CAPITAL PROPERTIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
(Unaudited)
1.
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Description of business:
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The operations of Capital Properties, Inc. and its wholly-owned subsidiary, Tri-State Displays, Inc. (collectively “the Company”) consist of the long-term leasing of certain of its real estate interests in and adjacent to the Capital Center area in downtown Providence, Rhode Island (upon the commencement of which the tenants have been required to construct buildings thereon, with the exception of the parking garage and Parcel 20) and the leasing of locations along interstate and primary highways in Rhode Island and Massachusetts to Lamar Outdoor Advertising, LLC (“Lamar”) which has constructed outdoor advertising boards thereon. The Company anticipates that the future development of its remaining properties in the Capital Center area will consist primarily of long-term ground leases. Pending this development, the Company leases these undeveloped parcels (other than Parcel 6C) for public parking to Metropark, Ltd.
2.
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Basis of presentation and summary of significant accounting policies:
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Principles of consolidation:
The accompanying condensed consolidated financial statements include the accounts and transactions of the Company. All significant intercompany accounts and transactions have been eliminated in consolidation.
The accompanying condensed consolidated balance sheet as of December 31, 2020 has been derived from audited financial statements. The unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s latest Form 10-K for the year ended December 31, 2020.
In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the financial position as of September 30, 2021 and the results of operations for the three and nine months ended September 30, 2021 and 2020, and cash flows for the nine months ended September 30, 2021 and 2020.
The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.
Use of estimates:
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
Environmental incidents:
The Company accrues a liability when an environmental incident has occurred and the costs are estimable. The Company does not record a receivable for recoveries from third parties for environmental matters until it has determined that the amount of the collection is reasonably assured. The accrued liability is relieved when the Company pays the liability or a third party assumes the liability. Upon determination that collection is reasonably assured or a third party assumes the liability, the Company records the amount as a reduction of expense.
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3.
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Properties and equipment:
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Properties and equipment consist of the following:
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September 30,
2021
|
|
|
December 31,
2020
|
|
Properties on lease or held for lease:
|
|
|
|
|
|
|
|
|
Land and land improvements
|
|
$
|
4,010,000
|
|
|
$
|
4,010,000
|
|
Steeple Street property (see Note 6)
|
|
|
3,011,000
|
|
|
$
|
3,011,000
|
|
Office equipment
|
|
|
67,000
|
|
|
|
67,000
|
|
|
|
|
7,088,000
|
|
|
|
7,088,000
|
|
Less accumulated depreciation:
|
|
|
|
|
|
|
|
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Land improvements on lease or held for lease
|
|
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93,000
|
|
|
|
93,000
|
|
Steeple Street property (see Note 6)
|
|
|
236,000
|
|
|
|
172,000
|
|
Office equipment
|
|
|
67,000
|
|
|
|
67,000
|
|
|
|
|
396,000
|
|
|
|
332,000
|
|
|
|
$
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6,692,000
|
|
|
$
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6,756,000
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Liabilities, other consist of the following:
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September 30,
2021
|
|
|
December 31,
2020
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Deferred revenue, Steeple Street property (see Note 6)
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$
|
-
|
|
|
$
|
199,000
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|
Accrued professional fees
|
|
|
140,000
|
|
|
|
152,000
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|
Deposits and prepaid rent
|
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239,000
|
|
|
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121,000
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|
Accrued payroll and related costs
|
|
|
102,000
|
|
|
|
75,000
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|
Other
|
|
|
33,000
|
|
|
|
16,000
|
|
|
|
$
|
514,000
|
|
|
$
|
563,000
|
|
5.
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Note Payable - Revolving Credit Line:
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In March 2021, the Company entered into a financing agreement (“Agreement”) with BankRI that provides for a revolving line-of-credit (“Line”) with a maximum borrowing capacity of $2,000,000 through March 2024. Amounts outstanding under the Agreement bear interest at the rate of the one-month LIBOR plus 200 basis points but not less than 3.25% or, at the option of the Company, the Wall Street Journal Prime Rate. Borrowings under the Line are secured by a First Mortgage on Parcel 5 in the Capital Center District in Providence, Rhode Island (the “Property”). The Line requires the maintenance of a debt service coverage ratio of not less than 1.25 to 1.0 on the Property and 1.20 to 1.0 for the Company. The Agreement contains other restrictive covenants, including, among others, a $250,000 limitation on the purchase of its outstanding capital stock in any twelve-month period. No advances have been made under the Line.
