT’s 7.75% Series A Cumulative
Redeemable Perpetual Preferred Stock payable on December 15, 2017 to shareholders of record on November 15, 2017.