UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~June~~September 30, 2023

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

For the transition period from to

Commission File Number: 001-38010

CLIPPER REALTY INC.

(Exact name of Registrant as specified in its charter)

Maryland

47-4579660

(State or other jurisdiction of incorporation or

organization)

(I.R.S. Employer Identification No.)

4611 12th Avenue, Suite 1L

Brooklyn, New York 11219

(Address of principal executive offices) (Zip Code)

(718) 438-2804

(Registrant's telephone number, including area code)

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

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, par value $0.01 per share	CLPR	New York Stock Exchange

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

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

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

Large accelerated filer ☐	Accelerated filer ☒
Non-accelerated filer ☐	Smaller reporting company ☒
	Emerging growth company ☐

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

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

As of ~~August 3,~~November 2, 2023, there were 16,063,228 shares of the Registrant’s Common Stock outstanding.

All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q for Clipper Realty Inc. (the “Company”), including, without limitation, statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” regarding the Company’s financial position, business strategy and the plans, objectives, expectations, or assumptions of management for future operations, are forward-looking statements. When used in this Quarterly Report on Form 10-Q, words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “believe,” “expect,” “intend,” “continue,” “potential,” “plan,” “goal” or other words that convey the uncertainty of future events or outcomes are intended to identify forward-looking statements, which are generally not historical in nature. These statements involve risks and uncertainties that could cause actual results to differ materially from those described in such statements. These risks, contingencies and uncertainties include, but are not limited to, the following:

These forward-looking statements speak only as of the date of this report, and the Company undertakes no obligation to revise or update these statements to reflect subsequent events or circumstances.

	June 30, 2023			December 31, 2022			September 30, 2023			December 31, 2022
	(unaudited)						(unaudited)
ASSETS
Investment in real estate
Land and improvements	$	571,988		$	540,859		$	571,988		$	540,859
Building and improvements		718,661			656,460			722,350			656,460
Tenant improvements		3,406			3,406			3,366			3,406
Furniture, fixtures and equipment		13,062			12,878			13,227			12,878
Real estate under development		66,361			142,287			73,303			142,287
Total investment in real estate		1,373,478			1,355,890			1,384,234			1,355,890
Accumulated depreciation		(198,825	)		(184,781	)		(206,077	)		(184,781	)
Investment in real estate, net		1,174,653			1,171,109			1,178,157			1,171,109
Cash and cash equivalents		16,342			18,152			22,450			18,152
Restricted cash		14,731			12,514			14,904			12,514
Tenant and other receivables, net of allowance for doubtful accounts of $175 and $321, respectively		5,169			5,005
Tenant and other receivables, net of allowance for doubtful accounts of $184 and $321, respectively								5,231			5,005
Deferred rent		2,546			2,573			2,508			2,573
Deferred costs and intangible assets, net		6,418			6,624			6,270			6,624
Prepaid expenses and other assets		5,960			13,654			10,239			13,654
TOTAL ASSETS	$	1,225,819		$	1,229,631		$	1,239,759		$	1,229,631

LIABILITIES AND EQUITY
Liabilities:
Notes payable, net of unamortized loan costs of $9,803 and $9,650, respectively	$	1,176,956		$	1,161,588
Notes payable, net of unamortized loan costs of $14,578 and $9,650, respectively							$	1,197,278		$	1,161,588
Accounts payable and accrued liabilities		15,319			17,094			12,954			17,094
Security deposits		8,660			7,940			8,653			7,940
Below-market leases, net		1			18			—			18
Other liabilities		5,353			5,812			7,234			5,812
TOTAL LIABILITIES		1,206,289			1,192,452			1,226,119			1,192,452
Equity:
Preferred stock, $0.01 par value; 100,000 shares authorized (including 140 shares of 12.5% Series A cumulative non-voting preferred stock), zero shares issued and outstanding		—			—			—			—
Common stock, $0.01 par value; 500,000,000 shares authorized,16,063,228 and 16,063,228 shares issued and outstanding, respectively		160			160			160			160
Additional paid-in-capital		89,127			88,829			89,302			88,829
Accumulated deficit		(81,883	)		(74,895	)		(84,290	)		(74,895	)
Total stockholders’ equity		7,404			14,094			5,172			14,094
Non-controlling interests		12,126			23,085			8,468			23,085
TOTAL EQUITY		19,530			37,179			13,640			37,179
TOTAL LIABILITIES AND EQUITY	$	1,225,819		$	1,229,631		$	1,239,759		$	1,229,631

	Number of common shares		Common stock		Additional paid-in- capital		Accumulated deficit			Total stockholders’ equity			Non- controlling interests			Total equity			Number of common shares		Common stock		Additional paid-in- capital		Accumulated deficit			Total stockholders' equity			Non- controlling interests			Total equity
Balance December 31, 2022		16,063,228	$	160	$	88,829	$	(74,895	)	$	14,094		$	23,085		$	37,179			16,063,228	$	160	$	88,829	$	(74,895	)	$	14,094		$	23,085		$	37,179
Amortization of LTIP grants		—		—		—		—			—			648			648			—		—		—		—			—			648			648
Dividends and distributions		—		—		—		(1,526	)		(1,526	)		(2,822	)		(4,348	)		—		—		—		(1,526	)		(1,526	)		(2,822	)		(4,348	)
Net loss		—		—		—		(2,687	)		(2,687	)		(4,402	)		(7,089	)		—		—		—		(2,687	)		(2,687	)		(4,402	)		(7,089	)
Reallocation of noncontrolling interests		—		—		123		—			123			(123	)		—			—		—		123		—			123			(123	)		—
Balance March 31, 2023		16,063,228	$	160	$	88,952	$	(79,108	)	$	10,004		$	16,386		$	26,390			16,063,228	$	160	$	88,952	$	(79,108	)	$	10,004		$	16,386		$	26,390
Amortization of LTIP grants		—		—		—		—			—			783			783			—		—		—		—			—			783			783
Dividends and distributions		—		—		—		(1,526	)		(1,526	)		(2,822	)		(4,348	)		—		—		—		(1,526	)		(1,526	)		(2,822	)		(4,348	)
Net loss		—		—		—		(1,249	)		(1,249	)		(2,046	)		(3,295	)		—		—		—		(1,249	)		(1,249	)		(2,046	)		(3,295	)
Reallocation of noncontrolling interests		—		—		175		—			175			(175	)		—			—		—		175		—			175			(175	)		—
Balance June 30, 2023		16,063,228	$	160	$	89,127	$	(81,883	)	$	7,404		$	12,126		$	19,530			16,063,228	$	160	$	89,127	$	(81,883	)	$	7,404		$	12,126		$	19,530
Amortization of LTIP grants																				—		—		—		—			—			783			783
Dividends and distributions																				—		—		—		(1,526	)		(1,526	)		(2,822	)		(4,348	)
Net loss																				—		—		—		(881	)		(881	)		(1,444	)		(2,325	)
Reallocation of noncontrolling interests																				—		—		175		—			175			(175	)		—
Balance September 30, 2023																				16,063,228	$	160	$	89,302	$	(84,290	)	$	5,172		$	8,468		$	13,640

	Number of common shares		Common stock		Additional paid-in- capital		Accumulated deficit			Total stockholders’ equity			Non- controlling interests			Total equity			Number of common shares		Common stock		Additional paid-in- capital		Accumulated deficit			Total stockholders' equity			Non- controlling interests			Total equity
Balance December 31, 2021		16,063,228	$	160	$	88,089	$	(61,736	)	$	26,513		$	43,436		$	69,949			16,063,228	$	160	$	88,089	$	(61,736	)	$	26,513		$	43,436		$	69,949
Cumulative-effect adjustment		—		—		—		(2,291	)		(2,291	)		(3,755	)		(6,046	)		—		—		—		(2,291	)		(2,291	)		(3,755	)		(6,046	)
Amortization of LTIP grants		—		—		—		—			—			495			495			—		—		—		—			—			495			495
Dividends and distributions		—		—		—		(1,526	)		(1,526	)		(2,662	)		(4,188	)		—		—		—		(1,526	)		(1,526	)		(2,662	)		(4,188	)
Net loss		—		—		—		(1,318	)		(1,318	)		(2,158	)		(3,476	)		—		—		—		(1,318	)		(1,318	)		(2,158	)		(3,476	)
Reallocation of noncontrolling interests		—		—		126		—			126			(126	)		—			—		—		126		—			126			(126	)		—
Balance March 31, 2022		16,063,228	$	160	$	88,215	$	(66,871	)	$	21,504		$	35,230		$	56,734			16,063,228	$	160	$	88,215	$	(66,871	)	$	21,504		$	35,230		$	56,734
Amortization of LTIP grants		—		—		—		—			—			714			714			—		—		—		—			—			714			714
Dividends and distributions		—		—		—		(1,526	)		(1,526	)		(2,747	)		(4,273	)		—		—		—		(1,526	)		(1,526	)		(2,747	)		(4,273	)
Net loss		—		—		—		(1,119	)		(1,119	)		(1,834	)		(2,953	)		—		—		—		(1,119	)		(1,119	)		(1,834	)		(2,953	)
Reallocation of noncontrolling interests		—		—		177		—			177			(177	)		—			—		—		177		—			177			(177	)		—
Balance June 30, 2022		16,063,228	$	160	$	88,392	$	(69,516	)	$	19,036		$	31,186		$	50,222			16,063,228	$	160	$	88,392	$	(69,516	)	$	19,036		$	31,186		$	50,222
Amortization of LTIP grants																				—		—		—		—			—			855			855
Dividends and distributions																				—		—		—		(1,526	)		(1,526	)		(2,780	)		(4,306	)
Net loss																				—		—		—		(1,057	)		(1,057	)		(1,731	)		(2,788	)
Reallocation of noncontrolling interests																				—		—		218		—			218			(218	)		—
Balance September 30, 2022																				16,063,228	$	160	$	88,610	$	(72,099	)	$	16,671		$	27,312		$	43,983

	Six Months Ended June 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(10,384	)	$	(6,429	)	$	(12,709	)	$	(9,217	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		14,044			13,318			21,296			20,041
Amortization of deferred financing costs		675			626			1,098			939
Amortization of deferred costs and intangible assets		292			360			441			540
Amortization of above- and below-market leases		(17	)		(17	)		(18	)		(26	)
Loss on extinguishment of debt		3,868			—			3,868			—
Deferred rent		27			(190	)		66			(220	)
Stock-based compensation		1,431			1,209			2,214			2,064
Bad debt (recovery) expense		(142	)		(379	)
Bad debt expense								(120	)		(387	)
Changes in operating assets and liabilities:
Tenant and other receivables		(18	)		150			(103	)		(304	)
Prepaid expenses, other assets and deferred costs		7,608			3,615			3,328			2,606
Accounts payable and accrued liabilities		(424	)		(510	)		(4,366	)		(2,558	)
Security deposits		720			476			713			896
Other liabilities		(459	)		(547	)		1,422			785
Net cash provided by operating activities		17,221			11,682			17,130			15,159

