Investment Properties

9 Months Ended

Sep. 30, 2024

Investment Properties

Investment Properties

3.      Investment Properties

Investment properties consist of the following:

		September 30, 2024		December 31,
		(unaudited)		2023
Land	$	14,733,611	$	13,720,502
Site improvements		2,618,530		3,797,755
Buildings and improvements (1)		59,617,376		58,183,070
Investment properties at cost (2)		76,969,517		75,701,327
Less accumulated depreciation		11,813,732		11,123,951
Investment properties, net	$	65,155,785	$	64,577,376

(1) Includes tenant improvements (both those acquired as part of the acquisition of the properties and those constructed after the acquisition of the properties), tenant incentives, capitalized leasing commissions and other capital costs incurred post-acquisition.

(2) Excludes intangible assets and liabilities (see Note 2, above, for a discussion of the Company’s accounting treatment of intangible assets), escrow deposits and property reserves.

The Company’s depreciation expense on investment properties was $827,469 and $2,500,529 for the three and nine months ended September 30, 2024, respectively, and $933,377 and $2,768,969 for the three and nine months ended September 30, 2023, respectively.

Capitalized Tenant Improvements

The Company carries three categories of capitalized tenant improvements on its condensed consolidated balance sheets, all of which are recorded under investment properties, net, on the Company’s condensed consolidated balance sheets. The first category is the

allocation of acquisition costs to tenant improvements that is recorded on the Company’s condensed consolidated balance sheets as of the date of the Company’s acquisition of the investment property. The second category is tenant improvement costs incurred and paid by the Company subsequent to the acquisition of the investment property.  The third category is tenant improvement costs incurred and paid by the Company subsequent to the acquisition of the investment property that are considered to be lease incentives under ASC 842.  All three categories are recorded as a component of investment properties on the Company’s condensed consolidated balance sheets.  

Depreciation expense on the allocation of acquisition costs to tenant improvements and tenant improvement costs incurred and paid by the Company subsequent to the acquisition of the investment property are depreciated on a straight-line basis as a component of depreciation expense on the Company’s condensed consolidated statement of operations.  Capitalized lease incentives are amortized as a reduction of rental income on a straight-line basis over the term of the respective lease.  

Details of these deferred costs, net of depreciation are as follows:

	September 30,
	2024		December 31,
	(unaudited)		2023
Capitalized tenant improvements – acquisition cost allocation, net	$	2,176,125	$	2,504,953
Capitalized tenant improvements incurred subsequent to acquisition, net		1,042,415		898,873
Capitalized tenant improvements considered to be lease incentives		27,422		—

Depreciation of capitalized tenant improvements arising from the acquisition cost allocation was $114,003 and $376,039 for the three and nine months ended September 30, 2024, respectively, and $160,546 and $499,041 for the three and nine months ended September 30, 2023, respectively. During the three and nine months ended September 30, 2024, the Company recorded $0 and $47,211, respectively, in tenant improvements arising from the acquisition of the Citibank Property.  No such additions were recorded during the three and nine months ended September 30, 2023.  During the three and nine months ended September 30, 2023, the Company wrote off capitalized tenant improvements of $0 and $8,655, respectively, associated with the tenant that abandoned its premises. No such write offs were recorded during the three and nine months ended September 30, 2024.

Depreciation of capitalized tenant improvements incurred subsequent to acquisition was $73,294 and $200,771 for the three and nine months ended September 30, 2024, respectively, and $51,158 and $125,719 for the three and nine months ended September 30, 2023, respectively.  During the three and nine months ended September 30, 2024, the Company recorded $165,361 and $344,313, respectively, in capitalized tenant improvements.  During the three and nine months ended September 30, 2023, the Company recorded $131,667 and $621,306, respectively, in capitalized tenant improvements.  

Adjustments to rental revenue related to the amortization of tenant inducements during the three and nine months ended September 30, 2024, respectively, were and $741 and $2,223 and during the three and nine months ended September 30, 2023, respectively, were $0.  During the three and nine months ended September 30, 2024, the Company recorded $0 and $29,645, respectively, in capitalized lease incentives.  During the three and nine months ended September 30, 2023, the Company recorded $0 in capitalized lease incentives.  

