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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2023

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from to

Commission file number 001-40771

 

GENERATION INCOME PROPERTIES, INC.

(Exact name of Registrant as specified in its charter)

 

Maryland

47-4427295

(State or other jurisdiction of

incorporation or organization)

(I.R.S. employer

identification no.)

 

 

401 E. Jackson Street

Suite 3300

Tampa, FL

33602

(Address of principal executive offices)

(Zip code)

 

Registrant’s telephone number, including area code: 813-448-1234

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class:

 

Trading symbol

 

Name of each exchange on which registered

Common Stock par value $0.01 per share

 

GIPR

 

The Nasdaq Stock Market LLC

 

Warrants to purchase Common Stock

 

GIPRW

 

The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.:

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

 

 

Non-accelerated filer

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

The registrant had 2,615,857 shares of Common Stock, par value $0.01 per share, outstanding as of May 8, 2023.

 

 


 

GENERATION INCOME PROPERTIES, INC.

TABLE OF CONTENTS

 

Page

 

 

 

PART I.

FINANCIAL INFORMATION

3

 

 

 

Item 1.

Financial Statements

3

 

 

 

Generation Income Properties, Inc. Consolidated Balance Sheets
March 31, 2023 (unaudited) and December 31, 2022

3

 

 

 

Generation Income Properties, Inc. Consolidated Statements of Operations
Three Months Ended March 31, 2023 and 2022 (unaudited)

4

 

 

 

 

Generation Income Properties, Inc. Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2023 and 2022 (unaudited)

5

 

 

 

Generation Income Properties, Inc. Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022 (unaudited)

6

Notes to Unaudited Consolidated Financial Statements

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

29

 

 

 

Item 4.

Controls and Procedures

29

 

 

 

PART II.

OTHER INFORMATION

30

 

 

 

Item 1.

Legal Proceedings

30

 

 

 

Item 1A.

Risk Factors

30

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

 

 

 

Item 3.

Defaults Upon Senior Securities

31

 

 

 

Item 4.

Mine Safety Disclosures

31

 

 

 

Item 5.

Other Information

31

 

 

 

Item 6.

Exhibits

32

 

 

SIGNATURES

34

 

 

 


 

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

Generation Income Properties, Inc. Consolidated Balance Sheets

(unaudited)

 

 

As of March 31,

 

As of December 31,

 

 

2023

 

2022

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Investments in real estate

 

 

 

 

Land

$

12,577,544

 

$

12,577,544

 

Building and site improvements

 

39,760,694

 

 

39,764,890

 

Tenant improvements

 

907,382

 

 

907,382

 

Acquired lease intangible assets

 

4,677,928

 

 

4,677,928

 

Less: accumulated depreciation and amortization

 

(6,176,672

)

 

(5,623,318

)

Net real estate investments

$

51,746,876

 

$

52,304,426

 

Investment in tenancy-in-common

 

1,232,670

 

 

1,218,268

 

Cash and cash equivalents

 

2,737,145

 

 

3,718,496

 

Restricted cash

 

34,500

 

 

34,500

 

Deferred rent asset

 

305,645

 

 

288,797

 

Prepaid expenses

 

542,574

 

 

132,642

 

Accounts receivable

 

151,218

 

 

96,063

 

Escrow deposits and other assets

 

210,296

 

 

184,241

 

Right of use asset, net

 

6,211,513

 

 

6,232,662

 

Total Assets

$

63,172,437

 

$

64,210,095

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 Accounts payable

$

119,516

 

$

173,461

 

 Accrued expenses

 

263,621

 

 

365,624

 

 Accrued expense - related party

 

506,000

 

 

128,901

 

 Acquired lease intangible liabilities, net

 

613,676

 

 

639,973

 

 Insurance payable

 

338,047

 

 

46,368

 

 Deferred rent liability

 

156,075

 

 

251,798

 

 Lease liability, net

 

6,370,726

 

 

6,356,288

 