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6.
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Description of leasing arrangements and subsequent event:
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Long-term land leases:
The Company’s leases generally have a term of 99 years or more, are triple net and provide for periodic adjustment in rent of various types depending on the particular lease, and otherwise contain terms and conditions normal for such instruments.
Through September 30, 2021, excluding the Parcel 6C lease, the Company had entered into nine long-term land leases. In September 2021, the Company sent a Notice of Default (“Default Notice”) to the tenant of Parcel 20 for the nonpayment of September’s rent and the 2021 first quarter property taxes. Subsequently, the tenant cured the rent default. On October 6, 2021 the tenant was sent a Notice of Lease Termination (“Termination Notice”) informing the tenant that the lease would terminate on October 18, 2021 unless the failure to pay the first quarter real estate taxes along with any related penalties and interest was cured. Subsequently, it was agreed that, provided the first and second quarter real estate taxes and any related penalties and interest were paid in full by October 31, 2021, the lease would not be terminated. Since payment was not made, the lease was terminated. Accordingly, there are currently eight parcels under lease, all of which have completed construction of the improvements.
The Parcel 20 Steeple Street Building (“Building”) lease was originally accounted for as a sales-type lease due to the transfer of the Building to the tenant. The land directly under the Building was allocated in the determination of the value of the property transferred in accordance with ASC 360-20, Property, Plant and Equipment - Real Estate Sales. Since the initial investment by the tenant was insufficient to recognize the transaction as a sale, in accordance with ASC 360-20, the Company reported the acquisition period rent and an allocable portion of the ground rent collected as deferred revenue on its
7
consolidated balance sheet. Upon termination of the lease, the $283,000 of deferred revenue through September 30, 2021 was recognized as leasing revenue in the condensed consolidated statement of income and shareholders’ equity. With the termination of the Parcel 20 lease, the Company became obligated for the real property taxes which currently total $134,000 annually. Accordingly, the Company increased its accrued property taxes and property tax expense by $101,000 at September 30, 2021.
Under the eight land leases, the tenants may negotiate tax stabilization treaties or other arrangements, appeal any changes in real property assessments, and pay real property taxes assessed on land and improvements under these arrangements. Accordingly, real property taxes payable by the tenants are excluded from both leasing revenues and leasing expenses on the accompanying condensed consolidated statements of income and shareholders’ equity. For the three and nine months ended September 30, 2021, real property taxes attributable to the Company’s land leases totaled $263,000 and $790,000, respectively and were $315,000 and $997,000 for the same periods in 2020.
With respect to Parcel 6C lease, on the termination date the annual rent was $220,000 and annual real estate taxes paid by the tenant equaled $311,000. The Company believes that the assessed value of Parcel 6C as agreed to by the City of Providence (“City”) and the former tenant of Parcel 6C pursuant to a Tax Stabilization Agreement is much greater than similar parcels in the Capital Center area. Negotiations with the City to reduce the assessment were unsuccessful. Accordingly, the Company filed a complaint against the Providence Tax Assessor in Rhode Island Superior asserting that the Company is not a party to the Tax Stabilization Agreement and that the assessed value should be determined based on the value of other Parcels in the Capital Center Area. The Company believes that it will prevail and accordingly, is recording real estate taxes based on the assessed value as determined by the firm engaged by the City, Vision Government Solutions, Inc.
Under two of the long-term land leases, the Company receives contingent rentals (based on a fixed percentage of gross revenue received by the tenants) which totaled $21,000 and $63,000 for the three and nine months ended September 30, 2021 and were $25,000 and $87,000 for the same periods in 2020.
