ITEM 1. BUSINESS
In this Annual Report on Form 10-K, when we use the terms the “Company,” “Clipper Realty,” “we,” “us,” or “our,” unless the context otherwise requires, we are referring to Clipper Realty Inc. and its consolidated subsidiaries. Certain disclosures included in this Annual Report on Form 10-K constitute forward-looking statements that are subject to risks and uncertainties. See Item 1A, "Risk Factors," and “Cautionary Note Concerning Forward-Looking Statements."
Overview
Clipper Realty Inc. is a self-administered and self-managed real estate company that acquires, owns, manages, operates and repositions multifamily residential and commercial properties in the New York metropolitan area, with a portfolio in Manhattan and Brooklyn. The Company was formed to continue and expand the commercial real estate business of the 50/53 JV LLC (a Delaware limited liability company), Renaissance Equity Holdings LLC (a Delaware limited liability company), Berkshire Equity LLC (a Delaware limited liability company) and Gunki Holdings LLC (a Delaware limited liability company) (collectively, the “Predecessor” or the “predecessor entities”). Our primary focus is to continue to own, manage and operate our portfolio, and to acquire and re-position additional multifamily residential and commercial properties in the New York metropolitan area.
We were incorporated on July 7, 2015. On August 3, 2015, we closed a private offering of shares of our common stock, in which we raised net proceeds of approximately $130.2 million. In connection with the private offering, we consummated a series of investment and other formation transactions that were designed, among other things, to enable us to qualify as a real estate investment trust (a “REIT”) for U.S. federal income tax purposes, and we elected to be treated as a REIT commencing with the taxable year ended December 31, 2015.
On February 9, 2017, the Company priced an initial public offering of 6,390,149 primary shares of its common stock (including the exercise of the over-allotment option, which closed on March 10, 2017) at a price of $13.50 per share (the “IPO”). The net proceeds of the IPO were approximately $78.7 million. We contributed the proceeds of the IPO to Clipper Realty L.P., our operating partnership subsidiary (the “Operating Partnership”), in exchange for units in the Operating Partnership.
On May 9, 2017, the Company completed the purchase of 107 Columbia Heights, a 161-unit apartment community located in Brooklyn Heights, New York, in vacant condition, for $87.5 million, financed with a $59.0 million secured mortgage loan. The Company also entered into a construction loan secured by the building that will provide up to $14.7 million for eligible capital improvements and carrying costs.
On October 27, 2017, the Company completed the acquisition of an 82-unit residential property at 10 West 65th Street in Manhattan, New York, for $79.0 million, financed with a $34.4 million secured mortgage loan.
As of December 31, 2017, the properties owned by the Company consist of the following (collectively, the “Properties”):
These properties are located in the most densely populated major city in the United States, each with immediate access to mass transportation.
The Company’s ownership interest in its initial portfolio of properties was acquired in the formation transactions in connection with the private offering. These properties are owned by the predecessor entities, which after the formation transactions are referred to as the “LLC subsidiaries.” The LLC subsidiaries are managed by the Company through the Operating Partnership. The Operating Partnership’s interest in the LLC subsidiaries generally entitles the Operating Partnership to all cash distributions from, and the profits and losses of, the LLC subsidiaries, other than the preferred distribution to the continuing investors who hold Class B LLC units in these LLC subsidiaries (described below). In connection with the formation transactions, holders of interests in the predecessor entities received Class B LLC units in the Operating Partnership or shares of our common stock. At December 31, 2017, the continuing investors owned an aggregate amount of 26,317,396 Class B LLC units, representing 58.8% of the Company’s common stock on a fully diluted basis. Accordingly, the Operating Partnership’s interests in the LLC subsidiaries entitles it to receive approximately 41.2% of the aggregate distributions from the LLC subsidiaries.
The Tribeca House properties were purchased in December 2014 and consist of two nearly adjacent properties in the Tribeca neighborhood of Manhattan, New York. They comprise approximately 481,000 square feet of leasable residential area, with 506 apartment units, 11-foot ceilings and extensive amenities, and approximately 77,000 square feet of retail space, including an externally managed garage.
The Flatbush Gardens property complex was purchased in September 2005 and consists of 59 primarily six-story buildings, approximately 1.7 million leasable residential square feet and 2,496 apartment units, in East Flatbush, Brooklyn. The property is subject to rent control regulations of New York City. Since acquisition, the management team has undertaken a comprehensive renovation and repositioning strategy that has included upgrades to both the exteriors and the interiors of the buildings.
The 141 Livingston Street property in the Downtown Brooklyn neighborhood was purchased in 2002, along with the below-mentioned 250 Livingston Street property. It is a 15-story commercial building with a gross leasable area of 206,084 square feet. The property’s main commercial tenant, the City of New York, executed a new 10-year lease in December 2015. Under the agreement, the City of New York has an option to terminate the lease after five years; if it decides to continue to occupy the building at such time, the annual rent will increase by 25% beginning the sixth year of the lease.
The 250 Livingston Street property in the Downtown Brooklyn neighborhood was purchased in 2002 (along with the 141 Livingston Street property), and consists of a 12-story commercial and residential building. It has approximately 294,000 square feet gross leasable area of commercial space and approximately 26,800 square feet of residential space. The property’s sole office tenant, the City of New York, has its two leases expiring in 2020. The office space has been remeasured to approximately 353,000 square feet, according to Real Estate Board of New York (“REBNY”) standards.
The Aspen property, purchased in June 2016, is located at 1955 1st Avenue in Manhattan, New York. It is a seven-story building that consists of approximately 187,000 square feet, 232 residential rental units, three retail units and a parking garage. The residential units are subject to regulations established by the New York City Housing Development Corporation (the “HDC”), under which there are no rental restrictions on approximately 55% of the property’s units, and low- and middle-income rental restrictions on approximately 45% of the units.
The 107 Columbia Heights property, purchased in May 2017 in vacant condition, is located in the Brooklyn Heights neighborhood of Brooklyn, New York. The property currently consists of approximately 154,000 gross square feet of space. Renovations are underway to create 159 well-appointed studio, one- and two-bedroom units, with amenities and indoor parking for 68 cars.
The 10 West 65th Street property, purchased in October 2017, is located in the Upper West Side neighborhood of Manhattan, New York, less than a block from Central Park. The property consists of approximately 76,000 square feet of leasable residential area, with 82 apartment units, plus an additional 53,000 square feet of air rights. Approximately 50% of the apartments are subject to a sale-leaseback agreement with Touro College, from whom the Company purchased the property, through 2019.
History
The Company’s Predecessor is a combination of four limited liability companies - Renaissance Equity Holdings LLC, Berkshire Equity LLC, Gunki Holdings LLC and 50/53 JV LLC - which were formed by principals of our management team from 2002 to 2014. Upon completion of the private offering and the formation transactions, we assumed responsibility for managing the predecessor LLCs.
Business and Growth Strategies
Our primary business objective is to enhance stockholder value by increasing cash flow from operations and total return to stockholders through the following strategies:
Competitive Strengths
We believe that the following competitive strengths distinguish us from other owners and operators of multifamily residential and commercial properties: