0001520138-19-000190.txt : 20190607 0001520138-19-000190.hdr.sgml : 20190607 20190607124556 ACCESSION NUMBER: 0001520138-19-000190 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 56 CONFORMED PERIOD OF REPORT: 20170331 FILED AS OF DATE: 20190607 DATE AS OF CHANGE: 20190607 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TALON REAL ESTATE HOLDING CORP. CENTRAL INDEX KEY: 0001426011 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 261771717 STATE OF INCORPORATION: UT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-53917 FILM NUMBER: 19884920 BUSINESS ADDRESS: STREET 1: 5500 WAYZATA BOULEVARD STREET 2: SUITE 1070 CITY: MINNEAPOLIS STATE: MN ZIP: 55416 BUSINESS PHONE: 612-604-4600 MAIL ADDRESS: STREET 1: 5500 WAYZATA BOULEVARD STREET 2: SUITE 1070 CITY: MINNEAPOLIS STATE: MN ZIP: 55416 FORMER COMPANY: FORMER CONFORMED NAME: GUIDE HOLDINGS INC DATE OF NAME CHANGE: 20100222 FORMER COMPANY: FORMER CONFORMED NAME: GUIDE HOLDING INC DATE OF NAME CHANGE: 20080205 10-Q 1 talr-170331_10q.htm FORM 10-Q FOR PERIOD ENDING MARCH 31, 2017
 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the Quarterly Period Ended: March 31, 2017

 

¨ 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 000-53917

 

TALON REAL ESTATE HOLDING CORP.

(Exact Name of Registrant as Specified in its Charter)

 

Utah   26-1771717

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

100 S. 1st Street, Minneapolis MN 55458-3357

(Address of Principal Executive Offices, Including Zip Code)

(612) 604-4600

(Registrant’s Telephone Number, Including Area Code)

 

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 x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

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

 

Large Accelerated Filer  ¨ Accelerated Filer  ¨ Non-Accelerated Filer  ¨ Smaller Reporting Company x
      (Do not check if a smaller reporting company)  

 

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

 

The number of shares of the registrant’s common stock, par value $0.001 per share, outstanding at June 5, 2019 was 29,102,791 shares.

 

 
 
 

TALON REAL ESTATE HOLDING CORP.

QUARTERLY REPORT ON FORM 10-Q

INDEX

 

 

PART I. FINANCIAL INFORMATION  
Item 1.    Financial Statements 1
Condensed Consolidated Balance Sheets as of March 31, 2017 (unaudited) and December 31, 2016 2
Condensed Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016 (unaudited) 3
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 (unaudited) 4
Notes to Condensed Consolidated Financial Statements (unaudited) 5
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 28
Item 3.   Quantitative and Qualitative Disclosures About Market Risk 41
Item 4.   Controls and Procedures 41
   
PART II. OTHER INFORMATION  
Item 1.   Legal Proceedings 46
Item 1A.   Risk Factors 46
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds 46
Item 3.   Defaults Upon Senior Securities 46
Item 4.   Mine Safety Disclosures 46
Item 5.   Other Information 46
Item 6.   Exhibits 46
   
Signatures 47

 

SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION

 

In this Quarterly Report on Form 10-Q, references to “Company,” “we,” “us,” “our” and words of similar import refer to Talon Real Estate Holding Corp. and its subsidiaries, unless the context requires otherwise.

 

This Quarterly Report on Form 10-Q contains forward-looking statements regarding us, our business prospects and our results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause our actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those described under the heading “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2016 as filed with the Securities and Exchange Commission on April 17, 2019. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Commission that advise interested parties of the risks and factors that may affect our business.

 

 
 

PART I. – FINANCIAL INFORMATION

 

Item 1.Financial Statements

 

TALON REAL ESTATE HOLDING CORP.

Minneapolis, Minnesota

 

FINANCIAL STATEMENTS

 

 

TABLE OF CONTENTS

As of March 31, 2017 and for the three months ended March 31, 2017 and 2016

 

 

  Page
Condensed Consolidated Financial Statements  
Condensed Consolidated Balance Sheets 2
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Statements of Cash Flows 4
Notes to Condensed Consolidated Financial Statements 5

 

 -1-

TALON REAL ESTATE HOLDING CORP.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2017 and December 31, 2016

 

  

March 31,

2017

 

December 31,

2016

    (unaudited)      
ASSETS          
Land and improvements  $8,302,447   $8,302,447 
Building and improvements   51,192,060    45,552,308 
Equipment, furniture and fixtures   32,193    30,571 
Total property and equipment   59,526,700    53,885,326 
Less: accumulated depreciation   (9,159,425)   (8,506,290)
Net property and equipment   50,367,275    45,379,036 
           
Cash   88,596    108,418 
Rents and other receivables, net   598,515    428,176 
Prepaid expenses and other assets   70,083    104,855 
Restricted escrows and reserves   13,995,393    3,001,232 
Deferred leasing costs, net   2,234,977    2,003,221 
Intangible assets, net   4,899,333    5,465,603 
TOTAL ASSETS  $72,254,172   $56,490,541 
           
LIABILITIES          
Notes payable  $73,204,216   $52,640,239 
Less: unamortized deferred financing costs   (3,264,295)   (496,063)
Notes payable, net   69,939,921    52,144,176 
Notes payable, related party   1,199,497    809,472 
Accounts payable   3,910,655    6,167,516 
Tenant improvement allowance   5,639,752    —   
Accrued expenses and other liabilities   1,260,136    854,743 
Tenant security deposits   167,242    167,242 
Deferred rent revenue   100,488    121,710 
Prepaid rent   133,875    175,758 
Accrued interest   635,977    1,029,911 
Below-market leases, net   121,741    150,638 
Mandatorily redeemable Operating Partnership preferred units   —      3,000,000 
Total Liabilities   83,109,284    64,621,166 
           
COMMITMENTS AND CONTINGENCIES (NOTE 7)          
           
SHAREHOLDERS' EQUITY (DEFICIT)          
Preferred shares outstanding at $.001 par value; authorized 10,000,000 shares; none issued or outstanding as of both March 31, 2017 and December 31, 2016        —   
Common shares outstanding at $.001 par value; authorized 90,000,000 shares; 19,720,981 and 17,135,981 issued and outstanding as of March 31, 2017 and December 31, 2016, respectively   19,720    17,135 
Additional paid in capital   2,350,316    2,261,411 
Accumulated loss   (16,102,357)   (14,215,704)
Total Talon Real Estate Holding Corp. shareholders’ equity (deficit)   (13,732,321)   (11,937,158)
Non-controlling interests – Operating Partnership; 9,200,001 common units issued and outstanding as of March 31, 2017 and December 31, 2016   4,502,532    5,418,810 
Non-controlling interests – consolidated real estate entities   (1,625,323)   (1,612,277)
TOTAL SHAREHOLDERS’ EQUITY (DEFICIT)   (10,855,112)   (8,130,625)
TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY (DEFICIT)  $72,254,172   $56,490,541 

 

See accompanying notes to condensed consolidated financial statements.

 

 -2-

TALON REAL ESTATE HOLDING CORP.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the three months ended March 31, 2017 and 2016

(unaudited)

 

  

For the Three Months

Ended March 31,

   2017  2016
REVENUE      
Rent  $1,771,070   $1,875,912 
Tenant reimbursement   861,384    897,491 
Other income   24,738    86,001 
Total Revenue   2,657,192    2,859,404 
           
EXPENSES          
General & administrative   51,772    347,003 
Salary and compensation   182,022    224,697 
Professional   357,140    225,845 
Property operating expenses   1,179,187    1,185,578 
Real estate taxes & insurance   460,379    445,477 
Depreciation and amortization   1,218,242    1,232,405 
Total Expenses   3,448,742    3,661,005 
Operating Loss   (791,550)   (801,601)
           
Interest expense   2,024,427    1,228,038 
           
NET LOSS   (2,815,977)   (2,029,639)
           
Net loss attributable to non-controlling interest - Operating Partnership   916,278    702,710 
Net loss attributable to non-controlling interests - consolidated real estate entities   13,046    24,187 
NET LOSS ATTRIBUTABLE TO TALON REAL ESTATE HOLDING CORP.  $(1,886,653)  $(1,302,742)
           
Loss per common share basic  $(0.10)  $(0.08)

 

See accompanying notes to condensed consolidated financial statements.

 

 -3-

TALON REAL ESTATE HOLDING CORP.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the three months ended March 31, 2017 and 2016

(unaudited)

 

  

Three months ended

March 31,

   2017  2016
CASH FLOWS FROM OPERATING ACTIVITIES          
Net loss  $(2,815,977)  $(2,029,639)
Adjustments to reconcile net loss to net cash flows from operating activities:          
Depreciation and amortization   1,267,434    1,295,847 
Amortization of deferred financing costs   923,463    204,752 
Stock-based compensation expense   55,740    38,285 
Provision for doubtful accounts   —      25,715 
Deferred financing costs   25,750    175,411 
Settlement added to notes payable   874,193    —   
           
Changes in operating assets and liabilities:          
Rents and other receivables   (170,339)   (22,708)
Prepaid expenses and other assets   34,772    110,241 
Deferred leasing costs   (308,682)   1,400 
Accounts payable   (255,984)   406,261 
Accrued expenses and other liabilities   405,393    529,590 
Tenant security deposits   —      —   
Deferred rent revenue   (21,222)   (102,052)
Prepaid rent   (41,883)   (234,478)
Accrued interest   (119,501)   214,509 
Net cash flows from operating activities   (146,843)   613,134 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchase of equipment, furniture and fixtures   (1,622)   —   
Deposits made for future acquisitions        —   
Deposits to restricted escrows and reserves        (772,397)
Payments from restricted escrows and reserves   466,839    39,093 
Net cash flows from investing activities   465,217    (733,304)
    —        
CASH FLOWS FROM FINANCING ACTIVITIES          
Proceeds from notes payable        —   
Principal payments on notes payable   (330,526)   (91,424)
Deposits or cash paid for financing costs   (7,670)   (11,000)
Common stock issued for financing costs        —   
Principal payments on Operating Partnership preferred units        —   
Net cash flows from financing activities   (338,196)   (102,424)
    —        
Net Change in Cash   (19,822)   (222,594)
           
CASH - BEGINNING OF PERIOD   108,418    340,385 
CASH - END OF PERIOD  $88,596   $117,791 
           
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES          
Purchases of building and land improvements included in accounts payable  $—     $22,944 
Leasing and financing fees included in accounts payable and other liabilities   —      58,252 
Escrow deposits from notes payable   14,159,480    —   
Escrows applied to notes payable   2,698,480    —   
Accounts payable settled through notes payable   1,990,877    103,002 
Accounts payable settled through share issuance   10,000    —   
Redemption of preferred units settled through notes payable   3,050,000    —   
Accrued interest settled through notes payable   224,433    —   
Original issuance discount and fees on notes payable   3,691,695    —   
Building improvements from tenant improvement allowance   5,639,752    —   
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION          
Cash paid during the period for interest on mortgages and Operating Partnership preferred units  $744,407   $863,636 

 

See accompanying notes to condensed consolidated financial statements.

 

 -4-

TALON REAL ESTATE HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2017 and for the three months ended March 31, 2017 and 2016 (unaudited)

 

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION

 

Organization

 

Talon Real Estate Holding Corp. (“TREHC”) previously established an Operating Partnership (“Talon OP”) and transferred all of its assets and liabilities to the operating partnership in exchange for general partnership units. As the sole general partner of Talon OP we have the exclusive power to manage and conduct the business and affairs for the operating partnership. TREHC owned approximately 65% of the Operating Partnership as of March 31, 2017 and March 31, 2016, respectively. The Operating Partnership owned 100% of 5130 Industrial Street, LLC, 100% of Talon Bren Road, LLC, 100% of Talon First Trust, LLC, and 100% of Talon RE as of December 31, 2016 and 2015. Talon Bren Road, LLC, and Talon First Trust, LLC, are both limited liability companies organized under the laws of the state of Delaware, and were formed on May 9, 2014 and April 21, 2014, respectively, to purchase real estate. Talon Real Estate, LLC (“Talon RE”) was incorporated in the state of Minnesota on December 20, 2012 and began operations in 2013 for the purpose of acquiring real estate properties. Talon RE merged with Guide Holdings, Inc. in which Guide Holdings, Inc. was the surviving entity and was renamed Talon Real Estate Holding Corp.

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles (“US GAAP”).

 

The accompanying consolidated financial statements include the accounts of TREHC and its interest in the Operating Partnership. The limited partners in the Operating Partnership have a redemption option that they may exercise. Upon exercise of the redemption option by the limited partners, the Company has the choice of redeeming the limited partners' interests ("Units") for TREHC common shares of stock on a one-for-one basis, or making a cash payment to the unit holder. The redemption generally may be exercised by the limited partners at any time after the first anniversary of the date of the acquisition of the Units subject to volume restrictions.

 

NOTE 2 – INVESTMENT IN REAL ESTATE PROPERTIES AND ENTITIES

 

The Company owns, through its subsidiary Talon First Trust, LLC, real estate property located at 180 East 5th Street, St. Paul, MN. The building has 656,875 net rentable square feet and is primarily leased to tenants for commercial and government use. As of March 31, 2017, the Company had tenants occupying approximately 60% of the rentable space. In April 2015, the Company executed a lease for a significant new tenant that would increase the occupancy by over 21% in the St. Paul building upon commencement of the lease. The lease was amended on January 27, 2017 to resolve certain disputes between the Company and the tenant and as amended, the lease is scheduled to commence on January 1, 2018. On March 7, 2017 one tenant that occupies approximately 16% of the net rentable square feet filed for Chapter 11 bankruptcy protection from its creditors. In June of 2018, this asset was sold to First Capital Reit (Note 12).

 

 -5-

TALON REAL ESTATE HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2017 and for the three months ended March 31, 2017 and 2016 (unaudited)

 

NOTE 2 – INVESTMENT IN REAL ESTATE PROPERTIES AND ENTITIES (continued)

 

The Company owns, through its subsidiary Talon Bren Road, LLC, real estate property located on 20 acres of land at 10301 Bren Road West, Minnetonka, MN. This property has 164,472 net rentable square feet and is primarily leased to tenants who are wholesale product sales representatives. These leases are subject to a master lease agreement entered into between Talon Bren Road, LLC and Upper Midwest Allied Gifts Association, Inc. (“UMAGA”), a Minnesota nonprofit corporation. As of March 31, 2017, the Company had 100% of the rentable space leased.

 

The Company owns and operates the following real estate properties through its subsidiary, 5130 LLC:

 

5130 Industrial Street, Maple Plain, MN

1350 Budd Ave, Maple Plain, MN

 

The properties have combined 171,639 net rentable square feet and are primarily leased to tenants for mixed commercial and industrial usage. As of March 31, 2017, the Company had tenants occupying approximately 85% of the rentable space.

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Accounting Estimates

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to use estimates and assumptions which affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from those estimates.

 

Principles of Consolidation

 

We evaluate the need to consolidate affiliates based on standards set forth in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation. In determining whether we have a controlling interest in an affiliate and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions, contractual and substantive participating rights of the limited partners and shareholders, as well as whether the entity is a variable interest entity for which we are the primary beneficiary. The accompanying consolidated financial statements include the accounts of Talon Real Estate Holding Corp. (“TREHC”) and Talon OP, our Operating Partnership, and all subsidiaries in which it maintains a controlling interest. Talon OP also consolidates 5130 LLC, an entity in which it has a 49% ownership interest, based on its ability to control the operating and financial decisions of 5130 LLC. All significant intercompany balances have been eliminated in consolidation.

 

Cash

 

The Company considers short-term investments with original maturities of 90 days or less to be cash equivalents. The Company believes it is not exposed to any significant credit risk on cash.

 

Restricted Escrows and Reserves

 

The Company is required to hold cash in restricted escrow accounts for insurance, real estate taxes and a replacement reserve. The escrows are used to pay periodic charges of real estate taxes and assessments, tenant improvements, and leasing commissions. The balances in the escrow accounts were $13,995,393 and $3,001,232 as of March 31, 2017 and December 31, 2016, respectively.

 

 -6-

TALON REAL ESTATE HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2017 and for the three months ended March 31, 2017 and 2016 (unaudited)

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Rents and Other Receivables

 

Rents receivable and deferred rent are recorded at their estimated net realizable value. The Company follows a policy of providing an allowance for doubtful accounts, which is based on a review of outstanding receivables, historical collection information, and existing economic conditions. The Company does not require collateral and accounts are considered past due if payment is not made on a timely basis in accordance with our credit terms. Accounts considered uncollectible are written off. Receivables have been reduced by an allowance for doubtful accounts of $129,330 as of both March 31, 2017 and December 31, 2016.

 

Revenue Recognition

 

Base rental income is recognized on a straight-line basis over the terms of the related lease agreement, inclusive of leases which provide for scheduled rent increases or rent concessions. Differences between rent income earned and base rent amounts due per the respective lease agreements are credited or charged to deferred rent revenue or deferred rent receivable as applicable. When the Company enters into lease modifications or extensions with current tenants, the deferred rent at the time of the extension is amortized over the remaining term of the lease, and the revised terms are considered a new lease.

 

Tenant recoveries related to reimbursement of real estate taxes, insurance, repairs and maintenance and other operating expenses are billed monthly based on current year estimated operating costs for applicable expenses. An additional billing or a refund is made to tenants in the following year after actual operating expenses are determined.

 

Deferred Leasing Costs and Tenant Allowance

 

Direct and indirect costs, including estimated internal costs and leasing commissions, associated with the leasing of real estate investments owned by the Company are capitalized as deferred leasing costs and amortized on a straight-line basis over the term of the related lease as amortization expense. Unamortized costs are charged to expense upon the early termination of the lease. Costs associated with unsuccessful leasing opportunities are expensed.

 

In leasing tenant space, the Company may provide funding to the lessee through a tenant allowance. In accounting for a tenant allowance, the Company determines whether the allowance represents funding for the construction of leasehold improvements and evaluates the ownership, for accounting purposes, of such improvements. If the Company is considered the owner of the leasehold improvements for accounting purposes, the Company capitalizes the amount of the tenant allowance as building improvements and depreciates it over the shorter of the useful life of the leasehold improvements or the related lease term. For tenant allowances committed at lease inception and recorded as building improvements but not yet performed or completed, the corresponding liability will be recorded as tenant improvement allowance payables. If the tenant allowance represents a payment for other than funding leasehold improvements, or in the event the Company is not considered the owner of the improvements, for accounting purposes, the tenant allowance is considered to be a lease incentive and is capitalized as a deferred leasing cost and is amortized over the lease term as a reduction of rental revenue on a straight-line basis.

 

The Company had amortization expense for tenant improvements of $259,782 and $269,475 for the three-months ended March 31, 2017 and 2016, respectively. The Company had amortization expense for leasing costs of $76,926 and $73,622 for the three-months ended March 31, 2017 and 2016, respectively. The Company had accumulated amortization for tenant allowances of $3,140,513 as of March 31, 2017 and $2,880,732 as of December 31, 2016.

 

 -7-

TALON REAL ESTATE HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2017 and for the three months ended March 31, 2017 and 2016 (unaudited)

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Deferred Financing Costs

 

Costs incurred in connection with obtaining financing are netted against notes payable and are being amortized using the effective interest method over the financing term and are included in interest expense. The Company had amortization expense of $923,463 for the three months ended March 31, 2017, and $204,752 for the three months ended March 31, 2016. Included in amortization expense for the three months ended March 31, 2017 is the write-off of unamortized deferred financing costs of $137,254 due to the refinancing of debt secured by the 180 East 5th Street property owned by Talon First Trust, LLC.

 

Real Estate Property and Fixed Assets

 

Investment in real estate and fixed assets with a useful life of longer than one year are carried at cost less accumulated depreciation and amortization. Property such as land, building and improvements includes cost of acquisitions, development, and construction and tenant allowances and improvements. We allocate the cost of an acquisition, including the assumption of liability, to the acquired tangible assets (including land, buildings and personal property) determined by valuing the property as if it were vacant, and identifiable intangibles based on their relative fair values. Acquisitions of real estate are recorded based upon preliminary allocations of the purchase price to management’s assessment of the fair value of tangible and intangible assets and any assumed liabilities acquired which are subject to adjustment as additional information is obtained up to one year after the date of acquisition. Management’s fair value assessment includes the use of readily accepted fair value techniques such as discounted cash flow analysis and comparable sales analysis including management’s reliance on independent market analysis.

 

Depreciation is provided using the straight-line method over the estimated useful life of the assets for furniture and equipment, buildings and land improvements, and the term of the lease for tenant improvements. The estimated useful lives being used are as follows:

 

Land Improvements 3-15 years
Buildings 25-30 years
Building Improvements 10-20 years
Tenant Improvements 1-12 years
Furniture and Equipment 3 years

 

Repair and maintenance costs are expensed as incurred, whereas expenditures that improve or extend the service lives of assets are capitalized. Disposal and abandonment of improvements are recognized at occurrence as a charge to depreciation.

 

Intangible Assets and Liabilities

 

Upon acquisitions of real estate, the Company assesses the fair value of acquired tangible assets and any significant intangible assets and liabilities (such as above- and below-market leases and value of acquired in-place leases), and any assumed liabilities, and allocates the purchase price based on these fair value assessments. The Company records intangible assets and liabilities acquired at their estimated fair value apart from goodwill for acquisitions of real estate. The Company amortizes identified intangible assets and liabilities based on the period over which the assets and liabilities are expected to affect the future cash flows of the real estate property acquired. Lease intangibles (such as in-place or above- and below-market leases) are amortized over the term of the related lease. Above and below-market leases are amortized as a reduction in (addition to) rent revenue. The Company amortized $45,220 as a net reduction in rent revenue for above and below-market leases for the three months ended March 31, 2017, and $48,267 for the three months ended March 31, 2016. Amortization of other intangibles is recorded in depreciation and amortization expense.

 

 -8-

TALON REAL ESTATE HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2017 and for the three months ended March 31, 2017 and 2016 (unaudited)

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Impairment of Long-Lived Assets

 

Long-lived assets, such as real estate property, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. An impairment loss would be recognized when the estimated future cash flows from the use and eventual disposition of the asset are less than the carrying amount of that asset. The Company did not recognize any impairment losses for either of the three months ended March 31, 2017 or 2016.

 

Income Taxes

 

The Company accounts for income taxes under FASB ASC 740-10-30 which results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the book carrying amounts and the tax basis of assets and liabilities. Deferred income tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the temporary differences and carry forwards are expected to reverse. Accounting standards require the consideration of a valuation allowance for deferred tax assets if it is “more likely than not” that some component or all of the benefits of deferred tax assets will not be realized.

 

The Company's policy of accounting for uncertain tax positions is to recognize the tax effects from an uncertain tax position in the financial statements, only if the position is more likely than not to be sustained on audit, based on the technical merits of the position. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized, upon ultimate settlement with the relevant tax authority. The Company has examined the tax positions taken in its tax returns and determined that there are no uncertain tax positions. As a result, the Company has recorded no uncertain tax liabilities in its consolidated balance sheet.

 

The Company is no longer subject to U.S. federal, state or local income tax examinations by tax authorities for the years before 2013. The Company is not currently under examination by any taxing jurisdiction. In the event of any future tax assessments, the Company has elected to record the income tax penalties as general and administrative expense and any related interest as interest expense in the Company's consolidated statements of operations.

 

Stock-based Compensation

 

The Company has granted restricted stock to employees under an approved employee equity incentive plan and to Directors under a director compensation plan. Granted shares are considered issued and outstanding as of the date of the grants. Stock-based compensation is expensed on a straight-line basis over the vesting period and is valued at the fair value on the date of the grant. The Company has recognized $55,740 and $38,285 of compensation expense for the three months ended March 31, 2017 and 2016, respectively.

 

The Company may also issue common stock in exchange for goods or services of non-employees. These shares are either fully vested at date of grant or vest over a certain period during which services are provided. The Company expenses the fair market value of the services over the period in which they are received.

 

 -9-

TALON REAL ESTATE HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2017 and for the three months ended March 31, 2017 and 2016 (unaudited)

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Non-controlling Interest

 

Interests in the Operating Partnership held by limited partners are represented by partnership common units of the Operating Partnership. The Company's interest in the Operating Partnership was approximately 67% and 65% of the common units of the Operating Partnership as of March 31, 2017 and December 31, 2016, respectively. The Operating Partnership’s income is allocated to holders of units based upon the ratio of their holdings to the total units outstanding during the period. Capital contributions, distributions, syndication costs, and profits and losses are allocated to non-controlling interests in accordance with the terms of the Operating Partnership agreement.

 

The portion of membership interests in 5130 LLC not held by Talon OP were reported as non-controlling interest. Capital contributions, distributions, and profits and losses are allocated to the non-controlling interest based on membership percentages and terms of the operating agreement.

 

Net Income (Loss) or Earnings Per Share

 

Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average common and potential dilutive common shares outstanding in accordance with the treasury stock method.

 

Given that the Company has incurred operating losses for all periods presented, diluted earnings per share is not presented. The weighted average outstanding shares used in the basic earnings per share computation is 18,945,481 and 16,788,586 for the three months ended March 31, 2017 and 2016 respectively.

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This new standard will eliminate all industry-specific guidance and replace all current U.S. GAAP guidance on the topic. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. Lease contracts are specifically excluded from the new accounting guidance.  This guidance will be effective for the Company beginning January 1, 2018 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. Adoption had no material impact on the Company’s consolidated financial statements.

 

In April 2015, the FASB issued ASU No. 2015-03 Interest—Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs.   The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update.  The Company adopted the amendments in this update effective January 1, 2016. Adoption did not have a material impact on the financial statements.

 

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15—Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 provides guidance for eight specific cash flow issues with respect to how cash receipts and cash payments are classified in the statements of cash flows, with the objective of reducing diversity in practice. The effective date for ASU 2016-15 is for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. Adoption of the ASU had no material impact on the Company’s financial statements.

 

 -10-

TALON REAL ESTATE HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2017 and for the three months ended March 31, 2017 and 2016 (unaudited)

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40).  The amendments in this Update provide guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures.  The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The Company has adopted this amendment in this update effective for the current fiscal year. (see Note 13).

 

In March 2016, the FASB issued ASU 2016-09—Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 modifies the accounting for share-

based payment awards, including income tax consequences, classification of awards as equity or liabilities, and classification on the statement of cash flows. The effective date for ASU 2016-09 is for annual periods beginning after December 15, 2016, and interim periods within those fiscal years. The adoption of this standard is not expected to have a material impact on the Company’s business, financial position, results of operations or liquidity.

 

During February 2016, FASB issued ASU No. 2016-02, “Leases.” ASU No. 2016-02 was issued to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset (as defined). ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with earlier application permitted. Upon adoption, the lessee will apply the new standard retrospectively to all periods presented or retrospectively using a cumulative effect adjustment in the year of adoption. The adoption of this Standard did not have a material impact on the Company’s financial statements.

 

In March 2016, the FASB issued ASU 2016-08 – “Revenue from Contracts with Customers: Principal versus Agent Considerations.” The amendments of this standard are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The effective date for ASU 2016-08 is the same as the effective date for ASU 2014-09 and ASU 2015-14. Adoption of this Standard did not have a material impact on The Company’s financial statements.

 

In January 2017, the FASB issued ASU 2017-01 – “Business Combinations (Topic 805): Clarifying the Definition of a Business.” The amendment is intended to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The effective date for ASU 2017-01 is for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted the new guidance effective January 1, 2018 and the guidance resulted in acquisitions of operating properties being accounted for as asset acquisitions instead of business combinations. The adoption of this guidance changed the Company’s accounting for the transaction costs for acquisitions of operating properties such that transaction costs are capitalized as part of the purchase price of the acquisition instead of being expensed as acquisition-related expenses. The ASU is required to be applied prospectively.

 

 -11-

TALON REAL ESTATE HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2017 and for the three months ended March 31, 2017 and 2016 (unaudited)

 

NOTE 4 – TENANT LEASES

 

The Company leases various commercial and industrial space to tenants over terms ranging from month-to-month to twelve years. Some of the leases have renewal options for additional terms. The leases expire at various dates from January 2017 to December 2025. Some leases provide for base monthly rentals and reimbursements for real estate taxes and common area maintenance.

 

The Company has the following future minimum base rentals on non-cancellable leases, including leases entered into subsequent to March 31, 2017:

 

2017 (remaining 9 months)   $ 5,264,839
2018     6,927,823
2019     6,207,780
2020     3,112,572
2021     1,728,134
Thereafter     10,851,438
  Total   $ 34,092,586

 

Included in the above table are base lease payments due beginning January 1, 2018 totaling $15,832,430 for a significant tenant that has not occupied space yet but for which we have an executed lease agreement.

 

NOTE 5 – NOTES PAYABLE

 

Note Payable, Related Party

 

During August 2014, the Company entered a two-year unsecured note payable with Curtis Marks, a former director, which matured on June 30, 2016. The note bore interest at an annual rate of 14% through November 2015, 20% through June 2016 and 26% thereafter under default provisions until the principal is repaid. The note required monthly interest only payments with the outstanding principal due at maturity. The Company defaulted on the note at maturity and in April 2017 the principal was increased by approximately $397,000 as a result of a judgement against the Company described in Note 7. At March 31, 2017, management determined a negative outcome was probable and recorded a $397,695 increase to the principal balance. At March 31, 2017 and December 31, 2016, the unpaid principal on the notes totaled $897,695 and $500,000, respectively.

 

During June 2014, the Company entered into two two-year unsecured notes payable totaling $370,000 with Bren Road, LLC, a limited partner in Talon OP (Note 11). The notes bore interest at an annual rate of 8% and required monthly principal and interest payments totaling $4,440 with the remaining principal due at maturity. At March 31, 2017 and December 31, 2016, the unpaid principal on the notes totaled $302,293 and $309,472, respectively. In July 2017, the principal and unpaid interest was satisfied by a $594,176 judgement against the lender as described in Note 7.

 

 -12-

TALON REAL ESTATE HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2017 and for the three months ended March 31, 2017 and 2016 (unaudited)

 

NOTE 5 – NOTES PAYABLE (continued)

 

Notes Payable

 

During March 2007, the Company entered into two mortgage notes payable totaling $4,750,000 secured by the Company’s real estate properties operated by 5130 Industrial Street, LLC (Note 2). The first note totaled $4,450,000 and required monthly interest only payments at 6.05% per annum with the outstanding principal due at maturity on April 8, 2017. The second note totaled $300,000 and required monthly interest only payments at 12.75% per annum with the outstanding principal due at maturity on April 8, 2017. At March 31, 2017 and December 31, 2016, the unpaid principal on the first note totaled $3,968,876 and $3,981,740, respectively. At March 31, 2017 and December 31, 2016, the unpaid principal on the second note totaled $292,609 and $292,941, respectively. The Company defaulted on the notes at maturity and in December 2018 the lender foreclosed on the properties as described in Note 12.

 

During May 2014, the Company entered into a five-year first mortgage note payable totaling $11,500,000 secured by the Company’s real estate property operated by Talon Bren Road, LLC (Note 2). The note bore interest at an annual rate of 4.65% and required monthly principal and interest payments totaling $65,438. At March 31, 2017 and December 31, 2016, the unpaid principal on the note totaled $10,788,414 and $10,858,648, respectively. During April 2017 the Company received a written default notice from the lender and in June 2017 the Company settled this note as described in Note 12.

