|Management agreement, fees and transactions with related party
Note 8 - Management agreement, fees and transactions with
On April 10, 2002, FREIT and Hekemian
& Co., Inc. (“Hekemian”) executed a Management Agreement whereby Hekemian would continue as Managing Agent for
FREIT. The term of the Management Agreement was renewed on November 1, 2017 for a two-year term which will expire on October 31,
2019. The Management Agreement automatically renews for successive periods of two years unless either party gives not less than
six (6) months prior notice to the other of non-renewal.
Hekemian currently manages all
the properties owned by FREIT and its affiliates, except for the office building at The Rotunda located in Baltimore, Maryland,
which is managed by an independent third party management company. However, FREIT may retain other managing agents to manage properties
acquired after April 10, 2002 and to perform various other duties such as sales, acquisitions, and development with respect to
any or all properties. Hekemian does not serve as the exclusive property acquisition advisor to FREIT and is not required to offer
potential acquisition properties exclusively to FREIT before acquiring those properties for its own account. The Management Agreement
includes a detailed schedule of fees for those services, which Hekemian may be called upon to perform. The Management Agreement
provides for a termination fee in the event of a termination or non-renewal of the Management Agreement under certain circumstances.
The Management Agreement with Hekemian,
effective November 1, 2001, requires the payment of management fees equal to 4% to 5% of rents collected. Such fees, charged to
operations, were approximately $2,216,000, $1,930,000, and $1,899,000 in Fiscal 2017, 2016 and 2015, respectively. In addition,
the Management Agreement provides for the payment to Hekemian of leasing commissions, as well as the reimbursement of operating
expenses incurred on behalf of FREIT. Such commissions and reimbursements amounted to approximately $1,191,000, $577,000 and $465,000
in Fiscal 2017, 2016 and 2015, respectively. Total Hekemian management fees outstanding at October 31, 2017 and 2016 were approximately
$200,000 and $181,000, respectively, and included in accounts payable on the accompanying consolidated balance sheets. FREIT also
uses the resources of the Hekemian insurance department to secure various insurance coverages for its properties and subsidiaries.
Hekemian is paid a commission for these services. Such commissions were charged to operations and amounted to approximately $175,000,
$164,000 and $166,000 in Fiscal 2017, 2016 and 2015, respectively.
Damascus Centre, LLC owns and operates
the Damascus Center. During Fiscal 2005, the Board authorized an investor group, Damascus 100, LLC (“Damascus 100”),
to acquire a 30% equity interest in Damascus Centre, LLC. The sale price, based on the fair market value of the
shopping center, reduced FREIT’s equity interest to 70%. The sale was completed on October 31, 2006, at a sales price of
$3,224,000, of which FREIT financed approximately $1,451,000. The sale price was equivalent to the book value of the interest sold.
Grande Rotunda, LLC owns and operates
the Rotunda property. FREIT owns a 60% equity interest in Grande Rotunda, LLC and Rotunda 100, LLC (“Rotunda 100”)
owns a 40% equity interest Grande Rotunda, LLC.
The equity owners of Rotunda 100
and Damascus 100 are principally employees of Hekemian. To incentivize the employees of Hekemian, FREIT advanced, only to employees
of Hekemian, up to 50% of the amount of the equity contributions that the Hekemian employees were required to invest in Rotunda
100 and Damascus 100. These advances were in the form of secured loans that bear interest that will float at 225 basis points over
the ninety (90) day LIBOR, as adjusted each November 1, February 1, May 1 and August 1. These loans are secured by the Hekemian
employees’ interests in Rotunda 100 and Damascus 100, and are full recourse loans. Interest only payments are required to
be made when billed.
No principal payments are required
during the term of the notes, except that the borrowers are required to pay to FREIT all refinancing proceeds and other cash flow
they receive from their interests in Damascus Centre, LLC and Grande Rotunda, LLC. These payments shall be applied first to accrued
and unpaid interest and then any outstanding principal. The notes had maturity dates at the earlier of (a) ten (10) years after
issue (Grande Rotunda, LLC– 6/19/2015, Damascus Centre, LLC – 9/30/2016), or, (b) at the election of FREIT, ninety
(90) days after the borrower terminates employment with Hekemian, at which time all outstanding unpaid principal is due. On May
8, 2008, the Board approved amendments to the existing loan agreements with the Hekemian employees, relative to their interests
in Rotunda 100, to increase the aggregate amount that FREIT may advance to such employees from $2 million to $4 million. On June
4, 2015, the Board approved an extension of the maturity date of the secured loans to occur the earlier of (a) June 19, 2018 or
(b) five days after the closing of a permanent mortgage loan secured by the Rotunda property. On December 7, 2017, the Board approved
a further extension of the maturity dates of these loans to the date or dates upon which distributions of cash are made by Grande
Rotunda, LLC to its members as a result of a refinancing or sale of Grande Rotunda, LLC or the Rotunda property.