 Other payable - related party

 

2,262,300

 

 

2,587,300

 

 Loan payable - related party

 

1,500,000

 

 

1,500,000

 

 Mortgage loans, net of unamortized debt issuance costs of $688,516 and $717,381 at March 31, 2023 and December 31, 2022, respectively

 

35,111,116

 

 

35,233,878

 

 Total liabilities

$

47,241,077

 

$

47,283,591

 

 

 

 

 

 

 Redeemable Non-Controlling Interests

$

6,326,737

 

$

5,789,731

 

 

 

 

 

 

 Stockholders' Equity

 

 

 

 

 Common stock, $0.01 par value, 100,000,000 shares authorized; 2,610,885 and 2,501,644 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively

 

26,108

 

 

25,016

 

 Additional paid-in capital

 

19,099,595

 

 

19,307,518

 

 Accumulated deficit

 

(9,958,363

)

 

(8,640,796

)

 Total Generation Income Properties, Inc. Stockholders' Equity

$

9,167,340

 

$

10,691,738

 

 

 

 

 

 

 Non-Controlling Interest

$

437,283

 

$

445,035

 

 Total equity

$

9,604,623

 

$

11,136,773

 

 

 

 

 

 

 Total Liabilities and Equity

$

63,172,437

 

$

64,210,095

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

3


 

Generation Income Properties, Inc. Consolidated Statements of Operations

(unaudited)

 

 

Three Months ended March 31,

 

 

2023

 

2022

 

Revenue

 

 

 

 

Rental income

$

1,326,707

 

$

1,181,935

 

Other income

 

10,332

 

 

-

 

Total revenue

$

1,337,039

 

$

1,181,935

 

 

 

 

 

 

Expenses

 

 

 

 

General and administrative expense

$

344,147

 

$

341,680

 

Building expenses

 

313,600

 

 

253,391

 

Depreciation and amortization

 

557,550

 

 

430,893

 

Interest expense, net

 

469,210

 

 

330,294

 

Compensation costs

 

351,287

 

 

279,742

 

Total expenses

$

2,035,794

 

$

1,636,000

 

Operating loss

 

(698,755

)

 

(454,065

)

Other expense

 

(506,000

)

 

-

 

Income on investment in tenancy-in-common

 

14,402

 

 

8,552

 

Net loss

$

(1,190,353

)

$

(445,513

)

Less: Net income attributable to non-controlling interests

 

127,214

 

 

129,963

 

Net loss attributable to Generation Income Properties, Inc.

$

(1,317,567

)

$

(575,476

)

 

 

 

 

 

Total Weighted Average Shares of Common Stock Outstanding – Basic & Diluted

 

2,541,477

 

 

2,196,056

 

 

 

 

 

 

Basic & Diluted Loss Per Share Attributable to Common Stockholders

$

(0.52

)

$

(0.26

)

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

4


 

Generation Income Properties, Inc. Consolidated Statements of Changes in Equity

(unaudited)

 

Common Stock

 

Additional
 Paid-In Capital

 

Accumulated Deficit

 

Stockholders' Equity

 

Non-Controlling Interest

 

Total Equity

 

Redeemable Non-Controlling Interest

 

 

Shares

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2021

 

2,172,950

 

$

21,729

 

$

19,051,929

 

$

(5,403,156

)

$

13,670,502

 

$

469,712

 

$

14,140,214

 

$

9,134,979

 

Restricted stock unit compensation

 

47,142

 

 

471

 

 

93,455

 

 

-

 

 

93,926

 

 

-

 

 

93,926

 

 

-

 

Stock issuance costs

 

-

 

 

-

 

 

(6,091

)

 

-

 

 

(6,091

)

 

 

 

(6,091

)

 

 

Cashless exercise of warrants

 

27,676

 

 

277

 

 

(277

)

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

Issuance of Redeemable Non-Controlling Interest for property acquisition

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

1,109,570

 