 

During February 2015, the Company entered into a two-year second mortgage note payable totaling $2,000,000 secured by the Company’s real estate property operated by Talon Bren Road, LLC (Note 2). The note bore interest at an annual rate of 16% and required monthly interest payments totaling $26,667 with principal due at maturity. At December 31, 2016, the unpaid principal on the note totaled $2,000,000. During January 2017 the Company settled this note as described below.

 

The May 2014 and February 2015 mortgage notes payable include a restrictive covenant that requires Talon Bren Road, LLC to maintain a minimum debt service coverage ratio (“DSCR”) before distributions of 1.35:1.00 and after distributions of 1:05:1.00 as of the last day of each calendar year. As of December 31, 2015, Talon Bren Road LLC was out of compliance with the DSCR test. An amendment to the note agreements as well as waiver of the DSCR default for the December 31, 2015 test date was executed. The note agreements were amended to include a minimum Senior DSCR (pre-distributions) of not less than 1.50:1.00. It also amended and restated the minimum DSCR before distributions of not less than 1.20:1.00 as of the last day of each calendar year commencing after December 31, 2015. As of March 31, 2017, Talon Bren Road, LLC was not in compliance with the DSCR.

 

 -13-

TALON REAL ESTATE HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2017 and for the three months ended March 31, 2017 and 2016 (unaudited)

 

NOTE 5 – NOTES PAYABLE (continued)

 

During July 2014, the Company entered into a three-year first mortgage note payable totaling $32,000,000 secured by the Company’s real estate property operated by Talon First Trust, LLC (Note 2). The note bore interest at an annual rate of 6.04% and required monthly interest only payments totaling $161,067 with the remaining principal due at maturity. At December 31, 2016 the unpaid principal on the note totaled $32,000,000. During the year ended December 31, 2016, mechanics lien statements were filed upon the property for unpaid balances included in accounts payable. In January 2017, the Company settled this note and satisfied all outstanding liens as described in later in this note.

 

During January and May 2015, respectively, the Company entered into two separate $500,000 unsecured notes payable which matured on June 30, 2016. The notes bore interest at an annual rate of 20% through October 31, 2015, 24% through June 30, 2016 and 26% thereafter until the principal is repaid. The notes required monthly interest only payments totaling approximately $20,000 with the outstanding principal due at maturity. The Company defaulted on the notes at maturity. A judgment was rendered against the Company in May 2017 as described in Note 7. At March 31, 2017, management determined a negative outcome was probable and recorded a $476,498 increase to the principal balance. At March 31, 2017 and December 31, 2016, the unpaid principal on the notes totaled $1,476,498 and $1,000,000, respectively.

 

During November 2015 the Company entered into a two-month unsecured note payable totaling $481,934. The Company defaulted on the note at maturity in January 2016. During June 2016, the Company refinanced the note with the lender resulting in the issuances of a six-month unsecured note payable totaling $1,008,908, including $481,934 in unpaid principal and $526,974 in accrued interest and penalties. The notes bore interest at an annual rate of 10%. At March 31, 2017 and December 31, 2016, the unpaid principal on the notes totaled $1,330,167 and $1,008,908, respectively. In January 2017, the Company settled the June 2016 note with the lender as described in Note 7.

 

During May 2016, the Company entered into a $59,489 unsecured note payable to settle accounts payable due to an unrelated party. The note bore interest at an annual rate of 10% and unpaid principal and interest are due upon the sale or refinancing of the property operated by Talon First Trust, LLC. At March 31, 2017 and December 31, 2016, the unpaid principal on the note totaled $59,489. The Company repaid the principal and unpaid interest in July 2017.

 

During August 2016, the Company entered into a one-year $654,926 unsecured note payable to settle accounts payable due to an unrelated party. The note bears interest at an annual rate of 3% and unpaid principal and interest were due at maturity. At March 31, 2017 and December 31, 2016, the unpaid principal on the note totaled $654,926. The Company defaulted on this note at maturity and the balance remains outstanding.

 

 -14-

TALON REAL ESTATE HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2017 and for the three months ended March 31, 2017 and 2016 (unaudited)

 

NOTE 5 – NOTES PAYABLE (continued)

 

During October 2016, the Company entered into a non-interest bearing $181,000 unsecured note payable. At March 31, 2017 and December 31, 2016, the unpaid principal on the note totaled $81,800. The Company defaulted on the note at maturity in October 2016. The Company refinanced the unpaid principal in June 2017 as described in Note 12.

 

At December 31, 2016, the Company recorded $271,287 unsecured note payable to a former employee to settle a complaint filed by a former employee as described in Note 7. The note bore interest at an annual rate of 15% and matured in January 2018. The unpaid principal balance as of March 31, 2017 was $186,178. The note was repaid during 2017.

 

During January 2017, the Company entered into two 18-month promissory note agreements with a third-party lender, Quick Liquidity Management, LLC, totaling $2,550,000. The notes had an interest rate of 20% per annum and required monthly interest only payments with the principal due at maturity. The note agreements were guaranteed by First Tracks, LLC, a related party (Note 12). The proceeds from the notes were used to pay off the outstanding principal and interest due under the February 2015 $2,000,000 note payable. During June 2017, the outstanding principal, interest and penalties totaling $3,475,220 under the notes were satisfied through the issuance of the MCREIF and MCC notes described in Note 12.

 

On January 27, 2017, Talon First Trust, LLC, (the “Talon First Trust”), a Delaware limited liability company that is wholly owned by Talon OP, L.P., (the “Parent”), a Minnesota limited partnership and the entity through which Talon Real Estate Holding Corp. conducts substantially all of its business, entered into a Loan Agreement (the “Gamma Loan”) with Gamma Real Estate Capital LLC (the “Lender”), a Delaware limited liability company, in the principal amount of $51.6 million. The loan bears an interest rate equal to the sum of (i) the greater of (x) the LIBOR Index Rate, and (y) the LIBOR Floor, plus (ii) a margin of 9.00% per annum and has an initial maturity date of January 26, 2018 with two 6-month options for the Company to extend upon satisfaction of certain conditions. Pursuant to the Gamma Loan, approximately $5.3 million has been deposited into an interest reserve account to be applied toward monthly interest payments to the Lender.

 

The Gamma Loan is secured by (i) a mortgage on the Company’s interest in its building located at 180 East 5th Street, St. Paul, Minnesota, 55101, (ii) an assignment of lease and rents, (iii) 100% of the membership and ownership interests in the Parent, and (iv) other collateral specified in the Gamma Loan documents. The Gamma Loan is guaranteed by First Tracks, LLC, a related party (Note 12). First Tracks received a fee of $750,000 and 2,500,000 shares for the guarantee.

 

 -15-

TALON REAL ESTATE HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2017 and for the three months ended March 31, 2017 and 2016 (unaudited)

 

NOTE 5 – NOTES PAYABLE (continued)

 

The following table details the allocation of the proceeds from the January 2017 Gamma Loan:

 

July 14 Note payoff  $29,354,774 
Financing costs   1,032,000 
Closing costs   2,012,869 
Gamma Loan escrows and reserves     
Interest reserve   5,289,000 
TI Escrow   2,000,000 
Shell work reserves   884,211 
Basement fireproof reserve   100,000 
Tax and insurance reserve   246,517 
TI allowance escrow (Note 7)   5,639,752 
Redemption of preferred units (Note 10)   3,050,000 
Satisfaction of TI invoices and mechanics liens   1,990,877 
   $51,600,000 

 

Under various mortgage notes payable, the Company is required to periodically fund and maintain escrow accounts to make future real estate tax and insurance payments, as well as to fund certain capital expenditures (Note 6).

 

During 2016, the Company received funds under agreements for the sale of future receivables from four different sources. As of December 31, 2016, the total outstanding balance under the agreements was $430,500 for the sale of future receivables generated by the property located at 180 E. Fifth Street. The agreements required payments totaling $644,039 over 120 days. Per FASB ASC 470-10-25, which provides guidance on funds received from sales of future receivables, these transactions have been classified as debt and included in notes payable. The agreements are guaranteed by the Company’s CEO. The unpaid principal balance as of March 31, 2017 was $215,259. The outstanding balances under the agreements were repaid during 2017.

 

At March 31, 2017, The Company is required to make the following principal payments on our outstanding notes payable for each of the succeeding fiscal years as follows:

 

   Amount
 2017 (remaining 9 months)   $9,344,567 
 2018    54,524,889 
 2019    10,534,257 
     $74,403,713 

 

 -16-

TALON REAL ESTATE HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2017 and for the three months ended March 31, 2017 and 2016 (unaudited)

 

NOTE 6 – RESTRICTED ESCROWS AND RESERVES

 

According to the terms of the Company's notes payable agreements (Note 5), the Company is required to make monthly and quarterly deposits to various escrow and reserve accounts for the payment of real estate taxes, tenant improvements and leasing commissions. The Company had $13,995,393 and $3,001,232 in restricted escrows and reserve accounts as of March 31, 2017 and December 31, 2016, respectively.

 

NOTE 7 – COMMITMENTS AND CONTINGENCIES

 

On June 7, 2013, Talon RE entered into a contribution agreement with the Kaminski Trust, the remaining interest holder of 5130 Industrial Street LLC, pursuant to which the Company will acquire the remaining 51% interest in 5130 Industrial Street LLC in exchange for 2,820,810 shares of the Company’s common stock, subject to receiving consent to the transfer from 5130 Industrial Street LLC’s mortgage holder under the March 2007 notes. During December 2018, the shares were issued to The Kaminski Trust. The Company’s CEO and his wife are the trustees of The Kaminski Trust.

 

The Company entered into a property lease agreement relating to rental of office space. This non-cancellable lease has been amended to run through May 2024. The Company incurred $22,761 and $26,339 of rent expense for the three-months ended March 31, 2017 and 2016, respectively. On December 15, 2018, the Company entered into a termination agreement with the landlord. In exchange for vacating the premises, the accrued rent was forgiven.

 

The Company entered into a Contribution Agreement dated May 29, 2014 with Bren Road, LLC, the contributor of the property acquired through our subsidiary, Talon Bren Road, LLC. The agreement provides for any deficit in achieving $1,560,000 of net operating income (“NOI”) per year for the first three years to be funded by Bren Road, LLC. The Company recognized $ 0 and $46,023 of income under this agreement for the three months ended March 31, 2017 and 2016, respectively.

 

The Company entered into a consulting agreement dated May 29, 2014 with Gerald Trooien (“Consultant”). This agreement provides for consulting services to Talon Bren Road, LLC for $43,750 per month payable beginning August 15, 2014 and continuing for 59 months thereafter. The agreement will terminate upon the occurrence of any of the following:

 

a.redemption or conversion of all limited partnership units held by Bren Road, LLC,
b.sale by Bren Road of any of its partnership units in Talon OP, L.P.,
c.payment to Bren Road of any dividends in respect to Bren Road’s interest in Talon, and
d.the Company qualifies as a real estate investment trust (REIT).

 

 -17-

TALON REAL ESTATE HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2017 and for the three months ended March 31, 2017 and 2016 (unaudited)

 

NOTE 7 – COMMITMENTS AND CONTINGENCIES (continued)

 

The Company incurred $145,312 and $140,289 of consulting expenses for the three months ended March 31, 2017 and 2016, respectively. The Company had amounts due to the consultant of $771,803 and $627,491 as of March 31, 2017 and December 31, 2016, respectively. The outstanding amount as March 31, 2017 was satisfied on June 23, 2017 (see Note 12) as part of the refinancing of Talon Bren Road, LLC’s outstanding mortgages.

 

The Company entered into a Property Management Agreement dated July 2, 2014 with Swervo Management Division, LLC (“Property Manager”). This agreement provides for management and other leasing duties for Talon First Trust, LLC for monthly payments of 7.5% of the monthly gross rental receipts at the property beginning July 2, 2014 and continuing for 59 months thereafter. Subsequently, on January 27, 2017, the agreement was terminated.

 

The Company incurred $-0- and $144,569 of expenses for the three months ended March 31, 2017 and 2016, respectively. On November 16, 2015, the Company entered into a $481,934 unsecured promissory note with the Property Manager related to unpaid fees for the period of March 2015 through December 2015. In June 2016 the Company entered into a $953,908 unsecured promissory note related to the refinance of the previous note plus unpaid fees for the period January 2016 through July 2016 due August 31, 2016 (Note 5). After that date, an additional $55,000 of fees became due and payable.

 

On April 9, 2015, the Company entered into a significant lease arrangement with a new tenant. On January 27, 2017 the company executed a Second Amendment to the lease with the tenant to resolve issues concerning a notice of default that the Company received from the tenant on April 1, 2016 resulting in the termination of the $7,760,995 improvement allowance. The Second Amendment rescinds the Notice of Default and the Termination Notice that the tenant had delivered, changes to the lease commencement date from January 1, 2016 to January 1, 2018 and placed $5.6 million in escrow to provide evidence of our ability to pay for the remaining tenant improvements. We deposited the required escrow funds on January 27, 2017 (Note 12).

 

The depositing of the escrowed funds was done for the express purpose of paying for the buildout for the significant tenant. The funds were deployed to pay for the tenant improvements during 2017. All remaining funds were applied to reduce the Gamma Loan (Note 5).

 

 -18-

TALON REAL ESTATE HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2017 and for the three months ended March 31, 2017 and 2016 (unaudited)

 

NOTE 7 – COMMITMENTS AND CONTINGENCIES (continued)

 

Legal Proceedings

 

The Company filed a complaint in the State of Minnesota on June 10, 2016 to enforce the NOI Payment Agreement and other documents issued in conjunction with the Contribution Agreement entered into on May 29, 2014 with Bren Road, L.L.C, a limited partner in Talon OP, L.P. The defendant has responded and filed a counterclaim and third-party complaint against Talon Bren Road, LLC and Talon OP, LP on July 7, 2016. On November 9, 2016 the matter came before the court on the Defendant’s motion for partial summary judgment. Subsequently, on February 27, 2017 the Hennepin County District Court issued a Findings of Fact and Order for Judgment on the counter claim against the Company in the amount of $719,365, plus post judgment interest which pursuant to our 10301 Bren Road and 180 E 5th Street loan agreements, constitutes a non-financial event of default. In an attempt to collect on the judgment, the defendant filed a motion for the appointment of the receiver. The outstanding amount of the judgment was satisfied on June 23, 2017 as part of the refinancing of Talon Bren Road, LLC’s outstanding mortgages. On March 27, 2017 our complaint in the amount of $771,408 went to trial in Hennepin County District Court. On July 21, 2017 a judgment was ordered in favor of Talon Bren Road, LLC and Talon O.P LP in the amount of $594,176. The principal and accrued interest under the two June 2014 notes (Note 5) were settled under the July 21, 2017 judgment.

 

On January 12, 2015 and May 19, 2015, respectively, the Company entered into two separate $500,000 unsecured promissory notes (Note 5) with the same unrelated party. In 2015, the Company extended the maturity dates of both notes to December 31, 2015. Subsequently, the Company extended the maturity dates of both notes to the earlier of, the disposition or refinancing of the property at 180 E 5th Street in St. Paul or June 30, 2016. On September 24, 2016, the unrelated party filed a summons and complaint in the State of Minnesota claiming that the Company breached its obligation under the notes. On May 19, 2017, a judgment was entered against the Company in the amount of $1,476,498. As of the date of this report, the judgment has not been repaid by the Company.

 

On August 12, 2014, the Company entered into a $500,000 unsecured promissory note with Curtis Marks (Note 5), a former director. The note had an original maturity date of February 8, 2015. Proceeds from this note paid off additional notes entered into on December 30, 2013 and March 7, 2014, respectively, for $100,000 each, with the same party. In 2015, the Company extended the maturity date of the note to December 31, 2015. Subsequently, in 2016 the Company extended the maturity date of the note to the earlier of, the disposition or refinancing of the property at 180 E. Fifth Street in St. Paul or June 30, 2016. On October 18, 2016, the related party filed a summons and complaint in the State of Minnesota claiming that the Company breached its obligation under the notes. In April 2017, this matter went to trial and the plaintiff was awarded $897,695 On May 31, 2017, the Court granted a Charging Order against the Company and Talon OP L.P. where the Company and Talon OP L.P are required to pay all profits and distributions to the plaintiff until the full amount of the judgment is paid and satisfied. Subsequent to the judgment and charging order, in April 2018, the judgment was fully satisfied by the Company, granting a second mortgage in favor of the judgment creditor. As of the date of this filing, the second mortgage amount has not been repaid by the Company.

 

On October 20, 2016, a former employee filed a summons and complaint in the State of Minnesota claiming that the Company breached its obligation under terms of the former employee’s employment with the Company. In January 2017, the parties reached an agreement to settle all claims. The Company executed a $271,287 promissory note (Note 5) which is fully recorded on the Consolidated Balance Sheet as of December 31, 2016. The promissory note has been satisfied as of December 31, 2017.

 

 -19-

TALON REAL ESTATE HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2017 and for the three months ended March 31, 2017 and 2016 (unaudited)

 

NOTE 7 – COMMITMENTS AND CONTINGENCIES (continued)

 

On January 25, 2017, in the matter of Swervo Management Division, LLC, as plaintiff, versus Talon Real Estate Holding Corp, Talon First Trust, LLC and Talon Bren Road, LLC, as defendant, the Company executed a $1,330,167 amended and restated promissory note, plus interest on the unpaid balance at 10%. The entire principal balance shall be due and payable on the earlier of July 24, 2017 or upon a time that the Company refinances or sells its property located at 10301 Bren Road. This note replaces the Amended and Restated promissory note dated June 30, 2016 in the amount of $953,908 ($1,008,908 as of December 31, 2016 – Note 5) given by Talon Real Estate Holding Corp. and Talon First Trust, LLC. On July 24, 2017, the $1,330,167 promissory note was amended and restated, based on the payment of combined principal and interest of $300,000, to a $1,095,764 promissory note, plus interest on the unpaid balance at 10%. The entire principal balance shall be due and payable on the earlier of October 24, 2017 or upon a time that the Company refinances or sells its property located at 10301 Bren Road. On November 6, 2017, the $1,095,764 promissory note was amended and restated to a $927,587 promissory note, plus interest on the unpaid balance at 10%. The entire principal balance shall be due and payable on the earlier of December 31, 2017 or upon a time that the Company refinances or sells its property located at 10301 Bren Road. The Company defaulted on the November 2017 note at December 31, 2017 and accepted a judgment in October 2018 in the amount of $1,010,180. As of the date of this filing, the judgement amount has not been repaid by the Company.

 

NOTE 8 – RESTRICTED STOCK

 

The Company has granted restricted stock to employees under an approved employee equity incentive plan and to directors under a director compensation plan. The 2013 Equity Incentive Plan dated June 7, 2013 (the “Plan”) allows up to 1,500,000 shares to be issued and granted to employees, non-employee directors and consultants. Authorized shares automatically increase on January 1 of each year by three percent of the outstanding shares of common stock as of December 31 of the immediately preceding year. Employee awards granted in 2013 vest monthly over 36 months provided the recipient remains an employee or consultant of the Company. Awards granted in 2014 vest either immediately, monthly over a three-year period, or monthly over a five-year period. Awards granted in 2016 vest on a cliff basis one year from the date of issuance, or partially vest immediately and the remaining vest on a cliff basis annually from 2017 to 2019.

 

The Non-Employee Director Compensation Plan allows shares of restricted common stock to be granted to board members and is included under the Plan. The 2013 board member awards vest one-third of the shares on the date of grant, one-third on January 1 of the year following the date of grant, and one-third on January 1 of the second year following the date of grant, provided the recipient remains a member of the board as of the vesting date. The 2014 awards vested immediately in March of 2014. The 2016 awards vest half on the date of grant and half on April 15, 2017.

 

As of March 31, 2017, the Company has granted 1,093,759 shares to employees and 480,000 shares to Directors, net of forfeitures, under the Plan. Of the employee shares granted, 360,000 remain unvested as of March 31. 2017.

 

Total unrecognized compensation expense related to the outstanding restricted stock as of March 31, 2017 was $267,334, which is expected to be recognized over a weighted average period of 32 months.

 

 -20-

TALON REAL ESTATE HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2017 and for the three months ended March 31, 2017 and 2016 (unaudited)

 

NOTE 9 – INTANGIBLE ASSETS AND LIABILITIES

 

The Company's identified intangible assets and liabilities at March 31, 2017 and December 31, 2016 were as follows:

 

  

March 31,

2017

 

December 31,

2016

Identified intangible assets:          
In-place leases  $10,078,055   $10,078,055 
Above-market leases   1,832,939    1,832,939 
Accumulated amortization   (7,011,661)   (6,445,391)
Net carrying amount  $4,899,333   $5,465,603 

 

  

March 31,

2017

 

December 31,

2016

Identified intangible liabilities:          
Below-market leases  $507,746   $507,746 
Accumulated amortization   (386,005)   (357,108)
Net carrying amount  $121,741   $150,638 

 

The effect of amortization of acquired intangible assets and liabilities was a net charge of $537,372 for the three months ended March 31, 2017 and $544,253 for the three months ended March 31, 2016. Above-market leases, included in intangible assets, are amortized as a reduction of rent revenue and totaled $74,117 for the three months ended March 31, 2017, and $77,167 for the three months ended March 31, 2016. Below-market leases are amortized as an addition to rent revenue and totaled $28,898 for the three months ended March 31, 2017, and $28,898 for the three months ended March 31, 2016. Amortization of in-place leases was $492,152 for the three months ended March 31, 2017, and $495,983 for the three months ended March 31, 2016. In-place leases, and above and below-market leases had a weighted average amortization period of 4.5 years in the year acquired.

 

The estimated annual amortization of acquired intangible assets and liabilities for each of the five succeeding fiscal years is as follows:

 

Years ending December 31,  Assets  Liabilities
  2017 (remaining 9 months)     $ 1,681,233     $ 84,952  
 2018    1,654,921    36,789 
 2019    1,175,158    —   
 2020    388,021    —   
     $4,899,333   $121,741 

 

 -21-

TALON REAL ESTATE HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2017 and for the three months ended March 31, 2017 and 2016 (unaudited)

 

NOTE 10 – MANDATORILY REDEEMABLE PREFERRED OPERATING PARTNERSHIP UNITS

 

On July 2, 2014, the Company issued 30,000 preferred units, at a price of $100 per unit, totaling $3,000,000. These preferred unit holders are entitled to distributions at a rate of 6% per annum of their liquidation preference amount of $100 per unit which are cumulative from the date of issuance and are payable monthly (to the extent there are sufficient distributable proceeds). The preferred units have been classified as a liability in the consolidated balance sheet as the preferred liquidation preference amount is mandatorily redeemable in specific amounts at specific dates in the future. The preferred units were redeemed on January 27, 2017. (Note 5)

 

NOTE 11 – RELATED PARTY TRANSACTIONS

 

In October 2016, the Company entered into a loan guaranty agreement with, First Tracks LLC, an entity wholly owned by the wife of the Company’s Chairman and CEO, to guaranty additional debt financing on behalf of the Company (Note 5). Total fees of approximately $70,000 were paid by the Company to First Tracks during 2016 pursuant to this agreement.

 

First Tracks, LLC also provided a guarantee on the issuance of debt secured by the property owned by Talon Bren Road, LLC. Fees of $55,000 was paid to First Tracks, LLC on January 5, 2017 for this guarantee.

 

The Gamma Loan (see Note 5) entered into on January 27, 2017, is guaranteed by First Tracks, LLC. As consideration for the guarantee, Talon Real Estate Holding Company issued First Tracks LLC 2,500,000 shares of its common stock on January 27, 2017 and paid a fee of $750,000.

 

During 2014, the Company entered into a Contribution Agreement and two note payable agreements (Note 5) with Bren Road, LLC, a limited partner of Talon OP. The Contribution Agreement contained a NOI Payment Agreement under which Bren Road, LLC, owed the Company $287,150 at December 31, 2016 and is included in rents and other receivables on the Company’s consolidated balance sheet. The balances due under the NOI Payment Agreement and note payable agreements were settled during 2017 as detailed in Note 7.

 

NOTE 12 – SUBSEQUENT EVENTS

 

In June 2018, the Company entered into a contribution agreement under which the Company sold Talon First Trust, LLC, a subsidiary owned by Talon OP, L.P., the entity through which the Company conducts substantially all of its business, to First Capital Real Estate Operating Partnership, LP (FCROP), a subsidiary of First Capital Real Estate Trust, Inc. (FCREIT). Under the agreement, the Company agreed to sell the Limited Liability Company which contained the ownership of the property located at 180 East 5th Street, St. Paul, MN, for consideration with an estimated value of $98,000,000. Consideration received included 2,495,321 ownership units of FCROP with an estimated valuation of $40,000,000 and the assumption of up to $58,000,000 of principal, interest and penalties due under the January 2017 Gamma loan agreement.

 

 -22-

TALON REAL ESTATE HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2017 and for the three months ended March 31, 2017 and 2016 (unaudited)

 

NOTE 12 – SUBSEQUENT EVENTS (continued)

 

Talon First Trust LLC (ft)

Pro Balance Sheet

    March 31, 2017   December 31, 2016
 Assets                
                 
 Cash                
 BMO     1,110       —    
 Talon First Trust, LLC Operating     (995 )     (33,059 )
 Talon First Trust, LLC Property     —         53  
 Talon First Trust, LLC Lockbox     5,000       67,821  
 Talon First Trust, Operating AB     (76,576 )     —    
 Talon Management Services AB     38,555       —    
  Total Cash     (32,906 )     34,815  
                 
 Escrow                
 Real Estate Tax Escrow     456,361       196,401  
 Property Insurance Escrow     36,672       81,836  
 Replacement Reserve Escrow     —         100,839  
 Interest Reserve Escrow     4,826,434       —    
 General Escrow     987,211       —    
 TI & Commission Escrow     7,331,070       2,397,502  
  Total Escrow     13,637,748       2,776,579  
                 
 Receivables                
 Tenant Receivable     320,915       102,775  
 Due From Affiliates     (25,000 )     —    
  Total Receivables     295,915       102,775  
                 
 Fixed Assets                
 Building     21,258,346       21,258,346  
 Accum Depr - Building     (1,948,682 )     (1,771,529 )
 Building Improvements     1,272,545       1,272,545  
 Accum Depr - Building Improvements     (318,361 )     (285,352 )
 Tenant Improvements     12,394,469       6,754,717  
 Accum Depr - Tenant Improvements     (2,927,127 )     (2,667,345 )
 Land     3,000,000       3,000,000  
 Land Improvements     137,447       137,447  
 Accum Depr - Land Improvements     (4,582 )     (2,291 )
  Total Fixed Assets     32,864,056       27,696,538  

 

 -23-

TALON REAL ESTATE HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2017 and for the three months ended March 31, 2017 and 2016 (unaudited)

 

NOTE 12 – SUBSEQUENT EVENTS (continued)

 

Talon First Trust LLC (ft)

Pro Balance Sheet (continued)

 

 Other Assets                
  Deposits Paid     15,000       15,000  
 Intangible Assets     9,091,055       9,091,055  
 Intangible Assets - Above Market     1,832,939       1,832,939  
 Intangible Assets - Below Market     (507,746 )     (507,746 )
 Accum Amort - Intangible Assets     (5,463,132 )     (5,024,045 )
 Accum Amort - Intangible Assets - Above     (947,131 )     (873,014 )
 Accum Amort - Intangible Assets - Below     386,005       357,108  
 Leasing Costs     3,063,156       2,754,474  
 Accum Amort - Leasing Costs     (845,388 )     (772,433 )
 Deferred Leasing Incentives     80,187       80,187  
 Accum Amort - Leasing Incentives     (62,978 )     (59,007 )
 Prepaid Insurance     16,669       41,673  
 Other Prepaid Expenses     300       300  
 Deferred Rent     (92,300 )     (112,504 )
  Total Other Assets     6,566,636       6,823,988  
                 
   Total Assets     53,331,449       37,434,694.92  
                 
 Liabilities_Capital                
                 
 Liabilities                
                 
 Accounts Payable & Accruals                
 Prepaid Rent     65,735       71,744.80  
 Tenant Deposits     22,696       22,696.06  
 Great Hall - Deposits     500       500.00  
 Accounts Payable (System)     2,128,733       4,268,679  
 Tenant Improvement Allowance     5,639,752       —    
 Leasing Incentives Payable     2,050       2,050  
 Other Payable     189,549       —    
 Accrued Interest     474,938       274,592  
 Accrued Real Estate Taxes     316,894       —    
 Accrued RE Taxes - Special Assessments     771,370       771,370  
 Accrued Payroll     13,548       —    
  Total Accounts Payable & Accruals     9,625,764.89       5,411,632  
                 
 Notes Payable                
 Other Notes     1,563,485       1,330,800  
 Mortgage - 1st     51,600,000       32,000,000  
  Total Notes Payable     53,163,485       33,330,800  
 Financing Costs     (3,070,315 )     (1,087,893 )
 Accum Amort - Financing Costs     589,456       874,180  
 Preferred OP Capital - 6%     —         3,000,000  
  Total Liabilities     60,308,391       41,528,719  
                 
 Capital                
 Operating Partnership Capital     5,000,000       5,000,000  
 Intra Company Transfer     (404,577 )     209,476  
 Retained Earnings     (2,193,865 )     (4,146,447 )
 Prior Retained Earnings     (9,378,500 )     (5,157,053 )
  Total Capital     (6,976,942 )     (4,094,024 )
                 
   Total Liabilities_Capital     53,331,449       37,434,695  

 

 -24-

TALON REAL ESTATE HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2017 and for the three months ended March 31, 2017 and 2016 (unaudited)

 

NOTE 12 – SUBSEQUENT EVENTS (continued)

 

Talon First Trust LLC (ft)

Pro Forma Statement of Operations

For the Three Months Ending March 31, 2017

 

    March 31, 2017 
 Income     
Rental Income     
        Rent Revenue   1,334,296 
        CAM Income   462,602 
        Storage   10,725 
        Utility Income   20,057 
        RE Tax Income   73,271 
            Gross Rental Income   1,900,954 
      
        GAAP Straightline Rent Adjustment   20,203 
        Amort - Intangible Assets - Above   (74,117)
        Amort - Intangible Assets - Below   28,897 
        Amort - Leasing Incentives   (3,971)
            Net Rental Income   1,871,966 
      
        Interest Income   240 
        Late Fee Income   200 
        Other Income   8,423 
        Great Hall Income   9,153 
        Direct Tenant Reimbursable Income   3,572 
      
                Total Income   1,893,558 
      
 Expenses     
      
 Management Company Expenses     
      
    Professional Fees     
        Legal   24,470 
            Total Professional Fees   24,470 
      
    Staff Costs - Admin     
        Admin Payroll Fee   337 
        Bank Service Charges   —   
        Filing Fees   —   
        Due Diligence Lost Deals   —   
            Total General & Administrative   24,807 
      
    Direct Tenant Reimbursable   —   
            Total Management Expenses   24,807 

 

 -25-

TALON REAL ESTATE HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2017 and for the three months ended March 31, 2017 and 2016 (unaudited)

 

NOTE 12 – SUBSEQUENT EVENTS (continued)

 

Talon First Trust LLC (ft)

Pro Forma Statement of Operations

For the Three Months Ending March 31, 2017 (continued)

 

    Owner Expenses        
        Bad Debt Expense        
        Fees     180,300  
        Taxes     —    
        Owner Utilities     —    
            Total Owner Expenses     180,300  
         
    Common Area Expenses        
         
    Building Operations        
        Alley Expense     —    
        Building Repairs     (2,435 )
        Building Supplies     984  
        Connectivity - Cable, Internet, Phones     6,956  
        Electrical     2,619  
        Elevator - Contract     10,555  
        Elevator - Other     —    
        Food Service     9,999  
        Garbage & Recycling     5,870  
        HVAC - Contract     11,600  
        HVAC - Other     1,889  
        Janitorial - Contract     145,491  
        Janitorial - Supplies     16,520  
        License & Permits     —    
        Locks & Hardware     —    
        Maintenance - Payroll     35,294  
        Parking     14,310  
        Payroll Taxes - Operations     4,514  
        Pest Control     285  
        Plant Service     3,134  
        Plumbing     1,635  
        Security     9,252  
        Security - Payroll     41,060  
        Skyway     4,605  
        Snow Removal     —    
        Sprinkler & Fire Protection     5,595  
        Tenant Events     —    
        Uniforms     327  
        Total Building Operations     330,059  

 

 -26-

TALON REAL ESTATE HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2017 and for the three months ended March 31, 2017 and 2016 (unaudited)

 

NOTE 12 – SUBSEQUENT EVENTS (continued)

 

Talon First Trust LLC (ft)

Pro Forma Statement of Operations

For the Three Months Ending March 31, 2017 (continued)

 

    Utilities        
        Electricity     222,435  
        Gas     40,141  
        Water & Sewer     9,503  
        Total Utilities     272,080  
         
    Great Hall Expense     20,231  
         
    Real Estate Taxes     316,894  
    Insurance     25,004  
    Health Insurance - Property     1,609  
    Management Fee     76,038  
    Professional Fees - Property     66,533  
         
    Administrative        
        Administrative - Property     25,443  
        Bank Charges     4,386  
        Legal-property     950  
        Dues & Subscriptions - Property     558  
        Advertising/Marketing - Property     590  
        Postage-Site     496  
        Meals - Property     1,540  
        Travel - Property     72  
        Office Supplies - Property     996  
        Total Administrative     35,031  
         
    Total Common Area Expenses     1,143,480  
    Total Expenses     1,348,586  
    Net Operating Income     544,972  
         
    Interest Expense        
        Interest - Operating Loan     (26,970 )
        Interest - 1st Mortgage     1,070,370  
        Interest - Other     82,653  
            Total Interest Expense     1,126,054  
         
    Depreciation/Amortization Exp        
        Depr - Building     177,153  
        Depr - Building Improvements     33,009  
        Depr - Tenant Improvements     259,782  
        Depr - Land Improvements     2,291  
        Amort - Financing Costs     703,506  
        Amort - Intangible Assets     439,088  
        Amort - Leasing Costs     72,954  
            Total Depreciation/Amortization Expense     1,687,783  
         
    NET INCOME     (2,268,865 )

 

 -27-

TALON REAL ESTATE HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2017 and for the three months ended March 31, 2017 and 2016 (unaudited)

 

NOTE 12 – SUBSEQUENT EVENTS (continued)

 

In April 2017, the Company defaulted on the March 2007 mortgage notes (Note 5). In December 2018, the lender foreclosed and conducted a sheriff’s sale on properties operated by 5130 Industrial Street, LLC, which secured the mortgage notes. Pursuant to Minnesota law, a property foreclosed upon in this manner is subject to a six (6) month redemption. The Company is currently under contract to sell the property located at 1350 Budd Ave, Maple Plain, MN for $1,400,000. The Company is engaged in refinancing the second property, but as of the date of this report has been unable to do so. Failure to sell the properties or refinance the mortgage notes could result in an acceleration of actions by the lender to foreclose on the properties.