Capitalized Leasing Commissions

The Company carries two categories of capitalized leasing commissions on its condensed consolidated balance sheets. The first category is the allocation of acquisition costs to leasing commissions that is recorded as an intangible asset (see Note 2, above, for a discussion of the Company’s accounting treatment for intangible assets) on the Company’s condensed consolidated balance sheet as of the date of the Company’s acquisition of the investment property. The second category is leasing commissions incurred and paid by the Company subsequent to the acquisition of the investment property. These costs are carried on the Company’s condensed consolidated balance sheets under investment properties.

The Company generally records depreciation of capitalized leasing commissions on a straight-line basis over the terms of the related leases. Details of these deferred costs, net of depreciation are as follows:

	September 30, 2024		December 31,
	(unaudited)		2023
Capitalized leasing commissions, net	$	862,767	$	759,677

During the three and nine months ended September 30, 2024, the Company recorded $167,935 and $248,264, respectively, in capitalized leasing commissions. During the three and nine months ended September 30, 2023, the Company recorded $173,080 and $317,155, respectively, in capitalized leasing commissions. Depreciation on capitalized leasing commissions was $52,572 and $145,174 for the three and nine months ended September 30, 2024, respectively. Depreciation on capitalized leasing commissions was $40,736 and $108,162 for the three and nine months ended September 30, 2023, respectively. Additionally, the Company wrote off capitalized leasing commissions of $5,873 associated with a tenant that abandoned its premises during the three and nine months ended September 30, 2023. No such write offs were recorded during the three and nine months ended September 30, 2024.

Assets Held for Sale

The Company records properties as assets held for sale, and any associated mortgages payable, net, as mortgages payable, net, associated with assets held for sale, on the Company’s condensed consolidated balance sheets when management has committed to a plan to sell the assets, actively seeks a buyer for the assets, and the consummation of the sale is considered probable and is expected within one year.

During November 2023, the Company committed to a plan to sell an asset group associated with the Hanover Square Shopping Center Property that includes the land associated with the Hanover Square Shopping Center (excluding the land associated with the Hanover Square Outparcel), site improvements, building, building improvements and tenant improvements. As a result, as of December 1, 2023, the Company reclassified these assets, and the related mortgage payable, net, for the Hanover Square Shopping Center Property as assets held for sale and liabilities associated with assets held for sale, respectively. Under ASC 360, depreciation of assets held for sale is discontinued, so no further depreciation or amortization was recorded subsequent to December 1, 2023.  The Company believed that the fair value, less estimated costs to sell, exceeded the Company’s carrying cost, so the Company has not recorded any impairment of assets held for sale related to the Hanover Square Shopping Center Property for any period subsequent to December 1, 2023.  

As of September 30, 2024 and December 31, 2023, assets held for sale and liabilities associated with assets held for sale consisted of the following:

		September 30, 2024		December 31,
	(unaudited)		2023
Investment properties, net	$	—	$	9,707,154
Total assets held for sale	$	—	$	9,707,154

	September 30, 2024		December 31,
	(unaudited)		2023
Mortgages payable, net	$	—	$	9,588,888
Total liabilities associated with assets held for sale	$	—	$	9,588,888

Sale of Investment Property

On March 13, 2024, the Company sold the Hanover Square Shopping Center Property to an unrelated third party for a sale price of $13.0 million, less credits for repairs of $85,000, resulting in a gain on disposal of investment properties of $2,819,502 reported on the Company’s condensed consolidated statement of operations for the nine months ended September 30, 2024. The Company did not report any gain or loss on the disposal of investment properties for the three months ended September 30, 2024 or the three and nine months ended September 30, 2023.

The Company reports properties that are either previously disposed of or currently held for sale in continuing operations in the Company’s condensed consolidated statements of operations if the disposition, or anticipated disposition, of the assets does not represent a shift in the Company’s investment strategy. The Company’s sale of the Hanover Square Shopping Center Property does not constitute a change in the Company’s investment strategy, which continues to include retail center properties as a targeted asset class.