Distribution on Non-Controlling Interest

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(3,938

)

 

(3,938

)

 

(115,303

)

Dividends paid on common stock

 

-

 

 

-

 

 

(334,799

)

 

-

 

 

(334,799

)

 

-

 

 

(334,799

)

 

-

 

Net (loss) income for the quarter

 

-

 

 

-

 

 

-

 

 

(575,476

)

 

(575,476

)

 

(1,120

)

 

(576,596

)

 

131,083

 

Balance, March 31, 2022

 

2,247,768

 

$

22,477

 

$

18,804,217

 

$

(5,978,632

)

$

12,848,062

 

$

464,654

 

$

13,312,716

 

$

10,260,329

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2022

 

2,501,644

 

$

25,016

 

$

19,307,518

 

$

(8,640,796

)

$

10,691,738

 

$

445,035

 

$

11,136,773

 

$

5,789,731

 

Restricted stock unit compensation

 

98,593

 

 

986

 

 

89,662

 

 

-

 

 

90,648

 

 

-

 

 

90,648

 

 

-

 

Cashless exercise of warrants

 

10,648

 

 

106

 

 

(106

)

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

Issuance of Redeemable Non-Controlling Interest

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

3,000,000

 

Redemption of Redeemable Non-Controlling Interest

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(2,479,299

)

Distribution on Non-Controlling Interest

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(2,844

)

 

(2,844

)

 

(115,817

)

Dividends paid on common stock

 

-

 

 

-

 

 

(297,479

)

 

-

 

 

(297,479

)

 

-

 

 

(297,479

)

 

-

 

Net (loss) income for the quarter

 

-

 

 

-

 

 

-

 

 

(1,317,567

)

 

(1,317,567

)

 

(4,908

)

 

(1,322,475

)

 

132,122

 

Balance, March 31, 2023

 

2,610,885

 

$

26,108

 

$

19,099,595

 

$

(9,958,363

)

$

9,167,340

 

$

437,283

 

$

9,604,623

 

$

6,326,737

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

5


 

Generation Income Properties, Inc. Consolidated Statements of Cash Flows

(unaudited)

 

 

Three Months Ended March 31,

 

 

 

2023

 

2022

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net loss

 

$

(1,190,353

)

$

(445,513

)

 Adjustments to reconcile net loss to cash used in operating activities

 

 

 

 

 

Depreciation

 

 

421,987

 

 

316,901

 

Amortization of acquired lease intangible assets

 

 

135,563

 

 

113,992

 

Amortization of debt issuance costs

 

 

28,865

 

 

33,673

 

Amortization of below market leases

 

 

(26,114

)

 

(23,841

)

Amortization of above market ground lease

 

 

(183

)

 

(43

)

Restricted stock unit compensation

 

 

90,648

 

 

93,926

 

Non-cash ground lease expense

 

 

21,149

 

 

7,247

 

Income on investment in tenancy-in-common

 

 

(14,402

)

 

(8,553

)

 Changes in operating assets and liabilities

 

 

 

 

 

Accounts receivable

 

 

(55,155

)

 

(6,753

)

Other assets

 

 

23,945

 

 

(83,704

)

Deferred rent asset

 

 

(16,848

)

 

(17,522

)

Prepaid expenses

 

 

(409,932

)

 

(257,117

)

Accounts payable

 

 

(53,945

)

 

(106,911

)

Accrued expenses

 

 

275,096

 

 

145,290

 

Lease liability

 

 

14,438

 

 

9,620

 

Deferred rent liability

 

 

(95,723

)

 

18,808

 

Net cash used in operating activities

 

$

(850,964

)

$

(210,500

)

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchase of land, buildings, other tangible and intangible assets

 

$

-

 

$

(12,775,600

)

Escrow (deposit) return for purchase of properties

 

 

(50,000

)

 

75,000

 

Net cash used in investing activities

 

$

(50,000

)

$

(12,700,600

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from issuance of redeemable non-controlling interest