 

During June 2017, the Company entered into a transaction that included a Promissory Note Secured by a Mortgage and Collateral Security Agreement with MCREIF SubREIT LLC, in the principal amount of $15,127,000. The Note bears interest at a rate equal to 9.5% per annum and had an initial maturity date of June 1, 2018. The Note is subject to a balloon payment upon maturity in the amount of $15,246,755, which is comprised of the unpaid principal balance and unpaid interest of $119,755. The loan is guaranteed personally by the Company’s Chief Executive Officer.

 

During November 2018, the Company entered into a Forbearance Agreement with MCREIF through February 1, 2019. Under the Forbearance Agreement the interest rate was increased to 16% per annum and the balance due on the note was increased to $16,218,000 for unpaid principal, interest and default penalties.

 

During January 2019, the Company and MCREIF agreed to extend the maturity of the June 2017 promissory note to July 31, 2019, reduce the interest rate to 9.50% per annum, and increase the balance due under the note to $16,689,000 for unpaid principal, interest and default penalties. As of the date of this filing, the note is in good standing.

 

During June 2017, the Company entered into a $500,000 secured promissory note payable with MCC, LLC. The note had an interest rate of 4.50% per annum, required monthly principal and interest payments of $10,000 with the unpaid principal and interest balance due at maturity on July 1, 2018.

 

During September 2018, the unpaid principal and interest under the note was refinanced under a $651,800 secured promissory note with MCC. The note has an interest rate of 10% per annum, requires monthly principal and interest payments of $5,430 with the unpaid principal and interest balance due at maturity on August 1, 2019. As of the date of this filing, the note is in good standing.

 

The following table details the allocation of proceeds from the June 2017 MCREIF and MCC notes payable:

 

May 2014 note payoff (Note 5)  $10,720,058 
October 2016 note payoff (Note 5)   81,800 
January 2017 Quick Liquidity notes payoff (Note 5)   3,475,220 
Trooien consulting fees (Note 7)   744,145 
Financing costs   415,625 
Closing costs   57,613 
Satisfaction of invoices   70,898 
MCREIF reserves:     
Interest reserve   35,927 
Insurance reserve   25,714 
   $15,627,000 

 

 -28-

TALON REAL ESTATE HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2017 and for the three months ended March 31, 2017 and 2016 (unaudited)

 

NOTE 12 – SUBSEQUENT EVENTS (continued)

 

During October 2017, the Company received funds under agreements for the sale of future receivables from two different sources totaling $500,000. The agreements required payments totaling $720,000 over 120 days and are guaranteed by the Company's CEO. As of the date of this report the agreements are past due and have an outstanding balance of approximately $200,000.

 

In August 2018, Talon OP, L.P., which is the entity through which the Company conducts substantially all of its business, entered into a Contribution Agreement (the “Antigua Contribution Agreement”) with FCREIT, through FCROP, its operating partnership, for the acquisition of the FCROP’s interests in and to Goat Head Hill and Dutchman’s Bay, Island of Antigua (the “Antigua Project”), including, without limitation, that certain Memorandum of Agreement dated July 28, 2015 between Brown McLennon, the FCROP and the government of Antigua and Barbuda regarding the development of hotels on the properties known as Dutchman’s Bay and Goat Head Hill on Antigua and the FCROP’s 100% ownership interest in Goat Head Hill Resort Development Ltd and Dutchman’s Bay, an Antigua and Barbuda Corporation. Pursuant to the Antigua Contribution Agreement, the FCROP agreed to transfer all of its interests in the Antigua Project to Talon OP, L.P. In consideration for such transfer Talon OP, L.P., will issue to FCROP $30 million in units of its limited partnership interests (“LP Units”), or 12,000,000 LP Units based on a valuation of $2.50 per LP Unit. The LP Units will be payable in three installments over a two-year period with 4,000,000 due at closing and 4,000,000 due one and two years from the closing date. FCROP has agreed to sign such documents at the Closing as are necessary in connection with its admission as a limited partner of Talon OP, L.P. The agreement closed during December 2018.

 

In August 2018, Talon OP, L.P., which is the entity through which the Company conducts substantially all of its business, entered into a Contribution Agreement (the “Hotels Contribution Agreement”) with FCREIT through FCROP, its operating partnership, for the acquisition of seven entities. In consideration for such transfer Talon OP, L.P. will issue to the FCROP $14,796,765 in units of its limited partnership interests (“LP Units”), or 5,918,706 LP Units based on a valuation of $2.50 per LP Unit. The aggregate value of the Companies/Hotels is $40,790,000 and a credit for existing indebtedness (“Existing Indebtedness”) of $25,993,235. FCROP has agreed to sign such documents at the Closing as are necessary in connection with its admission as a limited partner of Talon OP, L.P. The agreement closed during December 2018. The August 2018 hotel acquisitions require proforma presentation under Regulation S-X. However, as of the date of this filing, records for the three months ended March 31, 2017 provided by FCREIT are incomplete and contain uncorrected material errors. Complete records will be provided by FCREIT when they are available. Accordingly, proforma presentation as of March 31, 2017 and the three months then ended are not included herein.

 

In November 2018, the Company set up a facility to obtain financing with a private, affiliated limited liability company. The terms of the facility involved draw-downs by various professionals and the selling Two Million (2,000,000) shares. The facility included a Warrant to Purchase Four Hundred Thousand Shares at a floor of One Dollar ($1.00) per share. (the “Warrant”). The facility allows for an amount of Three Hundred Fifty Thousand Dollars ($350,000.00) to be brawn down upon. As of May 2019, approximately One Hundred Fifty Thousand Dollars ($150,000) of the facility are available for use.

 

During December 2018, the Company issued 675,000 common shares each to Kristian Wyrobek, Marc Agar and First Tracks LLC (on behalf of the Company’s CEO) as director compensation.

 

 -29-

TALON REAL ESTATE HOLDING CORP.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2017 and for the three months ended March 31, 2017 and 2016 (unaudited)

 

NOTE 12 – SUBSEQUENT EVENTS (continued)

 

During December 2018, the Company issued 3,000,000 common shares to First Tracks LLC (on behalf of the Company’s CEO) and 1,000,000 shares to an employee for compensation under the Company’s employee equity incentive plan (Note 9).

 

During December 2018, the Company issued 406,000 common shares to vendors.

 

On April 3rd 2019, Talon entered into two binding contracts  to purchase certain Student Housing assets in Minnesota, Indiana, Illinois, Iowa, Wisconsin, and Kansas. ..  (the “Student Housing Assets”). Talon is purchasing the assets for an aggregate total value of One hundred ninety one million seven hundred forty thousand and seventy nine dollars ($191,740,079). The two  portfolios consist of 2805 beds combined.  The contracts are binding, but include a due diligence contingency and a financing contingency. As of the date of this filing, the Company does not consider closing of the contracts to be probable. Accordingly, proforma presentation as of March 31, 2017 and the three months then ended are not included herein.

 

On April 29, 2019, Talon reached a settlement with the Upper Midwest Allied Gifts Association “UMAGA” and various tenants at Talon’s Bren Road property.  The settlement includes a new 3.5 year Master Triple Net Lease for the entire property with UMAGA.  Talon through the lease will obtain rights to certain parking areas at the property during the term of the lease.  The settlement also includes the dismissal of all suits, and claims, between Talon, UMAGA and the tenants.  The settlement was read into the court record, and is binding, as the final settlement and lease documents are being drafted.

 

On April 30, 2019, Talon entered into a Purchase and Sale Agreement to sell the UMAGA property.  Talon has contracted to sell UMAGA for Twenty Six Million Dollars ($26,000,000).  The contract is binding, but the contract includes a due diligence contingency.  The Purchase and Sale Agreement does not contain a financing contingency. As of the date of this filing, the Company does not consider closing of the UMAGA agreement to be probable. Accordingly, proforma presentation as of March 31, 2017 and the three months then ended are not included herein.

 

NOTE 13 – GOING CONCERN

 

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. For the three months ended March 31, 2017 and 2016, the Company incurred losses of $2,815,977 and $2,029,639, respectively, and as of March 31, 2017 had a total shareholders’ deficit of $10,855,112. These circumstances raise substantial doubt about the Company's ability to continue as a going concern. The Company's ability to continue as a going concern is dependent on its ability to raise the additional capital to meet short and long-term operating requirements. Management is continuing to pursue external Financing alternatives to improve the Company's working capital position however additional financing may not be available upon acceptable terms, or at all. If the Company is unable to obtain the necessary capital, the Company may have to cease operations.

 

 -30-

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with the financial statements and related notes included elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update them in light of new information or future events.

 

Overview

 

Talon Real Estate Holding Corp is a publicly traded real estate corporation that invests primarily in single and multi-tenant office, industrial, hospitality and retail properties within the Midwest and South Central regions of the United States.  It currently owns eleven properties. Headquartered in Minneapolis, MN and founded in June 2013, Talon’s primary objective is to provide shareholders with attractive returns from investments in real estate through dividend distribution and growth.

 

On June 7, 2013, we acquired a 49% interest in an entity that owns an industrial complex consisting of two buildings with approximately 171,639 square feet located in the Minneapolis-St. Paul metropolitan area. The buildings currently have a combined occupancy of 85%. We entered into a contribution agreement to acquire the remaining interest in this entity which closed at the end of 2018. In March of 2019 we entered into a purchase and sale agreement to sell this asset.

 

In 2014, we completed two acquisitions totaling approximately $58 Million and over one million in gross building square feet. On May 29, 2014, we completed the acquisition of a 227,000 square foot building situated on 20 acres of land in Minnetonka, MN that was 100% leased by over 100 tenants who are wholesale distributors.  This property contributes to our core stable income investment strategy. On July 2, 2014, we completed the acquisition of a thirteen-story office tower located in downtown St. Paul, MN totaling 856,223 total building square feet that was 62% occupied by corporate and government tenants at time of acquisition and is currently 60% occupied. Management acquired the St. Paul property for its attractive value-add and growth potential. In April 2015, the Company executed a lease for a significant new tenant that would increase the occupancy by over 21% in the St. Paul building upon commencement of the lease. On January 27, 2017 we executed a second amendment to the lease which amended the original lease to a seven-year term with a commencement date of January 1, 2018. We exchanged this asset for Operating Units of First Capital Reit in June of 2018.

 

On August 31, 2018, Talon OP, L.P. (Talon-OP), which is the entity through which Talon Real Estate Holding Corp. (“Talon”) conducts substantially all of its business, entered into a Contribution Agreement (the “Antigua Contribution Agreement”) with First Capital Real Estate Trust, Incorporated (“Contributor”), through First Capital Real Estate Operating Partnership, L.P. (the “FC-OP”), its operating partnership, for the acquisition of the FC-OP’s interests in and to Goat Head Hill and Dutchman’s Bay, Island of Antigua (the “Antigua Project”), including, without limitation, that certain Memorandum of Agreement dated July 28, 2015 between Brown McLennon, the FC-OP and the government of Antigua and Barbuda regarding the development of hotels on the properties known as Dutchman’s Bay and Goat Head Hill on Antigua and the FC-OP’s 100% ownership interest in Goat Head Hill Resort Development Ltd and Dutchman’s Bay, an Antigua and Barbuda Corporation.

 

Pursuant to the Antigua Contribution Agreement, the FC-OP agreed to transfer all of its interests in the Antigua Project to Talon-OP. In consideration for such transfer Talon-OP will issue to the FC-OP $30.0 million in units of its limited partnership interests (“LP Units”), or 12,000,000 LP Units based on a valuation of $2.50 per LP Unit. The LP Units will be payable in three installments over a two year period. The FC-OP has agreed to sign such documents at the Closing as are necessary in connection with its admission as a limited partner of the Company. This transaction closed in November 2018.

 

 -31-

On August 31, 2018, Talon OP, L.P. (Talon-OP), which is the entity through which Talon Real Estate Holding Corp. (“Talon”) conducts substantially all of its business, entered into a Contribution Agreement (the “Hotels Contribution Agreement”) with First Capital Real Estate Trust, Incorporated (“Contributor”), through First Capital Real Estate Operating Partnership, L.P. (the “FC-OP”), its operating partnership, for the acquisition of seven entities, as described in the Hotels Contribution Agreement. In consideration for such transfer Talon-OP will issue to the FC-OP $14,796,765.00 in units of its limited partnership interests (“LP Units”), or 5,918,706 LP Units based on a valuation of $2.50 per LP Unit. The aggregate value of the Companies/Hotels is $40,790,000 and a credit for existing indebtedness (“Existing Indebtedness”) of $25,993,235.00. The Existing Indebtedness is set forth on Exhibit B attached hereto. The FC-OP has agreed to sign such documents at the Closing as are necessary in connection with its admission as a limited partner of the Talon-OP.

 

Pursuant to the terms of the Hotels Contribution Agreement, Talon-OP’s obligation to close upon the acquisition is subject to customary conditions to closing. This series of transactions closed in December 2018.

 

Our Current Property Interests

 

We currently own an interest in three properties located in and around the Minneapolis-St. Paul metropolitan area of Minnesota.

 

We own a 49% interest in an entity that owns an industrial complex consisting of two buildings with approximately 171,639 square feet located in the Minneapolis-St. Paul metropolitan area. We have entered into a contribution agreement to acquire the remaining interest in this entity, subject to receiving consent to the transfer from the entity’s lender.

 

We also own a 227,000 square foot building situated on 20 acres of land in Minnetonka, Minnesota and an 856,223 square foot thirteen-story office tower located in downtown St. Paul, Minnesota. As of March 31, 2017 the combined occupancy for all of the buildings in our portfolio was 71%. In April 2015, the Company executed a lease in the St. Paul building for a significant new tenant that would increase the occupancy of our portfolio by over 14% upon occupancy. The lease was amended on January 27, 2017 to resolve certain disputes between the Company and the tenant and as amended, the lease is schedule to commence on January 1, 2018.

 

 -32-

The following table sets forth information regarding our 5 largest tenants as of March 31, 2017. [To be updated.] this correct for then. Since we don’t own 180 any more it is different today.

 

Property Location (1)   Tenant Industry  

Primary

Use

 

Lease

Expiration

 

Approx.

Total

Leased

Square

Feet

 

Percentage

of

Company's

Rentable

Square

Feet

 

Base Rent

for the three

months ended

Mar. 31, 2017

 

Percentage

of Company’s

Total Base Rent

for the three

months ended

Mar. 31, 2017

180 E 5th Street,

St. Paul, MN

  Health Care   Office   4/30/2018   119,490   12%   $ 1,364,382   23%

180 E 5th Street,

St. Paul, MN

  Government   Office   5/31/2020   89,130   9%   $ 1,162,903   19%

180 E 5th Street,

St. Paul, MN

  Retail   Office   3/31/2020   102,577   10%   $ 959,232   16%

5130 Industrial St,

Maple Plain, MN

  Construction   Industrial   2/28/2021   61,500   6%   $ 164,854   3%

1350 Budd Ave,

Maple Plain, MN

  Construction   Industrial   2/28/2018   29,903   3%   $ 81,533   1%

 

(1)The two properties located in Maple Plain, MN lease approximately 15% of the Company’s rentable space and account for approximately 6% of the Company’s total base rent revenues for the three months ended March 31, 2017 and 5% for the three months ended March 31, 2016. The property located in Minnetonka, MN leases approximately 17% of the Company’s rentable space and accounts for approximately 19% of the Company’s total base rent revenues for the three months ended March 31, 2017, and 18% for the three months ended March 31, 2016. No major tenants are located at the property in Minnetonka, MN. The property located in St. Paul, MN leases approximately 40% of the Company’s rentable space and accounts for approximately 76% of the Company’s total base rent revenues for the three months ended March 31, 2017 and 77% for the three months ended March 31, 2016.

 

The future square feet expiring for all current leases, including leases entered into subsequent to March 31, 2017:

 

Years ending December 31,

 

  5130 Industrial St   1350 Budd Ave   10301 Bren Rd   180 E 5th St    
  Maple Plain, MN   Maple Plain, MN   Minnetonka, MN   St. Paul, MN   Total
                   
2017 56,215   -   24,810   2,910   83,935
2018 -   -   -   25,554   25,554
2019 -   29,903   -   134,787   164,690
2020 -   -   139,662   708   140,370
2021 -   -   -   223,094   223,094
Thereafter 59,500   -   -   147,125 (1) 206,625
  115,715   29,903   164,472   534,178   844,268

 

(1)On April 1, 2016, the Company received a notice asserting a right to terminate the lease for 141,109 square feet pursuant to certain alleged defaults related to the completion and delivery of the building and tenant improvements under the lease. The lease was amended on January 27, 2017 to resolve certain disputes between the Company and the tenant and as amended, the lease is scheduled to commence on January 1, 2018.

 

Management may periodically sell certain properties including core income-producing and value-added properties for various reasons based on individual circumstances and opportunities. Proceeds from the sale of such properties may be used to repay related property debt, pay transaction expenses, acquire or invest in other properties and for general corporate purposes including satisfying existing liabilities.

 

 -33-

Factors That May Influence Our Operating Results

 

Acquisition Strategy. We plan to grow our business through the acquisition of new properties, initially targeting properties that meet the criteria described above under “Overview” and elsewhere in this report. We expect the properties we acquire will be subject to mortgage financing and other indebtedness that we will assume or refinance. Debt service on such indebtedness will have a priority over any distributions with respect to our common stock.

 

Rental Revenue. The amount of net rental revenue generated by our properties depends primarily on our ability to maintain the occupancy rates of currently leased space and to lease space that becomes available. As of March 31, 2017, our properties were 91% leased. We believe that the average rental rates for our properties are generally equal to the current average quoted market rates. Negative trends in one or more of these factors such as a decrease in rental rates or a decrease in demand for our properties could adversely affect our rental revenue in future periods. Future economic downturns affecting the Minneapolis-St. Paul metropolitan area or downturns in our tenants’ businesses that impair our ability to renew leases or re-let space or the ability of our tenants to fulfill their lease commitments could adversely affect our revenues. In addition, growth in rental revenue primarily will depend on our ability to acquire additional properties that meet our investment criteria.

 

Conditions in Our Markets. Our current properties are located in the Minneapolis-St. Paul metropolitan area. Positive or negative changes in economic or other conditions in this area, or areas in our prospective proprieties, including employment and wage rates, natural disasters and other factors, may impact our overall performance. Our ability to grow in our broader market throughout our region may also be impacted by these factors.

 

Operating Expenses. Our operating expenses primarily consist of property taxes, management fees, utilities, insurance and site maintenance costs. As of March 31, 2017, some of our leases required tenants to reimburse us for a share of our operating expenses. Increases or decreases in any unreimbursed operating expenses, either due to the nature of the expenses not requiring reimbursement from our tenants or due to a reduction in leased square footage requiring tenant reimbursement of a portion of our operating expenses, will impact our overall performance. Legal fees incurred in 2017 and 2016 were significant due to the Company’s acquisition and refinancing activities, as well as litigation expenses. We expect an increase in legal fees associated with these activities and business matters customary to a public real estate holding company, as well as our ongoing litigation.

 

Interest Expense. Our interest expense will depend on the amounts we borrow as well as the interest rates charged by our lenders. Our current loan agreements are a mix of both fixed and floating rates, as well as secured and unsecured by our properties. Our aggregate interest expense may increase as we acquire properties and could fluctuate between periods based on the variable rate loan arrangements, if we do not hedge any such interest rate risk.

 

 -34-

Critical Accounting Policies and Estimates

 

Our discussion and analysis of the historical financial condition and results of our operations are based upon our financial statements which have been prepared in accordance with U.S. generally accepted accounting principles, or US GAAP.

 

The preparation of these condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions in certain circumstances that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses in the reporting period. Actual amounts may differ from these estimates and assumptions. We have provided a summary of our significant accounting policies in the notes to the consolidated financial statements of our company elsewhere in this report. We have summarized below those accounting policies that require material subjective or complex judgments and that have the most significant impact on our financial condition and results of operations. We evaluate these estimates on an ongoing basis, based upon information currently available and on various assumptions that we believe are reasonable as of the date hereof. Other companies in similar businesses may use different estimation policies and methodologies, which may impact the comparability of our results of operations and financial condition to those of other companies. There have been no significant changes to those policies during the three months ended March 31, 2017.

 

Investment in Real Estate and Fixed Assets

 

Investment in real estate and fixed assets are carried at cost less accumulated depreciation and amortization. Property such as land, building and improvements includes cost of acquisitions, development, construction, and tenant improvement allowances. Maintenance and repairs are expensed as incurred, and major improvements are capitalized. We allocate the cost of an acquisition, including the assumption of liability, to the acquired tangible asset and identifiable intangibles based on their relative fair values. We assess fair value based on estimated cash flow projections that utilize appropriate discount and/or capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market economic conditions.

 

We allocate the cost of an acquisition, including the assumption of liability, to the acquired tangible assets (including land, buildings and personal property) determined by valuing the property as if it were vacant, and identifiable intangibles based on their relative fair values. Acquisitions of real estate are recorded based upon preliminary allocations of the purchase price to management’s assessment of the fair value of tangible and intangible assets and any assumed liabilities acquired which are subject to adjustment as additional information is obtained up to one year after the date of acquisition. Adjustments to preliminary allocations of purchase price are adjusted prospectively when all information necessary to determine the relative fair values has been received.

 

Depreciation is provided using the straight-line method over the estimated useful life of the assets for building, improvements, and furniture and equipment, and the term of the lease for tenant improvements. The estimated useful lives being used are as follows:

 

Land Improvements 3-15 years
Building 25-30 years
Building Improvements 10-20 years
Tenant Improvements 1-12 years
Furniture and Equipment 3 years

 

 -35-

Intangible Assets

 

Upon acquisitions of real estate, the Company assesses the fair value of acquired tangible assets and any significant intangible assets (such as above- and below-market leases and value of acquired in-place leases), and any assumed liabilities, and allocates the purchase price based on these fair value assessments. The Company amortizes identified intangible assets and liabilities based on the period over which the assets and liabilities are expected to affect the future cash flows of the real estate property acquired. Lease intangibles (such as in-place or above- and below-market leases) are amortized over the term of the related lease. Above and below-market leases are amortized as a reduction in (addition to) rent revenue. Amortization of other intangibles is recorded in depreciation and amortization expense.

 

Principles of Consolidation

 

In determining whether we have a controlling interest in an affiliate and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions, contractual and substantive participating rights of the limited partners and shareholders, as well as whether the entity is a variable interest entity for which we are the primary beneficiary. The accompanying consolidated financial statements include the accounts of Talon Real Estate Holding Corp. (“TREHC”) and Talon OP, our Operating Partnership. Talon OP also consolidates 5130 LLC, an entity in which it has a 100% ownership interest as of December 2018, based on its ability to control the operating and financial decisions of 5130 LLC. All significant intercompany balances have been eliminated in consolidation.

 

Non-controlling Interest

 

Interests in the Operating Partnership held by limited partners are represented by Operating Partnership units. The Company's interest in the Operating Partnership was approximately 67% and 65% of the common units of the Operating Partnership as of March 31, 2017 and December 31, 2016, respectively. The Operating Partnership’s income is allocated to holders of common units based upon the ratio of their holdings to the total units outstanding during the period. Holders of preferred units receive certain distributions based on a percentage of the liquidation preference. Capital contributions, distributions, syndication costs, and profits and losses are allocated to non-controlling interests in accordance with the terms of the Operating Partnership agreement.

 

The portion of membership interests in 5130 LLC not held by Talon OP is reported as non-controlling interest. Capital contributions, distributions, and profits and losses are allocated to the non-controlling interest based on membership percentages and terms of the operating agreement. This percentage was be consolidated in December 2018.

 

Revenue Recognition

 

Base rental income is recognized on a straight-line basis over the terms of the related leases, inclusive of leases which provide for scheduled rent increases or rent concessions. Differences between rental income earned and amounts due according to the respective lease agreements are credited or charged to deferred rent receivable, as applicable.

 

Tenant recoveries related to reimbursement of real estate taxes, insurance, repairs and maintenance and other operating expenses are recognized as revenue in the period the applicable expenses are incurred. Recoveries are billed monthly using estimated operating costs and an additional billing or a refund is made to tenants in the following year after actual operating expenses are determined.

 

 -36-

Accounting Standards Applicable to Emerging Growth Companies

 

We qualify as an “emerging growth company” pursuant to the provisions of the JOBS Act. Section 102(b)(1) of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. We have elected to use the extended transition period for complying with these new or revised accounting standards. Since we will not be required to comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies, our financial statements may not be comparable to the financial statements of companies that comply with public company effective dates. If we were to elect to comply with these public company effective dates, such election would be irrevocable pursuant to Section 107 of the JOBS Act.

 

Significant Events and Transactions during the three months ended March 31, 2017

 

Summarized below are the Company’s significant transactions and events during the three months ended March 31, 2017.

 

On January 27, 2017, Talon First Trust, LLC entered into a Loan Agreement (the “Gamma Loan”) with Gamma Real Estate Capital LLC (the “Lender”), a Delaware limited liability company, in the principal amount of $51,600,000. The loan bears an interest rate equal to the sum of (i) the greater of (x) the Prime Rate as published in the Wall Street Journal, and (y) the LIBOR Floor, plus (ii) a margin of 9.00% per annum, and has an initial maturity date of January 26, 2018 with two 6-month options for the Company to extend upon satisfaction of certain conditions. Pursuant to the Gamma Loan, approximately $5,298,000 has been deposited into an interest reserve account to be applied toward monthly interest payments to the Lender. The Gamma Loan is secured by (i) a mortgage on the Company’s interest in its building located at 180 East 5th Street, St. Paul, Minnesota, (ii) an assignment of lease and rents, (iii) 100% of the membership and ownership interests in the Parent, and (iv) other collateral specified in the Gamma Loan documents. The Gamma Loan documents contain events of default that are customary for loans of this type. The loan proceeds were used to pay-off the existing mortgage on the 180 East 5th Street property, redeem the Talon OP preferred units, and fund various escrows and reserves related to the property.

 

On April 9, 2015, the Company entered into a significant lease arrangement with a new tenant. On January 27, 2017 the company executed a Second Amendment to the lease with the tenant to resolve issues concerning a notice of default that the Company received from the tenant on April 1, 2016. The Second Amendment rescinds the Notice of Default and the Termination Notice that the tenant had delivered, changes the lease commencement date from January 1, 2016 to January 1, 2018 and required the Company to place approximately $5,640,000 in escrow to provide evidence of our ability to pay for the remaining tenant improvements. We deposited the required escrow funds on January 27, 2017.

 

On January 25, 2017, in the matter of Swervo Management Division, LLC, as plaintiff, versus Talon Real Estate Holding Corp, Talon First Trust, LLC and Talon Bren Road, LLC, as defendant, the Company executed a $1,330,167 amended and restated promissory note, plus interest on the unpaid balance at 10%. The entire principal balance shall be due and payable on the earlier of July 24, 2017 or upon a time that the Company refinances or sells its property located at 10301 Bren Road. This note replaces the Amended and Restated promissory note dated June 30, 2016 in the amount of $953,908 ($1,008,908 as of December 31, 2016) given by Talon Real Estate Holding Corp. and Talon First Trust, LLC.