CASH FLOWS FROM INVESTING ACTIVITIES
Additions to land, buildings, and improvements		(18,915	)		(24,851	)		(27,783	)		(35,966	)
Return of acquisition deposits		—			2,015			—			2,015
Cash paid in connection with acquisition of real estate		—			(8,043	)		—			(8,041	)
Net cash used in investing activities		(18,915	)		(30,879	)		(27,783	)		(41,992	)

CASH FLOWS FROM FINANCING ACTIVITIES
Payments of mortgage notes		(46,810	)		(1,101	)		(84,241	)		(1,652	)
Proceeds from mortgage notes		62,330			20,839			124,858			24,855
Dividends and distributions		(8,696	)		(8,461	)		(13,044	)		(12,767	)
Loan issuance and extinguishment costs		(4,723	)		(335	)		(10,232	)		(335	)
Net cash provided by financing activities		2,101			10,942			17,341			10,101

Net increase (decrease) in cash and cash equivalents and restricted cash		407			(8,255	)		6,688			(16,732	)
Cash and cash equivalents and restricted cash - beginning of period		30,666			52,224			30,666			52,224
Cash and cash equivalents and restricted cash - end of period	$	31,073		$	43,969		$	37,354		$	35,492

Cash and cash equivalents and restricted cash – beginning of period:
Cash and cash equivalents	$	18,152		$	34,524		$	18,152		$	34,524
Restricted cash		12,514			17,700			12,514			17,700
Total cash and cash equivalents and restricted cash – beginning of period	$	30,666		$	52,224		$	30,666		$	52,224

Cash and cash equivalents and restricted cash – end of period:
Cash and cash equivalents	$	16,342		$	29,432		$	22,450		$	19,987
Restricted cash		14,731			14,537			14,904			15,505
Total cash and cash equivalents and restricted cash – end of period	$	31,073		$	43,969		$	37,354		$	35,492

Supplemental cash flow information:
Cash paid for interest, net of capitalized interest of $3,258 and $2,309 in 2023 and 2022, respectively	$	21,099		$	19,423
Cash paid for interest, net of capitalized interest of $3,855 and $3,775 in 2023 and 2022, respectively							$	32,924		$	29,244
Non-cash interest capitalized to real estate under development		27			1,118			339			1,749
Additions to investment in real estate included in accounts payable and accrued liabilities		3,527			7,158			5,102			5,214

The unaudited condensed consolidated financial statements of Clipper Realty Inc. (the “Company” or “we”) and subsidiaries have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("GAAP") have been condensed or omitted pursuant to such rules and regulations. We believe that the disclosures are adequate to make the information presented not misleading when read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 16, 2023. Note that any references to square footage and unit count are outside the scope of our Independent registered public accounting firm’s review.

The financial information presented reflects all adjustments (consisting of normal recurring adjustments) which are, in our opinion, necessary for a fair presentation of the results of operations, cash flows and financial position for the interim periods presented. These results are not necessarily indicative of a full year’s results of operations.

As of ~~June~~September 30, 2023, the properties owned by the Company consist of the following (collectively, the “Properties”):

During 2019, we entered into a joint venture in which we own a 50% interest through which we are paying certain legal and advisory expenses in connection with various rent laws and ordinances which govern certain of our properties. During the ~~three and six~~nine months ended ~~June 30, 2023, the Company incurred $0.00 million and $0.00 million, respectively, and during the three and six months ended June~~September 30, 2022, the Company incurred ~~$0.09 million and~~ $0.11 million ~~respectively of such expenses,~~ which ~~are~~was recorded as part of general and administrative in the Condensed Consolidated Statements of Operations, and ~~the Company has~~ fulfilled its commitment in the joint venture.

On June 29, 2023 the ~~Company’~~Company’s Flatbush Gardens property entered into a 40 year regulatory agreement under Article 11 of the Private Housing Finance Law with the New York City Department Housing Preservation and Development (“Article 11 Agreement”). For the full term of the agreement, Flatbush Gardens received a full exemption from property taxes, committed to maintain rents with existing area median income groups, received eligibility for incremental rental assistance payments under Section 610 of the Private Housing Financing Law for tenants receiving government rental assistance, committed to lease 249 units to formerly homeless families and provide certain services as units become vacant, and committed to pay prevailing wage rates to employees of the property as defined under New York City regulations. The property also committed to a ~~3 year~~3-year capital improvements plan. As part of the agreement, a new not-for-profit Corporation, Flatbush Gardens Housing Development Fund Corporation (“HDFC”), became nominal owner of the Flatbush Gardens properties. This has no effect on the beneficial operations and finances of the properties but provides HDFC with certain consent rights for transfers and financings of the properties. (See Note 8 Commitments and Contingencies).

The operations of Clipper Realty Inc. and its consolidated subsidiaries are carried on primarily through the Operating Partnership. The Company has elected to be taxed as a Real Estate Investment Trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code (the “Code”). The Company is the sole general partner of the Operating Partnership and the Operating Partnership is the sole managing member of the LLCs that comprised the Predecessor.

At ~~June~~September 30, 2023, the Company’s interest, through the Operating Partnership, in the LLCs that own the properties generally entitles it to 37.9% of the aggregate cash distributions from, and the profits and losses of, the LLCs.

The Company determined that the Operating Partnership and the LLCs are variable interest entities (“VIEs”) and that the Company had control over these entities and was the primary beneficiary. The assets and liabilities of these VIEs represented substantially all of the Company’s assets and liabilities.

At ~~June~~September 30, 2023, the Company had two reportable operating segments, Residential Rental Properties and Commercial Rental Properties. The Company’s chief operating decision maker may review operational and financial data on a property basis.

The accompanying consolidated financial statements of the Company are prepared in accordance with GAAP. The effect of all intercompany balances has been eliminated. The consolidated financial statements include the accounts of all entities in which the Company has a controlling interest. The ownership interests of other investors in these entities are recorded as non-controlling interests.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from these estimates.

Real estate assets held for investment are carried at historical cost and consist of land, buildings and improvements, furniture, fixtures and equipment. Expenditures for ordinary repair and maintenance costs are charged to expense as incurred. Expenditures for improvements, renovations, and replacements of real estate assets are capitalized and depreciated over their estimated useful lives if the expenditures qualify as betterment or the life of the related asset will be substantially extended beyond the original life expectancy.

In accordance with ASU 2018-01, "Business Combinations – Clarifying the Definition of a Business,” the Company evaluates each acquisition of real estate or in-substance real estate to determine if the integrated set of assets and activities acquired meets the definition of a business and needs to be accounted for as a business combination. If either of the following criteria is met, the integrated set of assets and activities acquired would not qualify as a business:

Generally, the Company expects that acquisitions of real estate or in-substance real estate will not meet the revised definition of a business because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e., land, buildings and related intangible assets) or because the acquisition does not include a substantive process in the form of an acquired workforce or an acquired contract that cannot be replaced without significant cost, effort or delay.

Upon acquisition of real estate, the Company assesses the fair values of acquired tangible and intangible assets including land, buildings, tenant improvements, above-market and below-market leases, in-place leases and any other identified intangible assets and assumed liabilities. The Company allocates the purchase price to the assets acquired and liabilities assumed based on their fair values. In estimating fair value of tangible and intangible assets acquired, the Company assesses and considers fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates, estimates of replacement costs, net of depreciation, and available market information. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant.

The Company records acquired above-market and below-market lease values initially based on the present value, using a discount rate which reflects the risks associated with the leases acquired based on the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed renewal options for the below-market leases. Other intangible assets acquired include amounts for in-place lease values and tenant relationship values (if any) that are based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with the respective tenant. Factors to be considered by management in its analysis of in-place lease values include an estimate of carrying costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, management considers leasing commissions, legal and other related expenses.

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. A property’s value is impaired if management’s estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property is less than the carrying value of the property. To the extent impairment has occurred, a write-down is recorded and measured by the amount of the difference between the carrying value of the asset and the fair value of the asset. In the event that the Company obtains proceeds through an insurance policy due to impairment, the proceeds are offset against the write-down in calculating gain/loss on disposal of assets. Management of the Company does not believe that any of its properties within the portfolio are impaired as of ~~June~~September 30, 2023.

For long-lived assets to be disposed of, impairment losses are recognized when the fair value of the assets less estimated cost to sell is less than the carrying value of the assets. Properties classified as real estate held-for-sale generally represent properties that are actively marketed or contracted for sale with closing expected to occur within the next twelve months. Real estate held-for-sale is carried at the lower of cost, net of accumulated depreciation, or fair value less cost to sell, determined on an asset-by-asset basis. Expenditures for ordinary repair and maintenance costs on held-for-sale properties are charged to expense as incurred. Expenditures for improvements, renovations and replacements related to held-for-sale properties are capitalized at cost. Depreciation is not recorded on real estate held-for-sale.

If a tenant vacates its space prior to the contractual termination of the lease and no rental payments are being made on the lease, any unamortized balances of the related intangibles are written off. The tenant improvements and origination costs are amortized to expense over the remaining life of the lease (or charged against earnings if the lease is terminated prior to its contractual expiration date).

Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:

The capitalized above-market lease values are amortized as a reduction to base rental revenue over the remaining terms of the respective leases, and the capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any below-market fixed rate renewal options of the respective leases. The value of in-place leases is amortized to expense over the remaining initial terms of the respective leases.

Cash and cash equivalents are defined as cash on hand and in banks, plus all short-term investments with a maturity of three months or less when purchased. The Company maintains some of its cash in bank deposit accounts, which, at times, may exceed the federally insured limit. No losses have been experienced related to such accounts.

Restricted cash generally consists of escrows for future real estate taxes and insurance expenditures, repairs, capital improvements, loan reserves and security deposits.

Tenant and other receivables are comprised of amounts due for monthly rents and other charges less allowance for doubtful accounts. As described more fully under Revenue Recognition below, in the first quarter of 2022 the Company adopted Accounting Standards Codification (“ASC”) 842 “Leases” which replaced guidance under ASC 840 and provided for transition from balances at December 31, 2021. In accordance with ASC 842, the Company performed a detailed review of amounts due from tenants to determine if accounts receivable balances and future lease payments were probable of collection, wrote off receivables not probable of collection and recorded a general reserve against revenues for receivables probable of collection for which a loss can be reasonably estimated. If management determines that the tenant receivable is not probable of collection it is written off against revenues. In addition, the Company records a general reserve under ASC 450. In connection with the adoption of ASC 842, the Company recorded a cumulative effect adjustment in the amount of $6 million as of January 1, 2022 based on the modified retrospective method in accordance with the provisions of ASC 842.

Deferred lease costs consist of fees incurred to initiate and renew operating leases. Lease costs are being amortized using the straight-line method over the terms of the respective leases.

Deferred financing costs represent commitment fees, legal and other third-party costs associated with obtaining financing. These costs are amortized over the term of the financing and are recorded in interest expense in the consolidated statements of operations. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financing transactions which do not close are expensed in the period the financing transaction is terminated.

Comprehensive income (loss) is comprised of net income (loss) adjusted for changes in unrealized gains and losses, reported in equity, for financial instruments required to be reported at fair value under GAAP. For the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022, the Company did not own any financial instruments for which the change in value was not reported in net income (loss); accordingly, its comprehensive income (loss) was its net income (loss) as presented in the consolidated statements of operations.

