Comstock Holding Companies, Inc 10-Q for FY2020 Q2
Comstock Holding Companies, Inc. (CHCI)
10-Q
2020-08-14
For: 2020-06-30
View Original
Added on
April 09, 2026
About this 10-Q
Comstock Holding Companies, Inc filed this 10-Q on August 14, 2020, covering the quarter ended June 30, 2020 (FY2020 Q2).
Headline figures
Quarter ended June 30, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $6.46M
- up 21.1% from $5.34M a year earlier
- Net income
- $1.18M
- compared with a net loss of $237K a year earlier
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 30, 2020
or
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 1-32375
__________________________________________________________________________
(Exact name of registrant as specified in its charter)
__________________________________________________________________________
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
(703 ) 230-1985
(Address, including zip code, and telephone number, including area code, of principal executive offices)
__________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
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 (Section 232.405) 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 the definitions 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 | ☐ | |||||||||||||||||||||||
| ☒ | Smaller reporting company | |||||||||||||||||||||||||
| Emerging growth company | ||||||||||||||||||||||||||
If an emerging growth company, indicate by checkmark 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 Act). Yes ☐ No ☒
As of August 10, 2020, 7,858,262 shares of Class A common stock, par value $0.01 per share, and 220,250 shares of Class B common stock, par value $0.01 per share, of the registrant were outstanding.
COMSTOCK HOLDING COMPANIES, INC.
FORM 10-Q
TABLE OF CONTENTS
Page | |||||||||||
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
COMSTOCK HOLDING COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
| June 30, 2020 | December 31, 2019 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Trade receivables | |||||||||||
| Trade receivables - related parties | |||||||||||
| Prepaid and other assets, net | |||||||||||
| Total current assets | |||||||||||
| Equity method investments at fair value | |||||||||||
| Fixed assets, net | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| TOTAL ASSETS | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accrued personnel costs | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Accrued liabilities | |||||||||||
| Short term notes payable - due to affiliates, net of discount | |||||||||||
| Short term notes payable | |||||||||||
| Total current liabilities | |||||||||||
| Long term notes payable - due to affiliates | |||||||||||
| Long term notes payable - net of deferred financing charges | |||||||||||
| Long term operating lease liabilities, net of current portion | |||||||||||
| TOTAL LIABILITIES | $ | $ | |||||||||
| Commitments and contingencies | |||||||||||
| STOCKHOLDERS’ EQUITY | |||||||||||
Series C preferred stock $ | $ | $ | |||||||||
Class A common stock, $ | |||||||||||
Class B common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
Treasury stock, at cost ( | ( | ( | |||||||||
| Accumulated deficit | ( | ( | |||||||||
| TOTAL COMSTOCK HOLDING COMPANIES, INC. EQUITY | $ | $ | |||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
1
COMSTOCK HOLDING COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||||||||
| Revenue—asset management | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Revenue—real estate services | |||||||||||||||||||||||||||||||||||
| Total revenue | |||||||||||||||||||||||||||||||||||
| Expenses | |||||||||||||||||||||||||||||||||||
| Direct costs - asset management | |||||||||||||||||||||||||||||||||||
| Direct costs - real estate services | |||||||||||||||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||||||||||||||
| Selling and Marketing | |||||||||||||||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||||||||||||||
| Other income, net | |||||||||||||||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Income (loss) before income tax expense | ( | ||||||||||||||||||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||||||||||||||
| Loss on equity method investments carried at fair value | ( | ( | |||||||||||||||||||||||||||||||||
| Net income (loss) from continuing operations | ( | ||||||||||||||||||||||||||||||||||
| Net loss from discontinued operations, net of tax | ( | ( | |||||||||||||||||||||||||||||||||
| Net income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||
| Income (loss) per share from continuing operations | |||||||||||||||||||||||||||||||||||
| Basic net income (loss) per share | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||
| Diluted net income (loss) per share | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||
| Loss per share from discontinued operations | |||||||||||||||||||||||||||||||||||
| Basic net loss per share | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||
| Diluted net loss per share | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||
| Basic weighted average shares outstanding | |||||||||||||||||||||||||||||||||||
| Diluted weighted average shares outstanding (continuing operations) | |||||||||||||||||||||||||||||||||||
| Diluted weighted average shares outstanding (discontinued operations) | |||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
2
COMSTOCK HOLDING COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
Series C Preferred Stock | Class A | Class B | Additional paid-in capital | Treasury stock | Accumulated deficit | Non- controlling interest | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2018 | $ | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock compensation and issuances | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accrued liability settled through issuance of stock | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement of restricted stock awards | — | — | ( | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2019 | $ | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock compensation and issuances | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accrued liability settled through issuance of stock | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement of restricted stock awards | — | — | ( | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Warrant exercises | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class A stock conversion of non-controlling interest | — | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series C conversion of non-controlling interest | ( | — | — | — | — | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2019 | $ | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
3
COMSTOCK HOLDING COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
Series C Preferred Stock | Class A | Class B | Additional paid-in capital | Treasury stock | Accumulated deficit | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock compensation and issuances | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accrued liability settled through issuance of stock | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement of restricted stock awards | — | — | ( | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2020 | $ | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock compensation and issuances | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accrued liability settled through issuance of stock | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement of restricted stock awards | — | — | ( | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