The aggregate outstanding principal
balance of the notes at October 31, 2017 and 2016 was $5,451,000. The accrued but unpaid interest related to these notes for Fiscal
2017 and Fiscal 2016 amounted to approximately $1,068,000 and $886,000, respectively, and is included in accounts receivable on
the accompanying consolidated balance sheets.
With regard to the funding of the
Rotunda redevelopment project, Wells Fargo Bank required that Grande Rotunda, LLC contribute not less than $14,460,000 towards
the construction before any construction loan proceeds could be disbursed. To secure these funds, Grande Rotunda, LLC made a capital
call on its members, which are FREIT and Rotunda 100. FREIT’s share (60%) amounts to approximately $8.7 million, and the
Rotunda 100 members’ share (40%) amounts to approximately $5.8 million. FREIT, pursuant to previous agreements, made secured
loans to the Rotunda 100 members of approximately $2.1 million towards their share of the $5.8 million capital call, which were
in addition to the loans that FREIT made to the Rotunda 100 members in connection with their initial equity contribution to Rotunda
100 (described above). The balance of Rotunda 100’s capital call of approximately $3.7 million was initially made by FREIT
until it was repaid by Rotunda 100 in August 2014. As of October 31, 2017, FREIT and Rotunda 100 have made their required capital
call contributions of $8.7 million and $5.8 million, respectively, towards the Rotunda construction financing. Both FREIT and the
Rotunda 100 members are treating their required capital call contributions as additional investments in Grande Rotunda, LLC.
Grande Rotunda, LLC continues to
incur substantial expenditures at the Rotunda property. These expenditures include tenant improvements, leasing costs and operating
expenditures which, in the aggregate, exceed revenues as the property is still in the rent up phase. The construction loan is at
its maximum level resulting in no additional funding available to draw. Accordingly, the equity owners in Grande Rotunda, LLC (FREIT
with a 60% ownership and Rotunda 100, LLC with a 40% ownership) are contributing their respective pro-rata share of any cash needs
through loans to Grande Rotunda, LLC. As of October 31, 2017, Rotunda 100, LLC has funded Grande Rotunda,
LLC with approximately
$5.2 million which is included in “Due to affiliate” on the accompanying consolidated balance sheet.
From time to time, FREIT engages
Hekemian to provide certain additional services, such as consulting services related to development, property sales and financing
activities of FREIT. Separate fee arrangements are negotiated between Hekemian and FREIT with respect to such additional services.
In Fiscal 2007, FREIT’s Board of Trustees approved and FREIT executed a development fee agreement for the Rotunda redevelopment
project for the development services to be provided by Hekemian Development Resources, LLC (“Resources”), a wholly-owned
subsidiary of Hekemian. The development fee agreement, as amended, for the Rotunda provides for Resources to receive a fee equal
to 6.375% of the development costs as defined in the development agreement, less the amount of $3 million previously paid to Hekemian
for the Rotunda project. In addition, the Board approved the payment of a fee to Resources in the amount of $1.4 million in connection
with the revision to the scope of the Rotunda development project. The fee will be paid to Resources upon the following terms:
(i) $500,000 of the $1.4 million will be paid on a monthly basis during the design phase (the $500,000 was paid in Fiscal 2013);
and (ii) $900,000 of the $1.4 million will be paid upon the issuance of a certificate of occupancy for the multi-family portion
of the project (the $900,000 portion that has not yet been paid is included in accounts payable on FREIT’s consolidated balance
sheets at October 31, 2017 and 2016). Such fees incurred to Hekemian and Resources during Fiscal 2017, 2016 and 2015 were $467,500,
$443,000 and $1,546,000, respectively. Fees incurred in Fiscal 2017 related to commissions to Hekemian relating to the sale of
the Hammel Gardens property. Fees incurred in Fiscal 2016 and 2015 related to the Rotunda development project and were capitalized
and included in the cost of the project.
Mr. Robert S. Hekemian, Chairman
of the Board, Chief Executive Officer and a Trustee of FREIT, is the Chairman of the Board and Chief Executive Officer of Hekemian.
Mr. Robert S. Hekemian, Jr., a Trustee of FREIT, is the President of Hekemian. Trustee fee expense (including interest) incurred
by FREIT for Fiscal 2017, 2016 and 2015 was approximately $538,000, $532,000 and $538,000, respectively, for Mr. Robert S. Hekemian,
and $65,000, $65,000 and $65,000, respectively, for Mr. Robert S. Hekemian, Jr. (See Note 11 to FREIT’s consolidated financial