As mentioned above under Tenant and Other Receivables and Allowance for Doubtful Accounts, effective the first quarter of 2022, the Company has adopted ASC 842, “Leases” which replaces the guidance under ASC 840. ASC 842 applies to the Company principally as lessor; as a lessee, the Company’s leases are immaterial. The Company has determined that all its leases as lessor are operating leases. The Company has elected to not bifurcate lease and non-lease components under a practical expedient provision. With respect to collectability, beginning the first quarter of 2022, the Company has written off all receivables not probable of collection and related deferred rent, and has recorded income for those tenants on a cash basis. When the probability assessment has changed for these receivables, the Company has recognized lease income to the extent of the difference between the lease income that would have been recognized if collectability had always been assessed as probable and the lease income recognized to date. For remaining receivables probable of collection, the Company has recorded a general reserve under ASC 450.

In the three and ~~six~~nine months ended ~~June~~September 30, 2023 the Company has charged revenue in the amount of $0.9 million and ~~$2.4~~$3.3 million, respectively for residential receivables not deemed probable of collection and recognized revenue of ~~$0.4~~$0.2 million and ~~$1.1~~$1.3 million respectively, for a reassessment of collectability of residential receivables previously not deemed probable of collection.

In the three and ~~six~~nine months ended ~~June~~September 30, 2022, the Company has charged revenue in the amount of ~~$2.0~~$0.8 million and ~~$3.4~~$2.3 million, respectively, for residential receivables not deemed probable of collection. and recognized revenue of ~~$1.4~~$0.8 million and ~~$2.1~~$5.0 million respectively, for a reassessment of collectability of residential receivables previously not deemed probable of collection. Additionally, during the ~~six-months~~nine months ended ~~June~~September 30, 2022 the Company recognized a net $1.1 million for a reassessment of collectability of one commercial tenant at Tribeca House that was determined to be probable of collection.

In transitioning to ASC 842 in the first quarter of 2022, the Company elected the modified retrospective approach to existing leases at the beginning of the quarter and has recorded a cumulative-effect adjustment in retained earnings using the above methods applied to balances as of December 31, 2021, of $6.0 million.

In accordance with the provisions of ASC 842, rental revenue for commercial leases is recognized on a straight-line basis over the terms of the respective leases. Deferred rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with lease agreements. Rental income attributable to residential leases and parking is recognized as earned, which is not materially different from the straight-line basis. Leases entered by residents for apartment units are generally for one-year terms, renewable upon consent of both parties on an annual or monthly basis.

Reimbursements for operating expenses due from tenants pursuant to their lease agreements are recognized as revenue in the period the applicable expenses are incurred. These costs generally include real estate taxes, utilities, insurance, common area maintenance costs and other recoverable costs and are recorded as part of commercial rental income in the ~~condensed~~ consolidated statements of operations.

The Company accounts for stock-based compensation pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718, “Compensation — Stock Compensation.” As such, all equity-based awards are reflected as compensation expense in the Company’s consolidated statements of operations over their vesting period based on the fair value at the date of grant. In the event of a forfeiture, the previously recognized expense would be reversed.

As of ~~June~~September 30, 2023, and December 31, 2022, there were 3,382,465 and 2,949,823 long-term incentive plan (“LTIP”) units outstanding, respectively, with a weighted average grant date fair value of $8.80 and $9.26 per unit, respectively. As of ~~June~~September 30, 2023, and December 31, 2022, there was ~~$11.2~~$10.4 million and $10.2 million, respectively, of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under share incentive plans. As of ~~June~~September 30, 2023, the weighted-average period over which the unrecognized compensation expense will be recorded is approximately four years.

In March 2023, the Company granted employees and non-employee directors 274,911 and 157,731 LTIP units, respectively, with a weighted-average grant date value of $5.62 per unit. The grants vesting period range from up to one year for those granted to the non-employee directors and from 1 to 2.5 years to those granted to employees as 2022 bonus and long-term incentive compensation.

In April 2022, the Company granted employees and non-employee directors 900,000 and 275,000 LTIP units, respectively, with a weighted-average grant date value of $8.70 per unit, substantially all which vest in 10 years. Of these grants, 270,000 and 82,500 were approved by the shareholders of the Company at the 2022 Annual Meeting of the Shareholders on June 15, 2022 to increase the number of shares issuable under the Company’s 2015 Omnibus Incentive Plan and the 2015 Non-Employee Director Plan by 1.3 million and 0.5 million shares, respectively.

Transaction pursuit costs primarily reflect costs incurred for abandoned acquisition, disposition or other transaction pursuits.

During the ~~three-~~three and ~~six-month~~nine-month periods ended ~~June~~September 30, 2023 ~~Transaction~~transaction pursuit costs include $0 and $357, respectively of costs related to the Article 11 Agreement. During the three- and ~~six-month~~nine-month periods ended ~~June~~September 30, 2022 the company incurred ~~$92~~$(10) and ~~$516,~~$506, respectively, primarily for an abandoned acquisition, as well as the acquisition of the Dean Street property.

The Company elected to be taxed and to operate in a manner that will allow it to qualify as a REIT under the Code. To qualify as a REIT, the Company is required to distribute dividends equal to at least 90% of the REIT taxable income (computed without regard to the dividends paid deduction and net capital gains) to its stockholders, and meet the various other requirements imposed by the Code relating to matters such as operating results, asset holdings, distribution levels and diversity of stock ownership. Provided the Company qualifies for taxation as a REIT, it is generally not subject to U.S. federal corporate-level income tax on the earnings distributed currently to its stockholders. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to U.S. federal and state income tax on its taxable income at regular corporate tax rates and any applicable alternative minimum tax. In addition, the Company may not be able to re-elect as a REIT for the four subsequent taxable years. The entities comprising the Predecessor are limited liability companies and are treated as pass-through entities for income tax purposes. Accordingly, no provision has been made for federal, state or local income or franchise taxes in the accompanying consolidated financial statements.

In accordance with FASB ASC Topic 740, the Company believes that it has appropriate support for the income tax positions taken and, as such, does not have any uncertain tax positions that, if successfully challenged, could result in a material impact on its financial position or results of operations. The prior three years’ income tax returns are subject to review by the Internal Revenue Service.

FASB derivative and hedging guidance establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by FASB guidance, the Company records all derivatives on the consolidated balance sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation.

Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecast transactions, are considered cash flow hedges. For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (loss) (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in the fair value or cash flows of the derivative hedging instrument with the changes in the fair value or cash flows of the designated hedged item or transaction. For derivatives not designated as hedges, changes in fair value would be recognized in earnings. As of ~~June~~September 30, 2023 and December 31, 2022, the Company has no derivatives for which it applies hedge accounting.

Basic and diluted net loss per share is computed by dividing net loss attributable to common stockholders by the weighted average common shares outstanding. As of ~~June~~September 30, 2023 and 2022, the Company had unvested LTIP units which provide for non-forfeitable rights to dividend-equivalent payments. Accordingly, these unvested LTIP units are considered participating securities and are included in the computation of basic and diluted net loss per share pursuant to the two-class method. The Company did not have dilutive securities as of ~~June~~September 30, 2023 or 2022.

The effect of the conversion of the 26,317 Class B LLC units outstanding is not reflected in the computation of basic and diluted net loss per share, as the effect would be anti-dilutive. The net loss allocable to such units is reflected as non-controlling interests in the accompanying consolidated financial statements.

The following table sets forth the computation of basic and diluted net loss per share for the periods indicated (unaudited):

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This ASU requires entities to estimate a lifetime expected credit loss for most financial assets, including trade and other receivables and other ~~long term~~long-term financings including available for sale and held-to-maturity debt securities, and loans. Subsequently, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which amends the scope of ASU 2016-13 and clarified that receivables arising from operating leases are not within the scope of the standard and should continue to be accounted for in accordance with the leases standard (Topic 842). As a result, the adoption of the standard as of January 1, 2022 did not have a material impact on the consolidated financial statements.

In March 2020, FASB issued ASU 2020-04, “Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (Topic 848). ASU 2020-04 provides temporary optional expedients and exceptions to ease financial reporting burdens related to applying current GAAP to modifications of contracts, hedging relationships and other transactions in connection with the transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. ASU 2020-04 is effective beginning on March 12, 2020, and may be applied prospectively to such transactions through December 31, 2022. We will apply ASU 2020-04 ~~prospectively~~ as and when we enter transactions to which this guidance applies.

In January 2021, FASB issued ASU 2021-01, “Reference Rate Reform” (Topic 848). ASU 2021-01 modifies ASC 848 (ASU 2020-04), which was intended to provide relief related to “contracts and transactions that reference LIBOR or a reference rate that is expected to be discontinued as a result of reference rate reform.” ASU 2021-01 expands the scope of ASC 848 to include all affected derivatives and give reporting entities the ability to apply certain aspects of the contract modification and hedge accounting expedients to derivative contracts affected by the discounting transition. ASU 2021-01 also adds implementation guidance to clarify which optional expedients in ASC 848 may be applied to derivative instruments that do not reference LIBOR or a reference rate that is expected to be discontinued, but that are being modified as a result of the discounting transition. The Company does not expect the adoption of ASU 2021-01 to have a material impact on its consolidated financial statements.

During the ~~six~~nine months ended ~~June~~September 30, 2022 the Company acquired additional parcels of land for the Dean Street property, for $3,701 including acquisition costs of $151.

Amortization of deferred costs, lease origination costs and in-place lease intangible assets was ~~$26~~$29 and $60 for the three months ended ~~June~~September 30, 2023 and 2022, respectively, and ~~$51~~$79 and ~~$119~~$178 for the ~~six~~nine months ended ~~June~~September 30, 2023 and 2022, respectively; Amortization of real estate tax abatements of $120 and ~~$121~~$120 for the three months ended ~~June~~September 30, 2023 and 2022, respectively, and ~~$241~~$361 and ~~$241~~$361 for the ~~six~~nine months ended ~~June~~September 30, 2023 and 2022, is included in real estate taxes and insurance in the consolidated statements of operations.