4
COMSTOCK HOLDING COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Six Months Ended June 30, | |||||||||||||||||
| 2020 | 2019 | ||||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||
| Net income | $ | $ | |||||||||||||||
| Adjustment to reconcile net (loss) income from continuing operations to net cash (used in) provided by operating activities | |||||||||||||||||
| Amortization of loan discount, loan commitment and deferred financing fees | ( | ||||||||||||||||
| Amortization and depreciation expense | |||||||||||||||||
| Earnings from unconsolidated joint venture, net of distributions | |||||||||||||||||
| Stock compensation | |||||||||||||||||
| Change in fair value of equity method investment | |||||||||||||||||
| Distributions from equity method investments carried at fair value | |||||||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||||
| Trade receivables - related party | |||||||||||||||||
| Trade receivables | ( | ||||||||||||||||
| Accrued personnel costs | ( | ( | |||||||||||||||
| Prepaid and other assets | ( | ( | |||||||||||||||
| Accrued interest | |||||||||||||||||
| Accrued liabilities | ( | ||||||||||||||||
| Accounts payable | ( | ||||||||||||||||
| Lease liabilities | |||||||||||||||||
| Net cash provided by operating activities of discontinued operations | |||||||||||||||||
| Net cash provided by operating activities | $ | $ | |||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||
| Purchase of fixed assets | ( | ( | |||||||||||||||
| Principal received on note receivable | |||||||||||||||||
| Net cash used in investing activities | $ | ( | $ | ( | |||||||||||||
| Cash flows from financing activities: | |||||||||||||||||
| Proceeds from notes payable | |||||||||||||||||
| Payments on notes payable | ( | ( | |||||||||||||||
| Taxes paid related to net share settlement of equity awards | ( | ( | |||||||||||||||
| Net cash used in financing activities | $ | ( | $ | ( | |||||||||||||
| Net (decrease) increase in cash and cash equivalents | ( | ||||||||||||||||
| Cash and cash equivalents, beginning of period | |||||||||||||||||
| Cash and cash equivalents, end of period | $ | $ | |||||||||||||||
| Supplemental cash flow information: | |||||||||||||||||
| Interest paid | $ | $ | |||||||||||||||
| Supplemental disclosure for non-cash investing and financing activities: | |||||||||||||||||
| Accrued liability settled through issuance of stock | $ | $ | |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Comstock Holding Companies, Inc. and subsidiaries (“Comstock”, “CHCI” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X and other applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Such financial statements do not include all of the disclosures required by GAAP for complete financial statements. In our opinion, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included in the accompanying consolidated financial statements. The Company has evaluated subsequent events through the date these consolidated financial statements were issued and has included all necessary adjustments and disclosures. For further information and a discussion of our significant accounting policies, other than discussed below, refer to our audited consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Comstock Holding Companies, Inc., incorporated in 2004 as a Delaware corporation, is a multi-faceted asset management and services company primarily focused in the Washington, D.C. Metropolitan Statistical Area. In 2018, the Company made a strategic decision to transform its operating platform from being primarily focused on developing on-balance sheet, for-sale, homebuilding projects to being focused on commercial and residential asset management and real estate related services. On April 30, 2019, the Company announced the exit from the homebuilding business. The Company now operates through five subsidiaries – CDS Asset Management, LC (“CAM”), Comstock Residential Management, LC, Comstock Commercial Management, LC, Park X Management, LC and Comstock Environmental Services, LLC (“CES”). The Company’s homebuilding operations are presented in Discontinued Operations (see Note 19 – Discontinued Operations). References in these Consolidated Financial Statements to “Comstock,” “Company”, “we,” “our” and “us” refer to Comstock Holding Companies, Inc. together in each case with our subsidiaries unless the context suggests otherwise.
The Company’s Class A common stock is traded on the NASDAQ Capital Market under the symbol “CHCI”.
Throughout this quarterly report on Form 10-Q, amounts are in thousands, except per share data, number of stock options, number of stock awards, or as otherwise noted.
The Consolidated Balance Sheet as of December 31, 2019 was derived from the audited financial statements contained in the 2019 Form 10-K.
For the three and six months ended June 30, 2020 and 2019, comprehensive income (loss) equaled net income (loss); therefore, a separate statement of comprehensive income (loss) is not included in the accompanying consolidated financial statements.
Recent Developments
On July 30, 2020, the Company retired an unsecured seller-financed promissory note with an outstanding balance of $595 thousand. The Company received a $50 thousand discount to retire the note prior to maturity. The gain on extinguishment will be reflected in the Company's third quarter results. See Note 8 - Debt and Note 20 - Subsequent Events for more information.
Use of Estimates
Our condensed consolidated financial statements have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts for the reporting periods. We base these estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. We evaluate these estimates and judgments on an ongoing basis. Actual results may differ from those estimates under different assumptions or conditions. Material estimates are utilized in the valuation of deferred tax assets, analysis of goodwill impairment, valuation of equity-based compensation, valuation of preferred stock issuances, capitalization of costs, consolidation of variable interest entities and fair value of financial instruments (including the fair value of our equity method investments).
6
In August 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-13, “Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”), which removes, adds and modifies certain disclosure requirements for fair value measurements in Topic 820. ASU 2018-13 removes the following disclosure requirements: (i) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and (ii) the entity’s valuation processes for Level 3 fair value measurements. ASU 2018-13 adds the following disclosure requirements: (i) provide information about the measurement uncertainty of Level 3 fair value measurements as of the reporting date rather than a point in the future, (ii) disclose changes in unrealized gains and losses related to Level 3 measurements for the period included in other comprehensive income, and (iii) disclose for Level 3 measurements the range and weighted average of the significant unobservable inputs and the way it is calculated. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company adopted ASU 2018-13 prospectively as of January 1, 2020. The adoption did not have a material impact on our Consolidated Financial Statements.