 

$

3,000,000

 

$

1,109,570

 

Redemption of redeemable non-controlling interests

 

 

(2,479,299

)

 

-

 

Repayment on other payable - related party

 

 

(325,000

)

 

-

 

Mortgage loan borrowings

 

 

-

 

 

6,250,000

 

Mortgage loan repayments

 

 

(151,627

)

 

(146,254

)

Debt issuance costs

 

 

-

 

 

(78,878

)

Stock issuance costs

 

 

-

 

 

(6,091

)

Deferred financing costs

 

 

-

 

 

(165

)

Insurance financing borrowings

 

 

352,307

 

 

288,693

 

Insurance financing repayments

 

 

(60,628

)

 

(33,359

)

Distribution on non-controlling interests

 

 

(118,661

)

 

(119,241

)

Dividends paid on common stock

 

 

(297,479

)

 

(334,799

)

Net cash (used in) provided by financing activities

 

$

(80,387

)

$

6,929,476

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

$

(981,351

)

$

(5,981,624

)

Cash and cash equivalents and restricted cash - beginning of period

 

 

3,752,996

 

 

10,624,076

 

Cash and cash equivalents and restricted cash - end of period

 

$

2,771,645

 

$

4,642,452

 

 

 

 

 

 

 

CASH TRANSACTIONS

 

 

 

 

 

Interest paid

 

$

469,191

 

$

284,569

 

NON-CASH TRANSACTIONS

 

 

 

 

 

Stock issued for cashless exercise of Investor Warrants

 

$

106

 

$

277

 

Deferred distribution on redeemable non-controlling interests

 

 

16,305

 

 

15,780

 

Recognition of ROU asset and lease liability for ground lease related to property acquisition

 

$

-

 

$

6,304,334

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

6


 

 

GENERATION INCOME PROPERTIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Nature of Operations

Generation Income Properties, Inc. (the “Company”) was formed as a Maryland corporation on September 19, 2015. The Company is an internally managed real estate investment company focused on acquiring and managing income-producing retail, office and industrial properties net leased to high quality tenants in major markets throughout the United States.

The Company formed Generation Income Properties L.P. (the “Operating Partnership”) in October 2015. Substantially all of the Company’s assets are held by, and operations are conducted through, the Operating Partnership or its direct or indirect subsidiaries. The Company is the general partner of the Operating Partnership and as of March 31, 2023 owned 90% of the outstanding common units of the Operating Partnership. The Company formed a Maryland entity GIP REIT OP Limited LLC in 2018 that owns 0.002% of the Operating Partnership. The Company places each property in a separate entity which may have a Redeemable Non-Controlling interest as a member.

 

As of March 31, 2023, the Company, the Operating Partnership, and their controlled subsidiaries on a consolidated basis owned 12 properties and held a partial interest in one additional property through a tenancy-in-common investment.

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation

The information furnished reflects all adjustments, consisting only of normal recurring items which are, in the opinion of management, necessary in order to make the financial statements not misleading. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) were omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited financial statements and footnotes included in the Company’s Annual Report on Form 10-K filed with the SEC on March 28, 2023. The results for the three months ended March 31, 2023 are not necessarily indicative of the results to be expected for the year ending December 31, 2023.

The preparation of the consolidated financial statements in conformity with U.S. GAAP. The Company adopted the calendar year as its basis of reporting. Certain immaterial prior year amounts have been reclassified for consistency with the current period presentation.

 

Consolidation

The accompanying consolidated financial statements include the accounts of Generation Income Properties, Inc. and the Operating Partnership and all of the direct and indirect wholly-owned subsidiaries of the Operating Partnership and the Company’s subsidiaries. All significant inter-company balances and transactions have been eliminated in the consolidated financial statements.