Deferred costs and intangible assets as of ~~June~~September 30, 2023, amortize in future years as follows:

The mortgages, loans and mezzanine notes payable collateralized by the properties, or the Company’s interest in the entities that own the properties and assignment of leases, are as follows:

Property	Maturity	Interest Rate		June 30, 2023			December 31, 2022			Maturity	Interest Rate		September 30, 2023			December 31, 2022

Flatbush Gardens, Brooklyn, NY (a)	6/1/2032		3.125%	$	329,000		$	329,000		6/1/2032		3.125%	$	329,000		$	329,000
250 Livingston Street, Brooklyn, NY (b)	6/6/2029		3.63%		125,000			125,000		6/6/2029		3.63%		125,000			125,000
141 Livingston Street, Brooklyn, NY (c)	3/6/2031		3.21%		100,000			100,000		3/6/2031		3.21%		100,000			100,000
Tribeca House, Manhattan, NY (d)	3/6/2028		4.506%		360,000			360,000		3/6/2028		4.506%		360,000			360,000
Aspen, Manhattan, NY (e)	7/1/2028		3.68%		61,783			62,554		7/1/2028		3.68%		61,399			62,554
Clover House, Brooklyn, NY (f)	12/1/2029		3.53%		82,000			82,000		12/1/2029		3.53%		82,000			82,000
10 West 65^th Street, Manhattan, NY (g)	11/1/2027	SOFR + 2.50%			31,991			32,222
10 West 65th Street, Manhattan, NY (g)										11/1/2027	SOFR + 2.50%			31,929			32,222
1010 Pacific Street, Brooklyn, NY (h)	9/1/2024	LIBOR + 3.60%			—			43,477		9/1/2024	LIBOR + 3.60%			—			43,477
1010 Pacific Street, Brooklyn, NY (h)	2/9/2028		5.55%		60,000			—		9/15/2025		5.55%		60,000			—
1010 Pacific Street, Brooklyn, NY (h)										9/15/2025		6.370%		20,000			—
Dean Street, Brooklyn, NY (i)										9/22/2023	Prime + 1.60%			—			36,985
Dean Street, Brooklyn, NY (i)										8/10/2026	SOFR + 4%			37,899			—
Dean Street, Brooklyn, NY (i)	9/22/2023	Prime + 1.60%			36,985			36,985		8/10/2026	SOFR + 10%			4,629			—
Total debt	Total debt			$	1,186,759		$	1,171,238		Total debt			$	1,211,856		$	1,171,238
Unamortized debt issuance costs	Unamortized debt issuance costs				(9,803	)		(9,650	)	Unamortized debt issuance costs				(14,578	)		(9,650	)
Total debt, net of unamortized debt issuance costs	Total debt, net of unamortized debt issuance costs			$	1,176,956		$	1,161,588		Total debt, net of unamortized debt issuance costs			$	1,197,278		$	1,161,588

(a) The $329,000 mortgage note agreement with New York Community Bank (“NYCB”), entered into on May 8, 2020, matures on June 1, 2032, and bears interest at 3.125% through May 2027 and thereafter at the prime rate plus 2.75%, subject to an option to fix the rate. The note requires interest-only payments through May 2027, and monthly principal and interest payments thereafter based on a 30-year amortization schedule. The Company has the option to prepay all (but not less than all) of the unpaid balance of the note prior to the maturity date, subject to certain prepayment premiums, as defined.

(b) The $125,000 mortgage note agreement with Citi Real Estate Funding Inc., entered into on May 31, 2019, matures on June 6, 2029, bears interest at 3.63% and requires interest-only payments for the entire term. The Company has the option to prepay all (but not less than all) of the unpaid balance of the note within three months of maturity, without a prepayment premium.

(c), The $100,000 mortgage note agreement with Citi Real Estate Funding Inc., entered into on February 18, 2021 matures on March 6, 2031, bears interest at 3.21% and requires interest-only payments for the entire term. The Company has the option to prepay all (but not less than all) of the unpaid balance of the note within three months of maturity, without a prepayment premium.

(d) The $360,000 loan with Deutsche Bank, entered into on February 21, 2018, matures on March 6, 2028, bears interest at 4.506% and requires interest-only payments for the entire term. The Company has the option to prepay all (but not less than all) of the unpaid balance of the loan prior to the maturity date, subject to a prepayment premium if it occurs prior to December 6, 2027.

(e) The $70,000 mortgage note agreement with Capital One Multifamily Finance LLC matures on July 1, 2028, and bears interest at 3.68%. The note required interest-only payments through July 2017, and monthly principal and interest payments of $321 thereafter based on a 30-year amortization schedule. The Company has the option to prepay the note prior to the maturity date, subject to a prepayment premium.

(f) The $82,000 mortgage note agreement with MetLife Investment Management, entered into on November 8, 2019, matures on December 1, 2029, bears interest at 3.53% and requires interest-only payments for the entire term. The Company has the option, commencing on January 1, 2024, to prepay the note prior to the maturity date, subject to a prepayment premium if it occurs prior to September 2, 2029.

(g) The $32,200 mortgage note agreement with NYCB entered into in connection with the acquisition of the property matures on November 1, 2027. Through October 2022 the Company paid a fixed interest rate of 3.375% and thereafter was scheduled to pay interest at the prime rate plus 2.75%, subject to an option to fix the rate. On August 26, 2022, the Company and NYCB amended the note to replace prime plus 2.75% rate with SOFR plus 2.5% (~~7.25~~7.875% at ~~March 31,~~September 30, 2023). The note required interest-only payments through November 2019, and monthly principal and interest payments thereafter based on a 30-year amortization schedule. The Company has the option to prepay all (but not less than all) of the unpaid balance of the note prior to the maturity date, subject to certain prepayment premiums, as defined.

(h) On December 24, 2019, the Company entered into a $18,600 mortgage note agreement with CIT Bank, N.A., related to the 1010 Pacific Street acquisition. The Company also entered into a pre-development bridge loan secured by the property with the same lender to provide up to $2,987 for eligible pre-development and carrying costs. The notes were scheduled to mature on June 24, 2021, required interest-only payments and bore interest at one-month LIBOR (with a floor of 1.25%) plus 3.60%~~(4.85% as of June 30, 2021)~~. The notes were extended in June 2021 with a new maturity date of August 30, 2021. The Company guaranteed this mortgage note and complied with the financial covenants therein.

On August 10, 2021, the Company refinanced the above 1010 Pacific Street loan with a group of loans with AIG Asset Management (U.S.), LLC providing for maximum borrowings of $52,500 to develop the property. The notes had a 36-month term, bearing interest at 30 days LIBOR plus 3.60% (with a floor of 4.1%) (9.35% as of March 31, 2023). The notes were scheduled to mature on September 1, 2024 and could have been extended until September 1, 2026. The Company could have prepaid the unpaid balance of the note within five months of maturity without penalty.

On February 9, 2023 the Company refinanced this construction loan with a mortgage loan with Valley National Bank ~~providing~~which provided for maximum borrowings of $80,000. The loan provided initial funding of $60,000 and a further $20,000 subject to achievement of certain financial targets. The loan has a term of five years and an initial annual interest rate of 5.7% subject to reduction by up to 25 basis points upon achievement of certain financial targets. The interest rate on subsequent fundings will be fixed at the time of any funding. The loan requires interest-only payments for the first two years and principal and interest thereafter based on a 30-year amortization schedule. The Company has the option to prepay in full, or in part, the unpaid balance of the note prior to the maturity date. Prior to the second anniversary of the date of the note prepayment is subject to certain prepayment premiums, as defined. After the second anniversary of the date of the note the prepayment is not subject to a prepayment premium. During the quarter ended June 30, 2023 the company achieved a financial target and the interest rate was reduced by 15 basis points to 5.55%.

On September 15, 2023 the Company borrowed an additional $20,000 from Valley National Bank. The additional borrowing has a term of twenty-four months and an annual interest rate of 6.37%. The loan is interest only subject to the maintenance of certain financial targets after the first 16 months of the term. In conjunction with the additional borrowing, the Company and the bank agreed to amend the expiration date of the initial $60,000 to expire at the same time as the additional borrowing. No change was made to the interest rate on the initial borrowing.

In conjunction with the refinancing, the Company incurred $3,868 of loan extinguishment costs related to prepayment penalties, ~~writing off~~ unamortized deferred financed costs of the previous loan and other fees. These costs are included in the consolidated statement of operations for the ~~six-month~~nine-month period ended ~~June~~September 30, 2023.

(i) On December 22, 2021, the Company entered into a $30,000 mortgage note agreement with Bank Leumi, N.A related to the Dean Street acquisition. The notes original maturity was December 22, 2022 and was subsequently extended to September 22, 2023. The note ~~requires~~required interest-only payments and bears interest at the prime rate (with a floor of ~~3.25%~~3.25%) plus 1.60% ((9.85% as of June 30, 2023). In April 2022, the Company borrowed an additional $6,985 under the mortgage note in connection with the acquisition of additional parcels of land in February and April 2022.

On August 10, 2023, the “Company refinanced its $37 million mortgage on its Dean Street development with a senior construction loan (“Senior Loan”) that permits borrowings up to $115 million with Valley National Bank and a Mezzanine Loan (combined “Construction Loans”) that permits borrowings up to $8 million with BADF 953 Dean Street Lender LLC. The Construction Loans will finance the development of 240 residential units and 9,319 square feet of commercial space.

The Senior Loan will allow maximum borrowings of $115 million for a 30-month term, have two 6-month extension options, and bear interest at 1-Month Term SOFR plus 4.00%, with an all-in floor of 5.50% (9.33% at September 30, 2023). The Senior Loan will consist of a land loan, funded at closing to refinance the existing loan totaling $37 million, a construction loan of up to $62.4 million and a project loan of up to $15.6 million. The Company has provided a 30% payment guarantee of outstanding borrowings among other standard indemnities.

The Mezzanine Loan will allow maximum borrowings of $8 million for a 30-month term, have two 6-month extension options, and bear interest at 1-Month Term SOFR plus 10%, with an all-in floor of 13% (15.33% at September 30, 2023). Interest shall accrue of the principal, is compounded monthly and is due at the end of the loan. At closing, $4.5 million was funded to cover closing costs incurred on the construction loans.

On August 10, 2023 the Company entered into a $5 million corporate line of credit with Valley National Bank. The line of credit bears interest of Prime + 1.5%. The Company has not drawn on the line of credit as of September 30, 2023.

The Company has provided a limited guaranty for the mortgage notes at several of its properties. The Company’s loan agreements contain customary representations, covenants and events of default. Certain loan agreements require the Company to comply with affirmative and negative covenants, including the maintenance of debt service coverage and debt yield ratios. In the event that they are not compliant, certain lenders may require cash sweeps of rent until the conditions are cured. The Company believes it is not in default on any of its loan agreements.

The following table summarizes principal payment requirements under the terms of the mortgage notes as of ~~June~~September 30, 2023:

The Company’s commercial properties are leased to commercial tenants under operating leases with fixed terms of varying lengths. As of ~~June~~September 30, 2023, the minimum future cash rents receivable (excluding tenant reimbursements for operating expenses) under non-cancelable operating leases for the commercial tenants in each of the next five years and thereafter are as follows:

The Company has commercial leases with the City of New York that comprised approximately 23% and 24% of total revenues for the three months ended ~~June~~September 30, 2023 and 2022, respectively, and 23% and 24% of total revenues for the ~~six~~nine months ended ~~June~~September 30, 2023 and 2022, respectively.

GAAP requires the measurement of certain financial instruments at fair value on a recurring basis. In addition, GAAP requires the measure of other financial instruments and balances at fair value on a non-recurring ~~basis (e.g., carrying ‐‐‐value of impaired real estate and long-lived assets).~~basis. Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The GAAP fair value framework uses a three-tiered approach. Fair value measurements are classified and disclosed in one of the following three categories:

When available, the Company utilizes quoted market prices from an independent third-party source to determine fair value and classifies such items in Level 1 or Level 2. In instances where the market for a financial instrument is not active, regardless of the availability of a nonbinding quoted market price, observable inputs might not be relevant and could require the Company to make a significant adjustment to derive a fair value measurement. Additionally, in an inactive market, a market price quoted from an independent third party may rely more on models with inputs based on information available only to that independent third party. When the Company determines the market for a financial instrument owned by the Company to be illiquid or when market transactions for similar instruments do not appear orderly, the Company uses several valuation sources (including internal valuations, discounted cash flow analysis and quoted market prices) and establishes a fair value by assigning weights to the various valuation sources.