Recently Issued Accounting Standards
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments", which modifies how companies recognize expected credit losses on financial instruments and other commitments to extend credit held by an entity at each reporting date. Existing GAAP requires an “incurred loss” methodology whereby companies are prohibited from recording an expected loss until it is probable that the loss has been incurred. ASU 2016-13 requires companies to use a methodology that reflects current expected credit losses (“CECL”) and requires consideration of a broad range of reasonable and supportable information to record and report credit loss estimates, even when the CECL is remote. Companies will be required to record the allowance for credit losses and deduct that amount from the basis of the asset. The guidance is effective for the Company for financial statement periods beginning after December 15, 2022, although early adoption is permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements and related disclosures
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes", which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 will be effective for public business entities for annual reporting periods beginning after December 15, 2020, and interim periods within those periods. Early adoption is permitted. We do not expect the adoption of this pronouncement to have a material impact on our consolidated financial statements.
We assessed other accounting pronouncements issued or effective during the three and six months ended June 30, 2020 and deemed they were either not applicable to us or are not anticipated to have a material effect on our consolidated financial statements. Other standards previously issued and adopted by the Company have been disclosed in previous filings.
2. REVISION OF PRIOR PERIOD FINANCIAL STATEMENTS
In connection with the preparation of the Company’s 2019 consolidated financial statements, the Company identified errors in its historical financial statements relating to how the Company accounted for debt discounts and how the Company accounted for reimbursement of salaries and other salary related costs for its property management revenue arrangements. Specifically, the Company incorrectly accounted for debt discount of certain notes payable due to affiliates that should have been fully amortized at the end of the initial three-year term in October 2017. In addition, in the interim periods in 2019, the Company previously reported the reimbursement of salary costs from its property management agreements on a net basis, although the Company was required to account for these payroll related reimbursements on a gross basis. The correction of these non-cash errors had no effect on the previously reported operating income (loss) or total cash flows from operations, investing, or financing of the Company.
The Company evaluated the errors and, based on an analysis of quantitative and qualitative factors, determined that the related impact was not material to the Company’s consolidated financial statements for any prior period.
7
| For the three months ended June 30, 2019 | For the six months ended June 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| As previously reported | Adjustment | As adjusted | As previously reported | Adjustment | As adjusted | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Revenue—asset management | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Direct costs—asset management | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest (expense) | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other income, net | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Additional paid-in capital | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accumulated deficit | ( | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Total equity | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
3. TRADE RECEIVABLES & TRADE RECEIVABLES – RELATED PARTIES
Trade receivables include amounts due from real estate services, asset management and commercial development. The Company records an allowance for doubtful accounts based on historical collection experience and the aging of receivables. As of June 30, 2020, the allowance for doubtful accounts was de minimis based on the Company’s historical collection experience for receivables older than 90 days along with an analysis of collections received after the filing date.
As of June 30, 2020 and December 31, 2019, the Company had $3.0 million and $3.6 million, respectively, of receivables from related parties, primarily related to the 2019 AMA, as defined in Note 15. The Company does not record an allowance for doubtful accounts related to receivables from related parties. This is due to the related party nature of the receivables along with the collection history.
4. EQUITY METHOD INVESTMENTS IN REAL ESTATE VENTURES AT FAIR VALUE
Based upon elections made at the date of investment, the Company reports the equity method investments in real estate ventures at fair value. For such investments, the Company increases or decreases the investment each reporting period by the change in the fair value and the Company reports the fair value adjustments in the Consolidated Statement of Operations in the ‘loss on equity method investments carried at fair value’ line item. Changes in fair value of the Company's investment in Investors X (defined below) are impacted by distributions as the fair value is based on finite cash flows from the wind-down of that entity.
Fair value of equity method investments are classified as Level 3 of the fair value hierarchy. As of June 30, 2020 and December 31, 2019, the Company had equity method investments in real estate ventures at fair value of $7.6 million and $8.4 million, respectively. The table below shows the change in the Company’s investments in real estate ventures reported at fair value.
| Six Months Ended June 30, 2020 | |||||
| Fair value of investments as of December 31, 2019 | $ | ||||
| Distributions | ( | ||||
| Change in fair value | ( | ||||
| Fair value of investments as of June 30, 2020 | $ | ||||
See Note 15 – Related Party Transactions for additional discussion of our investments in real estate ventures at fair value.
Investors X
The Company has elected to account for the equity method investment in Comstock Investors X, L.C. (“Investors X”), a Variable Interest Entity (“VIE”) that owns the Company’s residual homebuilding operations at fair value. Fair value is determined using a discounted cash flow model based on expected future cash flows for income and realization events of the underlying asset. Expected future cash flows includes contractually fixed revenues and expenses as well as estimates for future revenues and expenses where contracts do not currently exist. These estimates are based on prior experience as well as comparable, third party data.
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As of June 30, 2020 and December 31, 2019, the fair value of the Company’s investment in Investors X is $6.4 million and $7.2 million, respectively. The Company received distributions of $144 thousand and $514 thousand during the three and six months ended June 30, 2020, respectively, and recognized a loss in fair value of $73 thousand and $42 thousand, respectively.