The consolidated financial statements include the accounts of all entities in which the Company has a controlling interest. The ownership interests of other investors in these entities are recorded as non-controlling interests or redeemable non-controlling interest. Non-controlling interests are adjusted each period for additional contributions, distributions, and the allocation of net income or loss attributable to the non-controlling interests. Investments in entities for which the Company has the ability to exercise significant influence over, but does not have financial or operating control, are accounted for using the equity method of accounting. Accordingly, the Company’s share of the earnings (or losses) of these entities are included in consolidated net income or loss.

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of commitments and contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. It is possible that the estimates and assumptions that have been utilized in the preparation of the consolidated financial statements could change significantly if economic conditions were to weaken.

 

 

7


 

Cash

The Company considers all demand deposits, cashier’s checks and money market accounts to be cash equivalents. Amounts included in restricted cash represent funds owned by the Company related to tenant escrow reimbursements and immediate capital repair reserve. The following table provides a reconciliation of the Company’s cash and cash equivalents and restricted cash that sums to the total of those amounts at the end of the periods presented on the Company’s accompanying Consolidated Statements of Cash Flows:

 

As of March 31,

 

 

As of March 31,

 

 

2023

 

 

2022

 

Cash and cash equivalents

$

2,737,145

 

 

$

4,607,952

 

Restricted cash

 

34,500

 

 

 

34,500

 

Cash and cash equivalents and restricted cash

$

2,771,645

 

 

$

4,642,452

 

Revenue Recognition

The Company leases real estate to its tenants under long-term net leases which the Company accounts for as operating leases. Those leases that have fixed and determinable rent increases are recognized on a straight-line basis over the lease term. In addition to straight-line rents, deferred rent liability includes $175,466 and $271,189 of prepaid rent as of March 31, 2023 and December 31, 2022, respectively.

The Company reviews the collectability of charges under its tenant operating leases on a regular basis, taking into consideration changes in factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates, and economic conditions in the area where the property is located. In the event that uncollectability exists with respect to any tenant changes, the Company would recognize an adjustment to Rental income. The Company’s review of collectability of charges under its operating leases includes any accrued rental revenues related to the straight-line rents. There were no allowances for receivables recorded during three months ended March 31, 2023 or 2022.

The Company’s leases provide for reimbursement from tenants for common area maintenance (“CAM”), insurance, real estate taxes and other operating expenses (“recoverable costs”). A portion of our operating cost reimbursement revenue is estimated each period and is recognized as rental income in the period the recoverable costs are incurred and accrued.

The Company often recognizes above- and below-market lease intangibles in connection with acquisitions of real estate. The capitalized above- and below-market lease intangibles are amortized to rental income over the remaining term of the related leases.

Stock-Based Compensation

The Company records all equity-based incentive grants to employees and non-employee members of the Company’s Board of Directors in compensation costs based on their fair values on the date of grant. Stock-based compensation expense, reduced for estimated forfeitures, is recognized on a straight-line basis over the requisite service period of the award, which is generally the vesting term of the outstanding equity awards.

Investments in Real Estate

Acquisitions of real estate are recorded at cost. The Company assigns the purchase price of real estate to tangible and intangible assets and liabilities based on fair value. Tangible assets consist of land, buildings, site improvements, and tenant improvements. Intangible assets and liabilities consist of the value of in-place leases and above- or below- market leases assumed with the acquisition. At the time of acquisition, the Company assesses whether the purchase of the real estate falls within the definition of a business under Accounting Standards Codification (“ASC”) 805 and to date has concluded that all asset transactions are asset acquisitions. Therefore, each acquisition has been recorded at the purchase price whereas assets and liabilities, inclusive of closing costs, are allocated to land, building, site improvements, tenant improvements, and intangible assets and liabilities based upon their relative fair values at the date of acquisition.