Changes in assumptions or estimation methodologies can have a material effect on these estimated fair values. In this regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in an immediate settlement of the instrument.

The financial assets and liabilities in the consolidated balance sheets include cash and cash equivalents, restricted cash, receivables, prepaid expenses, accounts payable and accrued liabilities, security deposits and notes payable. The carrying amount of cash and cash equivalents, restricted cash, receivables, prepaid expenses, accounts payable and accrued liabilities, and security deposits reported in the consolidated balance sheets approximates fair value due to the short-term nature of these instruments. The fair value of notes payable, which are classified as Level 2, is estimated by discounting the contractual cash flows of each debt instrument to their present value using adjusted market interest rates.

The carrying amount and estimated fair value of the notes payable are as follows:

On July 3, 2017, the Supreme Court of the State of New York (the “Court”) ruled in favor of 41 present or former tenants of apartment units at the Company’s buildings located at 50 Murray Street and 53 Park Place in Manhattan, New York (the Tribeca House property), who brought an action (the “Kuzmich” case) against the Company alleging that they were subject to applicable rent stabilization laws with the result that rental payments charged by the Company exceeded amounts permitted under these laws because the buildings were receiving certain tax abatements under Real Property Tax Law (“RPTL”) 421-g. The Court also awarded the plaintiffs- tenants their attorney’s fees and costs. After various court proceedings and discussions from 2018-2022, on March 4, 2022 the court issued a ruling, finalized on May 9, 2022, on the rent overcharges to which the plaintiffs are entitled. While the court ruled that the overcharges to which the plaintiffs are entitled total $1.2 million, the court agreed with the Company’s legal arguments that rendered the overcharge liability lower than it could have been, and therefore the Company did not appeal the ruling. On June 23, 2022, the court ruled that the plaintiffs are entitled to attorneys’ fees incurred through February 28, 2022, in the amount of $0.4 million.

On November 18, 2019, the same law firm which filed the Kuzmich case filed a second action involving a separate group of 26 tenants (captioned Crowe et al v 50 Murray Street Acquisition LLC, Supreme Court, New York County, Index No. 161227/19), which action advances essentially the same claims as in Kuzmich. The Company’s deadline to answer or otherwise respond to the complaint in Crowe had been extended to June 30, 2020; on such date, the Company filed its answer to the complaint. Pursuant to the court’s rules, on July 16, 2020, the plaintiffs filed an amended complaint; the sole difference as compared to the initial complaint is that seven new plaintiffs-tenants were added to the caption; there were no substantive changes to the complaint’s allegations. On August 5, 2020, the Company filed its answer to the amended complaint. The case was placed on the court’s calendar and was next scheduled for a discovery conference on November 16, 2022. Counsel for the parties have been engaged in and are continuing settlement discussions. On November 16, 2022, the court held a compliance conference and ordered the plaintiffs to provide rent overcharge calculations in response to proposed calculations previously provided by the Company. On July 12, 2023, the court referred this matter to a Judicial Hearing Officer (“JHO”) to determine the outstanding issues. A hearing before the JHO ~~is scheduled for August 3, 2023..~~was held in September 2023 and at this time all parties are engaged in settlement discussions.

On March 9, 2021, the same law firm which filed the Kuzmich and Crowe cases filed a third action involving another tenant (captioned Horn v 50 Murray Street Acquisition LLC, Supreme Court, New York County, Index No. 152415/21), which action advances the same claims as in Kuzmich and Crowe. The Company filed its answer to the complaint on May 21, 2021. The case was placed on the court’s calendar and is next scheduled for a preliminary conference in December 2023

As a result of the March 4 and May 9, 2022 decisions which established the probability and ability to reasonably compute amounts owed to tenants for all the cases, the Company recorded a charge for litigation settlement and other of $2.7 million in the consolidated statements of operations during the year ended December 31, 2021 comprising rent overcharges, interest and legal costs of plaintiff’s counsel. The Company paid $2.3 million to the plaintiffs related to the Kuzmich case during the year ended December 31, 2022 and $0.4 million related to the Crowe case during the ~~six~~nine month period ended ~~June~~September 30, 2023.

In addition to the above, the Company is subject to certain legal proceedings and claims arising in connection with its business. Management believes, based in part upon consultation with legal counsel, that the ultimate resolution of all such claims will not have a material adverse effect on the Company’s consolidated results of operations, financial position or cash flows.

The Office of the Attorney General of the State of New York (“OAG”) commenced an investigation concerning the conduct of screening of tenant applicants in the building portfolio in which Clipper Equity and its principals have a management and/or ownership interest. Clipper Equity cooperated with the investigation and, in April 2022, entered into an Assurance of Discontinuance with the OAG to resolve the investigation on behalf of itself and its affiliates, the terms of which have no impact to the Company’s financial position or results of operations.

June 29, 2023 the Company entered into the Article 11 Agreement Under the Article 11 agreement, the Company has entered into a Housing Repair and Maintenance Letter Agreement in which the Company has agreed to perform certain capital improvements to Flatbush Gardens over the next 3three years. The current estimate is that the costs of that work will be an amount up to $27 million. The Company expects those costs to be offset by the savings provided by property tax exemption and enhanced payments for tenants receiving government assistance (See note 1).

The Company is obligated to provide parking availability through August 2025 under a lease with a tenant at the 250 Livingston Street property; the current cost to the Company is approximately $205 per year.

The Company’s properties are located in the Boroughs of Manhattan and Brooklyn in New York City, which exposes the Company to greater economic risks than if it owned a more geographically dispersed portfolio.

The breakdown between commercial and residential revenue is as follows (unaudited):

The Company recorded office and overhead expenses pertaining to a related company in general and administrative expense of ~~$133~~$0 and $64 for the three months ended ~~June~~September 30, 2023 and 2022, respectively, and $198 and ~~$128~~$192 for the ~~six~~nine months ended ~~June~~September 30, 2023 and 2022. The Company recognized a charge/(credit) to reimbursable payroll expense pertaining to a related company in general and administrative expense of $$(~~(53)~~23) and $~~(9)~~$2 for the three months ended ~~June~~September 30, 2023 and 2022, respectively, and $$(~~(30)~~53) and $$(~~(17)~~16) for the ~~six~~nine months ended ~~June~~September 30, 2023 and 2022.

The Company has classified its reporting segments into commercial and residential rental properties. The commercial reporting segment includes the 141 Livingston Street property and portions of the 250 Livingston Street, Tribeca House and Aspen properties. The residential reporting segment includes the Flatbush Gardens property, the Clover House property, the 10 West 65^th65th Street property, the 1010 Pacific Street property and portions of the 250 Livingston Street, Tribeca House and Aspen properties.

The Company’s income from operations by segment for the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022, is as follows (unaudited):

The Company’s interest expense by segment for the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022, is as follows (unaudited):

The Company’s capital expenditures, including acquisitions, by segment for the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022, are as follows (unaudited):

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations in conjunction with the more detailed information set forth under the caption, “Cautionary Note Concerning Forward-Looking Statements,” and in our financial statements and the related notes thereto appearing elsewhere in this Quarterly Report on Form ~~10-Q.~~10-Qas well as information in our Annual Report on Form 10-K for the year ended December 31, 2022.

Clipper Realty Inc. (the “Company” or “we”) is a self-administered and self-managed real estate company that acquires, owns, manages, operates and repositions multifamily residential and commercial properties in the New York metropolitan area, with a current portfolio in Manhattan and Brooklyn. Our primary focus is to own, manage and operate our portfolio and to acquire and reposition additional multifamily residential and commercial properties in the New York metropolitan area. The Company has been organized and operates in conformity with the requirements for qualification and taxation as a real estate investment trust (“REIT”) under the U.S. federal income tax law and elected to be treated as a REIT commencing with the taxable year ended December 31, 2015.

These properties are located in the most densely populated major city in the United States, each with immediate access to mass transportation. At September 30, 2023, the Company had two reportable operating segments, residential rental properties and commercial rental properties. The residential reporting segment includes the Flatbush Gardens property, the Clover House property, the 10 West 65th Street property, the 1010 Pacific Street property and portions of the 250 Livingston Street, Tribeca House and Aspen properties. The commercial reporting segment includes the 141 Livingston Street property and portions of the 250 Livingston Street, Tribeca House and Aspen properties.

The Company’s ownership interest in its initial portfolio of properties, which includes the Tribeca House, Flatbush Gardens and the two Livingston Street properties, was acquired in the formation transactions in connection with the private offering. These properties are owned by the LLC subsidiaries, which are managed by the Company through the Operating Partnership. The Operating Partnership’s interests in the LLC subsidiaries generally entitle the Operating Partnership to all cash distributions from, and the profits and losses of, the LLC subsidiaries other than the preferred distributions to the continuing investors who hold Class B LLC units in these LLC subsidiaries. The continuing investors own an aggregate amount of 26,317,396 Class B LLC units, representing 62.1% of the Company’s common stock on a fully diluted basis. Accordingly, the Operating Partnership’s interests in the LLC subsidiaries entitle the Operating Partnership to receive 37.9% of the aggregate distributions from the LLC subsidiaries. The Company, through the Operating Partnership, owns all of the ownership interests in the Aspen property, the Clover House property, the 10 West 65^th65th Street property, the 1010 Pacific Street property and the Dean Street property.

Our focus throughout 2022 and year-to-date 2023 has been to manage our properties to optimize revenues and control costs, while continuing to renovate and reposition certain properties. The discussion below highlights the specific properties contributing to the changes in the results of operations and focuses on the properties that were in operation for the full period in each comparison.

Income Statement for the Three Months Ended ~~June~~September 30, 2023 and 2022 (in thousands except rent per square foot and occupancy)

Revenue. Residential rental income increased to ~~$24,245~~$24,341 for the three months ended ~~June~~September 30, 2023, from ~~$22,597~~$23,108 for the three months ended ~~June~~September 30, 2022, primarily due to increases in rental rates ~~and leased occupancy~~ at all properties of ~~$1,664.~~$1,233. For example, base rent per square foot increased at the Tribeca House property to ~~$76.36 (100% leased occupancy)~~$78.22 at ~~June~~September 30, 2023, from ~~$67.14 (99.7% leased occupancy)~~$70.56 at ~~June~~September 30, 2022 and base rent per square foot increased at the Clover House property to $78.33 at September 30, 2023, from $70.13 at September 30, 2022;

Commercial rental income ~~increased~~decreased to ~~$9,503~~$9,615 for the three months ended ~~June~~September 30, 2023, from ~~$9,290~~$9,692 for the three months ended ~~June~~September 30, 2022 due to the expiration of a ~~lower write off of receivables, primarily~~few small leases at the Tribeca House ~~of $432 partially offset by lower other miscellaneous income.~~and Aspen properties.

Property operating expenses. Property operating expenses include property-level costs such as compensation costs for property-level personnel, repairs and maintenance, supplies, utilities and landscaping. Property operating expenses ~~decreased~~increased to ~~$6,610~~$7,644 for the three months ended ~~June~~September 30, 2023, from ~~$6,928~~$7,267 for the three months ended ~~June~~September 30, 2022, primarily due ~~lower~~to increased repairs and maintenance costs partially offset by ~~increased payroll~~decreased utilities and water and sewer costs.