Summarized Financial Information for Investors X
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||
| 2020 | 2020 | ||||||||||
Statement of Operations: | |||||||||||
| Total revenue | $ | $ | |||||||||
| Direct costs | |||||||||||
| Net income | $ | $ | |||||||||
| Comstock Holding Companies, Inc. share of net income | $ | $ | |||||||||
The Hartford
On December 30, 2019, the Company made an investment related to the purchase of a stabilized commercial office building located at 3101 Wilson Boulevard in the Clarendon area of Arlington County, Virginia (the “Hartford”). The Company will retain a 2.5 % equity interest in the asset at a cost of approximately $1.2 million. The Company has elected to account for the equity method investment in the Hartford at fair value. Fair value is determined using an income approach and sales comparable approach models. As of June 30, 2020 and December 31, 2019, the fair value of the Company’s investment in the Hartford was $1.2 27 59
Summarized Financial Information for the Hartford
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||
| 2020 | 2020 | ||||||||||
Statement of Operations: | |||||||||||
| Total revenue | $ | $ | |||||||||
| Direct costs | |||||||||||
| Other costs | |||||||||||
| Net income | $ | ( | $ | ( | |||||||
| Comstock Holding Companies, Inc. share of net income | $ | ( | $ | ( | |||||||
5. GOODWILL & INTANGIBLES
Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a business acquisition. Following an acquisition, we perform an analysis to value the acquired company’s tangible and identifiable intangible assets and liabilities. With respect to identifiable intangible assets, we consider backlog, non-compete agreements, client relationships, trade names, patents and other assets. We amortize our intangible assets based on the period over which the contractual or economic benefits of the intangible assets are expected to be realized. We assess the recoverability of the unamortized balance of our intangible assets when indicators of impairment are present based on expected future profitability and undiscounted expected cash flows and their contribution to our overall operations. Should the review indicate that the carrying value is not fully recoverable, the excess of the carrying value over the fair value of the intangible assets would be recognized as an impairment loss. As of the acquisition date, goodwill consisted primarily of synergies resulting from the combination, expected expanded opportunities for growth and production, and savings in corporate overhead costs.
We perform our annual goodwill impairment review during our fourth quarter as of October 1. In addition, we regularly evaluate whether events and circumstances have occurred that may indicate a potential change in recoverability of goodwill. We perform interim goodwill impairment reviews between our annual reviews if certain events and circumstances have occurred, including a deterioration in general economic conditions, an increased competitive environment, a change in management, key personnel, strategy or customers, significant or unusual changes in market capitalization, negative or declining cash flows, or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior
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periods. During the three months ended March 31, 2020 we considered the impact of the coronavirus ("COVID-19") pandemic and the resulting economic impact a triggering event and performed a goodwill impairment review. There were no events indicating a potential change in recoverability of goodwill during the three months ended June 30, 2020.
When assessing goodwill for impairment, the Company may first assess qualitative factors to evaluate whether it is more likely than not that the fair value of a reporting unit is less than it's carrying amount or elect to bypass such assessment. If it is determined that it is more likely than not that the fair value of a reporting unit is less than it’s carrying value, or the Company elects to bypass such assessment, the Company then determines the fair value of each reporting unit. The estimate of the fair value of each reporting unit is based on a projected discounted cash flow model that includes significant assumptions and estimates, including the Company's discount rate, growth rate and future financial performance as well as a market multiple model based upon similar transactions in the market. Assumptions about the discount rate are based on a weighted average cost of capital built up from various interest rate components applicable to the Company. Assumptions about the growth rate and future financial performance of a reporting unit are based on the Company's forecasts, business plans, economic projections and anticipated future cash flows. Market multiples are derived from recent transactions among businesses of a similar size and industry. The fair value of each reporting unit is compared to the carrying amount of the reporting unit. If the carrying value of the reporting unit exceeds the fair value, then an impairment loss is recognized for the difference. For the three months ended March 31, 2020 the Company determined that there was no impairment to goodwill. As of June 30, 2020 and December 31, 2019, the balance of goodwill was $1.7
Intangible assets include customer relationships which have an amortization period of four years . During the three and six months ended June 30, 2020, $17 thousand and $33 thousand of intangible asset amortization was recorded in ‘General and administrative’ expense on the Consolidated Statements of Operations, respectively.
| June 30, 2020 | December 31, 2019 | ||||||||||
Intangibles | $ | $ | |||||||||
Less: accumulated amortization | ( | ( | |||||||||
| $ | $ | ||||||||||
As of June 30, 2020, the future estimated amortization expense related to these intangible assets was:
Amortization Expense | |||||
| 2020 (6 months ended December 31, 2020) | $ | ||||
| 2021 | |||||
Total | $ | ||||
6. LEASES
On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) 2016-2, Leases, later codified as Accounting Standards Codification ("ASC") 842 ("ASC 842"), using the modified retrospective method.
The determination of whether an arrangement contains a lease and the classification of a lease, if applicable, is made at lease commencement, at which time the Company also measures and recognizes an ROU asset, representing the Company’s right to use the underlying asset, and a lease liability, representing the Company’s obligation to make lease payments under the terms of the arrangement. For the purposes of recognizing ROU assets and lease liabilities associated with the Company’s leases, the Company has elected the practical expedient to not recognize a ROU asset or lease liability for short-term leases, which are leases with a term of twelve months or less. The lease term is defined as the non-cancelable portion of the lease term plus any periods covered by an option to extend the lease if it is reasonably certain that the option will be exercised.
ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The rates implicit within the Company's leases are generally not determinable; therefore, the Company's incremental borrowing rate of 6.5 %, at the time of adoption, was used to determine the present value of lease payments. The determination of the Company’s incremental borrowing rate requires judgment. The incremental borrowing rate is determined at lease commencement, or as of January 1, 2019 for operating leases in existence upon adoption of ASC 842.