The fair value of the in-place leases are estimated as the cost to replace the leases including loss of rent, commissions and legal fees. The in-place leases are amortized over the remaining team of the leases as amortization expense. The fair value of the above- or below-market lease is estimated as the present value of the difference between the contractual amount to be paid pursuant to the in-place lease and the estimated current market lease rate expected over the remaining non-cancelable life of the lease. The capitalized above- or below-market lease values are amortized as a decrease or increase to rental income over the remaining term of the lease inclusive of the renewal option periods that are considered probable at acquisition.

8


 

Depreciation Expense

Real estate and related assets are stated net of accumulated depreciation. Renovations, replacements and other expenditures that improve or extend the life of assets are capitalized and depreciated over their estimated useful lives. Expenditures for ordinary maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful life of the buildings, which are generally between 15 and 50 years, and site improvements, which are generally 5 years. Tenant improvements are amortized over the lease terms of the tenants, which is generally between 2 and 10 years.

 

Lease Liabilities

 

The Company has a certain property within its portfolio that is on land subject to a ground lease with a third party, which is classified as an operating lease. Accordingly, the Company owns only a long-term leasehold in this property. The building and improvements constructed on the leased land are capitalized as investment in real estate and are depreciated over the shorter of the useful life of the improvements or the lease term.

 

Under ASC 842, the Company recognizes a lease liability for its ground lease and corresponding right of use asset related to this same ground lease which is classified as an operating lease. A key input in estimating the lease liability and resulting right of use asset is establishing the discount rate in the lease, which since the rate implicit in the contract is not readily determinable, requires additional inputs for the longer-term ground lease, including mortgage market-based interest rates that correspond with the remaining term of the lease, the Company's credit spread, and the payment terms present in the lease. This discount rate is applied to the remaining unpaid minimum rental payments for the lease to measure the lease liability.

Impairments

The Company reviews investments in real estate and related lease intangibles for possible impairment when certain events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable though operations plus estimated disposition proceeds. Events or changes in circumstances that may occur include, but are not limited to, significant changes in real estate market conditions, estimated residual values, and an expectation to sell assets before the end of the previously estimated life. Impairments are measured to the extent the current book value exceeds the estimated fair value of the asset less disposition costs for any assets classified as held for sale. There were no impairments in the Company's investments in real estate during the three months ended March 31, 2023 or 2022.

The valuation of impaired assets is determined using valuation techniques including discounted cash flow analysis, analysis of recent comparable sales transactions, and purchase offers received from third parties, which are Level 3 inputs. The Company may consider a single valuation technique or multiple valuation techniques, as appropriate, when estimating the fair value of its real estate. Estimating future cash flows is highly subjective and estimates can differ materially from actual results.

A loss in value of investments in real estate partnerships under the equity method of accounting, other than a temporary decline, must be recognized in the period in which the loss occurs. If the Company identifies events or circumstances that indicate that the value of the Company's investment may be impaired, it evaluates the investment by calculating the estimated fair value of the investment by discounting estimated future cash flows over the expected term of the investment. There were no impairments in the Company's investment in tenancy-in-common during the three months ended March 31, 2023 or 2022.

Income Taxes

The Company elected to be taxed as a real estate investment trust (“REIT”) under Section 856 through 860 of the Internal Revenue Code, commencing with our taxable year ending December 31, 2021. To continue to qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its taxable income to its stockholders. As a REIT, the Company generally will not be subject to federal corporate income tax on that portion of its taxable income that is currently distributed to stockholders. Accordingly, the only provision for federal income taxes in the accompanying consolidated financial statements relates to the Company's consolidated taxable REIT subsidiary of which no income was generated during the three months ended March 31, 2023 and 2022.

The Company also recognizes liabilities for unrecognized tax benefits which are recognized if the weight of available evidence indicates that it is not more-likely-than-not that the positions will be sustained on examination, including resolution of the related processes, if any. As of each balance sheet date, unrecognized benefits are reassessed and adjusted if the Company’s judgment changes as a result of new information. No liability for unrecognized tax benefits was recorded as of March 31, 2023 or 2022. At March 31, 2023, the Company's tax returns for the years 2019 forward remain subject to examin