Real estate taxes and insurance. Real estate taxes and insurance expenses ~~increased~~decreased to ~~$8,601~~$7,237 for the three months ended ~~June~~September 30, 2023, from ~~$7,886~~$8,252 for the three months ended ~~June~~September 30, 2022, due to ~~increased property insurance and~~ real estate tax ~~assessments~~exemption at Flatbush Gardens as a result of the Article 11 transaction partially offset by higher insurance costs across the portfolio.

General and administrative. General and administrative expenses increased to ~~$3,320~~$3,218 for the three months ended ~~June~~September 30, 2023, from ~~$3,197~~$3,209 for the three months ended ~~June~~September 30, 2022 primarily due to ~~increased executive compensation expense partially offset by lower legal fees.~~the decrease in various administrative costs.

Transaction pursuit costs. Transaction pursuit costs during the three months ended September 30, 2023 primarily reflect costs ~~incurred in respect of the entry into~~related to the Article 11 Agreement.

Depreciation and amortization. Depreciation and amortization expense increased to ~~$6,846~~$6,854 for the three months ended ~~June~~September 30, 2023, from ~~$6,732~~$6,784 for the three months ended ~~June~~September 30, 2022, due to the additions to real estate across the portfolio during the three months ended ~~June~~September 30, 2023.

Interest expense, net. Interest expense, net, increased to ~~$10,571~~$10,634 for the three months ended ~~June~~September 30, 2023, from ~~$10,005~~$10,086 for the three months ended ~~June~~September 30, 2022 primarily ~~at the 10 West 65th Street~~ as a result of the interest rate ~~changing~~conversion the 10 West 65th Street from fixed to a floating rate in the fourth quarter of 2022.

Net loss. As a result of the foregoing, net loss ~~increased~~decreased to ~~$2,557~~$1,631 for the three months ended ~~June~~September 30, 2023, from ~~$2,953~~$2,788 for the three months ended ~~June~~September 30, 2022.

Income Statement for the ~~Six~~Nine Months Ended ~~June~~September 30, 2023 and 2022 (in thousands)

	2023			Less:1010 Pacific			2023 Excluding 1010 Pacific			2022			Increase (decrease)			%			2023			Less:1010 Pacific			2023 Excluding 1010 Pacific			2022			Increase (decrease)			%
Revenues
Residential rental income	$	48,980		$	795		$	48,185		$	44,059		$	4,126			9.4	%	$	74,481		$	1,952		$	72,529		$	67,167		$	5,362			8.0	%
Commercial rental income		19,230			-			19,230			19,878			(648	)		(3.3	)%		28,857			12			28,845			29,570			(725	)		(2.5	)%
Total revenues		68,210			795			67,415			63,937			3,478			5.4	%		103,338			1,964			101,374			96,737			4,637			4.8	%
Operating Expenses
Property operating expenses		14,881			172			14,709			14,467			242			1.7	%		22,811			458			22,353			21,734			619			2.8	%
Real estate taxes and insurance		17,236			99			17,137			15,817			1,320			8.3	%		24,610			236			24,374			24,069			305			1.3	%
General and administrative		6,689			76			6,613			6,139			474			7.7	%		10,029			198			9,831			9,348			483			5.2	%
Transaction pursuit costs		357			-			357			516			(159	)		(30.8	)%		357			-			357			506			(149	)		(29.4	)%
Depreciation and amortization		14,094			423			13,671			13,437			234			1.7	%		21,376			851			20,525			20,221			304			1.5	%
Total operating expenses		53,257			770			52,487			50,376			2,111			4.2	%		79,183			1,743			77,440			75,878			1,562			2.1	%
Income from operations		14,953			25			14,928			13,561			1,367			10.1	%		24,155			221			23,934			20,859			3,075			14.7	%
Interest expense, net		(21,469	)		(763	)		(20,706	)		(19,990	)		(716	)		(3.6	)%		(32,996	)		(1,656	)		(31,340	)		(30,076	)		(1,264	)		(4.2	)%
Loss on modification/extinguishment of debt		(3,868	)		-			(3,868	)		-			(3,868	)		(100.0	)%		(3,868	)		-			(3,868	)		-			(3,868	)		(100.0	)%
Net loss	$	(10,384	)	$	(738	)	$	(9,646	)	$	(6,429	)	$	(3,217	)		(50.0	)%	$	(12,709	)	$	(1,435	)	$	(11,274	)	$	(9,217	)	$	(2,057	)		(22.3	)%

Revenue. Residential rental income increased to ~~$48,185~~$72,529 for the ~~six~~nine months ended ~~June~~September 30, 2023, from ~~$44,059~~$67,167 for the ~~six~~nine months ended ~~June~~September 30, 2022, primarily, due to increases in rental ~~rates and leased occupancy at all properties.~~rates. For example, base rent per square foot increased at the Tribeca House property to ~~$76.36 (100% leased occupancy)~~$78.22 at ~~June~~September 30, 2023, from ~~$67.14 (99.7% leased occupancy)~~$70.56 at ~~June~~September 30, ~~2022;~~2022 and base rent per square foot increased at the Clover House property to $78.33 at September 30, 2023, from $70.13 at September 30, 2022.

Commercial rental income decreased to ~~$19,230~~$28,845 for the ~~six~~nine months ended ~~June~~September 30, 2023, from ~~$19,878~~$29,570 for the ~~six~~nine months ended ~~June~~September 30, 2022 primarily due to a net, $1,103 restoration of revenue as per ASC 842 from a tenant at Tribeca House deemed probable of collection during the ~~six-months~~nine months ended ~~June~~September 30, 2022, partially offset by the commencement of new leases at the Tribeca House property and increased escalation billings at the 141 Livingston Street property.

Property operating expenses. Property operating expenses include property-level costs such as compensation costs for property-level personnel, repairs and maintenance, supplies, utilities and landscaping. Property operating expenses increased to ~~$14,709~~$22,353 for the ~~six~~nine months ended ~~June~~September 30, 2023, from ~~$14,467~~$21,734 for the ~~six~~nine months ended ~~June~~September 30, 2022, primarily due to increased repairs and maintenance, utilities and payroll costs, ~~partially offset by lower repair and maintenance and supplies expense across the portfolio.~~primarily at Flatbush Gardens.

Real estate taxes and insurance. Real estate taxes and insurance expenses increased to ~~$17,137~~$24,374 for the ~~six~~nine months ended ~~June~~September 30, 2023, from ~~$15,817~~$24,069 for the ~~six~~nine months ended ~~June~~September 30, 2022, due to increased property taxes and insurance across the portfolio ~~and higher insurance costs at Tribeca House,~~ partially offset by ~~lower insurance costs~~the real estate tax exemption at Flatbush ~~Gardens.~~Gardens that began July 1, 2023.

General and administrative. General and administrative expenses increased to ~~$6,613~~$9,831 for the ~~six~~nine months ended ~~June~~September 30, 2023, from ~~$6,139~~$9,348 for the ~~six~~nine months ended ~~June~~September 30, 2022 primarily due to ~~primarily due to~~ higher payroll costs and accounting fees in relation to the separation from our prior ~~auditor and computer services costs.~~auditor.

Transaction pursuit costs. Transaction pursuit costs primarily reflect costs ~~incurred in respect of the entry into~~related to the Article 11 Agreement during the ~~six-months~~nine months ended ~~June~~September 30, 2023 and costs incurred for an abandoned acquisition during the ~~six-months~~nine months ended ~~June~~September 30, 2022.

Depreciation and amortization. Depreciation and amortization expense increased to ~~$13,671~~$20,525 for the ~~six~~nine months ended ~~June~~September 30, 2023, from ~~$13,437~~$20,221 for the ~~six~~nine months ended ~~June~~September 30, 2022, due to the additions to real estate across the portfolio during the ~~six~~nine months ended ~~June~~September 30, 2023.

Interest expense, net. Interest expense, net, increased to ~~$20,706~~$31,340 for the ~~six~~nine months ended ~~June~~September 30, 2023, from ~~$19,990~~$30,076 for the ~~six~~nine months ended ~~June~~September 30, 2022 primarily due to increased interest at the 10 West 65th Street as a result of the interest rate changing from fixed to a floating rate in the fourth quarter of 2022.

Loss on modification/extinguishment of debt. Loss on the extinguishment of debt consists of costs related to the early termination of our construction loan at 1010 Pacific. Additionally, we accelerated the remaining unamortized loan costs from the prior loan.

Net loss. As a result of the foregoing, net loss increased to ~~$9,646~~$11,274 for the ~~six~~nine months ended ~~June~~September 30, 2023, from ~~$6,429~~$9,217 for the ~~six~~nine months ended ~~June~~September 30, 2022.

As of ~~June~~September 30, 2023, we had ~~$1,177~~$1,197 million of indebtedness, net of unamortized issuance costs, secured by our properties, ~~$16.3~~$22.5 million of cash and cash equivalents, and ~~$14.7~~$14.9 million of restricted cash. See Note 5, “Notes Payable” of our consolidated financial statements for a discussion of the Company’s property-level debt.

As a REIT, we are required to distribute at least 90% of our REIT taxable income, computed without regard to the dividends paid deduction and excluding net capital gains, to stockholders on an annual basis. We expect that these needs will be met from cash generated from operations and other sources, including proceeds from secured mortgages and unsecured indebtedness, proceeds from additional equity issuances and cash generated from the sale of property.

Our short-term liquidity needs will primarily be to fund operating expenses, recurring capital expenditures, property taxes and insurance, interest and scheduled debt principal payments, general and administrative expenses, and distributions to stockholders and unit holders. We generally expect to meet our short-term liquidity requirements through net cash provided by operations and cash on hand, and we believe we will have sufficient resources to meet our short-term liquidity requirements.

Our principal long-term liquidity needs will primarily be to fund additional property acquisitions, major renovation and upgrading projects, and debt payments and debt payments at maturity. We do not expect that net cash provided by operations will be sufficient to meet all of these long-term liquidity needs. We anticipate meeting our long-term liquidity requirements by using cash as an interim measure and funds from public and private equity offerings and long-term secured and unsecured debt offerings.

We believe that as a publicly traded REIT, we will have access to multiple sources of capital to fund our long-term liquidity requirements. These sources include the incurrence of additional debt and the issuance of additional equity. However, we cannot provide assurance that this will be the case. Our ability to secure additional debt will depend on a number of factors, including our cash flow from operations, our degree of leverage, the value of our unencumbered assets and borrowing restrictions that may be imposed. Our ability to access the equity capital markets will depend on a number of factors as well, including general market conditions, market conditions for REITs and market perceptions about our company.

We believe that our current cash flows from operations and cash on hand, coupled with additional mortgage debt, will be sufficient to allow us to continue operations, satisfy our contractual obligations and make distributions to our stockholders and the members of our LLC subsidiaries for at least the next twelve months. However, no assurance can be given that we will be able to refinance any of our outstanding indebtedness in the future on favorable terms or at all.