The Company has operating leases for its office facilities as well as for office equipment. The Company's leases have remaining terms of less than one year to 3 years. The leases can contain various renewal and termination options. The period
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which is subject to an option to extend the lease is included in the lease term if it is reasonably certain that the option will be exercised. The period which is subject to an option to terminate the lease is included if it is reasonably certain that the option will not be exercised. Lease costs related to the Company's operating leases are generally recognized as a single ratable lease cost over the lease term.
Maturities of lease liabilities as of June 30, 2020 are as follows:
Operating Leases | |||||
| 2020 (6 months ended December 31) | $ | ||||
| 2021 | |||||
| 2022 | |||||
Total lease payments | |||||
Less: imputed interest | |||||
| Present value of lease liabilities | $ | ||||
As of June 30, 2020, operating lease payments include $54 thousand related to options to extend lease terms that are reasonably certain of being exercised. The Company does no t have any lease liabilities which have not yet commenced as of June 30, 2020.
7. REVENUE
The Company’s revenues consist primarily of
•Asset Management;
•Property Management;
•Capital Markets;
•Leasing;
•Project & Development Services; and
•Environmental Consulting and Engineering Services.
Asset Management
Asset Management primarily provides comprehensive real estate asset management services to the CDS Portfolio (defined below), representing a series of daily performance obligations delivered over time. Pricing includes a cost-plus management fee or a market-rate fee form of variable consideration. The Company earns whichever is higher. See Note 15 – Related Party Transactions.
The amount of revenue recognized is presented on a gross basis for any services provided by our employees, as we control the services provided by the employees. This is evidenced by our obligation for their performance and our ability to direct and redirect their work and negotiate the value of such services. In the instances where we do not control third-party services delivered to the client, we report revenues net of the third-party reimbursements. Consistent with the transfer of control for distinct, daily services to the customer, revenue is typically recognized at the end of each period for the fees associated with the services performed.
Property Management
We provide on-site day-to-day management services for owners of office, industrial, retail, multifamily residential and various other types of properties, representing a series of daily performance obligations delivered over time. Pricing is generally in the form of a monthly management fee based upon property-level cash receipts, square footage under management or some other variable metric. Revenues from project management may also include reimbursement of payroll and related costs for personnel providing the services and subcontracted vendor costs. Project management services represent a series of distinct daily services rendered over time. Consistent with the transfer of control for distinct, daily services to the customer, revenue is typically recognized at the end of each period for the fees associated with the services performed. The amount of revenue recognized is presented on a gross basis for any services provided by our employees, as we control the services provided by the employees. This is evidenced by our obligation for their performance and our ability to direct and redirect their work and negotiate the value of
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such services. In the instances where we do not control third-party services delivered to the client, we report revenues net of the third-party reimbursements.
Capital Markets
We offer clients commercial mortgage and structured financing services. We are compensated for our services via a fee paid upon successful commercial financing from third party lenders. The fee earned is contingent upon the funding of the loan, which represents the transfer of control for services to the customer. Therefore, we typically satisfy our performance obligation at the point in time of the funding of the loan, when there is a present right to payment.
Leasing
We provide strategic advice and execution services for owners, investors, and occupiers of real estate in connection with the leasing of office, industrial and retail space. We are compensated for our services in the form of a commission. Our commission is paid upon signing of the lease by the tenant. We satisfy our performance obligation at a point in time; generally, at the time of the contractual event where there is a present right to payment.
Project and Construction Management
We provide project and construction management services for owners and occupiers of real estate in connection with the management and leasing of office, industrial and retail space. The fees that we earn are typically variable based upon a percentage of project cost. We are compensated for our services in the form of management fees. Project and construction management services represent a series of performance obligations delivered over time and revenue is recognized over time.
Environmental Consulting and Engineering
We provide environmental consulting and engineering services for owners of real estate. Remediation services are generally contracted and performed by Comstock Environmental. We are compensated for our services as well as for the services of subcontractors used to perform remediation services. Fees earned are generally based upon employee time spent as well as a cost-plus arrangement for subcontractors used. Generally, environmental consulting and engineering services represent a series of performance obligations delivered over time and revenue is recognized over time.
Contract Costs
Expenses, primarily employee commissions, incurred on leasing and capital markets transactions represent substantially all of our incremental costs to obtain revenue contracts. We apply the applicable practical expedient offered by ASC Topic 606 "Revenue", when the amortization period is one year or less and, therefore, recognize these costs as an operating expense as they are incurred.
The following table presents the Company’s sales from contracts with customers disaggregated by categories which best represents how the nature, amount and timing and uncertainty of sales are affected by economic factors.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
Revenue by customer | |||||||||||||||||||||||||||||||||||
Related party | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
Commercial | |||||||||||||||||||||||||||||||||||
Total Revenue by customer | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
Revenue by contract type | |||||||||||||||||||||||||||||||||||
Fixed-price | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
Cost-plus | |||||||||||||||||||||||||||||||||||
Time and Material | |||||||||||||||||||||||||||||||||||
Total Revenue by contract type | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
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For the three and six months ended June 30, 2020, $6.1 million and $12.9 million, respectively, of our revenues were earned for contracts where revenue is recognized over time. For the three and six months ended June 30, 2019, $5.1 million and $10.0 million, respectively, of our revenues were earned for contracts where revenue is recognized over time.