 

 -37-

The Company filed a complaint in the State of Minnesota in June, 2016 to enforce the NOI Payment Agreement and other documents issued in conjunction with the Contribution Agreement entered into in May, 2014 with Bren Road, L.L.C. The defendant responded and filed a counterclaim and third-party complaint against Talon Bren Road, LLC and Talon OP, LP in July, 2016. In November, 2016 the matter came before the court on the Defendant’s motion for partial summary judgment. Subsequently, in February, 2017 the Hennepin County District Court issued a Findings of Fact and Order for Judgment on the counter claim against the Company in the amount of $719,365, plus post judgment interest which pursuant to our 10301 Bren Road and 180 East 5th Street loan agreements, constitutes a non-financial event of default. The outstanding amount of the judgment was satisfied on June 23, 2017 as part of the refinancing of Talon Bren Road, LLC’s outstanding mortgages.

 

In March, 2017, a significant tenant of our 180 East 5th Street, St Paul property filed for Chapter 11 bankruptcy protection from its creditors. The Company lost a portion of March rent from the period of the initial filing until a Trustee could be appointed. From the date of Trustee appointment through September 30, 2017, full lease payments were received by the Company. Under the terms of the bankruptcy, the tenant’s lease was terminated effective September 30, 2017.

 

On March 27, 2017, Talon Bren Road, LLC received a notice of default under the terms of our second mortgage agreement, the outstanding balance of which was $2,000,000 as of the date of the receipt of the notice. This mortgage was refinanced on June 23, 2017 which resolved the default.

 

Market Conditions and Outlook

 

Our last two acquisitions were accomplished utilizing a 721 Exchange tax deferral methodology similar to that of an “UPREIT” providing several unique advantages over a 1031 exchange or selling to cash buyers. This strategy is advantageous for real estate owners seeking to mitigate and defer their immediate tax obligations, stay invested in real estate, diversify their holdings, and seek potential future growth and liquidity by accepting Talon OP common units which can later be converted 1:1 for Talon common stock, which trade under the ticker “TALR,” and their capital gains tax obligations are deferred until then.

 

Our strategy is to continue offering these tax-deferred solutions to real estate owners as part of diversifying our shareholder base creating liquidity and shareholder value. We continue to believe office and industrial properties offer the best return on equity metrics as part of our investment strategy. Retail will also be part of our overall portfolio with an average overall target portfolio contribution of nearly 20% over the long-term.

 

The middle corridor of the United States continues to offer higher cap rates compared to the west and east coasts and we will continue to explore additional investment options within this region to continue our mission to provide return on equity targets of 8-15% per asset or portfolio.

 

Results of Operations

 

Our revenues and expenses have changed primarily due to increases in expenses attributable to an increase in legal services related to our legal proceedings in 2017. We expect our revenues, tenant reimbursements and many expenses will continue to increase on an absolute basis in the future as we seek to acquire additional properties, assume or refinance indebtedness in connection with the acquisitions and build the infrastructure necessary to grow our business. In the near term, we expect to continue to incur higher legal and other professional fees in pursuit of potential acquisitions.

 

 -38-

Three months ended March 31, 2017 compared to three months ended March 31, 2016

 

Revenues and Expenses

 

Rental revenues decreased $104,842, or 5.6%, to $1,771,070 for the three months ended March 31, 2017, compared to $1,875,912 for the same period of the prior year. The modest decrease in rental revenue relates to several smaller adjustments to rented space and certain lease rate adjustments with no significant new leased space across the portfolio.

 

Tenant reimbursements decreased $36,107, or 4.0%, to $861,384 for the three months ended March 31, 2017 compared to $897,491 for the same period of the prior year. The decrease in tenant reimbursements is consistent with the decrease in rent and stable property operating expenses.

 

Other income decreased $61,263, or 71.2%, to $24,738 for the three months ended March 31, 2017 compared to $86,001 for the same period of the prior year. The decrease primarily relates to lower recorded amounts related to an income guarantee on one of the properties owned and lower revenue from an event center located in the 180 East 5th Street property in St. Paul.

 

General and administrative expenses decreased $295,231, or 85.1%, to $51,722 for the three months ended March 31, 2017 compared to $347,033 for the same period of the prior year. The decrease is primarily due to the expensing of $285,000 of lost deal costs in 2016 with no comparable expense in 2017.

 

Salary and compensation expenses decreased $42,675 or 19.0%, to $182,022 for the three months ended March 31, 2017 compared to $224,697 for the same period of the prior year. The decrease in salary and compensation expense is primarily related to staff turnover in late 2016 resulting in lower salaries for replacement personnel in 2017.

 

Professional fees increased $131,295, or 58.1%, to $357,140 for the three months ended March 31, 2017 compared to $225,845 for the same period of the prior year. The increase is primarily due to an increase in legal services related to our legal proceedings and refinancing of debt in the three months ended March 31, 2017.

 

Property operating expenses decreased $6,391, or 0.5%, to $1,179,187 for the three months ended March 31, 2017 compared to $1,185,578 for the same period of the prior year. Property operating expenses have remained essentially unchanged due to a stable operating environment and the lack of unusual or infrequent expenditures.

 

Real estate taxes and insurance increased $14,902 or 3.4%, to $460,379 for the three months ended March 31, 2017 compared to $445,477 for the same period of the prior year. The three months ending March 31, 2017 are in line with the annual increase in real estate taxes across the portfolio as the composition of our real estate portfolio remained the same.

 

Depreciation and amortization expense decreased by $14,163, or 1.2%, to $1,218,242 for the three months ended March 31, 2017 compared to $1,232,405 for the same period of the prior year. The decrease is primarily attributable to certain intangible assets expiring in correlation with the applicable leases.

 

 -39-

Interest expense increased by $796,389, or 107.1% to $2,024,427 for the three months ended March 31, 2017 compared to $1,228,038 for the same period of the prior year. The increase is primarily attributable to the refinancing of the 180 East 5th Street mortgage and other changes in outstanding debt. The weighted average interest rate increased to 11.77% as of March 31, 2017 compared to 6.49% as of March 31, 2016 and outstanding debt increased by $23,105,751. In addition, deferred financing cost amortization was accelerated on the refinanced debt and significant new deferred financing costs were incurred which have predominantly a one-year amortization period.

 

Funds from Operations and Non-GAAP Reconciliation

 

The National Association of Real Estate Investment Trusts, or NAREIT, defines funds from operations, or FFO, as net income (loss) available to common shareholders and operating partnership unit holders computed in accordance with GAAP, excluding gains or losses from sales of operating real estate assets and extraordinary items, plus depreciation and amortization of operating properties, and after adjustments for unconsolidated partnerships and joint ventures. We intend to calculate FFO in a manner consistent with the NAREIT definition.

 

Management intends to use FFO as a supplemental measure to conduct and evaluate our business because there are certain limitations associated with using GAAP net income alone as the primary measure of our operating performance. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Because real estate values instead have historically risen or fallen with market conditions, management believes that the presentation of operating results for real estate companies that use historical cost accounting is insufficient by itself. In addition, securities analysts, investors, and other interested parties use FFO as the primary metric for comparing the relative performance of equity REITs. There can be no assurance that FFO presented by us is comparable to similarly titled measures used by REITs.

 

FFO should not be considered as an alternative to net income or other measurements under GAAP as an indicator of our operating performance or to cash flows from operating, investing or financing activities as a measure of liquidity. FFO does not reflect working capital changes, cash expenditures for capital improvements or principal payments on indebtedness.

 

We define adjusted funds from operations, or AFFO, as FFO excluding the non-cash effects of straight-line rent and amortization of lease inducements and deferred financing costs, depreciation of non-real estate, and excluding the effects of non-cash compensation charges. U.S. GAAP requires rental revenues related to non-contingent leases that contain specified rental increases over the life of the lease to be recognized evenly over the life of the lease. This method may result in rental income in the early years of a lease that is higher than actual cash received, creating a deferred rent receivable asset or lower income than actual cash received, creating a deferred rent revenue liability included in our consolidated balance sheet. At some point during the lease, depending on its terms, cash rent payments may exceed or be lower than the straight-line rent which results in the deferred rent receivable asset or liability, respectively, decreasing to zero over the remainder of the lease term. By excluding the non-cash portion of straight-line rental revenue and amortization of lease inducement and deferred financing costs as well as non-cash compensation expense, investors, analysts and our management can compare AFFO between periods.

 

Below is the calculation of FFO and AFFO and the reconciliation to net income (loss), which we believe is the most comparable GAAP financial measure:

 

 -40-

Reconciliation of Net Income Attributable to Talon Real Estate Holding Corp. (“TREHC”) to Funds From Operations

 

   Three months ended March 31,
In thousands $ (except per share)  2017  2016
   Amount 

Weighted Avg.

Shares and

Units (1)

 

Per Share

and Unit (2)

  Amount 

Weighted Avg.

Shares and

Units (1)

 

Per Share

and Unit (2)

Net loss attributable to TREHC  $(2,236)   18,945   $(0.12)  $(1,303)   16,789   $(0.08)
                               
Adjustments:                              
Non-controlling interest Operating Partnership   (1,086)   9,200         (703)   9,200      
Consolidated depreciation and amortization   1,218    —           1,232    —        
adjust for non-real estate depreciation   —      —           (2)   —        
adjust for amortization of above and below-market rents   45    —           63    —        
adjust for non-controlling real estate owned depreciation   (26)   —           (31)   —        
Net adjustments   151              559           
Funds from operations applicable to common shares  $(2,085)   28,1451   $(0.07)  $(744)   25,989   $(0.03)

 

   Three months ended March 31,
   2017  2016
Adjusted funds from operations  Amount 

Weighted Avg.

Shares and

Units (1)

 

Per Share

and Unit (2)

  Amount 

Weighted Avg.

Shares and

Units (1)

 

Per Share

and Unit (2)

FFO available to common shares  $(2,085)   28,145   $(0.07)  $(744)   25,989   $(0.03)
Adjustments:                              
Straight-line rents in excess of, or less than, contract rents   (21)   —           (102)   —        
Non-real estate depreciation   —      —           2    —        
Amortization of deferred financing costs net of non-controlling real estate   807    —           203    —        
Non-cash stock compensation charges   89    —           38    —        
AFFO available to common shares  $(1,210)   28,145   $(0.04)  $(603)   25,989   $(0.02)

 

(1) Non-controlling Units of the Operating Partnership are exchangeable for cash, or at the Company's discretion, for common shares of stock on a one-for-one basis.

(2) Net income is calculated on a per share basis. FFO and AFFO are calculated on a per share and unit basis.

 

Liquidity and Capital Resources

 

Liquidity is a measure of our ability to meet potential cash requirements, including commitments to repay borrowings, fund and maintain our operations and assets, acquire properties, make distributions to our shareholders and other general business needs. We have incurred significant expenses related to operating as a public corporation, building and tenant improvements at our properties, and preparation for and execution of our acquisition strategy creating a cash shortfall from operations through March 31, 2017.

 

We currently do not have available cash and cash flows from current operations to provide us with adequate liquidity for the foreseeable future. Our current liabilities exceed our unrestricted cash and we have insufficient cash flow from current operations to pursue our strategy without further financing. As of March 31, 2017, we had unrestricted cash of approximately $88,596 and current liabilities including tenant improvement allowances, unsecured debt, accounts payable and accrued expenses substantially in excess of the available cash. We therefore will require additional capital and increased cash flow from future operations to fund our ongoing business. There is no guarantee that we will be able to raise any required additional capital or generate sufficient cash flow from our current and future operations to fund our ongoing business. If the amount of capital we are able to raise together with our income from operations is not sufficient to satisfy our capital needs, we may be required to cease our operations or alter our growth plans. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our consolidated financial statements, and it is likely that investors will lose all or a part of their investment.

 

 -41-

Our short-term liquidity requirements consist primarily of funds needed to pay for operating expenses and other expenditures directly associated with our properties, pay off maturing debt, and to pursue our strategy of near-term growth through acquisition of properties as well as general and administrative expenses operating as a public company.

 

Our long-term liquidity requirements consist primarily of funds to pay for scheduled debt maturities, non-recurring capital expenditures that need to be made periodically and continued expansion of our business through acquisitions. Although we plan to aggressively pursue acquisitions to grow our business, there is no assurance that we will be able to acquire additional properties in the future.

 

Since our available cash and cash flows from current operations do not provide us with adequate cash to satisfy current liabilities and are not expected to provide us with adequate liquidity for the foreseeable future, we anticipate that we will undertake future debt or equity financings or asset sales during 2017. Additional financing or asset sales are necessary for our company to continue as a going concern.

 

In the future, we anticipate using a number of different sources to finance our liquidity needs, including cash flows from operations, issuance of debt securities or equity securities (which might be common or preferred stock), private financings (such as additional bank credit facilities or cash advances, which may or may not be secured by our assets), asset sales (including sales of accounts receivable), seller financing, property-level mortgage debt, or any combination of these sources, to the extent available to us, or other sources that may become available from time to time. Any debt that we incur may be recourse or non-recourse and may be secured or unsecured. Although we have successfully raised equity capital in the past, we cannot be assured that we will be able to continue to be successful in raising capital through issuance of securities. Our ability to obtain needed financing may be impaired by such factors as the capital markets, our status as a new enterprise without significant assets or demonstrated operating history, and/or the loss of key management. There is no guarantee that we will be able to raise any required additional capital or generate sufficient cash flow from our current and proposed operations to fund our ongoing business. Ongoing litigation may also impact our liquidity, as cash flow may need to be used on legal and other litigation expenses.

 

Outstanding Indebtedness

 

5130 LLC, an entity in which our Operating Partnership owns a 49% interest and that owns an industrial complex located in the Minneapolis-St. Paul metropolitan area, is party to a loan agreement secured by such industrial complex. This percentage was be consolidated in December 2018. The loan agreement provides for two term loans, the A loan and the B loan. The term loans had a balloon payment due on April 8, 2017 and is past due. The Company expects to refinance this loan but as of the filing of this document has been unable to do so.

 

Talon Bren Road, LLC, an entity through which our Operating Partnership acquired the property located at 10301 Bren Road West, Minnetonka, MN on May 29, 2014, is party to a loan agreement secured by such property. It is also a party to two loans the proceeds of which were used to fund certain capital improvements at the building. This property also secures the Talon Bren Road, LLC Mortgage 2 (as defined in the table below) entered into on July 2, 2014 in connection with the acquisition of the property located at 180 East 5th Street St. Paul, MN.

 

Talon First Trust, LLC, an entity through which our Operating Partnership acquired the property located at 180 E. Fifth Street St. Paul, MN on July 2, 2014, is party to a loan agreement secured by such property. The loan has an initial maturity date of January 26, 2018 with two 6-month options for the Company to extend upon satisfaction of certain conditions. If we are unable to satisfy the conditions to extend, we will need to seek alternative financing or possibly sell the property in order to satisfy the obligation.

 

TREHC has additional indebtedness related to various judgments and obligations arising in the normal course of financing our operations. These notes represent current obligations of the entity and continue to accrue interest while outstanding. We may need to seek alternative financing or sell certain assets in order to generate the necessary funds to satisfy these obligations.

 

 -42-

The following table summarizes the Company’s notes payable as of March 31, 2017 and December 31, 2016:

 

                Principal Balance At
Loan Description   Loan Type   Maturity Date  

Interest

Rate

 

March 31,

2017

 

December 31,

2016

Talon First Trust, LLC Mortgage   Secured floating rate interest only   July 5, 2017   6.04%   $   $ 32,000,000 
Talon First Trust, LLC Mortgage   Secured floating rate interest only   January 26, 2018   13.00%     51,600,000       
Talon First Trust, LLC. – Promissory Note(1)   Unsecured fixed rate interest only   July 24, 2017   10.00%     1,330,167      1,008,908 
Talon First Trust, LLC. – Promissory Note   Unsecured fixed rate interest only   See below (3)   10.00%     59,489      59,489 
Talon First Trust, LLC. – Sale of Future Receivable (4)   See below (4)   See below (4)   (4)     215,259      430,500 
Talon Bren Road, LLC Mortgage 1(5)   Secured fixed rate   May 28, 2019   4.65%     10,788,414      10,858,648 
Talon Bren Road, LLC Mortgage 2(5)   Secured fixed rate interest only   March 1, 2017   16.00%     2,550,000      2,000,000 
Talon Bren Road, LLC HVAC loan   Unsecured fixed rate   June 1, 2019   8.00%     77,293      84,472 
Talon Bren Road, LLC Roof loan   Unsecured fixed rate interest only   June 1, 2019   8.00%     225,000      225,000 
5130 Industrial Street, LLC Mortgage 1   Secured fixed rate   April 8, 2017   6.05%     3,968,876      3,981,740 
5130 Industrial Street, LLC Mortgage 2   Secured fixed rate   April 8, 2017   12.75%     292,609      292,941 
Talon OP, L.P. – Promissory Note – Related Party(6)   Unsecured fixed rate interest only   June 30, 2016   26.00%     897,204     500,000
Talon OP, L.P. – Promissory Note   Unsecured fixed rate interest only   July 31,2017   3.00%     654,926     654,926
Talon OP, L.P. – Promissory Notes(2)   Unsecured fixed rate interest only   June 30, 2016   26.00%     1,476,498      1,000,000 
Talon OP, L.P. – Promissory Note   Unsecured fixed rate   January 15,2018   15.00%     186,178      271,287 
Other   Unsecured fixed rate interest only   June 30, 2016   24.00%     81,800      81,800 
                $ 74,403,713    $ 53,449,711 
Less:  unamortized deferred financing costs     (2,745,286)     (496,063)
Notes payable, net   $ 71,658,427    $ 52,953,648 

 

(1)On January 25, 2017, the Company executed a $1,330,167 amended and restated promissory note, plus interest on the unpaid balance at 10%. The entire principal balance shall be due and payable on the earlier of July 24, 2017 or upon a time that the Company refinances or sells its property located at 10301 Bren Road. This note replaces the Amended and Restated promissory note dated June 30, 2016 in the amount of $953,908 ($1,008,908 as of December 31, 2016) given by Talon Real Estate Holding Corp. and Talon First Trust, LLC.
(2)In 2015, the Company entered into two separate $500,000 unsecured promissory notes with the same unrelated party. The notes bore interest at rates from14% to 24% annually through June 30, 2016 after which time the notes accrued interest at 26%. On May 19, 2017, a judgment was entered against the Company in the amount of $1,476,498. As of the date of the judgment, the interest rate on the note changed to 10% under Minnesota Statutes.
(3)The outstanding principal and applicable accrued interest is due in full upon sale or refinancing of the property at 180 E. Fifth Street in St. Paul.
(4)During 2016 the Company received funds from four different sources. As of March 31, 2017, the total outstanding balance was $215,259 for the sale of future receivables at the property located at 180 E. Fifth Street. The agreements require payments totaling $644,039 over 120 days. Per FASB ASC 470-10-25, which provides guidance on funds received from sales of future receivables, this transaction has been classified as debt and included in notes payable. The agreements are guaranteed by a shareholder of the Company.
(5)On June 21, 2017, we refinanced these mortgages with a new $15.1 million at 9.5% with an initial maturity date of June 1, 2018.
(6)On August 2014, the Company entered into a $500,000 unsecured promissory note with a related party, one of its then current directors. The note had an original maturity date of February 8, 2015. The Company extended the maturity date of the note in 2015 and 2016. In October 2016, the former director filed a summons and complaint in the State of Minnesota claiming that the Company breached its obligation under the note. In April 2017, this matter went to trial and the plaintiff was awarded $897,695. As of the date of the judgment, the interest rate on the note changed to 10% under Minnesota Statutes. On May 31, 2017, the Court granted a Charging Order against the Company and Talon OP L.P. where the Company and Talon OP L.P are required to pay all profits and distributions to the plaintiff until the full amount of the judgment is paid and satisfied.

 

 -43-

Off Balance Sheet Arrangements

 

At March 31, 2017, we did not have any off-balance sheet arrangements.

 

Inflation

 

As of March 31, 2017, most of our leases required tenants to reimburse us for a share of our operating expenses. As result, we are able to pass on much of any increases to our property operating expenses that might occur due to inflation by correspondingly increasing our expense reimbursement revenues. During the three months ended March 31, 2017, inflation did not have a material impact on our revenues or net income.

 

Item 3.Quantitative and Qualitative Disclosures About Market Risk

 

Interest Rate Sensitivity Risk

 

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market-sensitive instruments. In pursuing our business plan, we expect that interest rate risk will be the primary market risk to which we will be exposed. As of March 31, 2017, all but one of our outstanding loans had a fixed rate. Our interest rate risk may further increase if we increase our debt in the future or refinance our existing debt.

 

We may become exposed to the effects of interest rate changes as a result of floating rate debt used to maintain liquidity and fund expansion of our real estate investment portfolio and operations. Our interest rate risk management objectives will be to limit the impact of interest rate changes on earnings and cash flows and to manage overall borrowing.

 

Foreign Currency Exchange Risk

 

Our results of operations and cash flows are not materially affected by fluctuations in foreign currency exchange rates.

 

Item 4.Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this Quarterly Report on Form 10-Q, our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of March 31, 2017.

 

 -44-

The following control deficiencies were identified and were determined to be material weaknesses in our internal control over financial reporting as of March 31, 2017:

 

1.Internal Control Environment
2.Period end Financial Reporting Process

 

The material weaknesses occurred as a result of a significant turnover in the Company’s accounting personnel in the latter part of 2016, which, despite having established policies and procedures, the company lacked adequate controls regarding training in in the internal control environment. In addition, we did not maintain a sufficient complement of personnel with the appropriate accounting knowledge, experience and training, commensurate with our financial reporting requirements in order to execute a timely close, which resulted in incomplete disclosures, unreconciled accounts, incomplete accounting for certain events and transactions and inaccurate conclusions. This resulted in misstatements that were corrected by the Company prior to the issuance of the consolidated financial statements, and for which a reasonable possibility existed that a material misstatement in the Company’s consolidated financial statements would not be prevented or detected on a timely basis.

 

Management also identified multiple significant deficiencies in its review. These could also lead to potential misstatements in our financial statements or prevent the Company from timely completing its financial statement preparation.

 

Management Remediation Plan

 

Due to the material weaknesses reported as of March 31, 2017, management performed additional analysis and procedures to ensure that our consolidated financial statements and schedules included in this Quarterly Report were presented fairly in conformity with generally accepted accounting principles and fairly present in all material respects our financial position, results of operations and cash flows for the periods presented.

 

Management will implement changes to our internal control over financial reporting to remediate the control deficiencies that gave rise to the material weaknesses. We are undertaking the following remediation plans and actions:

 

·Develop and deliver Internal Controls (“COSO”) training to Executives and finance/accounting resources. The training will include a review of management’s and individual roles and responsibilities related to internal controls;
·hire accounting personnel with the appropriate level of knowledge to properly record transactions in the general ledger and prepare financial statements in accordance with generally accepted accounting principles;
·augment our existing staff with external consultants with the requisite knowledge and expertise to supplement our accounting staff to ensure that transactions are recorded in accordance with generally accepted accounting principals and that are disclosures are accurate and complete; and
·provide increased board level oversight to ensure established policies and procedures are adhered to.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Changes in Internal Control Over Financial Reporting

 

There were the following changes in the Company’s internal control over financial reporting that occurred during the three months ended March 31, 2017 which have the potential to have materially affected, or is reasonably likely to have materially affect, the Company’s internal control over financial reporting.

 

 -45-

PART II. – OTHER INFORMATION

 

Item 1.Legal Proceedings

 

We are currently engaged in legal proceedings that may have a material impact on our financial statements. From time to time, we may be named as a defendant in legal actions or otherwise be subject to claims arising from our normal business activities. Any such actions, even those that lack merit, could result in the expenditure of significant financial and managerial resources.

 

The Company filed a complaint in the State of Minnesota on June 10, 2016 to enforce the NOI Payment Agreement and other documents issued in conjunction with the Contribution Agreement entered into on May 29, 2014 with Bren Road, L.L.C. The defendant has responded and filed a counterclaim and third-party complaint against Talon Bren Road, LLC and Talon OP, LP on July 7, 2016. On November 9, 2016 the matter came before the court on the Defendant’s motion for partial summary judgment. Subsequently, on February 27, 2017 the Hennepin County District Court issued a Findings of Fact and Order for Judgment on the counter claim against the Company in the amount of $719,365, plus post judgment interest which pursuant to our 10301 Bren Road and 180 E 5th Street loan agreements, constitutes a non-financial event of default. The outstanding amount of the judgment was satisfied on June 23, 2017 as part of the refinancing of Talon Bren Road, LLC’s outstanding mortgages.

 

On January 25, 2017, in the matter of Swervo Management Division, LLC, as plaintiff, versus Talon Real Estate Holding Corp, Talon First Trust, LLC and Talon Bren Road, LLC, as defendant, the Company executed a $1,330,167 amended and restated promissory note, plus interest on the unpaid balance at 10%. The entire principal balance shall be due and payable on the earlier of July 24, 2017 or upon a time that the Company refinances or sells its property located at 10301 Bren Road. This note replaces the Amended and Restated promissory note dated June 30, 2016 in the amount of $953,908 ($1,008,908 as of December 31, 2016) given by Talon Real Estate Holding Corp. and Talon First Trust, LLC.

 

In April 2019, Talon has reached a settlement with the Upper Midwest Allied Gifts Association “UMAGA” and various tenants at Talon’s Bren Road property.  The settlement includes a new 3.5 year Master Triple Net Lease for the entire property with UMAGA.  Talon through the lease will obtain rights to certain parking areas at the property during the term of the lease.  The settlement also includes the dismissal of all suits, and claims, between Talon, UMAGA and the tenants.  The settlement was read into the court record, and is binding, as the final settlement and lease documents are now fully executed.

 

Item 1A.Risk Factors

 

There have been no material changes in our risk factors from those disclosed under the heading “Risk Factors” in our Current Report on Form 10-K for the year ended December 31, 2016 as filed with the Securities and Exchange Commission on April 17, 2018.

 

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

 

Not Applicable

 

Item 3.Defaults Upon Senior Securities

 

Not Applicable.

 

Item 4.Mine Safety Disclosures

 

Not Applicable.

 

Item 5.Other Information

 

Not Applicable.

 

Item 6.Exhibits

 

The exhibits filed as part of this Quarterly Report on Form 10-Q are listed in the Exhibit Index immediately following the signatures to this report.

 

 -46-

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

Dated: June 7, 2019 TALON REAL ESTATE HOLDING CORP.
   
  /s/ Matthew G. Kaminski
  Matthew G. Kaminski
 

Chief Executive Officer

(principal financial and accounting officer)

 

 -47-

EXHIBIT INDEX

 

Exhibit

Number

  Description
3.1   Amended and Restated Articles of Incorporation (Incorporated by reference to the exhibit of the same number in our Form 8-K dated June 7, 2013, filed on June 7, 2013 (File No. 005-87490))
3.2   Amended and Restated Bylaws (Incorporated by reference to the exhibit of the same number in our Form 8-K dated June 7, 2013, filed on June 7, 2013 (File No. 005-87490))
31.1   Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rules 13a-14(a) under the Securities Exchange Act of 1934, as amended (filed herewith).
32.1   Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
101*   Interactive Data Files Pursuant to Rule 405 of Regulation S-T (filed herewith).

 

________________________

* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are otherwise not subject to liability under those sections.