Lamar lease:
Tri-State Displays Inc. leases 23 outdoor advertising locations containing 44 billboard faces along interstate and primary highways in Rhode Island and Massachusetts to Lamar under a lease which expires in 2049. The Lamar lease provides, among other things, for the following: (1) the base rent will increase annually at the rate of 2.75% for each leased billboard location on June 1 of each year, and (2) in addition to base rent, for each 12-month period commencing each June 1 (each 12-month period a “Lease Year”), Lamar must pay to the Company within thirty days after the close of the Lease Year, 30% of the gross revenues from each standard billboard and 20% of the gross revenues from each electronic billboard for such Lease Year, reduced by the sum of (a) commissions paid to unrelated third parties and (b) base rent paid to the Company for each leased billboard location. Leasing revenue includes $136,000 and $139,000 for the nine months ended September 30, 2021 and 2020, respectively, related to this agreement.
Parking lease:
The Company leases the undeveloped parcels of land in the Capital Center area (other than Parcel 6C) and, effective November 1, 2021 as a result of the lease termination, Parcel 20 for public parking purposes to Metropark under a ten-year lease (the “Parking Lease”). The lease is cancellable as to all or any portion of the leased premises at any time on thirty days’ written notice in order for the Company or any new tenant of the Company to develop all or any portion of the leased premises. The Parking Lease provides for contingent rentals (based on a fixed percentage of gross revenue in excess of the base rent). There was no contingent rent for the three months and nine months ended September 30, 2021 nor was there contingent rent for the three months ended September 30, 2020. Revenue for the nine months ended September 30, 2020 was reduced by $34,000 due to the revision of the estimate of 2019’s contingent rent.
The COVID-19 pandemic and stay-at-home orders have had a significant adverse impact on Metropark’s parking operations. On July 31, 2020, Metropark and the Company entered into an agreement for revenue sharing at various percentages until parking revenues received by Metropark equal or exceed $70,000 per month whereupon Metropark would be obligated to resume regularly scheduled rental payments under its lease. Upon resumption of regularly scheduled rent payments, Metropark and the Company will share fifty (50) percent of the revenue in excess of $70,000 until the arrearage has been paid in full. If prior to payment in full of the arrearage one or more of the lots is removed from the Metropark lease for development, the amount of the then unpaid arrearage in the ratio of the number of parking spaces on the removed lot to the total parking spaces on all lots prior to such lot’s removal shall be deemed paid in full.
At September 30, 2021 the receivable from Metropark equaled $683,000 and was fully reserved. In April 2020, the Company began to recognize Metropark’s rent on a cash basis and will continue to do so until the resumption of regularly scheduled rental payments under its lease. For the three and nine months ended September 30, 2021, cash collections totaled $42,000 and $65,000, respectively and $11,000 and $170,000 for the same periods in 2020.
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Historically, the Company has made financial statement footnote disclosure of the excess of straight-line rentals over contractual payments and its determination of collectability of such excess. Included in the amount of the excess were payments which under ASC 842 are deemed variable payments. As part of its ongoing review of the requirements of ASC 842, the Company has concluded that under ASC 842 variable rental payments should not be included in the straight-line rental amount. To the extent the Company determines that, with respect to any of its leases, the excess of straight-line rentals over contractual payments is not collectible, such excess is not recognized as revenue. Consistent with prior conclusions, the Company has determined that, at this time, the excess of straight-line rentals over contractual payments is not probable of collection. Accordingly, the Company has not included any part of that amount in revenue. As a matter of information only, as of September 30, 2021 the excess of straight-line rentals (calculated by excluding variable payments) over contractual payments was $85,233,000.
7.
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Income taxes, continuing operations:
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Deferred income taxes are recorded based upon differences between financial statement and tax basis amounts of assets and liabilities. The tax effects of temporary differences for continuing operations which give rise to deferred tax assets and liabilities are as follows:
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September 30,
2021
|
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December 31,
2020
|
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Gross deferred tax liabilities:
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|
|
|
|
|
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|
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Property having a financial statement basis in excess of tax basis
|
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$
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361,000
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|
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$
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361,000
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Accounts receivable
|
|
|
196,000
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|
|
|
98,000
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|
Deferred income - conversion to cash basis of accounting for tax purposes
|
|
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42,000
|
|
|
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56,000
|
|
Insurance premiums and accrued leasing revenues
|
|
|
15,000
|
|
|
|
19,000
|
|
|
|
|
614,000
|
|
|
|
534,000
|
|
Gross deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
(184,000
|
)
|
|
|
(91,000
|
)
|
Prepaid rent
|
|
|
(55,000
|
)
|
|
|
(24,000
|
)
|
Accounts payable and accrued expenses
|
|
|
(85,000
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)
|
|
|
(75,000
|
)
|
Accrued property taxes
|
|
|
(94,000
|
)
|
|
|
(56,000
|
)
|
Deferred income, Parcel 20
|
|
|
-
|
|
|
|
(54,000
|
)
|
|
|
|
(418,000
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)
|
|
|
(300,000
|
)
|
|
|
$
|
196,000
|
|
|
$
|
234,000
|
|
|
|
|
|
|
|
|
|
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8.