For the three and six months ended June 30, 2020, $0.4 million and $0.6 million, respectively, of our revenues were earned for contracts where revenue is recognized at a point in time. For the three and six months ended June 30, 2019, $0.2
8. DEBT
As of June 30, 2020, notes payable consisted of the following:
| June 30, 2020 | December 31, 2019 | ||||||||||
Secured financing | $ | $ | |||||||||
Notes payable- due to affiliates, unsecured, net of $ | |||||||||||
Unsecured financing | |||||||||||
Total notes payable | $ | $ | |||||||||
As of June 30, 2020, net maturities and/or curtailment obligations of all borrowings are as follows:
| 2020 | $ | ||||
| 2021 | |||||
| 2022 | |||||
| 2023 | |||||
Total | $ | ||||
Secured financing
As of December 31, 2019, the Company had two secured loans related to Comstock Environmental. The first loan was used to finance the acquisition of Comstock Environmental and carried a fixed interest rate of 6.5 % with a maturity date of October 17, 2022. At December 31, 2019, this financing had an outstanding balance of $667 thousand. This loan was retired during the three months ended June 30, 2020. Comstock Environmental had an additional secured loan with an outstanding balance of $27 thousand as of December 31, 2019 that was used to fund the purchase of an asset used in the business. This loan was retired during the six months ended June 30, 2020. These financings were secured by the assets of Comstock Environmental and guaranteed by our Chief Executive Officer.
Unsecured financing
As of June 30, 2020 and December 31, 2019, the Company had one 595 3 % and has a maturity date of July 17, 2022. This loan has $50 3.6 % and 5.0 %, respectively. On July 30, 2020 the Company retired this promissory note. See Note 20 - Subsequent Events for more details. In addition, during the six months ended June 30, 2020, the Company financed the Director’s and Officer’s insurance policy with a one year term loan. As of June 30, 2020, the balance on this loan was $37 thousand.
Notes payable, due to affiliates – unsecured
Comstock Growth Fund
On October 17, 2014, the Company entered into an unsecured promissory note with Comstock Growth Fund ("CGF") whereby CGF made a loan to the Company in the initial principal amount of $10.0 million and a maximum amount available for borrowing of up to $20.0 million with a three-year term. On December 18, 2014, the loan agreement was amended and restated to provide for a maximum capacity of $25 million. On May 23, 2018, the Company entered into a Membership Interest Exchange and Subscription Agreement (the “Membership Exchange Agreement”), together with a revised promissory note agreement, in which a note (“CGF Note”) with an outstanding principal and accrued interest balance of $7.7 million was exchanged for
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Revolving Capital Line of Credit
On March 19, 2020, the Company entered into a Revolving Capital Line of Credit Agreement (the “Loan Documents”) with CDS, pursuant to which the Company secured a $10.0 million capital line of credit (the “Revolver”). Under the terms of the Loan Documents, the Revolver provides for an initial variable interest rate of the Wall Street Journal Prime Rate plus 1.00 % per annum on advances made under the Revolver, payable monthly in arrears. The five-year term facility allows for interim draws that carry a maturity date of 12 months from the initial date of the disbursement unless a longer initial term is agreed to by CDS. On March 27, 2020, the Company borrowed $5.5 million under the Revolver. The $5.5 million borrowed has a maturity date of April 30, 2023.
For the three and six months ended June 30, 2020, the Company made interest payments for all debt facilities of $0.1 million and $0.3 million, respectively. For the three and six months ended June 30, 2019, the Company made interest payments for all debt facilities of $0.1 million and $0.2 million, respectively.
During the three months ended June 30, 2020, the Company retired the $5.7 million of outstanding borrowings for the CGF Note and did no no
9. PAYCHECK PROTECTION PLAN LOAN
In response to the COVID-19 pandemic, the Paycheck Protection Program (the “PPP”) was established under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and administered by the U.S. Small Business Administration (“SBA”). Companies who met the eligibility requirements set forth by the PPP could qualify for PPP loans provided by local lenders, which supports payroll, rent and utility expenses (“qualified expenses”). If the loan proceeds are fully utilized to pay qualified expenses over the covered period, as further defined by the PPP, the full principal amount of the PPP loan may qualify for loan forgiveness, subject to potential reduction based on the level of full-time employees maintained by the organization during the covered period as compared to a baseline period.
In April 2020, the Company received proceeds of $1.95 million under the PPP (the "PPP Loan") provided by Mainstreet Bank (the “Lender”). Based on the term and conditions of the loan agreement, the term of the PPP loan is two years with an annual interest rate of 1% and principal and interest payments will be deferred for the first six-months of the loan term, which has been updated according to the Paycheck Protection Program Flexibility Act of 2020 (“Flexibility Act”).
In June 2020, the Flexibility Act was signed into law, which amended the CARES Act. The Flexibility Act changed key provisions of the PPP, including, but not limited to, (i) provisions relating to the maturity of PPP loans, (ii) the deferral period covering of PPP loan payments and (iii) the process for measurement of loan forgiveness. More specifically, the Flexibility Act provides a minimum maturity of five years for all PPP loans made on or after the date of the enactment of the Flexibility Act (“June 5, 2020”) and permits lenders and borrowers to extend the maturity date of earlier PPP loans by mutual agreement. As of the date of this filing, the Company has not approached the Lender to request an extension of the current maturity date from two years to five years. The Flexibility Act also provides that if a borrower does not apply for forgiveness of a loan within 10 months after the last day of the measurement period (“covered period”), the PPP loan is no longer deferred and the borrower must begin paying principal and interest. Therefore, the Company’s deferral period for principal and interest payments was updated from six-months according to the terms and conditions of the loan agreement to ten months. In addition, the Flexibility Act extended the length of the covered period from eight weeks to 24 weeks from receipt of proceeds, while allowing borrowers that received PPP loans before June 5, 2020 to determine, at their sole discretion, a covered period of either eight weeks or 24-weeks.