In order to qualify as a REIT for Federal income tax purposes, we must currently distribute at least 90% of our taxable income to our shareholders. ~~On May 4, 2023 the company declared dividends and distributions on our common shares, Class B LLC units and LTIP units totaling $4.3 million paid on May 24, 2023~~ During the three months ended ~~June~~September 30, 2023 and 2022, we paid dividends and distributions on our common shares, Class B LLC units and LTIP units totaling ~~$8.6~~$4.3 million and ~~$4.2~~$4.3 million, respectively.

Cash Flows for the ~~Six~~Nine Months Ended ~~June~~September 30, 2023 and 2022 (in thousands)

Cash flows provided by (used in) operating activities, investing activities and financing activities for the ~~six~~nine months ended ~~June~~September 30, 2023 and 2022, were as follows:

Net cash flow provided by operating activities was ~~$17,221~~$17,130 for the ~~six~~nine months ended ~~June~~September 30, 2023, compared to ~~$11,682~~$15,159 for the ~~six~~nine months ended ~~June~~September 30, 2022. The net increase during the 2023 period primarily reflects improved revenues discussed above, ~~and~~ improved collection experience and lower ~~prepayments for~~ property ~~taxes,~~tax payments due to the entry into the Article 11 Agreement.

Net cash used in investing activities was ~~$18,915~~$27,783 for the ~~six~~nine months ended ~~June~~September 30, 2023, compared to ~~$30,879~~$41,992 for the ~~six~~nine months ended ~~June~~September 30, 2022. The decrease was primarily due to $7,871 lower capital spending at all of our operating properties, ~~$5,938 less in the period ended June 30, 2023, then the period ended June 30, 2022,~~ primarily at Flatbush Gardens and 1010 Pacific Street, partially offset by increased ~~spend~~capital spending at the Dean Street ~~property in the current period.~~property. Additionally, the Company purchased parcels of land at Dean Street for $8,041 in the ~~six-month~~nine-month period ended ~~June~~September 30, 2022. These were partially offset by a refund of a potential acquisition deposit of $2,015 in the ~~six-month~~nine-month period ended ~~June~~September 30, 2022.

Net cash provided by financing activities was ~~$2,101~~$17,341 for the ~~six~~nine months ended ~~June~~September 30, 2023, compared to ~~$10,942~~$10,101 for the ~~six~~nine months ended ~~June~~September 30, 2022. ~~Cash~~For the nine months ended September 30, 2023, $40,617 was provided ~~in the six months ended June 30, 2023,~~ by refinancing of the 1010 Pacific Street and Dean Street property ~~for~~loans, net ~~proceeds~~ of ~~$16,523~~scheduled debt amortization payments, partially offset by ~~the~~$9,921 of loan extinguishment and issuance costs, and ~~amortization payments~~$13,044 of ~~$5,725,~~ dividends and ~~distributions of $8,697. Cash~~distributions. For the nine months ended September 30, 2022, $24,855 was provided ~~in the six months ended June 30, 2022,~~ by net borrowings ~~from~~under the 1010 Pacific Street ~~refinance~~ and ~~under the lending facility for~~ 953 Dean Street development ~~properties~~property loans, net of ~~$20,839 partially offset by dividends and distributions of $8,461,~~ scheduled debt amortization payments, partially offset by $12,767 of ~~$1,101~~dividends and distributions and $335 of loan issuance and extinguishment ~~cost of $335.~~costs.

No provision has been made for income taxes since all of the Company’s operations are held in pass-through entities and accordingly the income or loss of the Company is included in the individual income tax returns of the partners or members.

We elected to be treated as a REIT for U.S. federal income tax purposes, beginning with our first taxable three months ended March 31, 2015. As a REIT, we generally will not be subject to federal income tax on income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate tax rates. We believe that we are organized and operate in a manner that will enable us to qualify and be taxed as a REIT and we intend to continue to operate to satisfy the requirements for qualification as a REIT for federal income tax purposes.

Inflation did not have a significant impact on the results of operations for the Company’s business for the periods reported in the consolidated financial statements. We do not believe that inflation currently poses a material risk to the Company. The leases at our residential rental properties, which comprise approximately 72% of our revenue, are short-term in nature. Our longer-term commercial and retail leases would generally allow us to recover some increased operating costs in the event of significant inflation.

Although the impact of inflation on our results of operations is not material, inflation has recently become a factor in the United States economy and could increase the cost of acquiring, replacing and operating the properties in the future.

In this Quarterly Report on Form 10-Q, we disclose and discuss funds from operations (“FFO”), adjusted funds from operations (“AFFO”), adjusted earnings before interest, income taxes, depreciation and amortization (“Adjusted EBITDA”) and net operating income (“NOI”), all of which meet the definition of “non-GAAP financial measures” set forth in Item 10(e) of Regulation S-K promulgated by the SEC.

While management and the investment community in general believe that presentation of these measures provides useful information to investors, neither FFO, AFFO, Adjusted EBITDA, nor NOI should be considered as an alternative to net income (loss) or income from operations as an indication of our performance. We believe that to understand our performance further, FFO, AFFO, Adjusted EBITDA, and NOI should be compared with our reported net income (loss) or income from operations and considered in addition to cash flows computed in accordance with GAAP, as presented in our consolidated financial statements.

FFO is defined by the National Association of Real Estate Investment Trusts (“NAREIT”) as net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property and impairment adjustments, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Our calculation of FFO is consistent with FFO as defined by NAREIT.

AFFO is defined by us as FFO excluding amortization of identifiable intangibles incurred in property acquisitions, straight-line rent adjustments to revenue from long-term leases, amortization costs incurred in originating debt, interest rate cap mark-to-market adjustments, amortization of non-cash equity compensation, acquisition and other costs, transaction pursuit costs, loss on modification/extinguishment of debt, gain on involuntary conversion, gain on termination of lease and certain litigation-related expenses, less recurring capital spending.

Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. In fact, real estate values have historically risen or fallen with market conditions. FFO is intended to be a standard supplemental measure of operating performance that excludes historical cost depreciation and valuation adjustments from net income. We consider FFO useful in evaluating potential property acquisitions and measuring operating performance. We further consider AFFO useful in determining funds available for payment of distributions. Neither FFO nor AFFO represent net income (loss) or cash flows from operations computed in accordance with GAAP. You should not consider FFO and AFFO to be alternatives to net income (loss) as reliable measures of our operating performance; nor should you consider FFO and AFFO to be alternatives to cash flows from operating, investing or financing activities (computed in accordance with GAAP) as measures of liquidity.

Neither FFO nor AFFO measure whether cash flow is sufficient to fund all of our cash needs, including principal amortization, capital improvements and distributions to stockholders. FFO and AFFO do not represent cash flows from operating, investing or financing activities computed in accordance with GAAP. Further, FFO and AFFO as disclosed by other REITs might not be comparable to our calculations of FFO and AFFO.

The following table sets forth a reconciliation of the Company’s FFO and AFFO for the periods presented to net loss, computed in accordance with GAAP (amounts in thousands):

Adjusted Earnings Before Interest, Income Taxes, Depreciation and Amortization

We believe that Adjusted EBITDA is a useful measure of our operating performance. We define Adjusted EBITDA as net income (loss) before allocation to non-controlling interests, plus real estate depreciation and amortization, amortization of identifiable intangibles, straight-line rent adjustments to revenue from long-term leases, amortization of non-cash equity compensation, interest expense (net), acquisition and other costs, transaction pursuit costs, loss on modification/extinguishment of debt and certain litigation-related expenses, less gain on involuntary conversion and gain on termination of lease.

We believe that this measure provides an operating perspective not immediately apparent from GAAP income from operations or net income (loss). We consider Adjusted EBITDA to be a meaningful financial measure of our core operating performance.

However, Adjusted EBITDA should only be used as an alternative measure of our financial performance. Further, other REITs may use different methodologies for calculating Adjusted EBITDA, and accordingly, our Adjusted EBITDA may not be comparable to that of other REITs.

The following table sets forth a reconciliation of Adjusted EBITDA for the periods presented to net loss, computed in accordance with GAAP (amounts in thousands):

We believe that NOI is a useful measure of our operating performance. We define NOI as income from operations plus real estate depreciation and amortization, general and administrative expenses, acquisition and other costs, transaction pursuit costs, amortization of identifiable intangibles and straight-line rent adjustments to revenue from long-term leases, less gain on termination of lease. We believe that this measure is widely recognized and provides an operating perspective not immediately apparent from GAAP income from operations or net income (loss). We use NOI to evaluate our performance because NOI allows us to evaluate the operating performance of our company by measuring the core operations of property performance and capturing trends in rental housing and property operating expenses. NOI is also a widely used metric in valuation of properties.

However, NOI should only be used as an alternative measure of our financial performance. Further, other REITs may use different methodologies for calculating NOI, and accordingly, our NOI may not be comparable to that of other REITs.

The following table sets forth a reconciliation of NOI for the periods presented to income from operations, computed in accordance with GAAP (amounts in thousands):

Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Management bases its estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. ~~Except for the effects of adoption of ASC 842 in the first quarter of 2022 as more fully described in Note 2 Significant Accounting Policies, we~~We believe that there have been no material changes to the items that we disclosed as our critical accounting policies under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Form 10-K for the year ended December 31, 2022.

See Note 2, “Significant Accounting Policies” of our consolidated financial statements for a discussion of recent accounting pronouncements.

Our future income, cash flows and fair value relevant to our financial instruments ~~depends~~depend upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. Based upon the nature of our operations, the principal market risk to which we are exposed is the risk related to interest rate fluctuations. Many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors that are beyond our control, contribute to interest rate risk.

A one percent change in interest rates on our ~~$69.0~~$74.4 million of variable rate debt as of ~~June~~September 30, 2023, would impact annual net loss by approximately $0.7 million.

At ~~June~~September 30, 2023, there were no interest rate caps for the Company’s outstanding debt.

The fair value of the Company’s notes payable was approximately ~~$1,078.7~~$1,117.0 million and $1,092.3 million as of ~~June~~September 30, 2023 and December 31, 2022, ~~respectively~~respectively.

The Company carried out an evaluation under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of ~~June~~September 30, 2023. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the ~~Securities~~ Exchange Act ~~of 1934~~ is recorded, processed, and summarized, within the time periods specified in the SEC's rules and forms.

We continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

There were no changes in our internal control over financial reporting identified in connection with the management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

See Note 8, “Commitments and Contingencies” of our consolidated financial statements for a discussion of legal proceedings.

The risk factors disclosed in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, as well as subsequent Quarterly Report on Form 10-Q, set forth information relating to various risks and uncertainties that could materially adversely affect our business, financial condition, liquidity, and operating results. Such risk factors continue to be relevant to an understanding of our business, financial condition, liquidity and operating results as of ~~June~~September 30, 2023, and there have been no material changes to those risk factors for the ~~six~~nine months ended ~~June~~September 30, ~~2023 except for the following updates:~~2023.

~~We hold a portion of our cash and cash equivalents in deposit accounts that could be adversely affected if the financial institutions holding such deposits fail~~.