 

 -48-

EX-31.1 2 talr-170331_10qex31z1.htm EXHIBIT 31.1

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

 

I, MG Kaminski, certify that:

 

1.I have reviewed this Annual Report on Form 10-Q of Talon Real Estate Holding Corp.;

 

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

 

4.The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

 

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c.Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d.Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

 

5.The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

 

a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

 

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

 

 

/s/ MG Kaminski

MG Kaminski

Chief Executive Officer (principal executive officer) and

Chief Financial Officer (principal financial and accounting officer)

June 7, 2019

EX-32.1 3 talr-170331_10qex32z1.htm EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. §1350

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Annual Report on Form 10-Q of Talon Real Estate Holding Corp. (the “Company”) for the period ended March 31, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, the Chief Executive Officer and the Chief Financial Officer of the Company, hereby certify, pursuant to and for purposes of 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

/s/ MG Kaminski

MG Kaminski

Chief Executive Officer and

Chief Financial Officer

June 7, 2019

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EX-101.DEF 7 talr-20170331_def.xml XBRL DEFINITION FILE EX-101.LAB 8 talr-20170331_lab.xml XBRL LABEL FILE Finite-Lived Intangible Assets by Major Class [Axis] Finite-Lived Intangible Assets Ownership [Axis] Talon OP, L.P. 5130 Industrial Street, LLC Talon Bren Road, LLC Talon First Trust, LLC Talon Real Estate, LLC Property, Plant and Equipment By Type [Axis] Furniture and Equipment Plan Name [Axis] 2013 Equity Incentive Plan Award Type [Axis] Restricted Stock Title of Individual [Axis] Director Above Market Leases Below Market Lease In-Place Leases Property, Plant and Equipment, Type [Axis] Buildings Range [Axis] Minimum [Member] Maximum [Member] Building Improvements Tenant Improvements Land Improvements Employees Finite-Lived Intangible Liabilities Related Party [Axis] Curtis Marks [Member] Bren Road, LLC [Member] Short-term Debt, Type [Axis] June 2014 Unsecured Loan [Member] 5130 Industrial Street, LLC [Member] Note Payable One [Member] Note Payable Two [Member] Talon Bren Road, LLC [Member] Notes Payable [Member] Notes Payable [Member] Jan 2015 Unsecured Promissory Notes [Member] May 2015 Unsecured Promissory Notes [Member] Unsecured Notes Payable [Member] Gamma Real Estate Capital LLC [Member] Scenario [Axis] Pro Forma [Member] Document And Entity Information Entity Registrant Name Entity Central Index Key Document Type Document Period End Date Amendment Flag Current Fiscal Year End Date Is Entity a Well-known Seasoned Issuer? Is Entity a Voluntary Filer? Is Entity's Reporting Status Current? Entity Filer Category Entity Public Float Entity Common Stock, Shares Outstanding Document Fiscal Period Focus Document Fiscal Year Focus Entity Shell Company Entity Emerging Growth Company Entity Small Business Entity Ex Transition Period Statement of Financial Position [Abstract] ASSETS Land and improvements Building and improvements Furniture and equipment Total property and equipment Less: accumulated depreciation Net property and equipment Cash Rents and other receivables, net Prepaid expenses and other assets Restricted escrows and reserves Deferred leasing costs, net Intangible assets, net TOTAL ASSETS LIABILITIES Notes payable Less: unamortized deferred financing costs Notes payable, net Notes payable, related party Accounts payable Tenant improvement allowance Accrued expenses and other liabilities Tenant security deposits Deferred rent revenue Prepaid rent Accrued interest Below-market leases, net Mandatorily redeemable Operating Partnership preferred units Total Liabilities COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY (DEFICIT) Preferred shares outstanding at $.001 par value; authorized 10,000,000 shares; none issued or outstanding as of both March 31, 2017 and December 31, 2016 Common shares outstanding at $.001 par value; authorized 90,000,000 shares; 19,720,981 and 17,135,981 issued and outstanding as of March 31, 2017 and December 31, 2016, respectively Additional paid in capital Accumulated loss Total Talon Real Estate Holding Corp. shareholders' equity (deficit) Non-controlling interests - Operating Partnership; 9,200,001 common units issued and outstanding as of March 31, 2017 and December 31, 2016 Non-controlling interests - consolidated real estate entities TOTAL SHAREHOLDERS' EQUITY (DEFICIT) TOTAL LIABILITIES & SHAREHOLDERS' EQUITY (DEFICIT) Preferred stock, par value per share in dollars Preferred stock, shares authorized Preferred stock, shares issued Preferred stock, shares outstanding Common stock, par value in dollars Common stock, shares authorized Common stock, shares issued Common stock, shares outstanding Operating Partnership, Common Unit, Issued Operating Partnership, Common Unit, Outstanding Income Statement [Abstract] REVENUE Rent Tenant reimbursement Other income Total Revenue EXPENSES General & administrative Salary and compensation Professional Property operating expenses Real estate taxes & insurance Depreciation and amortization Total Expenses Operating Loss Interest expense NET LOSS Net loss attributable to noncontolling interests - Operating Partnership Net loss attributable to noncontolling interests - consolidated real estate entities NET LOSS ATTRIBUTABLE TO TALON REAL ESTATE HOLDING CORP. Loss per common share basic and diluted Statement of Cash Flows [Abstract] CASH FLOWS FROM OPERATING ACTIVITIES Net Loss Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation and amortization Amortization of deferred financing costs Stock-based compensation expense Provision for doubtful accounts Deferred financing costs Settlement added to notes payable Changes in operating assets and liabilities: Rents and other receivables Prepaid expenses and other assets Deferred leasing costs Accounts payable Accrued expenses and other liabilities Tenant security deposits Deferred rent revenue Prepaid rent Accrued interest Net cash flows from operating activities CASH FLOWS FROM INVESTING ACTIVITIES Purchase of equipment, furniture and fixtures Deposits to restricted escrows and reserves Payments from restricted escrows and reserves Net cash flows from investing activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from notes payable Principal payments on notes payable Deposits or cash paid for financing costs Net cash flows from financing activities Net Change in Cash CASH - BEGINNING OF PERIOD CASH - END OF PERIOD SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Purchases of building and land improvements included in accounts payable Leasing and financing fees included in accounts payable and other liabilities Escrow deposits from notes payable Escrows applied to notes payable Accounts payable settled through note payable Accounts payable settled through share issuance Redemption of preferred units settled through notes payable Accrued interest settled through note payable Original issuance discount and fees on notes payable Building improvements from tenant improvement allowance SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for interest on mortgages and preferred Operating Partnership preferred units Organization, Consolidation and Presentation of Financial Statements [Abstract] Organization and Basis of Presentation Real Estate [Abstract] Investment in Real Estate Properties and Entities Accounting Policies [Abstract] Summary of Significant Accounting Policies Leases [Abstract] Tenant Leases Debt Disclosure [Abstract] Notes Payable Cash and Cash Equivalents [Abstract] Restricted Escrows and Reserves Commitments and Contingencies Disclosure [Abstract] Commitments and Contingencies Disclosure of Compensation Related Costs, Share-based Payments [Abstract] Restricted Stock Goodwill and Intangible Assets Disclosure [Abstract] Intangible Assets and Liabilities Derivative Instruments and Hedging Activities Disclosure [Abstract] Hedging Activities Other Liabilities and Financial Instruments Subject to Mandatory Redemption [Abstract] Manditorily Redeemable Preferred Operating Partnership Units Related Party Transactions [Abstract] Related Parties Transactions Subsequent Events [Abstract] Subsequent Events Going Concern Accounting Estimates Principles of Consolidation Cash Restricted Escrows and Reserves Rents and other Receivables Revenue Recognition Deferred Leasing Costs and Tenant Allowance Deferred Financing Costs Real Estate Property and Fixed Assets Intangible Assets or Liabilities Impairment of Long-Lived Assets Income Taxes Stock-based Compensation Noncontrolling Interest Net Income (Loss) or Earnings Per Share Recent Accounting Pronouncements Schedule of Real Estate Property and Fixed Assets Schedule of Future Minimum Rental Payments Schedule of Notes Payable Schedule of Maturities of Notes Payable Schedule of Intangible Assets Schedule of Future Amortization Expense Subsequent Events Schedule of Pro Forma Balance Sheet Schedule of Pro Forma Statement of Operations Statement [Table] Statement [Line Items] Parent ownership percentage, approximate Noncontrolling ownership percentage Rentable area Rentable office space currently occupied, percent Property, Plant and Equipment [Table] Property, Plant and Equipment [Line Items] Property, Improvements and Equipment, estimated useful lives Restricted Escrows and Reserves Restricted escrows & reserves Rents Receivable Allowance for doubtful accounts Deferred Leasing Costs and Tenant Allowance Amortization expense, tenant improvements Amortization expense, deferred leasing costs Accumulated amortization expense for tenant allowances Deferred Financing Costs Amortization expense, deferred financing costs Stock-Based Compensation Stock-based compensation expense Intangible Assets or Liabilities Amortization of above and below market-leases Operating Leases Future Minimum Payments 2017 2018 2019 2020 2021 Thereafter Total operating leases, future minimum payments Lease payments for significant tenant that has not occupied space yet, executed lease agreement 2017 2018 2019 Total Note payable, restrictive covenant Note payable, covenant compliance Notes Payable Notes Payable, Interest Rate, Per Annum Notes Payable, Maturity Date Total restricted cash and investments Commitment, description Rent expense Equity Incentive Plan, description Number of shares available for grant Vesting terms Compensation expense Compensation expense expected to be recognized, weighted average period Shares granted Schedule of Finite-Lived Intangible Assets [Table] Finite-Lived Intangible Assets [Line Items] In-place leases Above-market leases Below-market leases Accumulated amortization Net carrying amount Finite-Lived Intangible Assets, Net, Amortization Expense 2017 2018 2019 2020 Finite-Lived Intangible Assets, Net Amortization of acquired assets and liabilities Weighted average amortization period Preferred units, issued Preferred units issued, price per unit Preferred units, description Preferred payments, outstanding Liquidation preference Common Shares Issued Assets Cash BMO Talon First Trust, LLC Operating Talon First Trust, LLC Property Talon First Trust, LLC Lockbox Talon First Trust, Operating AB Talon Management Services AB Total Cash Escrow Real Estate Tax Escrow Property Insurance Escrow Replacement Reserve Escrow Interest Reserve Escrow General Escrow TI & Commission Escrow Total Escrow Receivables Tenant Receivable Due From Affiliates Total Receivables Fixed Assets Building Accum Depr - Building Building Improvements Accum Depr - Building Improvements Tenant Improvements Accum Depr - Tenant Improvements Land Land Improvements Accum Depr - Land Improvements Total Fixed Assets Other Assets Deposits Paid Intangible Assets Intangible Assets - Above Market Intangible Assets - Below Market Accum Amort - Intangible Assets Accum Amort - Intangible Assets - Above Accum Amort - Intangible Assets - Below Leasing Costs Accum Amort - Leasing Costs Deferred Leasing Incentives Accum Amort - Leasing Incentives Prepaid Insurance Other Prepaid Expenses Deferred Rent Total Other Assets Total Assets Liabilities_Capital Liabilities Accounts Payable & Accruals Prepaid Rent Tenant Deposits Great Hall - Deposits Accounts Payable (System) Tenant Improvement Allowance Leasing Incentives Payable Other Payable Accrued Interest Accrued Real Estate Taxes Accrued RE Taxes - Special Assessments Accrued Payroll Total Accounts Payable & Accruals Notes Payable Other Notes Mortgage - 1st Total Notes Payable Financing Costs Accum Amort - Financing Costs Preferred OP Capital - 6% Total Liabilities Capital Operating Partnership Capital Intra Company Transfer Retained Earnings Prior Retained Earnings Total Capital Total Liabilities_Capital Net Loss Shareholders' Deficit Description of the nature and terms of commitment. 5130 Industrial Street, LLC Future rental payments receivable due beginning January 1, 2018 for a significant tenant that has not occupied space yet but for which we have an executed lease agreement. Represents the percent of rentable office space currently occupied. The fair value of assets acquired in noncash investing or financing activities. Rents Receivable Talon Bren Road Talon First Trust LLC Talon OP, L.P. Talon Real Estate, LLC Tenant improvements 2013 Equity Incentive Plan In accordance with the provisions of their lease agreement, this element represents allowable charges due a landlord from its tenant. In retail store and office building leases, for example, tenant reimbursements may cover items such as taxes, utilities, and common area expenses. Accrued interest settled through note payable Liabilities, excluding financial liabilities, that lack physical substance, having a limited useful life. Curtis Marks [Member] Bren Road LLC [Member] 5130 Industrial Street LLC [Member] Notes Payable [Member] Notes Payable [Member] Talon Bren Road LLC [Member] Notes Payable [Member] Notes Payable [Member] Unsecured Note Payable [Member] Unsecured Note Payable [Member] Unsecured Note Payable [Member] Unsecured Note Payable [Member] Gamma Real Estate Capital LLC [Member] Settlement added to notes payable Escrow deposits from notes payable Escrows applied to notes payable Accounts payable settled through share issuance Redemption of preferred units settled through notes payable Original issuance discount and fees on notes payable Building improvements from tenant improvement allowance BMO Talon First Trust, LLC Operating Talon First Trust, LLC Property Talon First Trust, LLC Lockbox Talon First Trust, Operating AB Talon Management Services AB Escrow [Abstract] Real Estate Tax Escrow Property Insurance Escrow Interest Reserve Escrow General Escrow TI & Commission Escrow Tenant Receivable Fixed Assets [Abstract] Accum Depr - Building Accum Depr - Building Improvements Accum Depr - Tenant Improvements Accum Depr - Land Improvements Total Fixed Assets Deposits Paid Intangible Assets Intangible Assets - Above Market Intangible Assets - Below Market Accum Amort - Intangible Assets Accum Amort - Intangible Assets - Above Accum Amort - Intangible Assets - Below Accum Amort - Leasing Costs Deferred Leasing Incentives Accum Amort - Leasing Incentives Deferred Rent Tenant Deposits Great Hall - Deposits Tenant Improvement Allowance Leasing Incentives Payable Accrued Interest Accrued Real Estate Taxes Accrued RE Taxes - Special Assessments Mortgage Financing Costs Accum Amort - Financing Costs Preferred OP Capital Intra Company Transfer Prior Retained Earnings NotesPayableTwoMember Real Estate Investment Property, at Cost Real Estate Investment Property, Accumulated Depreciation Real Estate Investment Property, Net Debt Issuance Costs, Net Notes and Loans Payable Stockholders' Equity Attributable to Parent Revenues Operating Expenses Operating Income (Loss) Noncontrolling Interest in Net Income (Loss) Operating Partnerships, Redeemable Noncontrolling Interest in Net Income (Loss) Limited Partnerships, Redeemable Net Income (Loss) Attributable to Parent Depreciation, Depletion and Amortization Increase (Decrease) in Prepaid Expense and Other Assets Increase (Decrease) in Accounts Payable Increase (Decrease) in Accrued Liabilities Increase (Decrease) in Customer Deposits Deferred Revenue, Period Increase (Decrease) Increase (Decrease) in Prepaid Rent Increase (Decrease) in Interest Payable, Net Payments to Acquire Property, Plant, and Equipment Increase in Restricted Cash Net Cash Provided by (Used in) Investing Activities Repayments of Notes Payable Payments of Financing Costs Cash, Period Increase (Decrease) Disclosure of Compensation Related Costs, Share-based Payments [Text Block] Cash and Cash Equivalents, Policy [Policy Text Block] Cash and Cash Equivalents, Restricted Cash and Cash Equivalents, Policy [Policy Text Block] Employee Benefits and Share-based Compensation Operating Leases, Future Minimum Payments Receivable Long-term Debt, Maturities, Repayments of Principal in Next Twelve Months Long-term Debt, Maturities, Repayments of Principal in Year Two Long-term Debt, Maturities, Repayments of Principal in Year Three Long-term Debt Finite-Lived Intangible Assets, Accumulated Amortization Finite-Lived Intangible Assets, Amortization Expense, Next Twelve Months Finite-Lived Intangible Assets, Amortization Expense, Year Two Finite-Lived Intangible Assets, Amortization Expense, Year Three Finite-Lived Intangible Assets, Amortization Expense, Year Four Due from Affiliates Buildings and Improvements, Gross Tenant Improvements [Default Label] EX-101.PRE 9 talr-20170331_pre.xml XBRL PRESENTATION FILE XML 10 R1.htm IDEA: XBRL DOCUMENT v3.19.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2017
Jun. 05, 2019
Document And Entity Information    
Entity Registrant Name TALON REAL ESTATE HOLDING CORP.  
Entity Central Index Key 0001426011  
Document Type 10-Q  
Document Period End Date Mar. 31, 2017  
Amendment Flag false  
Current Fiscal Year End Date --12-31  
Is Entity's Reporting Status Current? Yes  
Entity Filer Category Non-accelerated Filer  
Entity Common Stock, Shares Outstanding   29,102,791
Document Fiscal Period Focus Q1  
Document Fiscal Year Focus 2017  
Entity Emerging Growth Company false  
Entity Small Business true  
Entity Ex Transition Period false  
XML 11 R2.htm IDEA: XBRL DOCUMENT v3.19.1
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) - USD ($)
Mar. 31, 2017
Dec. 31, 2016
ASSETS    
Land and improvements $ 8,302,447 $ 8,302,447
Building and improvements 51,192,060 45,552,308
Furniture and equipment 32,193 30,571
Total property and equipment 59,526,700 53,885,326
Less: accumulated depreciation (9,159,425) (8,506,290)
Net property and equipment 50,367,275 45,379,036
Cash 88,596 108,418
Rents and other receivables, net 598,515 428,176
Prepaid expenses and other assets 70,083 104,855
Restricted escrows and reserves 13,995,393 3,001,232
Deferred leasing costs, net 2,234,977 2,003,221
Intangible assets, net 4,899,333 5,465,603
TOTAL ASSETS 72,254,172 56,490,541
LIABILITIES    
Notes payable 73,204,216 52,640,239
Less: unamortized deferred financing costs (3,264,295) (496,063)
Notes payable, net 69,939,921 52,144,176
Notes payable, related party 1,199,497 809,472
Accounts payable 3,910,655 6,167,516
Tenant improvement allowance 5,639,752
Accrued expenses and other liabilities 1,260,136 854,743
Tenant security deposits 167,242 167,242
Deferred rent revenue 100,488 121,710
Prepaid rent 133,875 175,758
Accrued interest 635,977 1,029,911
Below-market leases, net 121,741 150,638
Mandatorily redeemable Operating Partnership preferred units 3,000,000
Total Liabilities 83,109,284 64,621,166
COMMITMENTS AND CONTINGENCIES  
SHAREHOLDERS' EQUITY (DEFICIT)    
Preferred shares outstanding at $.001 par value; authorized 10,000,000 shares; none issued or outstanding as of both March 31, 2017 and December 31, 2016
Common shares outstanding at $.001 par value; authorized 90,000,000 shares; 19,720,981 and 17,135,981 issued and outstanding as of March 31, 2017 and December 31, 2016, respectively 19,720 17,135
Additional paid in capital 2,350,316 2,261,411
Accumulated loss (16,102,357) (14,215,704)
Total Talon Real Estate Holding Corp. shareholders' equity (deficit) (13,732,321) (11,937,158)
Non-controlling interests - Operating Partnership; 9,200,001 common units issued and outstanding as of March 31, 2017 and December 31, 2016 4,502,532 5,418,810
Non-controlling interests - consolidated real estate entities (1,625,323) (1,612,277)
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (10,855,112) (8,130,625)
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY (DEFICIT) $ 72,254,172 $ 56,490,541
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CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) - $ / shares
Mar. 31, 2017
Dec. 31, 2016
Statement of Financial Position [Abstract]    
Preferred stock, par value per share in dollars $ 0.001 $ 0.001
Preferred stock, shares authorized 10,000,000 10,000,000
Preferred stock, shares issued 0 0
Preferred stock, shares outstanding 0 0
Common stock, par value in dollars $ 0.001 $ 0.001
Common stock, shares authorized 90,000,000 90,000,000
Common stock, shares issued 19,720,981 17,135,981
Common stock, shares outstanding 19,720,981 17,135,981
Operating Partnership, Common Unit, Issued 9,200,001 9,200,001
Operating Partnership, Common Unit, Outstanding 9,200,001 9,200,001
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - USD ($)
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
REVENUE    
Rent $ 1,771,070 $ 1,875,912
Tenant reimbursement 861,384 897,491
Other income 24,738 86,001
Total Revenue 2,657,192 2,859,404
EXPENSES    
General & administrative 51,772 347,003
Salary and compensation 182,022 224,697
Professional 357,140 225,845
Property operating expenses 1,179,187 1,185,578
Real estate taxes & insurance 460,379 445,477
Depreciation and amortization 1,218,242 1,232,405
Total Expenses 3,448,742 3,661,005
Operating Loss (791,550) (801,601)
Interest expense 2,024,427 1,228,038
NET LOSS (2,815,977) (2,029,639)
Net loss attributable to noncontolling interests - Operating Partnership 916,278 702,710
Net loss attributable to noncontolling interests - consolidated real estate entities 13,046 24,187
NET LOSS ATTRIBUTABLE TO TALON REAL ESTATE HOLDING CORP. $ (1,886,653) $ (1,302,742)
Loss per common share basic and diluted $ (0.10) $ (0.08)
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($)
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
CASH FLOWS FROM OPERATING ACTIVITIES    
Net Loss $ (2,815,977) $ (2,029,639)
Adjustments to reconcile net loss to net cash flows from operating activities:    
Depreciation and amortization 1,267,434 1,295,847
Amortization of deferred financing costs 923,463 204,752
Stock-based compensation expense 55,740 38,285
Provision for doubtful accounts 25,715
Deferred financing costs 25,750 175,411
Settlement added to notes payable 874,193
Changes in operating assets and liabilities:    
Rents and other receivables (170,339) (22,708)
Prepaid expenses and other assets 34,772 110,241
Deferred leasing costs (308,682) 1,400
Accounts payable (255,984) 406,261
Accrued expenses and other liabilities 405,393 529,590
Tenant security deposits
Deferred rent revenue (21,222) (102,052)
Prepaid rent (41,883) (234,478)
Accrued interest (119,501) 214,509
Net cash flows from operating activities (146,843) 613,134
CASH FLOWS FROM INVESTING ACTIVITIES    
Purchase of equipment, furniture and fixtures (1,622)
Deposits to restricted escrows and reserves (772,397)
Payments from restricted escrows and reserves 466,839 39,093
Net cash flows from investing activities 465,217 (733,304)
CASH FLOWS FROM FINANCING ACTIVITIES    
Proceeds from notes payable
Principal payments on notes payable (330,526) (91,424)
Deposits or cash paid for financing costs (7,670) (11,000)
Net cash flows from financing activities (338,196) (102,424)
Net Change in Cash (19,822) (222,594)
CASH - BEGINNING OF PERIOD 108,418 340,385
CASH - END OF PERIOD 88,596 117,791
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES    
Purchases of building and land improvements included in accounts payable 22,944
Leasing and financing fees included in accounts payable and other liabilities 58,252
Escrow deposits from notes payable 14,159,480
Escrows applied to notes payable 2,698,480
Accounts payable settled through note payable 1,990,877 103,002
Accounts payable settled through share issuance 10,000
Redemption of preferred units settled through notes payable 3,050,000
Accrued interest settled through note payable 224,433
Original issuance discount and fees on notes payable 3,691,695
Building improvements from tenant improvement allowance 5,639,752
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION    
Cash paid during the period for interest on mortgages and preferred Operating Partnership preferred units $ 744,407 $ 863,636
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Organization and Basis of Presentation
3 Months Ended
Mar. 31, 2017
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Organization and Basis of Presentation

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION

 

Organization

 

Talon Real Estate Holding Corp. (“TREHC”) previously established an Operating Partnership (“Talon OP”) and transferred all of its assets and liabilities to the operating partnership in exchange for general partnership units. As the sole general partner of Talon OP we have the exclusive power to manage and conduct the business and affairs for the operating partnership. TREHC owned approximately 65% of the Operating Partnership as of March 31, 2017 and March 31, 2016, respectively. The Operating Partnership owned 100% of 5130 Industrial Street, LLC, 100% of Talon Bren Road, LLC, 100% of Talon First Trust, LLC, and 100% of Talon RE as of December 31, 2016 and 2015. Talon Bren Road, LLC, and Talon First Trust, LLC, are both limited liability companies organized under the laws of the state of Delaware, and were formed on May 9, 2014 and April 21, 2014, respectively, to purchase real estate. Talon Real Estate, LLC (“Talon RE”) was incorporated in the state of Minnesota on December 20, 2012 and began operations in 2013 for the purpose of acquiring real estate properties. Talon RE merged with Guide Holdings, Inc. in which Guide Holdings, Inc. was the surviving entity and was renamed Talon Real Estate Holding Corp.

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles (“US GAAP”).

 

The accompanying consolidated financial statements include the accounts of TREHC and its interest in the Operating Partnership. The limited partners in the Operating Partnership have a redemption option that they may exercise. Upon exercise of the redemption option by the limited partners, the Company has the choice of redeeming the limited partners' interests ("Units") for TREHC common shares of stock on a one-for-one basis, or making a cash payment to the unit holder. The redemption generally may be exercised by the limited partners at any time after the first anniversary of the date of the acquisition of the Units subject to volume restrictions.

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Investment in Real Estate Properties and Entities
3 Months Ended
Mar. 31, 2017
Real Estate [Abstract]  
Investment in Real Estate Properties and Entities

NOTE 2 – INVESTMENT IN REAL ESTATE PROPERTIES AND ENTITIES

 

The Company owns, through its subsidiary Talon First Trust, LLC, real estate property located at 180 East 5th Street, St. Paul, MN. The building has 656,875 net rentable square feet and is primarily leased to tenants for commercial and government use. As of March 31, 2017, the Company had tenants occupying approximately 60% of the rentable space. In April 2015, the Company executed a lease for a significant new tenant that would increase the occupancy by over 21% in the St. Paul building upon commencement of the lease. The lease was amended on January 27, 2017 to resolve certain disputes between the Company and the tenant and as amended, the lease is scheduled to commence on January 1, 2018. On March 7, 2017 one tenant that occupies approximately 16% of the net rentable square feet filed for Chapter 11 bankruptcy protection from its creditors. In June of 2018, this asset was sold to First Capital Reit (Note 12).

 

The Company owns, through its subsidiary Talon Bren Road, LLC, real estate property located on 20 acres of land at 10301 Bren Road West, Minnetonka, MN. This property has 164,472 net rentable square feet and is primarily leased to tenants who are wholesale product sales representatives. These leases are subject to a master lease agreement entered into between Talon Bren Road, LLC and Upper Midwest Allied Gifts Association, Inc. (“UMAGA”), a Minnesota nonprofit corporation. As of March 31, 2017, the Company had 100% of the rentable space leased.

 

The Company owns and operates the following real estate properties through its subsidiary, 5130 LLC:

 

5130 Industrial Street, Maple Plain, MN

1350 Budd Ave, Maple Plain, MN

 

The properties have combined 171,639 net rentable square feet and are primarily leased to tenants for mixed commercial and industrial usage. As of March 31, 2017, the Company had tenants occupying approximately 85% of the rentable space.

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Summary of Significant Accounting Policies
3 Months Ended
Mar. 31, 2017
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Accounting Estimates

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to use estimates and assumptions which affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from those estimates.

 

Principles of Consolidation

 

We evaluate the need to consolidate affiliates based on standards set forth in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation. In determining whether we have a controlling interest in an affiliate and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions, contractual and substantive participating rights of the limited partners and shareholders, as well as whether the entity is a variable interest entity for which we are the primary beneficiary. The accompanying consolidated financial statements include the accounts of Talon Real Estate Holding Corp. (“TREHC”) and Talon OP, our Operating Partnership, and all subsidiaries in which it maintains a controlling interest. Talon OP also consolidates 5130 LLC, an entity in which it has a 49% ownership interest, based on its ability to control the operating and financial decisions of 5130 LLC. All significant intercompany balances have been eliminated in consolidation.

 

Cash

 

The Company considers short-term investments with original maturities of 90 days or less to be cash equivalents. The Company believes it is not exposed to any significant credit risk on cash.

 

Restricted Escrows and Reserves

 

The Company is required to hold cash in restricted escrow accounts for insurance, real estate taxes and a replacement reserve. The escrows are used to pay periodic charges of real estate taxes and assessments, tenant improvements, and leasing commissions. The balances in the escrow accounts were $13,995,393 and $3,001,232 as of March 31, 2017 and December 31, 2016, respectively.

 

Rents and Other Receivables

 

Rents receivable and deferred rent are recorded at their estimated net realizable value. The Company follows a policy of providing an allowance for doubtful accounts, which is based on a review of outstanding receivables, historical collection information, and existing economic conditions. The Company does not require collateral and accounts are considered past due if payment is not made on a timely basis in accordance with our credit terms. Accounts considered uncollectible are written off. Receivables have been reduced by an allowance for doubtful accounts of $129,330 as of both March 31, 2017 and December 31, 2016.

 

Revenue Recognition

 

Base rental income is recognized on a straight-line basis over the terms of the related lease agreement, inclusive of leases which provide for scheduled rent increases or rent concessions. Differences between rent income earned and base rent amounts due per the respective lease agreements are credited or charged to deferred rent revenue or deferred rent receivable as applicable. When the Company enters into lease modifications or extensions with current tenants, the deferred rent at the time of the extension is amortized over the remaining term of the lease, and the revised terms are considered a new lease.

 

Tenant recoveries related to reimbursement of real estate taxes, insurance, repairs and maintenance and other operating expenses are billed monthly based on current year estimated operating costs for applicable expenses. An additional billing or a refund is made to tenants in the following year after actual operating expenses are determined.

 

Deferred Leasing Costs and Tenant Allowance

 

Direct and indirect costs, including estimated internal costs and leasing commissions, associated with the leasing of real estate investments owned by the Company are capitalized as deferred leasing costs and amortized on a straight-line basis over the term of the related lease as amortization expense. Unamortized costs are charged to expense upon the early termination of the lease. Costs associated with unsuccessful leasing opportunities are expensed.

 

In leasing tenant space, the Company may provide funding to the lessee through a tenant allowance. In accounting for a tenant allowance, the Company determines whether the allowance represents funding for the construction of leasehold improvements and evaluates the ownership, for accounting purposes, of such improvements. If the Company is considered the owner of the leasehold improvements for accounting purposes, the Company capitalizes the amount of the tenant allowance as building improvements and depreciates it over the shorter of the useful life of the leasehold improvements or the related lease term. For tenant allowances committed at lease inception and recorded as building improvements but not yet performed or completed, the corresponding liability will be recorded as tenant improvement allowance payables. If the tenant allowance represents a payment for other than funding leasehold improvements, or in the event the Company is not considered the owner of the improvements, for accounting purposes, the tenant allowance is considered to be a lease incentive and is capitalized as a deferred leasing cost and is amortized over the lease term as a reduction of rental revenue on a straight-line basis.

 

The Company had amortization expense for tenant improvements of $259,782 and $269,475 for the three-months ended March 31, 2017 and 2016, respectively. The Company had amortization expense for leasing costs of $76,926 and $73,622 for the three-months ended March 31, 2017 and 2016, respectively. The Company had accumulated amortization for tenant allowances of $3,140,513 as of March 31, 2017 and $2,880,732 as of December 31, 2016.

 

Deferred Financing Costs

 

Costs incurred in connection with obtaining financing are netted against notes payable and are being amortized using the effective interest method over the financing term and are included in interest expense. The Company had amortization expense of $923,463 for the three months ended March 31, 2017, and $204,752 for the three months ended March 31, 2016. Included in amortization expense for the three months ended March 31, 2017 is the write-off of unamortized deferred financing costs of $137,254 due to the refinancing of debt secured by the 180 East 5th Street property owned by Talon First Trust, LLC.

 

Real Estate Property and Fixed Assets

 

Investment in real estate and fixed assets with a useful life of longer than one year are carried at cost less accumulated depreciation and amortization. Property such as land, building and improvements includes cost of acquisitions, development, and construction and tenant allowances and improvements. We allocate the cost of an acquisition, including the assumption of liability, to the acquired tangible assets (including land, buildings and personal property) determined by valuing the property as if it were vacant, and identifiable intangibles based on their relative fair values. Acquisitions of real estate are recorded based upon preliminary allocations of the purchase price to management’s assessment of the fair value of tangible and intangible assets and any assumed liabilities acquired which are subject to adjustment as additional information is obtained up to one year after the date of acquisition. Management’s fair value assessment includes the use of readily accepted fair value techniques such as discounted cash flow analysis and comparable sales analysis including management’s reliance on independent market analysis.

 

Depreciation is provided using the straight-line method over the estimated useful life of the assets for furniture and equipment, buildings and land improvements, and the term of the lease for tenant improvements. The estimated useful lives being used are as follows:

 

Land Improvements 3-15 years
Buildings 25-30 years
Building Improvements 10-20 years
Tenant Improvements 1-12 years
Furniture and Equipment 3 years

 

Repair and maintenance costs are expensed as incurred, whereas expenditures that improve or extend the service lives of assets are capitalized. Disposal and abandonment of improvements are recognized at occurrence as a charge to depreciation.

 

Intangible Assets and Liabilities

 

Upon acquisitions of real estate, the Company assesses the fair value of acquired tangible assets and any significant intangible assets and liabilities (such as above- and below-market leases and value of acquired in-place leases), and any assumed liabilities, and allocates the purchase price based on these fair value assessments. The Company records intangible assets and liabilities acquired at their estimated fair value apart from goodwill for acquisitions of real estate. The Company amortizes identified intangible assets and liabilities based on the period over which the assets and liabilities are expected to affect the future cash flows of the real estate property acquired. Lease intangibles (such as in-place or above- and below-market leases) are amortized over the term of the related lease. Above and below-market leases are amortized as a reduction in (addition to) rent revenue. The Company amortized $45,220 as a net reduction in rent revenue for above and below-market leases for the three months ended March 31, 2017, and $48,267 for the three months ended March 31, 2016. Amortization of other intangibles is recorded in depreciation and amortization expense.

 

Impairment of Long-Lived Assets

 

Long-lived assets, such as real estate property, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. An impairment loss would be recognized when the estimated future cash flows from the use and eventual disposition of the asset are less than the carrying amount of that asset. The Company did not recognize any impairment losses for either of the three months ended March 31, 2017 or 2016.

 

Income Taxes

 

The Company accounts for income taxes under FASB ASC 740-10-30 which results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the book carrying amounts and the tax basis of assets and liabilities. Deferred income tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the temporary differences and carry forwards are expected to reverse. Accounting standards require the consideration of a valuation allowance for deferred tax assets if it is “more likely than not” that some component or all of the benefits of deferred tax assets will not be realized.

 

The Company's policy of accounting for uncertain tax positions is to recognize the tax effects from an uncertain tax position in the financial statements, only if the position is more likely than not to be sustained on audit, based on the technical merits of the position. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized, upon ultimate settlement with the relevant tax authority. The Company has examined the tax positions taken in its tax returns and determined that there are no uncertain tax positions. As a result, the Company has recorded no uncertain tax liabilities in its consolidated balance sheet.

 

The Company is no longer subject to U.S. federal, state or local income tax examinations by tax authorities for the years before 2013. The Company is not currently under examination by any taxing jurisdiction. In the event of any future tax assessments, the Company has elected to record the income tax penalties as general and administrative expense and any related interest as interest expense in the Company's consolidated statements of operations.