After reviewing the applicable terms and conditions of the Flexibility Act, the Company has elected to extend the length of the covered period from the lesser of (i) period whereby qualified expenses equal loan proceeds or (ii) 24 weeks. The Company has performed initial calculations for the PPP loan forgiveness according to the terms and conditions of the SBA’s Loan Forgiveness Application (Revised June 16, 2020) and, based on such calculations, expects that the PPP loan will be forgiven in full over a period less than 24 weeks. In addition, the Company has determined that it is probable the Company will meet all the
14
conditions of the PPP loan forgiveness. As such, the Company has determined that the PPP loan should be accounted for as a government grant which analogizes with International Accounting Standards (“IAS”) 20, Accounting for Government Grants and Disclosure of Government Assistance. Under the provisions of IAS 20, “a forgivable loan from government is treated as a government grant when there is reasonable assurance that the entity will meet the terms for forgiveness of the loan.” IAS 20 does not define “reasonable assurance”, however, based on certain interpretations, it is analogous to “probable” under GAAP under FASB ASC 450-20-20, which is the definition the Company has applied to its expectations of the PPP loan forgiveness. In addition, in accordance with the provisions of IAS 20, government grants shall be recognized in profit or loss on a systematic basis over the periods in which the Company recognizes costs for which the grant is intended to compensate (i.e. qualified expenses). Therefore, the Company recognized PPP funding as a contra-expense during the periods when qualified expenses were incurred. The balance and activity related to the PPP loan is as follows as of June 30, 2020.
| June 30, 2020 | |||||
| PPP loan proceeds | $ | ||||
| Qualified expenses eligible for forgiveness | ( | ||||
| PPP loan balance | $ | ||||
The Company plans to submit the PPP loan forgiveness application in the near term. In accordance with the terms and conditions under the Flexibility Act, the lender has 60 days from receipt of the completed application to issue a decision to the SBA. If the lender determines that the borrower is entitled to forgiveness of some or all of the amount applied for under the statue and applicable regulations, the lender must request payment from the SBA at the time the lender issues its decision to the SBA. The SBA will, subject to any SBA review of the loan or loan application, remit the appropriate forgiveness amount to the lender, plus any interest accrued through the date of payment, not later than 90 days after the lender issues its decision to the SBA. Although the Company believes it is probable that the PPP loan will be forgiven, the Company cannot currently provide any objective assurance that it will obtain forgiveness in whole or in part. The amount the Company borrowed is within the "safe-harbor" limitations of the SBA. The SBA has published Frequently Asked Question 46 stating that if the principal amount of the loan is less than $2 million, the borrower "will be deemed to have made the required certification concerning the necessity of the loan request in good faith".
Pursuant to the Flexibility Act, the Company’s PPP loan agreement will be amended in the event that no amount or less than all of the PPP loan is forgiven. In addition, starting in August 2021, the Company will be required to make principal and interest payments totaling $82,671 per month or an adjustment amount based on the loan amendment over the remaining term of the PPP loan until such time the loan is fully settled. The Company may prepay the PPP loan at any time without penalty and the loan agreement evidencing the PPP Loan contains customary events of default relating to, among other things, payment defaults, or breaches of representations and warranties, or other provisions of the loan agreement. The occurrence of an event of default may trigger the immediate repayment of all amounts outstanding, collection of all amounts owing from the Company, and/or the Lender filing suit and obtaining a judgment against the Company.
10. COMMITMENTS AND CONTINGENCIES
Litigation
Currently, we are not subject to any material legal proceedings. From time to time, we are named as a defendant in legal actions arising from our normal business activities. Although we cannot accurately predict the amount of our liability, if any, that could arise with respect to legal actions pending against us, we do not believe it is reasonably possible that such liability will have a material adverse effect on our financial position, operating results and cash flows. We believe that we have obtained adequate insurance coverage, rights to indemnification, or where appropriate, have established appropriate reserves in connection with any such legal proceedings.
11. FAIR VALUE DISCLOSURES
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| June 30, 2020 | December 31, 2019 | ||||||||||
Carrying amount | $ | $ | |||||||||
Fair value | $ | $ | |||||||||
Fair value estimates are made at a specific point in time, based on relevant market information about the financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Investments in Real Estate Ventures at Fair Value
We report our two investments in real estate ventures at fair value. For such investments, we increase or decrease our investment each reporting period by the change in the fair value and we report these fair value adjustments in the Consolidated Statements of Operations.
For our investments in real estate ventures at fair value, we estimate the fair value using the level 3 Income Approach or a sales comparable approach to determine a fair value. Critical inputs to fair value estimates include various level 3 inputs such as valuations of the underlying real estate assets and borrowings, which incorporate investment-specific assumptions such as discount rates, capitalization rates, rental and expense growth rates, and asset-specific market borrowing rates. As of June 30, 2020 and December 31, 2019, investments in the real estate ventures at fair value were approximately $7.6 million and $8.4 million, respectively.
Non-Recurring Fair Value Measurements
The Company may also value its non-financial assets and liabilities, including items such as long-lived assets, at fair value on a non-recurring basis if it is determined that impairment has occurred. Such fair value measurements use significant unobservable inputs and are classified as Level 3.
12. RESTRICTED STOCK, STOCK OPTIONS AND OTHER STOCK PLANS
During the three and six months ended June 30, 2020, the Company issued no 630,352 restricted stock awards to employees. During the three and six months ended June 30, 2019, the Company issued 20,000 and 114,431 stock options and 184,463 and 242,251 restricted stock awards to employees, respectively.