We maintain our cash and cash equivalents at insured financial institutions. The combined account balances at each institution periodically exceed the FDIC insurance coverage of $250,000, and, as a result, there is a concentration of credit risk related to amounts in excess of FDIC insurance coverage. We do not have any bank accounts, loans to or from, or any other amounts due to or from any recently failed financial institution, nor have we experienced any losses to date on our cash and cash equivalents held in bank accounts. However, there is no assurance that financial institutions in which we hold our cash and cash equivalents will not fail, in which case we may be subject to a risk of loss or delay in accessing all or a portion of our funds exceeding the FDIC insurance coverage, which could adversely impact our short-term liquidity, ability to operate our business, and financial performance.

~~Reimbursements from government agencies under the Article 11 Agreement might be lower than expected and costs to implement the mandatory capital improvements might be higher than expected:~~

The Article 11 Agreement made us eligible incremental assistance payments under section 610 of the Private Housing Financing Law for tenants receiving governmental rental assistance (“Section 610 Benefits”). Section 610 Benefits are provided under current New York State Law and are subject to change via legislation or regulation. In addition, the number of eligible tenants may be reduced if they no longer receive governmental rental assistance. Also, we have committed to a three-year capital improvement plan whose costs are subject to market costs for construction materials and labor and may increase beyond current expectations.

ITEM 2.2 UNREGISTERED SALES OF EQUITY SECURITIES, ~~AND~~ USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

*** Incorporated by reference to the Company’s Form 8-K dated ~~June 29,~~August 10, 2023, filed on ~~July 5,~~August 14, 2023

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

		Page
PART I –FINANCIAL INFORMATION

CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

ITEM 1.	CONDENSED FINANCIAL STATEMENTS
	CONSOLIDATED BALANCE SHEETS AS OF ~~JUNE~~SEPTEMBER 30, 2023 (UNAUDITED) AND DECEMBER 31, 2022	3
	CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2023 AND 2022 (UNAUDITED)	4
	CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE THREE AND ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2023 AND 2022 (UNAUDITED)	5
	CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2023 AND 2022 (UNAUDITED)	6
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	7
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	2220
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	3027
ITEM 4.	CONTROLS AND PROCEDURES	3027


PART II –OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	3028
ITEM 1A.	RISK FACTORS	3128
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES, ~~AND~~ USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES	3128
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	28
ITEM 4.	MINE SAFETY DISCLOSURE	3128
ITEM 5.	OTHER INFORMATION	28
ITEM 6.	EXHIBITS	3129
SIGNATURES		3230

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except per share amounts)	2023			2022			2023			2022			2023			2022			2023			2022
Numerator
Net loss attributable to common stockholders	$	(1,249	)	$	(1,119	)	$	(3,936	)	$	(2,437	)	$	(881	)	$	(1,057	)	$	(4,817	)	$	(3,494	)
Less: income attributable to participating securities		(322	)		(246	)		(644	)		(408	)		(322	)		(280	)		(967	)		(688	)
Subtotal	$	(1,571	)	$	(1,365	)	$	(4,580	)	$	(2,845	)	$	(1,203	)	$	(1,337	)	$	(5,784	)	$	(4,182	)
Denominator
Weighted-average common shares outstanding		16,063			16,063			16,063			16,063			16,063			16,063			16,063			16,063

Basic and diluted net loss per share attributable to common stockholders	$	(0.10	)	$	(0.08	)	$	(0.29	)	$	(0.18	)	$	(0.07	)	$	(0.08	)	$	(0.36	)	$	(0.26	)

	June 30, 2023			December 31, 2022			September 30, 2023			December 31, 2022
	(unaudited)						(unaudited)
Deferred costs	$	348		$	348		$	348		$	348
Lease origination costs		1,463			1,376			1,463			1,376
In-place leases		428			428			428			428
Real estate tax abatements		9,142			9,142			9,142			9,142
Total deferred costs and intangible assets		11,381			11,294			11,381			11,294
Less accumulated amortization		(4,963	)		(4,670	)		(5,111	)		(4,670	)
Total deferred costs and intangible assets, net	$	6,418		$	6,624		$	6,270		$	6,624

2023 (Remainder)	$	37,956
2024		2,009
2025		2,803
2026		3,000
2027		34,215
Thereafter		1,106,776
Total	$	1,186,759

2023 (Remainder)	$	15,166	$	7,580
2024		30,457		30,457
2025		24,822		24,822
2026		4,548		4,548
2027		3,915		3,915
Thereafter		19,315		19,315
Total	$	98,223	$	90,637

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022			2023			2022			2023			2022
REVENUES
Residential rental income	$	25,040		$	22,597		$	48,980		$	44,059		$	25,501		$	23,108		$	74,481		$	67,167
Commercial rental income		9,503			9,290			19,230			19,878			9,627			9,692			28,857			29,570
TOTAL REVENUES		34,543			31,887			68,210			63,937			35,128			32,800			103,338			96,737

OPERATING EXPENSES
Property operating expenses		6,782			6,928			14,881			14,467			7,930			7,267			22,811			21,734
Real estate taxes and insurance		8,700			7,886			17,236			15,817			7,374			8,252			24,610			24,069
General and administrative		3,396			3,197			6,689			6,139			3,340			3,209			10,029			9,348
Transaction pursuit costs		357			92			357			516			—			(10	)		357			506
Depreciation and amortization		7,269			6,732			14,094			13,437			7,282			6,784			21,376			20,221
TOTAL OPERATING EXPENSES		26,504			24,835			53,257			50,376			25,926			25,502			79,183			75,878


INCOME FROM OPERATIONS		8,039			7,052			14,953			13,561			9,202			7,298			24,155			20,859

Interest expense, net		(11,334	)		(10,005	)		(21,469	)		(19,990	)		(11,527	)		(10,086	)		(32,996	)		(30,076	)
Loss on extinguishment of debt		—			—			(3,868	)		—			—			—			(3,868	)		—

Net loss		(3,295	)		(2,953	)		(10,384	)		(6,429	)		(2,325	)		(2,788	)		(12,709	)		(9,217	)

Net loss attributable to non-controlling interests		2,046			1,834			6,448			3,992			1,444			1,731			7,892			5,723
Net loss attributable to common stockholders	$	(1,249	)	$	(1,119	)	$	(3,936	)	$	(2,437	)	$	(881	)	$	(1,057	)	$	(4,817	)	$	(3,494	)

Basic and diluted net loss per share	$	(0.10	)	$	(0.08	)	$	(0.29	)	$	(0.18	)	$	(0.07	)	$	(0.08	)	$	(0.36	)	$	(0.26	)

Building and improvements (in years)	10	–	44
Tenant improvements	Shorter of useful life or lease term
Furniture, fixtures and equipment (in years)	3	–	15

2023 (Remainder)	$	487
2024		1,993
2025		82,092
2026		44,718
2027		33,461
Thereafter		1,049,105
Total	$	1,211,856

	Commercial			Residential			Total
Three months ended June 30, 2023		28	%		72	%		100	%
Three months ended June 30, 2022		29	%		71	%		100	%
Six months ended June 30, 2023		28	%		72	%		100	%
Six months ended June 30, 2022		31	%		69	%		100	%

	Commercial			Residential			Total
Three months ended September 30, 2023		27	%		73	%		100	%
Three months ended September 30, 2022		30	%		70	%		100	%
Nine months ended September 30, 2023		28	%		72	%		100	%
Nine months ended September 30, 2022		31	%		69	%		100	%

	2023			Less: 1010 Pacific			2023 Excluding 1010 Pacific			2022			Increase (decrease)			%			2023			Less: 1010 Pacific			2023 Excluding 1010 Pacific			2022			Increase (decrease)			%
Revenues
Residential rental income	$	25,040		$	795		$	24,245		$	22,597		$	1,648			7.3	%	$	25,501		$	1,160		$	24,341		$	23,108		$	1,233			5.3	%
Commercial rental income		9,503			-			9,503			9,290			213			2.3	%		9,627			12			9,615			9,692			(77	)		(0.8	)%
Total revenues		34,543			795			33,748			31,887			1,861			5.8	%		35,128			1,172			33,956			32,800			1,156			3.5	%
Operating Expenses
Property operating expenses		6,782			172			6,610			6,928			(318	)		(4.6	)%		7,930			286			7,644			7,267			377			5.2	%
Real estate taxes and insurance		8,700			99			8,601			7,886			715			9.1	%		7,374			137			7,237			8,252			(1,015	)		(12.3	)%
General and administrative		3,396			76			3,320			3,197			123			3.8	%		3,340			122			3,218			3,209			9			0.3	%
Transaction pursuit costs		357			-			357			92			265			288.0	%		-			-			-			(10	)		10			(100.0	)%
Depreciation and amortization		7,269			423			6,846			6,732			114			1.7	%		7,282			428			6,854			6,784			70			1.0	%
Total operating expenses		26,504			770			25,734			24,835			899			3.6	%		25,926			973			24,953			25,502			(549	)		(2.2	)%
Income from operations		8,039			25			8,014			7,052			962			13.6	%		9,202			199			9,003			7,298			1,705			23.4	%
Interest expense, net		(11,334	)		(763	)		(10,571	)		(10,005	)		(566	)		(5.7	)%		(11,527	)		(893	)		(10,634	)		(10,086	)		(548	)		(5.4	)%
Net loss	$	(3,295	)	$	(738	)	$	(2,557	)	$	(2,953	)	$	396			13.4	%	$	(2,325	)	$	(694	)	$	(1,631	)	$	(2,788	)	$	1,157			41.5	%

	Six Months Ended June 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Operating activities	$	17,221		$	11,682		$	17,130		$	15,159
Investing activities		(18,915	)		(30,879	)		(27,783	)		(41,992	)
Financing activities		2,101			10,942			17,341			10,101

Exhibit Number	Description
***10.1	~~Affordable Housing Regulatory Agreement,~~Acquisition Loan Note, dated ~~June 29,~~August 10, 2023, ~~between Renaissance Equity Holdings~~by Dean Owner LLC A, Renaissance Equity Holdings LLC B, Renaissance Equity Holdings LLC C, Renaissance Equity Holdings LLC D, Renaissance Equity Holdings LLC E, Renaissance Equity Holdings LLC F, Renaissance Equity Holdings LLC G, Flatbush Gardens Housing Development Fund Corporation and The Cityin favor of ~~New York.~~Valley National Bank

***10.2	~~Housing Repair and Maintenance Letter~~Building Loan Note, dated August 10, 2023, by Dean Owner LLC in favor of Valley National Bank

***10.3	Project Loan Note, dated August 10, 2023, by Dean Owner LLC in favor of Valley National Bank

***10.4	Credit Agreement, dated ~~June 29,~~August 10, 2023, by Dean Owner LLC in favor of Valley National Bank

***10.5	Mezzanine Loan Note, dated August 10, 2023, by Dean Member LLC in favor of BADF 953 Dean Street Lender LLC

***10.6	Line of Credit Note, dated August 10, 2023, between Clipper Realty Inc. in favor of Valley National Bank

*31.1	Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer

*31.2	Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer

*32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

**101.INS	Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)

**101.SCH	Inline XBRL Taxonomy Extension Schema Document

**101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document

**101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document

**101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document

**101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document

**104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

	CLIPPER REALTY INC.

~~August 3,~~November 2, 2023	By:	/s/ David Bistricer
		David Bistricer
		Co-Chairman and Chief Executive Officer