 

Stock-based Compensation

 

The Company has granted restricted stock to employees under an approved employee equity incentive plan and to Directors under a director compensation plan. Granted shares are considered issued and outstanding as of the date of the grants. Stock-based compensation is expensed on a straight-line basis over the vesting period and is valued at the fair value on the date of the grant. The Company has recognized $55,740 and $38,285 of compensation expense for the three months ended March 31, 2017 and 2016, respectively.

 

The Company may also issue common stock in exchange for goods or services of non-employees. These shares are either fully vested at date of grant or vest over a certain period during which services are provided. The Company expenses the fair market value of the services over the period in which they are received.

 

Non-controlling Interest

 

Interests in the Operating Partnership held by limited partners are represented by partnership common units of the Operating Partnership. The Company's interest in the Operating Partnership was approximately 67% and 65% of the common units of the Operating Partnership as of March 31, 2017 and December 31, 2016, respectively. The Operating Partnership’s income is allocated to holders of units based upon the ratio of their holdings to the total units outstanding during the period. Capital contributions, distributions, syndication costs, and profits and losses are allocated to non-controlling interests in accordance with the terms of the Operating Partnership agreement.

 

The portion of membership interests in 5130 LLC not held by Talon OP were reported as non-controlling interest. Capital contributions, distributions, and profits and losses are allocated to the non-controlling interest based on membership percentages and terms of the operating agreement.

 

Net Income (Loss) or Earnings Per Share

 

Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average common and potential dilutive common shares outstanding in accordance with the treasury stock method.

 

Given that the Company has incurred operating losses for all periods presented, diluted earnings per share is not presented. The weighted average outstanding shares used in the basic earnings per share computation is 18,945,481 and 16,788,586 for the three months ended March 31, 2017 and 2016 respectively.

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This new standard will eliminate all industry-specific guidance and replace all current U.S. GAAP guidance on the topic. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. Lease contracts are specifically excluded from the new accounting guidance.  This guidance will be effective for the Company beginning January 1, 2018 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. Adoption had no material impact on the Company’s consolidated financial statements.

 

In April 2015, the FASB issued ASU No. 2015-03 Interest—Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs.   The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update.  The Company adopted the amendments in this update effective January 1, 2016. Adoption did not have a material impact on the financial statements.

 

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15—Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 provides guidance for eight specific cash flow issues with respect to how cash receipts and cash payments are classified in the statements of cash flows, with the objective of reducing diversity in practice. The effective date for ASU 2016-15 is for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. Adoption of the ASU had no material impact on the Company’s financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40).  The amendments in this Update provide guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures.  The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The Company has adopted this amendment in this update effective for the current fiscal year. (see Note 13).

 

In March 2016, the FASB issued ASU 2016-09—Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 modifies the accounting for share-

based payment awards, including income tax consequences, classification of awards as equity or liabilities, and classification on the statement of cash flows. The effective date for ASU 2016-09 is for annual periods beginning after December 15, 2016, and interim periods within those fiscal years. The adoption of this standard is not expected to have a material impact on the Company’s business, financial position, results of operations or liquidity.

 

During February 2016, FASB issued ASU No. 2016-02, “Leases.” ASU No. 2016-02 was issued to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset (as defined). ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with earlier application permitted. Upon adoption, the lessee will apply the new standard retrospectively to all periods presented or retrospectively using a cumulative effect adjustment in the year of adoption. The adoption of this Standard did not have a material impact on the Company’s financial statements.

 

In March 2016, the FASB issued ASU 2016-08 – “Revenue from Contracts with Customers: Principal versus Agent Considerations.” The amendments of this standard are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The effective date for ASU 2016-08 is the same as the effective date for ASU 2014-09 and ASU 2015-14. Adoption of this Standard did not have a material impact on The Company’s financial statements.

 

In January 2017, the FASB issued ASU 2017-01 – “Business Combinations (Topic 805): Clarifying the Definition of a Business.” The amendment is intended to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The effective date for ASU 2017-01 is for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted the new guidance effective January 1, 2018 and the guidance resulted in acquisitions of operating properties being accounted for as asset acquisitions instead of business combinations. The adoption of this guidance changed the Company’s accounting for the transaction costs for acquisitions of operating properties such that transaction costs are capitalized as part of the purchase price of the acquisition instead of being expensed as acquisition-related expenses. The ASU is required to be applied prospectively.

XML 18 R9.htm IDEA: XBRL DOCUMENT v3.19.1
Tenant Leases
3 Months Ended
Mar. 31, 2017
Leases [Abstract]  
Tenant Leases

NOTE 4 – TENANT LEASES

 

The Company leases various commercial and industrial space to tenants over terms ranging from month-to-month to twelve years. Some of the leases have renewal options for additional terms. The leases expire at various dates from January 2017 to December 2025. Some leases provide for base monthly rentals and reimbursements for real estate taxes and common area maintenance.

 

The Company has the following future minimum base rentals on non-cancellable leases, including leases entered into subsequent to March 31, 2017:

 

2017 (remaining 9 months)  $5,264,839 
2018   6,927,823 
2019   6,207,780 
2020   3,112,572 
2021   1,728,134 
Thereafter   10,851,438 
  Total  $34,092,586 

 

Included in the above table are base lease payments due beginning January 1, 2018 totaling $15,832,430 for a significant tenant that has not occupied space yet but for which we have an executed lease agreement.

XML 19 R10.htm IDEA: XBRL DOCUMENT v3.19.1
Notes Payable
3 Months Ended
Mar. 31, 2017
Debt Disclosure [Abstract]  
Notes Payable

NOTE 5 – NOTES PAYABLE

 

Note Payable, Related Party

 

During August 2014, the Company entered a two-year unsecured note payable with Curtis Marks, a former director, which matured on June 30, 2016. The note bore interest at an annual rate of 14% through November 2015, 20% through June 2016 and 26% thereafter under default provisions until the principal is repaid. The note required monthly interest only payments with the outstanding principal due at maturity. The Company defaulted on the note at maturity and in April 2017 the principal was increased by approximately $397,000 as a result of a judgement against the Company described in Note 7. At March 31, 2017, management determined a negative outcome was probable and recorded a $397,695 increase to the principal balance. At March 31, 2017 and December 31, 2016, the unpaid principal on the notes totaled $897,695 and $500,000, respectively.

 

During June 2014, the Company entered into two two-year unsecured notes payable totaling $370,000 with Bren Road, LLC, a limited partner in Talon OP (Note 11). The notes bore interest at an annual rate of 8% and required monthly principal and interest payments totaling $4,440 with the remaining principal due at maturity. At March 31, 2017 and December 31, 2016, the unpaid principal on the notes totaled $302,293 and $309,472, respectively. In July 2017, the principal and unpaid interest was satisfied by a $594,176 judgement against the lender as described in Note 7.

 

Notes Payable

 

During March 2007, the Company entered into two mortgage notes payable totaling $4,750,000 secured by the Company’s real estate properties operated by 5130 Industrial Street, LLC (Note 2). The first note totaled $4,450,000 and required monthly interest only payments at 6.05% per annum with the outstanding principal due at maturity on April 8, 2017. The second note totaled $300,000 and required monthly interest only payments at 12.75% per annum with the outstanding principal due at maturity on April 8, 2017. At March 31, 2017 and December 31, 2016, the unpaid principal on the first note totaled $3,968,876 and $3,981,740, respectively. At March 31, 2017 and December 31, 2016, the unpaid principal on the second note totaled $292,609 and $292,941, respectively. The Company defaulted on the notes at maturity and in December 2018 the lender foreclosed on the properties as described in Note 12.

 

During May 2014, the Company entered into a five-year first mortgage note payable totaling $11,500,000 secured by the Company’s real estate property operated by Talon Bren Road, LLC (Note 2). The note bore interest at an annual rate of 4.65% and required monthly principal and interest payments totaling $65,438. At March 31, 2017 and December 31, 2016, the unpaid principal on the note totaled $10,788,414 and $10,858,648, respectively. During April 2017 the Company received a written default notice from the lender and in June 2017 the Company settled this note as described in Note 12.

 

During February 2015, the Company entered into a two-year second mortgage note payable totaling $2,000,000 secured by the Company’s real estate property operated by Talon Bren Road, LLC (Note 2). The note bore interest at an annual rate of 16% and required monthly interest payments totaling $26,667 with principal due at maturity. At December 31, 2016, the unpaid principal on the note totaled $2,000,000. During January 2017 the Company settled this note as described below.

 

The May 2014 and February 2015 mortgage notes payable include a restrictive covenant that requires Talon Bren Road, LLC to maintain a minimum debt service coverage ratio (“DSCR”) before distributions of 1.35:1.00 and after distributions of 1:05:1.00 as of the last day of each calendar year. As of December 31, 2015, Talon Bren Road LLC was out of compliance with the DSCR test. An amendment to the note agreements as well as waiver of the DSCR default for the December 31, 2015 test date was executed. The note agreements were amended to include a minimum Senior DSCR (pre-distributions) of not less than 1.50:1.00. It also amended and restated the minimum DSCR before distributions of not less than 1.20:1.00 as of the last day of each calendar year commencing after December 31, 2015. As of March 31, 2017, Talon Bren Road, LLC was not in compliance with the DSCR.

 

During July 2014, the Company entered into a three-year first mortgage note payable totaling $32,000,000 secured by the Company’s real estate property operated by Talon First Trust, LLC (Note 2). The note bore interest at an annual rate of 6.04% and required monthly interest only payments totaling $161,067 with the remaining principal due at maturity. At December 31, 2016 the unpaid principal on the note totaled $32,000,000. During the year ended December 31, 2016, mechanics lien statements were filed upon the property for unpaid balances included in accounts payable. In January 2017, the Company settled this note and satisfied all outstanding liens as described in later in this note.

 

During January and May 2015, respectively, the Company entered into two separate $500,000 unsecured notes payable which matured on June 30, 2016. The notes bore interest at an annual rate of 20% through October 31, 2015, 24% through June 30, 2016 and 26% thereafter until the principal is repaid. The notes required monthly interest only payments totaling approximately $20,000 with the outstanding principal due at maturity. The Company defaulted on the notes at maturity. A judgment was rendered against the Company in May 2017 as described in Note 7. At March 31, 2017, management determined a negative outcome was probable and recorded a $476,498 increase to the principal balance. At March 31, 2017 and December 31, 2016, the unpaid principal on the notes totaled $1,476,498 and $1,000,000, respectively.

 

During November 2015 the Company entered into a two-month unsecured note payable totaling $481,934. The Company defaulted on the note at maturity in January 2016. During June 2016, the Company refinanced the note with the lender resulting in the issuances of a six-month unsecured note payable totaling $1,008,908, including $481,934 in unpaid principal and $526,974 in accrued interest and penalties. The notes bore interest at an annual rate of 10%. At March 31, 2017 and December 31, 2016, the unpaid principal on the notes totaled $1,330,167 and $1,008,908, respectively. In January 2017, the Company settled the June 2016 note with the lender as described in Note 7.

 

During May 2016, the Company entered into a $59,489 unsecured note payable to settle accounts payable due to an unrelated party. The note bore interest at an annual rate of 10% and unpaid principal and interest are due upon the sale or refinancing of the property operated by Talon First Trust, LLC. At March 31, 2017 and December 31, 2016, the unpaid principal on the note totaled $59,489. The Company repaid the principal and unpaid interest in July 2017.

 

During August 2016, the Company entered into a one-year $654,926 unsecured note payable to settle accounts payable due to an unrelated party. The note bears interest at an annual rate of 3% and unpaid principal and interest were due at maturity. At March 31, 2017 and December 31, 2016, the unpaid principal on the note totaled $654,926. The Company defaulted on this note at maturity and the balance remains outstanding.

 

During October 2016, the Company entered into a non-interest bearing $181,000 unsecured note payable. At March 31, 2017 and December 31, 2016, the unpaid principal on the note totaled $81,800. The Company defaulted on the note at maturity in October 2016. The Company refinanced the unpaid principal in June 2017 as described in Note 12.

 

At December 31, 2016, the Company recorded $271,287 unsecured note payable to a former employee to settle a complaint filed by a former employee as described in Note 7. The note bore interest at an annual rate of 15% and matured in January 2018. The unpaid principal balance as of March 31, 2017 was $186,178. The note was repaid during 2017.

 

During January 2017, the Company entered into two 18-month promissory note agreements with a third-party lender, Quick Liquidity Management, LLC, totaling $2,550,000. The notes had an interest rate of 20% per annum and required monthly interest only payments with the principal due at maturity. The note agreements were guaranteed by First Tracks, LLC, a related party (Note 12). The proceeds from the notes were used to pay off the outstanding principal and interest due under the February 2015 $2,000,000 note payable. During June 2017, the outstanding principal, interest and penalties totaling $3,475,220 under the notes were satisfied through the issuance of the MCREIF and MCC notes described in Note 12.

 

On January 27, 2017, Talon First Trust, LLC, (the “Talon First Trust”), a Delaware limited liability company that is wholly owned by Talon OP, L.P., (the “Parent”), a Minnesota limited partnership and the entity through which Talon Real Estate Holding Corp. conducts substantially all of its business, entered into a Loan Agreement (the “Gamma Loan”) with Gamma Real Estate Capital LLC (the “Lender”), a Delaware limited liability company, in the principal amount of $51.6 million. The loan bears an interest rate equal to the sum of (i) the greater of (x) the LIBOR Index Rate, and (y) the LIBOR Floor, plus (ii) a margin of 9.00% per annum and has an initial maturity date of January 26, 2018 with two 6-month options for the Company to extend upon satisfaction of certain conditions. Pursuant to the Gamma Loan, approximately $5.3 million has been deposited into an interest reserve account to be applied toward monthly interest payments to the Lender.

 

The Gamma Loan is secured by (i) a mortgage on the Company’s interest in its building located at 180 East 5th Street, St. Paul, Minnesota, 55101, (ii) an assignment of lease and rents, (iii) 100% of the membership and ownership interests in the Parent, and (iv) other collateral specified in the Gamma Loan documents. The Gamma Loan is guaranteed by First Tracks, LLC, a related party (Note 12). First Tracks received a fee of $750,000 and 2,500,000 shares for the guarantee.

 

The following table details the allocation of the proceeds from the January 2017 Gamma Loan:

 

July 14 Note payoff  $29,354,774 
Financing costs   1,032,000 
Closing costs   2,012,869 
Gamma Loan escrows and reserves     
Interest reserve   5,289,000 
TI Escrow   2,000,000 
Shell work reserves   884,211 
Basement fireproof reserve   100,000 
Tax and insurance reserve   246,517 
TI allowance escrow (Note 7)   5,639,752 
Redemption of preferred units (Note 10)   3,050,000 
Satisfaction of TI invoices and mechanics liens   1,990,877 
   $51,600,000 

 

Under various mortgage notes payable, the Company is required to periodically fund and maintain escrow accounts to make future real estate tax and insurance payments, as well as to fund certain capital expenditures (Note 6).

 

During 2016, the Company received funds under agreements for the sale of future receivables from four different sources. As of December 31, 2016, the total outstanding balance under the agreements was $430,500 for the sale of future receivables generated by the property located at 180 E. Fifth Street. The agreements required payments totaling $644,039 over 120 days. Per FASB ASC 470-10-25, which provides guidance on funds received from sales of future receivables, these transactions have been classified as debt and included in notes payable. The agreements are guaranteed by the Company’s CEO. The unpaid principal balance as of March 31, 2017 was $215,259. The outstanding balances under the agreements were repaid during 2017.

 

At March 31, 2017, The Company is required to make the following principal payments on our outstanding notes payable for each of the succeeding fiscal years as follows:

 

   Amount
2017 (remaining 9 months)  $9,344,567 
2018   54,524,889 
2019   10,534,257 
   $74,403,713 
XML 20 R11.htm IDEA: XBRL DOCUMENT v3.19.1
Restricted Escrows and Reserves
3 Months Ended
Mar. 31, 2017
Cash and Cash Equivalents [Abstract]  
Restricted Escrows and Reserves

NOTE 6 – RESTRICTED ESCROWS AND RESERVES

 

According to the terms of the Company's notes payable agreements (Note 5), the Company is required to make monthly and quarterly deposits to various escrow and reserve accounts for the payment of real estate taxes, tenant improvements and leasing commissions. The Company had $13,995,393 and $3,001,232 in restricted escrows and reserve accounts as of March 31, 2017 and December 31, 2016, respectively.

XML 21 R12.htm IDEA: XBRL DOCUMENT v3.19.1
Commitments and Contingencies
3 Months Ended
Mar. 31, 2017
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies

NOTE 7 – COMMITMENTS AND CONTINGENCIES

 

On June 7, 2013, Talon RE entered into a contribution agreement with the Kaminski Trust, the remaining interest holder of 5130 Industrial Street LLC, pursuant to which the Company will acquire the remaining 51% interest in 5130 Industrial Street LLC in exchange for 2,820,810 shares of the Company’s common stock, subject to receiving consent to the transfer from 5130 Industrial Street LLC’s mortgage holder under the March 2007 notes. During December 2018, the shares were issued to The Kaminski Trust. The Company’s CEO and his wife are the trustees of The Kaminski Trust.

 

The Company entered into a property lease agreement relating to rental of office space. This non-cancellable lease has been amended to run through May 2024. The Company incurred $22,761 and $26,339 of rent expense for the three-months ended March 31, 2017 and 2016, respectively. On December 15, 2018, the Company entered into a termination agreement with the landlord. In exchange for vacating the premises, the accrued rent was forgiven.

 

The Company entered into a Contribution Agreement dated May 29, 2014 with Bren Road, LLC, the contributor of the property acquired through our subsidiary, Talon Bren Road, LLC. The agreement provides for any deficit in achieving $1,560,000 of net operating income (“NOI”) per year for the first three years to be funded by Bren Road, LLC. The Company recognized $ 0 and $46,023 of income under this agreement for the three months ended March 31, 2017 and 2016, respectively.

 

The Company entered into a consulting agreement dated May 29, 2014 with Gerald Trooien (“Consultant”). This agreement provides for consulting services to Talon Bren Road, LLC for $43,750 per month payable beginning August 15, 2014 and continuing for 59 months thereafter. The agreement will terminate upon the occurrence of any of the following:

 

  a. redemption or conversion of all limited partnership units held by Bren Road, LLC,
     
  b. sale by Bren Road of any of its partnership units in Talon OP, L.P.,
     
  c. payment to Bren Road of any dividends in respect to Bren Road’s interest in Talon, and
     
  d. the Company qualifies as a real estate investment trust (REIT).

 

The Company incurred $145,312 and $140,289 of consulting expenses for the three months ended March 31, 2017 and 2016, respectively. The Company had amounts due to the consultant of $771,803 and $627,491 as of March 31, 2017 and December 31, 2016, respectively. The outstanding amount as March 31, 2017 was satisfied on June 23, 2017 (see Note 12) as part of the refinancing of Talon Bren Road, LLC’s outstanding mortgages.

 

The Company entered into a Property Management Agreement dated July 2, 2014 with Swervo Management Division, LLC (“Property Manager”). This agreement provides for management and other leasing duties for Talon First Trust, LLC for monthly payments of 7.5% of the monthly gross rental receipts at the property beginning July 2, 2014 and continuing for 59 months thereafter. Subsequently, on January 27, 2017, the agreement was terminated.

 

The Company incurred $-0- and $144,569 of expenses for the three months ended March 31, 2017 and 2016, respectively. On November 16, 2015, the Company entered into a $481,934 unsecured promissory note with the Property Manager related to unpaid fees for the period of March 2015 through December 2015. In June 2016 the Company entered into a $953,908 unsecured promissory note related to the refinance of the previous note plus unpaid fees for the period January 2016 through July 2016 due August 31, 2016 (Note 5). After that date, an additional $55,000 of fees became due and payable.

 

On April 9, 2015, the Company entered into a significant lease arrangement with a new tenant. On January 27, 2017 the company executed a Second Amendment to the lease with the tenant to resolve issues concerning a notice of default that the Company received from the tenant on April 1, 2016 resulting in the termination of the $7,760,995 improvement allowance. The Second Amendment rescinds the Notice of Default and the Termination Notice that the tenant had delivered, changes to the lease commencement date from January 1, 2016 to January 1, 2018 and placed $5.6 million in escrow to provide evidence of our ability to pay for the remaining tenant improvements. We deposited the required escrow funds on January 27, 2017 (Note 12).

 

The depositing of the escrowed funds was done for the express purpose of paying for the buildout for the significant tenant. The funds were deployed to pay for the tenant improvements during 2017. All remaining funds were applied to reduce the Gamma Loan (Note 5).

 

Legal Proceedings

 

The Company filed a complaint in the State of Minnesota on June 10, 2016 to enforce the NOI Payment Agreement and other documents issued in conjunction with the Contribution Agreement entered into on May 29, 2014 with Bren Road, L.L.C, a limited partner in Talon OP, L.P. The defendant has responded and filed a counterclaim and third-party complaint against Talon Bren Road, LLC and Talon OP, LP on July 7, 2016. On November 9, 2016 the matter came before the court on the Defendant’s motion for partial summary judgment. Subsequently, on February 27, 2017 the Hennepin County District Court issued a Findings of Fact and Order for Judgment on the counter claim against the Company in the amount of $719,365, plus post judgment interest which pursuant to our 10301 Bren Road and 180 E 5th Street loan agreements, constitutes a non-financial event of default. In an attempt to collect on the judgment, the defendant filed a motion for the appointment of the receiver. The outstanding amount of the judgment was satisfied on June 23, 2017 as part of the refinancing of Talon Bren Road, LLC’s outstanding mortgages. On March 27, 2017 our complaint in the amount of $771,408 went to trial in Hennepin County District Court. On July 21, 2017 a judgment was ordered in favor of Talon Bren Road, LLC and Talon O.P LP in the amount of $594,176. The principal and accrued interest under the two June 2014 notes (Note 5) were settled under the July 21, 2017 judgment.

 

On January 12, 2015 and May 19, 2015, respectively, the Company entered into two separate $500,000 unsecured promissory notes (Note 5) with the same unrelated party. In 2015, the Company extended the maturity dates of both notes to December 31, 2015. Subsequently, the Company extended the maturity dates of both notes to the earlier of, the disposition or refinancing of the property at 180 E 5th Street in St. Paul or June 30, 2016. On September 24, 2016, the unrelated party filed a summons and complaint in the State of Minnesota claiming that the Company breached its obligation under the notes. On May 19, 2017, a judgment was entered against the Company in the amount of $1,476,498. As of the date of this report, the judgment has not been repaid by the Company.

 

On August 12, 2014, the Company entered into a $500,000 unsecured promissory note with Curtis Marks (Note 5), a former director. The note had an original maturity date of February 8, 2015. Proceeds from this note paid off additional notes entered into on December 30, 2013 and March 7, 2014, respectively, for $100,000 each, with the same party. In 2015, the Company extended the maturity date of the note to December 31, 2015. Subsequently, in 2016 the Company extended the maturity date of the note to the earlier of, the disposition or refinancing of the property at 180 E. Fifth Street in St. Paul or June 30, 2016. On October 18, 2016, the related party filed a summons and complaint in the State of Minnesota claiming that the Company breached its obligation under the notes. In April 2017, this matter went to trial and the plaintiff was awarded $897,695 On May 31, 2017, the Court granted a Charging Order against the Company and Talon OP L.P. where the Company and Talon OP L.P are required to pay all profits and distributions to the plaintiff until the full amount of the judgment is paid and satisfied. Subsequent to the judgment and charging order, in April 2018, the judgment was fully satisfied by the Company, granting a second mortgage in favor of the judgment creditor. As of the date of this filing, the second mortgage amount has not been repaid by the Company.

 

On October 20, 2016, a former employee filed a summons and complaint in the State of Minnesota claiming that the Company breached its obligation under terms of the former employee’s employment with the Company. In January 2017, the parties reached an agreement to settle all claims. The Company executed a $271,287 promissory note (Note 5) which is fully recorded on the Consolidated Balance Sheet as of December 31, 2016. The promissory note has been satisfied as of December 31, 2017.

 

On January 25, 2017, in the matter of Swervo Management Division, LLC, as plaintiff, versus Talon Real Estate Holding Corp, Talon First Trust, LLC and Talon Bren Road, LLC, as defendant, the Company executed a $1,330,167 amended and restated promissory note, plus interest on the unpaid balance at 10%. The entire principal balance shall be due and payable on the earlier of July 24, 2017 or upon a time that the Company refinances or sells its property located at 10301 Bren Road. This note replaces the Amended and Restated promissory note dated June 30, 2016 in the amount of $953,908 ($1,008,908 as of December 31, 2016 – Note 5) given by Talon Real Estate Holding Corp. and Talon First Trust, LLC. On July 24, 2017, the $1,330,167 promissory note was amended and restated, based on the payment of combined principal and interest of $300,000, to a $1,095,764 promissory note, plus interest on the unpaid balance at 10%. The entire principal balance shall be due and payable on the earlier of October 24, 2017 or upon a time that the Company refinances or sells its property located at 10301 Bren Road. On November 6, 2017, the $1,095,764 promissory note was amended and restated to a $927,587 promissory note, plus interest on the unpaid balance at 10%. The entire principal balance shall be due and payable on the earlier of December 31, 2017 or upon a time that the Company refinances or sells its property located at 10301 Bren Road. The Company defaulted on the November 2017 note at December 31, 2017 and accepted a judgment in October 2018 in the amount of $1,010,180. As of the date of this filing, the judgement amount has not been repaid by the Company.

XML 22 R13.htm IDEA: XBRL DOCUMENT v3.19.1
Restricted Stock
3 Months Ended
Mar. 31, 2017
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Restricted Stock

NOTE 8 – RESTRICTED STOCK

 

The Company has granted restricted stock to employees under an approved employee equity incentive plan and to directors under a director compensation plan. The 2013 Equity Incentive Plan dated June 7, 2013 (the “Plan”) allows up to 1,500,000 shares to be issued and granted to employees, non-employee directors and consultants. Authorized shares automatically increase on January 1 of each year by three percent of the outstanding shares of common stock as of December 31 of the immediately preceding year. Employee awards granted in 2013 vest monthly over 36 months provided the recipient remains an employee or consultant of the Company. Awards granted in 2014 vest either immediately, monthly over a three-year period, or monthly over a five-year period. Awards granted in 2016 vest on a cliff basis one year from the date of issuance, or partially vest immediately and the remaining vest on a cliff basis annually from 2017 to 2019.

 

The Non-Employee Director Compensation Plan allows shares of restricted common stock to be granted to board members and is included under the Plan. The 2013 board member awards vest one-third of the shares on the date of grant, one-third on January 1 of the year following the date of grant, and one-third on January 1 of the second year following the date of grant, provided the recipient remains a member of the board as of the vesting date. The 2014 awards vested immediately in March of 2014. The 2016 awards vest half on the date of grant and half on April 15, 2017.

 

As of March 31, 2017, the Company has granted 1,093,759 shares to employees and 480,000 shares to Directors, net of forfeitures, under the Plan. Of the employee shares granted, 360,000 remain unvested as of March 31. 2017.

 

Total unrecognized compensation expense related to the outstanding restricted stock as of March 31, 2017 was $267,334, which is expected to be recognized over a weighted average period of 32 months.

XML 23 R14.htm IDEA: XBRL DOCUMENT v3.19.1
Intangible Assets and Liabilities
3 Months Ended
Mar. 31, 2017
Goodwill and Intangible Assets Disclosure [Abstract]  
Intangible Assets and Liabilities

NOTE 9 – INTANGIBLE ASSETS AND LIABILITIES

 

The Company's identified intangible assets and liabilities at March 31, 2017 and December 31, 2016 were as follows:

 

  

March 31, 2017

 

December 31, 2016

Identified intangible assets:          
In-place leases  $10,078,055   $10,078,055 
Above-market leases   1,832,939    1,832,939 
Accumulated amortization   (7,011,661)   (6,445,391)
Net carrying amount  $4,899,333   $5,465,603 

 

   March 31, 2017  December 31, 2016
Identified intangible liabilities:          
Below-market leases  $507,746   $507,746 
Accumulated amortization   (386,005)   (357,108)
Net carrying amount  $121,741   $150,638 

 

The effect of amortization of acquired intangible assets and liabilities was a net charge of $537,372 for the three months ended March 31, 2017 and $544,253 for the three months ended March 31, 2016. Above-market leases, included in intangible assets, are amortized as a reduction of rent revenue and totaled $74,117 for the three months ended March 31, 2017, and $77,167 for the three months ended March 31, 2016. Below-market leases are amortized as an addition to rent revenue and totaled $28,898 for the three months ended March 31, 2017, and $28,898 for the three months ended March 31, 2016. Amortization of in-place leases was $492,152 for the three months ended March 31, 2017, and $495,983 for the three months ended March 31, 2016. In-place leases, and above and below-market leases had a weighted average amortization period of 4.5 years in the year acquired.

 

The estimated annual amortization of acquired intangible assets and liabilities for each of the five succeeding fiscal years is as follows:

 

Years ending December 31,  Assets  Liabilities
2017 (remaining 9 months)  $1,681,233   $84,952 
2018   1,654,921    36,789 
2019   1,175,158    —   
2020   388,021    —   
   $4,899,333   $121,741 
XML 24 R15.htm IDEA: XBRL DOCUMENT v3.19.1
Mandatorily Redeemable Preferred Operating Partnership Units
3 Months Ended
Mar. 31, 2017
Other Liabilities and Financial Instruments Subject to Mandatory Redemption [Abstract]  
Manditorily Redeemable Preferred Operating Partnership Units

NOTE 10 – MANDATORILY REDEEMABLE PREFERRED OPERATING PARTNERSHIP UNITS

 

On July 2, 2014, the Company issued 30,000 preferred units, at a price of $100 per unit, totaling $3,000,000. These preferred unit holders are entitled to distributions at a rate of 6% per annum of their liquidation preference amount of $100 per unit which are cumulative from the date of issuance and are payable monthly (to the extent there are sufficient distributable proceeds). The preferred units have been classified as a liability in the consolidated balance sheet as the preferred liquidation preference amount is mandatorily redeemable in specific amounts at specific dates in the future. The preferred units were redeemed on January 27, 2017. (Note 5)

XML 25 R16.htm IDEA: XBRL DOCUMENT v3.19.1
Related Party Transactions
3 Months Ended
Mar. 31, 2017
Related Party Transactions [Abstract]  
Related Parties Transactions

NOTE 11 – RELATED PARTY TRANSACTIONS

 

In October 2016, the Company entered into a loan guaranty agreement with, First Tracks LLC, an entity wholly owned by the wife of the Company’s Chairman and CEO, to guaranty additional debt financing on behalf of the Company (Note 5). Total fees of approximately $70,000 were paid by the Company to First Tracks during 2016 pursuant to this agreement.

 

First Tracks, LLC also provided a guarantee on the issuance of debt secured by the property owned by Talon Bren Road, LLC. Fees of $55,000 was paid to First Tracks, LLC on January 5, 2017 for this guarantee.

 

The Gamma Loan (see Note 5) entered into on January 27, 2017, is guaranteed by First Tracks, LLC. As consideration for the guarantee, Talon Real Estate Holding Company issued First Tracks LLC 2,500,000 shares of its common stock on January 27, 2017 and paid a fee of $750,000.