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Discontinued operations:
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Prior to February 2017, the Company operated a petroleum storage facility (“Terminal”) through two wholly owned subsidiaries. On February 10, 2017, the Terminal was sold to Sprague Operating Resources, LLC (“Sprague”). In accordance with ASC 205-20, Presentation of Financial Statements – Discontinued Operations, the sale of the Terminal was accounted for as a discontinued operation.
Pursuant to the Terminal Sale Agreement, the Sale Price was reduced by $1,040,000, the estimated cost of a breasting dolphin to be constructed by Sprague adjacent to the Terminal’s Pier in order that the Pier can berth Panamax sized vessels. The Terminal Sale Agreement contained a cost sharing provision for the breasting dolphin whereby any cost incurred in connection with the construction of the breasting dolphin in excess of the initial estimate of $1,040,000 will be borne equally by Sprague and the Company subject to certain limitations, including, in the Company’s opinion, a 20% cap on the increase from the initial estimate, subject to a sharing arrangement. In November 2019, the Company received a demand letter from Sprague asserting that it is owed $427,000, which amount represents 50% of the actual costs incurred ($1,894,008) in excess of $1,040,000. The Company asserts that its obligation cannot exceed $104,000. On June 17, 2021 the Company and Sprague met with a mediator to review Sprague’s claim. On July 15, 2021, Sprague commenced an action against the Company in the Rhode Island Superior Court seeking monetary damages of $427,000, interest and attorney’s fees. The Company intends to vigorously defend against the claims being asserted by Sprague.
As part of the Terminal Sale Agreement, the Company has agreed to retain and pay for the environmental remediation costs associated with a 1994 storage tank fuel oil leak which allowed the escape of a small amount of fuel oil. In February 2020, the Company filed a revised Remediation Action Work Plan (“RAWP”) with the Rhode Island Department of Environmental Management (“RIDEM”) to describe the technical details associated with the preferred remedial activities and to update the previously filed RAWP. In 2019, the Company incurred remediation costs of $293,000 and, as a result of
9
the revised remedial activities included in the 2020 RAWP, the remediation accrual was increased by $846,000 primarily due to design changes necessary to meet the requirements of applicable life safety codes resulting in an environmental remediation liability of $1,043,000 at December 31, 2019. In 2020, the Company incurred costs of $553,000 which reduced the remediation liability to $490,000 at December 31, 2020. For the three and nine months ended September 30, 2021, the Company incurred costs of $26,000 and $108,000, respectively which reduced the remediation liability to $382,000 at September 30, 2021. Any subsequent increases or decreases to the expected cost of remediation will be recorded in gain (loss) on sale of discontinued operations, net of taxes in the Company’s condensed consolidated income statement.
9.
|
Fair value of financial instruments:
|
The Company believes that the fair values of its financial instruments, including cash and cash equivalents, receivables and payables, approximate their respective book values because of their short-term nature. The fair values described herein were determined using significant other observable inputs (Level 2) as defined by GAAP.
On October 6, 2021 the tenant of the Parcel 20 lease was sent a Notice of Lease Termination (“Termination Notice”) informing the tenant that the lease would terminate on October 18, 2021 unless the failure to pay the first quarter real estate taxes along with any related penalties and interest was cured. Subsequently, it was agreed that, provided the first and second quarter real estate taxes and any related penalties and interest were paid in full by October 31, 2021, the lease would not be terminated. The tenant did not make the required payments and accordingly, the lease was terminated.
At its October 27, 2021 regularly scheduled quarterly Board meeting, the Board of Directors voted to declare a quarterly dividend of $.07 per share for shareholders of record on November 12, 2021, payable November 24, 2021.
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