Operating results of the Hanover Square Shopping Center Property, which are included in continuing operations, are as follows:

	For the three months ended				For the nine months ended
	September 30,				September 30,
	2024		2023		2024		2023
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Revenue
Retail center property revenues	$	—	$	327,348	$	307,325	$	987,121
Total Revenue		—		327,348		307,325		987,121
Operating Expenses
Retail center property operating expenses		23		82,132		92,559		248,876
Bad debt expense		2,472		—		16,136		—
Depreciation and amortization		—		76,869		—		231,143
Total Operating Expenses		2,495		159,001		108,695		480,019
Gain on disposal of investment properties		—		—		2,819,502		—
Loss on extinguishment of debt		—		—		(51,837)		—
Operating (Loss) Income		(2,495)		168,347		2,966,295		507,102
Interest expense		—		169,755		129,248		516,367
Net (Loss) Income		(2,495)		(1,408)		2,837,047		(9,265)
Less: Net (loss) income attributable to Hanover Square Property noncontrolling interests		(399)		(225)		453,928		(1,482)
Less: Net (loss) income attributable to Operating Partnership noncontrolling interests		(363)		(14)		137,029		(93)
Net (Loss) Income Attributable to Medalist Common Stockholders	$	(1,733)	$	(1,169)	$	2,246,090	$	(7,690)

2024 Property Acquisitions

Acquisition of 16% noncontrolling interest in the Hanover Square Outparcel

On March 25, 2024, the Company completed the acquisition of its tenant in common partner’s 16% ownership interest in the Hanover Square Outparcel through a wholly-owned subsidiary.  The purchase price for the 16% interest in the Hanover Square Outparcel was $98,411 paid in cash.  The Company’s total investment was $100,891.  The Company incurred $2,480 of closing costs which were capitalized and added to the tangible assets acquired.  

Citibank Property

On March 28, 2024, the Company completed its acquisition of the Citibank Property, a 4,350 square foot single tenant building on 0.45 acres located in Chicago, Illinois, through a wholly-owned subsidiary, from RMP 3535 N. Central Ave., LLC.  The sole manager and member of RMP 3535 N. Central Ave., LLC is CWS BET Seattle, LP, a Delaware limited partnership, a company controlled and owned by Frank Kavanaugh, the Company’s President and Chief Executive Officer and a member of the Company’s Board of Directors.  The Citibank Property, built in 1954 and subsequently renovated, was 100% leased to Citibank, NA.  The purchase price for the Citibank Property was $2,400,000 paid through the issuance of 208,695 Operating Partnership Units at a price of $11.50 per operating partnership unit.  The Company’s total investment was $2,444,454.  The Company incurred $44,454 of closing costs which were capitalized and added to the tangible assets acquired.  

		NCI Interest in
		Hanover Square			Citibank
		Outparcel			Property			Total
Fair value of assets acquired:
Investment property	$	100,891	(a)	$	2,298,373	(a)	$	2,399,264
Lease intangibles		—			245,837	(b)		245,837
Below market leases		—			(99,756)	(b)		(99,756)
Fair value of net assets acquired	$	100,891	(b)	$	2,444,454	(c)	$	2,545,345
Purchase consideration:
Consideration paid with cash	$	100,891	(c)	$	44,454	(d)	$	145,345
Consideration paid with operating partnership units		—			2,400,000	(e)		2,400,000
Total consideration	$	100,891	(d)	$	2,444,454	(f)	$	2,545,345

NCI Interest in Hanover Square Outparcel

a. Represents the acquisition cost of the land acquired.  Closing costs were allocated and added to the fair value of the tangible assets acquired.

b. Represents the total acquisition cost of the land acquired at closing.

c. Represents cash paid for closing costs.

d. Represents the consideration paid for the acquisition cost of the assets acquired.

Citibank Property

a. Represents the fair value of the investment property acquired which includes land, buildings, site improvements and tenant improvements. The fair value was determined using the market approach, the cost approach, the income approach or a combination thereof. Closing costs were allocated and added to the fair value of the tangible assets acquired.

b. Represents the fair value of lease intangibles. Lease intangibles include leasing commissions, leases in place, below market leases and legal and marketing costs associated with replacing existing leases.

c. Represents the total fair value of assets and liabilities acquired at closing.

d. Represents cash paid for closing costs paid at closing or directly by the Company outside of closing.

e. Represents issuance of 208,695 Operating Partnership Units at $11.50 per Operating Partnership Unit. See Note 7, below.

f. Represents the consideration paid for the fair value of the assets and liabilities acquired.