 

During 2014, the Company entered into a Contribution Agreement and two note payable agreements (Note 5) with Bren Road, LLC, a limited partner of Talon OP. The Contribution Agreement contained a NOI Payment Agreement under which Bren Road, LLC, owed the Company $287,150 at December 31, 2016 and is included in rents and other receivables on the Company’s consolidated balance sheet. The balances due under the NOI Payment Agreement and note payable agreements were settled during 2017 as detailed in Note 7.

XML 26 R17.htm IDEA: XBRL DOCUMENT v3.19.1
Subsequent Events
3 Months Ended
Mar. 31, 2017
Subsequent Events [Abstract]  
Subsequent Events

NOTE 12 – SUBSEQUENT EVENTS

 

In June 2018, the Company entered into a contribution agreement under which the Company sold Talon First Trust, LLC, a subsidiary owned by Talon OP, L.P., the entity through which the Company conducts substantially all of its business, to First Capital Real Estate Operating Partnership, LP (FCROP), a subsidiary of First Capital Real Estate Trust, Inc. (FCREIT). Under the agreement, the Company agreed to sell the Limited Liability Company which contained the ownership of the property located at 180 East 5th Street, St. Paul, MN, for consideration with an estimated value of $98,000,000. Consideration received included 2,495,321 ownership units of FCROP with an estimated valuation of $40,000,000 and the assumption of up to $58,000,000 of principal, interest and penalties due under the January 2017 Gamma loan agreement.

 

Talon First Trust LLC (ft)

Pro Balance Sheet

 

   March 31, 2017  December 31, 2016
Assets      
       
 Cash          
 BMO   1,110    —   
 Talon First Trust, LLC Operating   (995)   (33,059)
 Talon First Trust, LLC Property   —      53 
 Talon First Trust, LLC Lockbox   5,000    67,821 
 Talon First Trust, Operating AB   (76,576)   —   
 Talon Management Services AB   38,555    —   
  Total Cash   (32,906)   34,815 
           
 Escrow          
 Real Estate Tax Escrow   456,361    196,401 
 Property Insurance Escrow   36,672    81,836 
 Replacement Reserve Escrow   —      100,839 
 Interest Reserve Escrow   4,826,434    —   
 General Escrow   987,211    —   
 TI & Commission Escrow   7,331,070    2,397,502 
  Total Escrow   13,637,748    2,776,579 
           
 Receivables          
 Tenant Receivable   320,915    102,775 
 Due From Affiliates   (25,000)   —   
  Total Receivables   295,915    102,775 
           
 Fixed Assets          
 Building   21,258,346    21,258,346 
 Accum Depr - Building   (1,948,682)   (1,771,529)
 Building Improvements   1,272,545    1,272,545 
 Accum Depr - Building Improvements   (318,361)   (285,352)
 Tenant Improvements   12,394,469    6,754,717 
 Accum Depr - Tenant Improvements   (2,927,127)   (2,667,345)
 Land   3,000,000    3,000,000 
 Land Improvements   137,447    137,447 
 Accum Depr - Land Improvements   (4,582)   (2,291)
  Total Fixed Assets   32,864,056    27,696,538 

 

Talon First Trust LLC (ft)

Pro Balance Sheet (continued)

 

Other Assets      
  Deposits Paid   15,000    15,000 
 Intangible Assets   9,091,055    9,091,055 
 Intangible Assets - Above Market   1,832,939    1,832,939 
 Intangible Assets - Below Market   (507,746)   (507,746)
 Accum Amort - Intangible Assets   (5,463,132)   (5,024,045)
 Accum Amort - Intangible Assets - Above   (947,131)   (873,014)
 Accum Amort - Intangible Assets - Below   386,005    357,108 
 Leasing Costs   3,063,156    2,754,474 
 Accum Amort - Leasing Costs   (845,388)   (772,433)
 Deferred Leasing Incentives   80,187    80,187 
 Accum Amort - Leasing Incentives   (62,978)   (59,007)
 Prepaid Insurance   16,669    41,673 
 Other Prepaid Expenses   300    300 
 Deferred Rent   (92,300)   (112,504)
  Total Other Assets   6,566,636    6,823,988 
           
   Total Assets   53,331,449    37,434,695 
           
 Liabilities_Capital          
           
 Liabilities          
           
 Accounts Payable & Accruals          
 Prepaid Rent   65,735    71,745 
 Tenant Deposits   22,696    22,696 
 Great Hall - Deposits   500    500 
 Accounts Payable (System)   2,128,733    4,268,679 
 Tenant Improvement Allowance   5,639,752    —   
 Leasing Incentives Payable   2,050    2,050 
 Other Payable   189,549    —   
 Accrued Interest   474,938    274,592 
 Accrued Real Estate Taxes   316,894    —   
 Accrued RE Taxes - Special Assessments   771,370    771,370 
 Accrued Payroll   13,548    —   
  Total Accounts Payable & Accruals   9,625,765    5,411,632 
           
 Notes Payable          
 Other Notes   1,563,485    1,330,800 
 Mortgage - 1st   51,600,000    32,000,000 
  Total Notes Payable   53,163,485    33,330,800 
 Financing Costs   (3,070,315)   (1,087,893)
 Accum Amort - Financing Costs   589,456    874,180 
 Preferred OP Capital - 6%   —      3,000,000 
  Total Liabilities   60,308,391    41,528,719 
           
 Capital          
 Operating Partnership Capital   5,000,000    5,000,000 
 Intra Company Transfer   (404,577)   209,476 
 Retained Earnings   (2,193,865)   (4,146,447)
 Prior Retained Earnings   (9,378,500)   (5,157,053)
  Total Capital   (6,976,942)   (4,094,024)
           
   Total Liabilities_Capital   53,331,449    37,434,695 

 

Talon First Trust LLC (ft)

Pro Forma Statement of Operations

For the Three Months Ending March 31, 2017

 

   March 31, 2017
Income   
Rental Income   
        Rent Revenue   1,334,296 
        CAM Income   462,602 
        Storage   10,725 
        Utility Income   20,057 
        RE Tax Income   73,271 
            Gross Rental Income   1,900,954 
      
        GAAP Straightline Rent Adjustment   20,203 
        Amort - Intangible Assets - Above   (74,117)
        Amort - Intangible Assets - Below   28,897 
        Amort - Leasing Incentives   (3,971)
            Net Rental Income   1,871,966 
      
        Interest Income   240 
        Late Fee Income   200 
        Other Income   8,423 
        Great Hall Income   9,153 
        Direct Tenant Reimbursable Income   3,572 
      
                Total Income   1,893,558 
      
 Expenses     
      
 Management Company Expenses     
      
    Professional Fees     
        Legal   24,470 
            Total Professional Fees   24,470 
      
    Staff Costs - Admin     
        Admin Payroll Fee   337 
        Bank Service Charges   —   
        Filing Fees   —   
        Due Diligence Lost Deals   —   
            Total General & Administrative   24,807 
      
    Direct Tenant Reimbursable   —   
            Total Management Expenses   24,807 

 

Talon First Trust LLC (ft)

Pro Forma Statement of Operations

For the Three Months Ending March 31, 2017 (continued)

 

Owner Expenses   
        Bad Debt Expense     
        Fees   180,300 
        Taxes   —   
        Owner Utilities   —   
            Total Owner Expenses   180,300 
      
    Common Area Expenses     
      
    Building Operations     
        Alley Expense   —   
        Building Repairs   (2,435)
        Building Supplies   984 
        Connectivity - Cable, Internet, Phones   6,956 
        Electrical   2,619 
        Elevator - Contract   10,555 
        Elevator - Other   —   
        Food Service   9,999 
        Garbage & Recycling   5,870 
        HVAC - Contract   11,600 
        HVAC - Other   1,889 
        Janitorial - Contract   145,491 
        Janitorial - Supplies   16,520 
        License & Permits   —   
        Locks & Hardware   —   
        Maintenance - Payroll   35,294 
        Parking   14,310 
        Payroll Taxes - Operations   4,514 
        Pest Control   285 
        Plant Service   3,134 
        Plumbing   1,635 
        Security   9,252 
        Security - Payroll   41,060 
        Skyway   4,605 
        Snow Removal   —   
        Sprinkler & Fire Protection   5,595 
        Tenant Events   —   
        Uniforms   327 
        Total Building Operations   330,059 

 

Talon First Trust LLC (ft)

Pro Forma Statement of Operations

For the Three Months Ending March 31, 2017 (continued)

 

Utilities   
        Electricity   222,435 
        Gas   40,141 
        Water & Sewer   9,503 
        Total Utilities   272,080 
      
    Great Hall Expense   20,231 
      
    Real Estate Taxes   316,894 
    Insurance   25,004 
    Health Insurance - Property   1,609 
    Management Fee   76,038 
    Professional Fees - Property   66,533 
      
    Administrative     
        Administrative - Property   25,443 
        Bank Charges   4,386 
        Legal-property   950 
        Dues & Subscriptions - Property   558 
        Advertising/Marketing - Property   590 
        Postage-Site   496 
        Meals - Property   1,540 
        Travel - Property   72 
        Office Supplies - Property   996 
        Total Administrative   35,031 
      
    Total Common Area Expenses   1,143,480 
    Total Expenses   1,348,586 
    Net Operating Income   544,972 
      
    Interest Expense     
        Interest - Operating Loan   (26,970)
        Interest - 1st Mortgage   1,070,370 
        Interest - Other   82,653 
            Total Interest Expense   1,126,054 
      
    Depreciation/Amortization Exp     
        Depr - Building   177,153 
        Depr - Building Improvements   33,009 
        Depr - Tenant Improvements   259,782 
        Depr - Land Improvements   2,291 
        Amort - Financing Costs   703,506 
        Amort - Intangible Assets   439,088 
        Amort - Leasing Costs   72,954 
            Total Depreciation/Amortization Expense   1,687,783 
      
    NET INCOME   (2,268,865)

 

In April 2017, the Company defaulted on the March 2007 mortgage notes (Note 5). In December 2018, the lender foreclosed and conducted a sheriff’s sale on properties operated by 5130 Industrial Street, LLC, which secured the mortgage notes. Pursuant to Minnesota law, a property foreclosed upon in this manner is subject to a six (6) month redemption. The Company is currently under contract to sell the property located at 1350 Budd Ave, Maple Plain, MN for $1,400,000. The Company is engaged in refinancing the second property, but as of the date of this report has been unable to do so. Failure to sell the properties or refinance the mortgage notes could result in an acceleration of actions by the lender to foreclose on the properties.

 

During June 2017, the Company entered into a transaction that included a Promissory Note Secured by a Mortgage and Collateral Security Agreement with MCREIF SubREIT LLC, in the principal amount of $15,127,000. The Note bears interest at a rate equal to 9.5% per annum and had an initial maturity date of June 1, 2018. The Note is subject to a balloon payment upon maturity in the amount of $15,246,755, which is comprised of the unpaid principal balance and unpaid interest of $119,755. The loan is guaranteed personally by the Company’s Chief Executive Officer.

 

During November 2018, the Company entered into a Forbearance Agreement with MCREIF through February 1, 2019. Under the Forbearance Agreement the interest rate was increased to 16% per annum and the balance due on the note was increased to $16,218,000 for unpaid principal, interest and default penalties.

 

During January 2019, the Company and MCREIF agreed to extend the maturity of the June 2017 promissory note to July 31, 2019, reduce the interest rate to 9.50% per annum, and increase the balance due under the note to $16,689,000 for unpaid principal, interest and default penalties. As of the date of this filing, the note is in good standing.

 

During June 2017, the Company entered into a $500,000 secured promissory note payable with MCC, LLC. The note had an interest rate of 4.50% per annum, required monthly principal and interest payments of $10,000 with the unpaid principal and interest balance due at maturity on July 1, 2018.

 

During September 2018, the unpaid principal and interest under the note was refinanced under a $651,800 secured promissory note with MCC. The note has an interest rate of 10% per annum, requires monthly principal and interest payments of $5,430 with the unpaid principal and interest balance due at maturity on August 1, 2019. As of the date of this filing, the note is in good standing.

 

The following table details the allocation of proceeds from the June 2017 MCREIF and MCC notes payable:

 

May 2014 note payoff (Note 5)  $10,720,058 
October 2016 note payoff (Note 5)   81,800 
January 2017 Quick Liquidity notes payoff (Note 5)   3,475,220 
Trooien consulting fees (Note 7)   744,145 
Financing costs   415,625 
Closing costs   57,613 
Satisfaction of invoices   70,898 
MCREIF reserves:     
Interest reserve   35,927 
Insurance reserve   25,714 
   $15,627,000 

 

During October 2017, the Company received funds under agreements for the sale of future receivables from two different sources totaling $500,000. The agreements required payments totaling $720,000 over 120 days and are guaranteed by the Company's CEO. As of the date of this report the agreements are past due and have an outstanding balance of approximately $200,000.

 

In August 2018, Talon OP, L.P., which is the entity through which the Company conducts substantially all of its business, entered into a Contribution Agreement (the “Antigua Contribution Agreement”) with FCREIT, through FCROP, its operating partnership, for the acquisition of the FCROP’s interests in and to Goat Head Hill and Dutchman’s Bay, Island of Antigua (the “Antigua Project”), including, without limitation, that certain Memorandum of Agreement dated July 28, 2015 between Brown McLennon, the FCROP and the government of Antigua and Barbuda regarding the development of hotels on the properties known as Dutchman’s Bay and Goat Head Hill on Antigua and the FCROP’s 100% ownership interest in Goat Head Hill Resort Development Ltd and Dutchman’s Bay, an Antigua and Barbuda Corporation. Pursuant to the Antigua Contribution Agreement, the FCROP agreed to transfer all of its interests in the Antigua Project to Talon OP, L.P. In consideration for such transfer Talon OP, L.P., will issue to FCROP $30 million in units of its limited partnership interests (“LP Units”), or 12,000,000 LP Units based on a valuation of $2.50 per LP Unit. The LP Units will be payable in three installments over a two-year period with 4,000,000 due at closing and 4,000,000 due one and two years from the closing date. FCROP has agreed to sign such documents at the Closing as are necessary in connection with its admission as a limited partner of Talon OP, L.P. The agreement closed during December 2018.

 

In August 2018, Talon OP, L.P., which is the entity through which the Company conducts substantially all of its business, entered into a Contribution Agreement (the “Hotels Contribution Agreement”) with FCREIT through FCROP, its operating partnership, for the acquisition of seven entities. In consideration for such transfer Talon OP, L.P. will issue to the FCROP $14,796,765 in units of its limited partnership interests (“LP Units”), or 5,918,706 LP Units based on a valuation of $2.50 per LP Unit. The aggregate value of the Companies/Hotels is $40,790,000 and a credit for existing indebtedness (“Existing Indebtedness”) of $25,993,235. FCROP has agreed to sign such documents at the Closing as are necessary in connection with its admission as a limited partner of Talon OP, L.P. The agreement closed during December 2018. The August 2018 hotel acquisitions require proforma presentation under Regulation S-X. However, as of the date of this filing, records for the three months ended March 31, 2017 provided by FCREIT are incomplete and contain uncorrected material errors. Complete records will be provided by FCREIT when they are available. Accordingly, proforma presentation as of March 31, 2017 and the three months then ended are not included herein.

 

In November 2018, the Company set up a facility to obtain financing with a private, affiliated limited liability company. The terms of the facility involved draw-downs by various professionals and the selling Two Million (2,000,000) shares. The facility included a Warrant to Purchase Four Hundred Thousand Shares at a floor of One Dollar ($1.00) per share. (the “Warrant”). The facility allows for an amount of Three Hundred Fifty Thousand Dollars ($350,000.00) to be brawn down upon. As of May 2019, approximately One Hundred Fifty Thousand Dollars ($150,000) of the facility are available for use.

 

During December 2018, the Company issued 675,000 common shares each to Kristian Wyrobek, Marc Agar and First Tracks LLC (on behalf of the Company’s CEO) as director compensation.

 

During December 2018, the Company issued 3,000,000 common shares to First Tracks LLC (on behalf of the Company’s CEO) and 1,000,000 shares to an employee for compensation under the Company’s employee equity incentive plan (Note 9).

 

During December 2018, the Company issued 406,000 common shares to vendors.

 

On April 3rd 2019, Talon entered into two binding contracts  to purchase certain Student Housing assets in Minnesota, Indiana, Illinois, Iowa, Wisconsin, and Kansas. ..  (the “Student Housing Assets”). Talon is purchasing the assets for an aggregate total value of One hundred ninety one million seven hundred forty thousand and seventy nine dollars ($191,740,079). The two  portfolios consist of 2805 beds combined.  The contracts are binding, but include a due diligence contingency and a financing contingency. As of the date of this filing, the Company does not consider closing of the contracts to be probable. Accordingly, proforma presentation as of March 31, 2017 and the three months then ended are not included herein.

 

On April 29, 2019, Talon reached a settlement with the Upper Midwest Allied Gifts Association “UMAGA” and various tenants at Talon’s Bren Road property.  The settlement includes a new 3.5 year Master Triple Net Lease for the entire property with UMAGA.  Talon through the lease will obtain rights to certain parking areas at the property during the term of the lease.  The settlement also includes the dismissal of all suits, and claims, between Talon, UMAGA and the tenants.  The settlement was read into the court record, and is binding, as the final settlement and lease documents are being drafted.

 

On April 30, 2019, Talon entered into a Purchase and Sale Agreement to sell the UMAGA property.  Talon has contracted to sell UMAGA for Twenty Six Million Dollars ($26,000,000).  The contract is binding, but the contract includes a due diligence contingency.  The Purchase and Sale Agreement does not contain a financing contingency. As of the date of this filing, the Company does not consider closing of the UMAGA agreement to be probable. Accordingly, proforma presentation as of March 31, 2017 and the three months then ended are not included herein.

XML 27 R18.htm IDEA: XBRL DOCUMENT v3.19.1
Going Concern
3 Months Ended
Mar. 31, 2017
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Going Concern

NOTE 13 – GOING CONCERN

 

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. For the three months ended March 31, 2017 and 2016, the Company incurred losses of $2,815,977 and $2,029,639, respectively, and as of March 31, 2017 had a total shareholders’ deficit of $10,855,112. These circumstances raise substantial doubt about the Company's ability to continue as a going concern. The Company's ability to continue as a going concern is dependent on its ability to raise the additional capital to meet short and long-term operating requirements. Management is continuing to pursue external Financing alternatives to improve the Company's working capital position however additional financing may not be available upon acceptable terms, or at all. If the Company is unable to obtain the necessary capital, the Company may have to cease operations.

XML 28 R19.htm IDEA: XBRL DOCUMENT v3.19.1
Summary of Significant Accounting Policies (Policies)
3 Months Ended
Mar. 31, 2017
Accounting Policies [Abstract]  
Accounting Estimates

Accounting Estimates

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to use estimates and assumptions which affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from those estimates.

Principles of Consolidation

Principles of Consolidation

 

We evaluate the need to consolidate affiliates based on standards set forth in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation. In determining whether we have a controlling interest in an affiliate and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions, contractual and substantive participating rights of the limited partners and shareholders, as well as whether the entity is a variable interest entity for which we are the primary beneficiary. The accompanying consolidated financial statements include the accounts of Talon Real Estate Holding Corp. (“TREHC”) and Talon OP, our Operating Partnership, and all subsidiaries in which it maintains a controlling interest. Talon OP also consolidates 5130 LLC, an entity in which it has a 49% ownership interest, based on its ability to control the operating and financial decisions of 5130 LLC. All significant intercompany balances have been eliminated in consolidation.

Cash

Cash

 

The Company considers short-term investments with original maturities of 90 days or less to be cash equivalents. The Company believes it is not exposed to any significant credit risk on cash.

Restricted Escrows and Reserves

Restricted Escrows and Reserves

 

The Company is required to hold cash in restricted escrow accounts for insurance, real estate taxes and a replacement reserve. The escrows are used to pay periodic charges of real estate taxes and assessments, tenant improvements, and leasing commissions. The balances in the escrow accounts were $13,995,393 and $3,001,232 as of March 31, 2017 and December 31, 2016, respectively.

Rents and other Receivables

Rents and Other Receivables

 

Rents receivable and deferred rent are recorded at their estimated net realizable value. The Company follows a policy of providing an allowance for doubtful accounts, which is based on a review of outstanding receivables, historical collection information, and existing economic conditions. The Company does not require collateral and accounts are considered past due if payment is not made on a timely basis in accordance with our credit terms. Accounts considered uncollectible are written off. Receivables have been reduced by an allowance for doubtful accounts of $129,330 as of both March 31, 2017 and December 31, 2016.

Revenue Recognition

Revenue Recognition

 

Base rental income is recognized on a straight-line basis over the terms of the related lease agreement, inclusive of leases which provide for scheduled rent increases or rent concessions. Differences between rent income earned and base rent amounts due per the respective lease agreements are credited or charged to deferred rent revenue or deferred rent receivable as applicable. When the Company enters into lease modifications or extensions with current tenants, the deferred rent at the time of the extension is amortized over the remaining term of the lease, and the revised terms are considered a new lease.

 

Tenant recoveries related to reimbursement of real estate taxes, insurance, repairs and maintenance and other operating expenses are billed monthly based on current year estimated operating costs for applicable expenses. An additional billing or a refund is made to tenants in the following year after actual operating expenses are determined.

Deferred Leasing Costs and Tenant Allowance

Deferred Leasing Costs and Tenant Allowance

 

Direct and indirect costs, including estimated internal costs and leasing commissions, associated with the leasing of real estate investments owned by the Company are capitalized as deferred leasing costs and amortized on a straight-line basis over the term of the related lease as amortization expense. Unamortized costs are charged to expense upon the early termination of the lease. Costs associated with unsuccessful leasing opportunities are expensed.

 

In leasing tenant space, the Company may provide funding to the lessee through a tenant allowance. In accounting for a tenant allowance, the Company determines whether the allowance represents funding for the construction of leasehold improvements and evaluates the ownership, for accounting purposes, of such improvements. If the Company is considered the owner of the leasehold improvements for accounting purposes, the Company capitalizes the amount of the tenant allowance as building improvements and depreciates it over the shorter of the useful life of the leasehold improvements or the related lease term. For tenant allowances committed at lease inception and recorded as building improvements but not yet performed or completed, the corresponding liability will be recorded as tenant improvement allowance payables. If the tenant allowance represents a payment for other than funding leasehold improvements, or in the event the Company is not considered the owner of the improvements, for accounting purposes, the tenant allowance is considered to be a lease incentive and is capitalized as a deferred leasing cost and is amortized over the lease term as a reduction of rental revenue on a straight-line basis.

 

The Company had amortization expense for tenant improvements of $259,782 and $269,475 for the three-months ended March 31, 2017 and 2016, respectively. The Company had amortization expense for leasing costs of $76,926 and $73,622 for the three-months ended March 31, 2017 and 2016, respectively. The Company had accumulated amortization for tenant allowances of $3,140,513 as of March 31, 2017 and $2,880,732 as of December 31, 2016.

Deferred Financing Costs

Deferred Financing Costs

 

Costs incurred in connection with obtaining financing are netted against notes payable and are being amortized using the effective interest method over the financing term and are included in interest expense. The Company had amortization expense of $923,463 for the three months ended March 31, 2017, and $204,752 for the three months ended March 31, 2016. Included in amortization expense for the three months ended March 31, 2017 is the write-off of unamortized deferred financing costs of $137,254 due to the refinancing of debt secured by the 180 East 5th Street property owned by Talon First Trust, LLC.

Real Estate Property and Fixed Assets

Real Estate Property and Fixed Assets

 

Investment in real estate and fixed assets with a useful life of longer than one year are carried at cost less accumulated depreciation and amortization. Property such as land, building and improvements includes cost of acquisitions, development, and construction and tenant allowances and improvements. We allocate the cost of an acquisition, including the assumption of liability, to the acquired tangible assets (including land, buildings and personal property) determined by valuing the property as if it were vacant, and identifiable intangibles based on their relative fair values. Acquisitions of real estate are recorded based upon preliminary allocations of the purchase price to management’s assessment of the fair value of tangible and intangible assets and any assumed liabilities acquired which are subject to adjustment as additional information is obtained up to one year after the date of acquisition. Management’s fair value assessment includes the use of readily accepted fair value techniques such as discounted cash flow analysis and comparable sales analysis including management’s reliance on independent market analysis.

 

Depreciation is provided using the straight-line method over the estimated useful life of the assets for furniture and equipment, buildings and land improvements, and the term of the lease for tenant improvements. The estimated useful lives being used are as follows:

 

Land Improvements 3-15 years
Buildings 25-30 years
Building Improvements 10-20 years
Tenant Improvements 1-12 years
Furniture and Equipment 3 years

 

Repair and maintenance costs are expensed as incurred, whereas expenditures that improve or extend the service lives of assets are capitalized. Disposal and abandonment of improvements are recognized at occurrence as a charge to depreciation.

Intangible Assets or Liabilities

Intangible Assets and Liabilities

 

Upon acquisitions of real estate, the Company assesses the fair value of acquired tangible assets and any significant intangible assets and liabilities (such as above- and below-market leases and value of acquired in-place leases), and any assumed liabilities, and allocates the purchase price based on these fair value assessments. The Company records intangible assets and liabilities acquired at their estimated fair value apart from goodwill for acquisitions of real estate. The Company amortizes identified intangible assets and liabilities based on the period over which the assets and liabilities are expected to affect the future cash flows of the real estate property acquired. Lease intangibles (such as in-place or above- and below-market leases) are amortized over the term of the related lease. Above and below-market leases are amortized as a reduction in (addition to) rent revenue. The Company amortized $45,220 as a net reduction in rent revenue for above and below-market leases for the three months ended March 31, 2017, and $48,267 for the three months ended March 31, 2016. Amortization of other intangibles is recorded in depreciation and amortization expense.

Impairment of Long-Lived Assets

Impairment of Long-Lived Assets

 

Long-lived assets, such as real estate property, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. An impairment loss would be recognized when the estimated future cash flows from the use and eventual disposition of the asset are less than the carrying amount of that asset. The Company did not recognize any impairment losses for either of the three months ended March 31, 2017 or 2016.

Income Taxes

Income Taxes

 

The Company accounts for income taxes under FASB ASC 740-10-30 which results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the book carrying amounts and the tax basis of assets and liabilities. Deferred income tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the temporary differences and carry forwards are expected to reverse. Accounting standards require the consideration of a valuation allowance for deferred tax assets if it is “more likely than not” that some component or all of the benefits of deferred tax assets will not be realized.

 

The Company's policy of accounting for uncertain tax positions is to recognize the tax effects from an uncertain tax position in the financial statements, only if the position is more likely than not to be sustained on audit, based on the technical merits of the position. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized, upon ultimate settlement with the relevant tax authority. The Company has examined the tax positions taken in its tax returns and determined that there are no uncertain tax positions. As a result, the Company has recorded no uncertain tax liabilities in its consolidated balance sheet.

 

The Company is no longer subject to U.S. federal, state or local income tax examinations by tax authorities for the years before 2013. The Company is not currently under examination by any taxing jurisdiction. In the event of any future tax assessments, the Company has elected to record the income tax penalties as general and administrative expense and any related interest as interest expense in the Company's consolidated statements of operations.

Stock-based Compensation

Stock-based Compensation

 

The Company has granted restricted stock to employees under an approved employee equity incentive plan and to Directors under a director compensation plan. Granted shares are considered issued and outstanding as of the date of the grants. Stock-based compensation is expensed on a straight-line basis over the vesting period and is valued at the fair value on the date of the grant. The Company has recognized $55,740 and $38,285 of compensation expense for the three months ended March 31, 2017 and 2016, respectively.

 

The Company may also issue common stock in exchange for goods or services of non-employees. These shares are either fully vested at date of grant or vest over a certain period during which services are provided. The Company expenses the fair market value of the services over the period in which they are received.

Noncontrolling Interest

Non-controlling Interest

 

Interests in the Operating Partnership held by limited partners are represented by partnership common units of the Operating Partnership. The Company's interest in the Operating Partnership was approximately 67% and 65% of the common units of the Operating Partnership as of March 31, 2017 and December 31, 2016, respectively. The Operating Partnership’s income is allocated to holders of units based upon the ratio of their holdings to the total units outstanding during the period. Capital contributions, distributions, syndication costs, and profits and losses are allocated to non-controlling interests in accordance with the terms of the Operating Partnership agreement.

 

The portion of membership interests in 5130 LLC not held by Talon OP were reported as non-controlling interest. Capital contributions, distributions, and profits and losses are allocated to the non-controlling interest based on membership percentages and terms of the operating agreement.

Net Income (Loss) or Earnings Per Share

Net Income (Loss) or Earnings Per Share

 

Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average common and potential dilutive common shares outstanding in accordance with the treasury stock method.

 

Given that the Company has incurred operating losses for all periods presented, diluted earnings per share is not presented. The weighted average outstanding shares used in the basic earnings per share computation is 18,945,481 and 16,788,586 for the three months ended March 31, 2017 and 2016 respectively.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This new standard will eliminate all industry-specific guidance and replace all current U.S. GAAP guidance on the topic. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. Lease contracts are specifically excluded from the new accounting guidance.  This guidance will be effective for the Company beginning January 1, 2018 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. Adoption had no material impact on the Company’s consolidated financial statements.

 

In April 2015, the FASB issued ASU No. 2015-03 Interest—Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs.   The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update.  The Company adopted the amendments in this update effective January 1, 2016. Adoption did not have a material impact on the financial statements.

 

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15—Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 provides guidance for eight specific cash flow issues with respect to how cash receipts and cash payments are classified in the statements of cash flows, with the objective of reducing diversity in practice. The effective date for ASU 2016-15 is for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. Adoption of the ASU had no material impact on the Company’s financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40).  The amendments in this Update provide guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures.  The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The Company has adopted this amendment in this update effective for the current fiscal year. (see Note 13).

 

In March 2016, the FASB issued ASU 2016-09—Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 modifies the accounting for share-

based payment awards, including income tax consequences, classification of awards as equity or liabilities, and classification on the statement of cash flows. The effective date for ASU 2016-09 is for annual periods beginning after December 15, 2016, and interim periods within those fiscal years. The adoption of this standard is not expected to have a material impact on the Company’s business, financial position, results of operations or liquidity.

 

During February 2016, FASB issued ASU No. 2016-02, “Leases.” ASU No. 2016-02 was issued to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset (as defined). ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with earlier application permitted. Upon adoption, the lessee will apply the new standard retrospectively to all periods presented or retrospectively using a cumulative effect adjustment in the year of adoption. The adoption of this Standard did not have a material impact on the Company’s financial statements.

 

In March 2016, the FASB issued ASU 2016-08 – “Revenue from Contracts with Customers: Principal versus Agent Considerations.” The amendments of this standard are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The effective date for ASU 2016-08 is the same as the effective date for ASU 2014-09 and ASU 2015-14. Adoption of this Standard did not have a material impact on The Company’s financial statements.

 

In January 2017, the FASB issued ASU 2017-01 – “Business Combinations (Topic 805): Clarifying the Definition of a Business.” The amendment is intended to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The effective date for ASU 2017-01 is for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted the new guidance effective January 1, 2018 and the guidance resulted in acquisitions of operating properties being accounted for as asset acquisitions instead of business combinations. The adoption of this guidance changed the Company’s accounting for the transaction costs for acquisitions of operating properties such that transaction costs are capitalized as part of the purchase price of the acquisition instead of being expensed as acquisition-related expenses. The ASU is required to be applied prospectively.

XML 29 R20.htm IDEA: XBRL DOCUMENT v3.19.1
Summary of Significant Accounting Policies (Tables)
3 Months Ended
Mar. 31, 2017
Accounting Policies [Abstract]  
Schedule of Real Estate Property and Fixed Assets

The estimated useful lives being used are as follows:

 

Land Improvements 3-15 years
Buildings 25-30 years
Building Improvements 10-20 years
Tenant Improvements 1-12 years
Furniture and Equipment 3 years
XML 30 R21.htm IDEA: XBRL DOCUMENT v3.19.1
Tenant Leases (Tables)
3 Months Ended
Mar. 31, 2017
Leases [Abstract]  
Schedule of Future Minimum Rental Payments

The Company has the following future minimum base rentals on non-cancellable leases, including leases entered into subsequent to March 31, 2017:

 

2017 (remaining 9 months)  $5,264,839 
2018   6,927,823 
2019   6,207,780 
2020   3,112,572 
2021   1,728,134 
Thereafter   10,851,438 
  Total  $34,092,586 
XML 31 R22.htm IDEA: XBRL DOCUMENT v3.19.1
Notes Payable (Tables)
3 Months Ended
Mar. 31, 2017
Debt Disclosure [Abstract]  
Schedule of Notes Payable

The following table details the allocation of the proceeds from the January 2017 Gamma Loan:

 

July 14 Note payoff  $29,354,774 
Financing costs   1,032,000 
Closing costs   2,012,869 
Gamma Loan escrows and reserves     
Interest reserve   5,289,000 
TI Escrow   2,000,000 
Shell work reserves   884,211 
Basement fireproof reserve   100,000 
Tax and insurance reserve   246,517 
TI allowance escrow (Note 7)   5,639,752 
Redemption of preferred units (Note 10)   3,050,000 
Satisfaction of TI invoices and mechanics liens   1,990,877 
   $51,600,000 
Schedule of Maturities of Notes Payable

At March 31, 2017, The Company is required to make the following principal payments on our outstanding notes payable for each of the succeeding fiscal years as follows:

 

   Amount
2017 (remaining 9 months)  $9,344,567 
2018   54,524,889 
2019   10,534,257 
   $74,403,713 
XML 32 R23.htm IDEA: XBRL DOCUMENT v3.19.1
Intangible Assets and Liabilities (Tables)
3 Months Ended
Mar. 31, 2017
Goodwill and Intangible Assets Disclosure [Abstract]  
Schedule of Intangible Assets

The Company's identified intangible assets and liabilities at March 31, 2017 and December 31, 2016 were as follows:

 

  

March 31, 2017

 

December 31, 2016

Identified intangible assets:          
In-place leases  $10,078,055   $10,078,055 
Above-market leases   1,832,939    1,832,939 
Accumulated amortization   (7,011,661)   (6,445,391)
Net carrying amount  $4,899,333   $5,465,603 

 

   March 31, 2017  December 31, 2016
Identified intangible liabilities:          
Below-market leases  $507,746   $507,746 
Accumulated amortization   (386,005)   (357,108)
Net carrying amount  $121,741   $150,638 
Schedule of Future Amortization Expense

The estimated annual amortization of acquired intangible assets and liabilities for each of the five succeeding fiscal years is as follows:

 

Years ending December 31,  Assets  Liabilities
2017 (remaining 9 months)  $1,681,233   $84,952 
2018   1,654,921    36,789 
2019   1,175,158    —   
2020   388,021    —   
   $4,899,333   $121,741 
XML 33 R24.htm IDEA: XBRL DOCUMENT v3.19.1
Subsequent Events (Tables)
3 Months Ended
Mar. 31, 2017
Disclosure Subsequent Events Table Abstract  
Schedule of Pro Forma Balance Sheet

Talon First Trust LLC (ft)

Pro Balance Sheet

 

   March 31, 2017  December 31, 2016
Assets      
       
 Cash          
 BMO   1,110    —   
 Talon First Trust, LLC Operating   (995)   (33,059)
 Talon First Trust, LLC Property   —      53 
 Talon First Trust, LLC Lockbox   5,000    67,821 
 Talon First Trust, Operating AB   (76,576)   —   
 Talon Management Services AB   38,555    —   
  Total Cash   (32,906)   34,815 
           
 Escrow          
 Real Estate Tax Escrow   456,361    196,401 
 Property Insurance Escrow   36,672    81,836 
 Replacement Reserve Escrow   —      100,839 
 Interest Reserve Escrow   4,826,434    —   
 General Escrow   987,211    —   
 TI & Commission Escrow   7,331,070    2,397,502 
  Total Escrow   13,637,748    2,776,579 
           
 Receivables          
 Tenant Receivable   320,915    102,775 
 Due From Affiliates   (25,000)   —   
  Total Receivables   295,915    102,775 
           
 Fixed Assets          
 Building   21,258,346    21,258,346 
 Accum Depr - Building   (1,948,682)   (1,771,529)
 Building Improvements   1,272,545    1,272,545 
 Accum Depr - Building Improvements   (318,361)   (285,352)
 Tenant Improvements   12,394,469    6,754,717 
 Accum Depr - Tenant Improvements   (2,927,127)   (2,667,345)
 Land   3,000,000    3,000,000 
 Land Improvements   137,447    137,447 
 Accum Depr - Land Improvements   (4,582)   (2,291)
  Total Fixed Assets   32,864,056    27,696,538 

 

Talon First Trust LLC (ft)

Pro Balance Sheet (continued)

 

Other Assets      
  Deposits Paid   15,000    15,000 
 Intangible Assets   9,091,055    9,091,055 
 Intangible Assets - Above Market   1,832,939    1,832,939 
 Intangible Assets - Below Market   (507,746)   (507,746)
 Accum Amort - Intangible Assets   (5,463,132)   (5,024,045)
 Accum Amort - Intangible Assets - Above   (947,131)   (873,014)
 Accum Amort - Intangible Assets - Below   386,005    357,108 
 Leasing Costs   3,063,156    2,754,474 
 Accum Amort - Leasing Costs   (845,388)   (772,433)
 Deferred Leasing Incentives   80,187    80,187 
 Accum Amort - Leasing Incentives   (62,978)   (59,007)
 Prepaid Insurance   16,669    41,673 
 Other Prepaid Expenses   300    300 
 Deferred Rent   (92,300)   (112,504)
  Total Other Assets   6,566,636    6,823,988 
           
   Total Assets   53,331,449    37,434,695 
           
 Liabilities_Capital          
           
 Liabilities          
           
 Accounts Payable & Accruals          
 Prepaid Rent   65,735    71,745 
 Tenant Deposits   22,696    22,696 
 Great Hall - Deposits   500    500 
 Accounts Payable (System)   2,128,733    4,268,679 
 Tenant Improvement Allowance   5,639,752    —   
 Leasing Incentives Payable   2,050    2,050 
 Other Payable   189,549    —   
 Accrued Interest   474,938    274,592 
 Accrued Real Estate Taxes   316,894    —   
 Accrued RE Taxes - Special Assessments   771,370    771,370 
 Accrued Payroll   13,548    —   
  Total Accounts Payable & Accruals   9,625,765    5,411,632 
           
 Notes Payable          
 Other Notes   1,563,485    1,330,800 
 Mortgage - 1st   51,600,000    32,000,000 
  Total Notes Payable   53,163,485    33,330,800 
 Financing Costs   (3,070,315)   (1,087,893)
 Accum Amort - Financing Costs   589,456    874,180 
 Preferred OP Capital - 6%   —      3,000,000 
  Total Liabilities   60,308,391    41,528,719 
           
 Capital          
 Operating Partnership Capital   5,000,000    5,000,000 
 Intra Company Transfer   (404,577)   209,476 
 Retained Earnings   (2,193,865)   (4,146,447)
 Prior Retained Earnings   (9,378,500)   (5,157,053)
  Total Capital   (6,976,942)   (4,094,024)
           
   Total Liabilities_Capital   53,331,449    37,434,695 
Schedule of Pro Forma Statement of Operations

Talon First Trust LLC (ft)

Pro Forma Statement of Operations

For the Three Months Ending March 31, 2017

 

   March 31, 2017
Income   
Rental Income   
        Rent Revenue   1,334,296 
        CAM Income   462,602 
        Storage   10,725 
        Utility Income   20,057 
        RE Tax Income   73,271 
            Gross Rental Income   1,900,954 
      
        GAAP Straightline Rent Adjustment   20,203 
        Amort - Intangible Assets - Above   (74,117)
        Amort - Intangible Assets - Below   28,897 
        Amort - Leasing Incentives   (3,971)
            Net Rental Income   1,871,966 
      
        Interest Income   240 
        Late Fee Income   200 
        Other Income   8,423 
        Great Hall Income   9,153 
        Direct Tenant Reimbursable Income   3,572 
      
                Total Income   1,893,558 
      
 Expenses     
      
 Management Company Expenses     
      
    Professional Fees     
        Legal   24,470 
            Total Professional Fees   24,470 
      
    Staff Costs - Admin     
        Admin Payroll Fee   337 
        Bank Service Charges   —   
        Filing Fees   —   
        Due Diligence Lost Deals   —   
            Total General & Administrative   24,807 
      
    Direct Tenant Reimbursable   —   
            Total Management Expenses   24,807 

 

Talon First Trust LLC (ft)

Pro Forma Statement of Operations

For the Three Months Ending March 31, 2017 (continued)

 

Owner Expenses   
        Bad Debt Expense     
        Fees   180,300 
        Taxes   —   
        Owner Utilities   —   
            Total Owner Expenses   180,300 
      
    Common Area Expenses     
      
    Building Operations     
        Alley Expense   —   
        Building Repairs   (2,435)
        Building Supplies   984 
        Connectivity - Cable, Internet, Phones   6,956 
        Electrical   2,619 
        Elevator - Contract   10,555 
        Elevator - Other   —   
        Food Service   9,999 
        Garbage & Recycling   5,870 
        HVAC - Contract   11,600 
        HVAC - Other   1,889 
        Janitorial - Contract   145,491 
        Janitorial - Supplies   16,520 
        License & Permits   —   
        Locks & Hardware   —   
        Maintenance - Payroll   35,294 
        Parking   14,310 
        Payroll Taxes - Operations   4,514 
        Pest Control   285 
        Plant Service   3,134 
        Plumbing   1,635 
        Security   9,252 
        Security - Payroll   41,060 
        Skyway   4,605 
        Snow Removal   —   
        Sprinkler & Fire Protection   5,595 
        Tenant Events   —   
        Uniforms   327 
        Total Building Operations   330,059 

 

Talon First Trust LLC (ft)

Pro Forma Statement of Operations

For the Three Months Ending March 31, 2017 (continued)

 

Utilities   
        Electricity   222,435 
        Gas   40,141 
        Water & Sewer   9,503 
        Total Utilities   272,080 
      
    Great Hall Expense   20,231 
      
    Real Estate Taxes   316,894 
    Insurance   25,004 
    Health Insurance - Property   1,609 
    Management Fee   76,038 
    Professional Fees - Property   66,533 
      
    Administrative     
        Administrative - Property   25,443 
        Bank Charges   4,386 
        Legal-property   950 
        Dues & Subscriptions - Property   558 
        Advertising/Marketing - Property   590 
        Postage-Site   496 
        Meals - Property   1,540 
        Travel - Property   72 
        Office Supplies - Property   996 
        Total Administrative   35,031 
      
    Total Common Area Expenses   1,143,480 
    Total Expenses   1,348,586 
    Net Operating Income   544,972 
      
    Interest Expense     
        Interest - Operating Loan   (26,970)
        Interest - 1st Mortgage   1,070,370 
        Interest - Other   82,653 
            Total Interest Expense   1,126,054 
      
    Depreciation/Amortization Exp     
        Depr - Building   177,153 
        Depr - Building Improvements   33,009 
        Depr - Tenant Improvements   259,782 
        Depr - Land Improvements   2,291 
        Amort - Financing Costs   703,506 
        Amort - Intangible Assets   439,088 
        Amort - Leasing Costs   72,954 
            Total Depreciation/Amortization Expense   1,687,783 
      
    NET INCOME   (2,268,865)
XML 34 R25.htm IDEA: XBRL DOCUMENT v3.19.1
Organization and Basis of Presentation (Details Narrative)
Mar. 31, 2017
Dec. 31, 2016
Mar. 31, 2015
Talon OP, L.P.      
Parent ownership percentage, approximate 65.00% 65.00%  
5130 Industrial Street, LLC      
Noncontrolling ownership percentage   100.00% 100.00%
Talon Bren Road, LLC      
Noncontrolling ownership percentage   100.00% 100.00%
Talon First Trust, LLC      
Noncontrolling ownership percentage   100.00% 100.00%
Talon Real Estate, LLC      
Noncontrolling ownership percentage   100.00% 100.00%
XML 35 R26.htm IDEA: XBRL DOCUMENT v3.19.1
Investment in Real Estate Properties and Entities (Details Narrative) - ft²
3 Months Ended
Mar. 31, 2017
Dec. 31, 2016
Talon First Trust, LLC    
Rentable area   656,875
Rentable office space currently occupied, percent 60.00%  
Talon Bren Road, LLC    
Rentable area   164,472
Rentable office space currently occupied, percent 100.00%  
5130 Industrial Street, LLC    
Rentable area   171,639
Rentable office space currently occupied, percent 85.00%  
XML 36 R27.htm IDEA: XBRL DOCUMENT v3.19.1
Summary of Significant Accounting Policies (Details)
3 Months Ended
Mar. 31, 2017
Land Improvements | Minimum [Member]  
Property, Plant and Equipment [Line Items]  
Property, Improvements and Equipment, estimated useful lives 3 years
Land Improvements | Maximum [Member]  
Property, Plant and Equipment [Line Items]  
Property, Improvements and Equipment, estimated useful lives 15 years
Buildings | Minimum [Member]  
Property, Plant and Equipment [Line Items]  
Property, Improvements and Equipment, estimated useful lives 25 years
Buildings | Maximum [Member]  
Property, Plant and Equipment [Line Items]  
Property, Improvements and Equipment, estimated useful lives 30 years
Building Improvements | Minimum [Member]  
Property, Plant and Equipment [Line Items]  
Property, Improvements and Equipment, estimated useful lives 10 years
Building Improvements | Maximum [Member]  
Property, Plant and Equipment [Line Items]  
Property, Improvements and Equipment, estimated useful lives 20 years
Tenant Improvements | Minimum [Member]  
Property, Plant and Equipment [Line Items]  
Property, Improvements and Equipment, estimated useful lives 1 year
Tenant Improvements | Maximum [Member]  
Property, Plant and Equipment [Line Items]  
Property, Improvements and Equipment, estimated useful lives 12 years
Furniture and Equipment  
Property, Plant and Equipment [Line Items]  
Property, Improvements and Equipment, estimated useful lives 3 years
XML 37 R28.htm IDEA: XBRL DOCUMENT v3.19.1
Summary of Significant Accounting Policies (Details Narrative) - USD ($)
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Dec. 31, 2016
Restricted Escrows and Reserves      
Restricted escrows & reserves $ 13,995,393   $ 3,001,232
Rents Receivable      
Allowance for doubtful accounts 129,330   129,330
Deferred Leasing Costs and Tenant Allowance      
Amortization expense, tenant improvements 259,782 $ 269,475  
Amortization expense, deferred leasing costs 76,926 73,622  
Accumulated amortization expense for tenant allowances 3,140,513   $ 2,880,732
Deferred Financing Costs      
Amortization expense, deferred financing costs 923,463 204,752  
Stock-Based Compensation      
Stock-based compensation expense 55,740 38,285  
Intangible Assets or Liabilities      
Amortization of above and below market-leases $ 45,220 $ 48,267  
XML 38 R29.htm IDEA: XBRL DOCUMENT v3.19.1
Tenant Leases (Details)
Dec. 31, 2016
USD ($)
Operating Leases Future Minimum Payments  
2017 $ 5,264,839
2018 6,927,823
2019 6,207,780
2020 3,112,572
2021 1,728,134
Thereafter 10,851,438
Total operating leases, future minimum payments $ 34,092,586
XML 39 R30.htm IDEA: XBRL DOCUMENT v3.19.1
Tenant Leases (Details Narrative)
Dec. 31, 2016
USD ($)
Leases [Abstract]  
Lease payments for significant tenant that has not occupied space yet, executed lease agreement $ 15,832,430
XML 40 R31.htm IDEA: XBRL DOCUMENT v3.19.1
Notes Payable (Details)
Dec. 31, 2016
USD ($)
Debt Disclosure [Abstract]  
2017 $ 9,344,567
2018 54,524,889
2019 10,534,257
Total $ 74,403,713
XML 41 R32.htm IDEA: XBRL DOCUMENT v3.19.1
Notes Payable (Details Narrative) - USD ($)
1 Months Ended 3 Months Ended
May 19, 2015
Jan. 12, 2015
May 29, 2014
Nov. 30, 2015
Feb. 28, 2015
Jul. 31, 2014
May 31, 2014
Mar. 31, 2007
Mar. 31, 2017
Jul. 21, 2017
May 19, 2017
Apr. 30, 2017
Dec. 31, 2016
Note payable, restrictive covenant                 The Company’s mortgage assumed by Talon Bren Road, LLC in connection with the acquisition of the property at Bren Road includes a restrictive covenant that requires Talon Bren Road, LLC to maintain a minimum debt service coverage (“DSCR”) before distributions of 1.35:1.00 and after distributions of 1:05:1.00 as of the last day of each calendar year.        
Note payable, covenant compliance                 As of December 31, 2015, Talon Bren Road LLC was out of compliance with the DSCR test. An amendment to the loan agreement as well as waiver of the DSCR default for the December 31, 2015 test date was subsequently executed. The loan agreement was amended to include a minimum Senior Debt Service Coverage Ratio (pre-distributions) of not less than 1.50:1.00. It also amended and restated the minimum Debt Service Coverage Ratio before distributions of not less than 1.20:1.00 as of the last day of each calendar year commencing after December 31, 2015.        
Notes Payable                 $ 73,204,216       $ 52,640,239
Unsecured Notes Payable [Member]                          
Notes Payable       $ 481,934         481,934       1,008,908
Notes Payable, Interest Rate, Per Annum       10.00%                  
Curtis Marks [Member]                          
Notes Payable                 500,000     $ 897,000 500,000
Bren Road, LLC [Member] | June 2014 Unsecured Loan [Member]                          
Notes Payable     $ 370,000           336,797 $ 594,176     309,472
Notes Payable, Interest Rate, Per Annum     8.00%                    
Bren Road, LLC [Member] | Jan 2015 Unsecured Promissory Notes [Member]                          
Notes Payable   $ 500,000             1,000,000   $ 1,476,498   1,000,000
Notes Payable, Interest Rate, Per Annum   20.00%                      
Bren Road, LLC [Member] | May 2015 Unsecured Promissory Notes [Member]                          
Notes Payable $ 500,000               1,000,000   $ 1,476,498   1,000,000
Notes Payable, Interest Rate, Per Annum 20.00%                        
5130 Industrial Street, LLC [Member]                          
Notes Payable               $ 4,750,000          
5130 Industrial Street, LLC [Member] | Note Payable One [Member]                          
Notes Payable               $ 4,450,000 4,049,498       3,981,740
Notes Payable, Interest Rate, Per Annum               6.05%          
Notes Payable, Maturity Date               Apr. 08, 2017          
5130 Industrial Street, LLC [Member] | Note Payable Two [Member]                          
Notes Payable               $ 300,000 294,007       292,941
Notes Payable, Interest Rate, Per Annum               12.75%          
Notes Payable, Maturity Date               Apr. 08, 2017          
Talon Bren Road, LLC [Member] | Notes Payable [Member]                          
Notes Payable             $ 11,500,000   11,123,715       10,858,648
Notes Payable, Interest Rate, Per Annum             4.65%            
Talon Bren Road, LLC [Member] | Notes Payable [Member]                          
Notes Payable         $ 2,000,000       2,000,000       2,000,000
Notes Payable, Interest Rate, Per Annum         16.00%                
Talon First Trust, LLC | Notes Payable [Member]                          
Notes Payable           $ 32,000,000     $ 32,000,000       $ 32,000,000
Notes Payable, Interest Rate, Per Annum           6.04%              
XML 42 R33.htm IDEA: XBRL DOCUMENT v3.19.1
Restricted Escrows and Reserves (Details Narrative) - USD ($)
Mar. 31, 2017
Dec. 31, 2016
Cash and Cash Equivalents [Abstract]    
Total restricted cash and investments $ 13,995,393 $ 3,001,232
XML 43 R34.htm IDEA: XBRL DOCUMENT v3.19.1
Commitments and Contingencies (Details Narrative) - USD ($)
3 Months Ended
Jun. 07, 2013
Mar. 31, 2017
Mar. 31, 2016
Commitments and Contingencies Disclosure [Abstract]      
Commitment, description On June 7, 2013, Talon RE, entered into a contribution agreement with the remaining interest holder of 5130 LLC pursuant to which it will acquire the remaining 51% interest in 5130 LLC in exchange for 2,820,810 shares of our common stock, subject to receiving consent to the transfer from 5130 LLC's lender.    
Rent expense   $ 22,761 $ 26,339
XML 44 R35.htm IDEA: XBRL DOCUMENT v3.19.1
Restricted Stock (Details Narrative) - 2013 Equity Incentive Plan - USD ($)
3 Months Ended
Jun. 07, 2013
Mar. 31, 2017
Equity Incentive Plan, description The 2013 Equity Incentive Plan dated June 7, 2013 allows up to 1,500,000 shares to be issued and granted to employees, non-employee directors, and consultants and automatically increases on January 1 of each year by three percent of the outstanding shares of common stock as of December 31 of the immediately preceding year. Non-Employee Director Compensation Plan allows shares of restricted common stock to be granted to board members and is included under the Plan.  
Number of shares available for grant 1,500,000  
Vesting terms Employee awards granted in 2013 vest monthly over 36 months provided the recipient remains an employee or consultant of the Company. Awards granted in 2014 vest either immediately, monthly over a three year period, or monthly over a five year period. Awards granted in June 2016 vest either immediately or in April 2017. The Non-Employee Director Compensation Plan allows shares of restricted common stock to be granted to board members and is included under the Plan. The 2013 board member awards vest one-third of the shares on the date of grant, one-third on January 1 of the year following the date of grant, and one-third on January 1 of the second year following the date of grant, provided the recipient remains a member of the board as of the vesting date. The 2014 awards vested immediately in March of 2014 and the 2016 awards vested half in June 2016 with the remainder to vest in April 2017.  
Restricted Stock    
Compensation expense   $ 267,334
Compensation expense expected to be recognized, weighted average period   32 months
Restricted Stock | Employees    
Shares granted   1,093,759
Restricted Stock | Director    
Shares granted   480,000
XML 45 R36.htm IDEA: XBRL DOCUMENT v3.19.1
Intangible Assets (Details) - USD ($)
Mar. 31, 2017
Dec. 31, 2016
Finite-Lived Intangible Assets [Line Items]    
Net carrying amount $ 4,899,333 $ 5,465,603
Finite-Lived Intangible Assets    
Finite-Lived Intangible Assets [Line Items]    
In-place leases 10,078,055 10,078,055
Above-market leases 1,832,939 1,832,939
Accumulated amortization (7,011,661) (6,445,391)
Net carrying amount 4,899,333 5,465,603
Finite-Lived Intangible Liabilities    
Finite-Lived Intangible Assets [Line Items]    
Below-market leases 507,746 507,746
Accumulated amortization (386,005) (357,108)
Net carrying amount $ 121,741 $ 150,638
XML 46 R37.htm IDEA: XBRL DOCUMENT v3.19.1
Intangible Assets (Details 2) - USD ($)
Mar. 31, 2017
Dec. 31, 2016
Finite-Lived Intangible Assets, Net, Amortization Expense    
Finite-Lived Intangible Assets, Net $ 4,899,333 $ 5,465,603
Finite-Lived Intangible Assets    
Finite-Lived Intangible Assets, Net, Amortization Expense    
2017 1,681,233  
2018 1,654,921  
2019 1,175,158  
2020 388,021  
Finite-Lived Intangible Assets, Net 4,899,333 5,465,603
Finite-Lived Intangible Liabilities    
Finite-Lived Intangible Assets, Net, Amortization Expense    
2017 84,952  
2018 36,789  
2019  
2020  
Finite-Lived Intangible Assets, Net $ 121,741 $ 150,638
XML 47 R38.htm IDEA: XBRL DOCUMENT v3.19.1
Intangible Assets (Details Narrative) - USD ($)
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Above Market Leases    
Amortization of acquired assets and liabilities $ 74,117 $ 77,167
Weighted average amortization period 4 years 6 months  
Below Market Lease    
Amortization of acquired assets and liabilities $ 28,898 28,898
Weighted average amortization period 4 years 6 months  
In-Place Leases    
Amortization of acquired assets and liabilities $ 492,152 $ 495,983
Weighted average amortization period 4 years 6 months  
XML 48 R39.htm IDEA: XBRL DOCUMENT v3.19.1
Mandatorily Redeemable Preferred Operating Partnership Units (Details Narrative) - USD ($)
Jul. 02, 2014
Mar. 31, 2017
Dec. 31, 2016
Other Liabilities and Financial Instruments Subject to Mandatory Redemption [Abstract]      
Preferred units, issued 30,000    
Preferred units issued, price per unit $ 100    
Mandatorily redeemable Operating Partnership preferred units $ 3,000,000 $ 3,000,000
Preferred units, description The preferred unit holders are entitled to distributions which are cumulative from the date of issuance at a rate of 6% per annum of their liquidation preference amount of $100 per unit payable monthly to the extent of distributable proceeds. On or after July 2, 2020, the Company shall redeem the units, in whole, at the liquidation preference price of $100 per unit, plus accrued and unpaid distributions.    
XML 49 R40.htm IDEA: XBRL DOCUMENT v3.19.1
Related Party Transactions (Details Narrative) - shares
Mar. 31, 2017
Jan. 27, 2017
Dec. 31, 2016
Common Shares Issued 19,720,981   17,135,981
Gamma Real Estate Capital LLC [Member]      
Common Shares Issued   2,500,000  
XML 50 R41.htm IDEA: XBRL DOCUMENT v3.19.1
Subsequent Events (Details) - USD ($)
Mar. 31, 2017
Dec. 31, 2016
Mar. 31, 2016
Dec. 31, 2015
Cash        
Total Cash $ 88,596 $ 108,418 $ 117,791 $ 340,385
Receivables        
Total Receivables 598,515 428,176    
Fixed Assets        
Building 51,192,060 45,552,308    
Land Improvements 8,302,447 8,302,447    
Other Assets        
Total Assets 72,254,172 56,490,541    
Notes Payable        
Total Notes Payable 73,204,216 52,640,239    
Total Liabilities 83,109,284 64,621,166    
Capital        
Retained Earnings (16,102,357) (14,215,704)    
Total Capital (10,855,112) (8,130,625)    
Total Liabilities_Capital 72,254,172 56,490,541    
Pro Forma [Member]        
Cash        
BMO 1,110    
Talon First Trust, LLC Operating (995) (33,059)    
Talon First Trust, LLC Property 53    
Talon First Trust, LLC Lockbox 5,000 67,821    
Talon First Trust, Operating AB (76,576)    
Talon Management Services AB 38,555    
Total Cash (32,906) 34,815    
Escrow        
Real Estate Tax Escrow 456,361 196,401    
Property Insurance Escrow 36,672 81,836    
Replacement Reserve Escrow 100,839    
Interest Reserve Escrow 4,826,434    
General Escrow 987,211    
TI & Commission Escrow 7,331,070 2,397,502    
Total Escrow 13,637,748 2,776,579    
Receivables        
Tenant Receivable 320,915 102,775    
Due From Affiliates (25,000)    
Total Receivables 295,915 102,775    
Fixed Assets        
Building 21,258,346 21,258,346    
Accum Depr - Building (1,948,682) (1,771,529)    
Building Improvements 1,272,545 1,272,545    
Accum Depr - Building Improvements (318,361) (285,352)    
Tenant Improvements 12,394,469 6,754,717    
Accum Depr - Tenant Improvements (2,927,127) (2,667,345)    
Land 3,000,000 3,000,000    
Land Improvements 137,447 137,447    
Accum Depr - Land Improvements (4,582) (2,291)    
Total Fixed Assets 32,864,056 27,696,538    
Other Assets        
Deposits Paid 15,000 15,000    
Intangible Assets 9,091,055 9,091,055    
Intangible Assets - Above Market 1,832,939 1,832,939    
Intangible Assets - Below Market (507,746) (507,746)    
Accum Amort - Intangible Assets (5,463,132) (5,024,045)    
Accum Amort - Intangible Assets - Above (947,131) (873,014)    
Accum Amort - Intangible Assets - Below 386,005 357,108    
Leasing Costs 3,063,156 2,754,474    
Accum Amort - Leasing Costs (845,388) (772,433)    
Deferred Leasing Incentives 80,187 80,187    
Accum Amort - Leasing Incentives (62,978) (59,007)    
Prepaid Insurance 16,669 41,673    
Other Prepaid Expenses 300 300    
Deferred Rent (92,300) (112,504)    
Total Other Assets 6,566,636 6,823,988    
Total Assets 53,331,449 37,434,695    
Accounts Payable & Accruals        
Prepaid Rent 65,735 71,745    
Tenant Deposits 22,696 22,696    
Great Hall - Deposits 500 500    
Accounts Payable (System) 2,128,733 4,268,679    
Tenant Improvement Allowance 5,639,752    
Leasing Incentives Payable 2,050 2,050    
Other Payable 189,549    
Accrued Interest 474,938 274,592    
Accrued Real Estate Taxes 316,894    
Accrued RE Taxes - Special Assessments 771,370 771,370    
Accrued Payroll 13,548    
Total Accounts Payable & Accruals 9,625,765 5,411,632    
Notes Payable        
Other Notes 1,563,485 1,330,800    
Mortgage - 1st 51,600,000 32,000,000    
Total Notes Payable 53,163,485 33,330,800    
Financing Costs (3,070,315) (1,087,893)    
Accum Amort - Financing Costs 589,456 874,180    
Preferred OP Capital - 6% 3,000,000    
Total Liabilities 60,308,391 41,528,719    
Capital        
Operating Partnership Capital 5,000,000 5,000,000    
Intra Company Transfer (404,577) 209,476    
Retained Earnings (2,193,865) (4,146,447)    
Prior Retained Earnings (9,378,500) (5,157,053)    
Total Capital (6,976,942) (4,094,024)    
Total Liabilities_Capital $ 53,331,449 $ 37,434,695    
XML 51 R42.htm IDEA: XBRL DOCUMENT v3.19.1
Going Concern (Details Narrative) - USD ($)
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Dec. 31, 2016
Organization, Consolidation and Presentation of Financial Statements [Abstract]      
Net Loss $ 2,815,977 $ 2,029,639  
Shareholders' Deficit $ 10,855,112   $ 8,130,625
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