Stock-based compensation expense associated with restricted stock and stock options is recognized based on the grant date fair value of the award over its vesting period. The following table reflects the statements of operations line items for stock-based compensation for the periods presented:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
Cost of sales - Real Estate Services | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
Expense - General and administrative | |||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
Under net settlement procedures currently applicable to our outstanding restricted stock awards for employees, upon each settlement date and election by the employees, restricted stock awards are withheld to cover the required withholding tax, which is based on the value of the restricted stock award on the settlement date as determined by the closing price of our Class A common stock on the trading day immediately preceding the applicable settlement date. The remaining amounts are delivered to the recipient as shares of our Class A common stock.
As of June 30, 2020, the weighted-average remaining contractual term of unexercised stock options was 7 years. As of June 30, 2020 and December 31, 2019, there was $1.6 million and $0.6 million, respectively, of unrecognized compensation cost related to stock options and restricted stock awards.
The Company intends to issue new shares of its Class A common stock upon vesting of restricted stock grants or the exercise of stock options.
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13. INCOME (LOSS) PER SHARE
The weighted average shares and share equivalents used to calculate basic and diluted (loss) income from continuing operations for the three and six months ended June 30, 2020 and 2019, and discontinued operations per share for the three and six months ended June 30, 2019, are presented in the accompanying consolidated statements of operations. Restricted stock awards, stock options and warrants for the three and six months ended June 30, 2020 and 2019 are included in the diluted income (loss) per share calculation using the treasury stock method and average market prices during the periods, unless their inclusion would be anti-dilutive.
The following share equivalents have been excluded from the continuing operations dilutive share computation for the three and six months ended June 30, 2020 and 2019 as their inclusion would be anti-dilutive.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
Restricted stock awards | |||||||||||||||||||||||||||||||||||
Stock options | |||||||||||||||||||||||||||||||||||
Warrants | |||||||||||||||||||||||||||||||||||
The following share equivalents have been excluded from the discontinued operations dilutive share computation for the three and six months ended June 30, 2019 as their inclusion would be anti-dilutive.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
Restricted stock awards | |||||||||||||||||||||||||||||||||||
Stock options | |||||||||||||||||||||||||||||||||||
Warrants | |||||||||||||||||||||||||||||||||||
14. CONSOLIDATION OF VARIABLE INTEREST ENTITIES
Consolidated loss in statement of operations
Included within the Company’s net loss from discontinued operations, net of tax for the three and six months ended June 30, 2019 are the activities of real estate entities that were determined to be VIEs. These entities have been established to own and operate real estate property and were deemed VIEs primarily based on the fact that the equity investment at risk is not sufficient to permit the entities to finance their activities without additional financial support. The Company determined that it was the primary beneficiary of these VIEs as a result of the Company’s majority voting rights and complete operational control of these entities.
15. RELATED PARTY TRANSACTIONS
Lease for Corporate Headquarters
The Company leases its corporate headquarters from an affiliate wholly-owned by our CEO. Future minimum lease payments under this lease, which expires on September 30, 2020, are $149 thousand.
For the three and six months ended June 30, 2020, total rental payments made were $156 thousand and $298 thousand, respectively. For the three and six months ended June 30, 2019, total rental payments made were $153 thousand and $299 thousand, respectively.
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Asset Management Agreement
On March 30, 2018, CAM, an entity wholly owned by the Company, entered into that AMA with CDS. The effective date of the AMA is January 2, 2018. Pursuant to the AMA, CDS has engaged CAM to manage and administer the CDS’ commercial real estate portfolio and the day to-day operations of CDS and each property-owning subsidiary of CDS (the "CDS Portfolio"). Pursuant to the terms of the AMA, CAM will provide investment advisory, development and asset management services necessary to build out, stabilize and manage certain assets.
Pursuant to the AMA, CDS will pay CAM an annual cost-plus fee (the “Annual Fee”) in an aggregate amount equal to the sum of (i) the employment expenses of personnel dedicated to providing services to the CDS Portfolio pursuant to the AMA, (ii) the costs and expenses of the Company related to maintaining the listing of its shares on a securities exchange and complying with regulatory and reporting obligations as a public company, and (iii) a fixed annual payment of $1,000,000 .
2019 Amended Asset Management Agreement
On April 30, 2019, CAM entered into the 2019 AMA with CDS, which amends and restates in its entirety the AMA. Pursuant to the 2019 AMA, CDS will engage CAM to manage and administer the Anchor Portfolio and the day to-day operations of CDS and each property-owning subsidiary of CDS (collectively, the “CDS Entities”). The “Anchor Portfolio” consists of a majority of the properties we currently manage.
Pursuant to the 2019 AMA, the Company provides asset management services related to the build out, lease-up and stabilization, and management of the Anchor Portfolio. CDS pays the Company and its subsidiaries annual fees equal to the greater of either (i) an aggregate amount equal to the sum of (a) an asset management fee equal to 2.5 % of revenues generated by properties included in the Anchor Portfolio; (b) a construction management fee equal to 4 % of all costs associated with Anchor Portfolio projects in development; (c) a property management fee equal to 1 % of the Anchor Portfolio revenues, (d) an acquisition fee equal to up to 0.5 % of the purchase price of acquired assets; and (f) a disposition fee equal to 0.5 % of the sales price of an asset on disposition; or (ii) an aggregate amount equal to the sum of (x) the employment expenses of personnel dedicated to providing services to the Anchor Portfolio pursuant to the 2019 AMA, (y) the costs and expenses of the Company related to maintaining the public listing of its shares and complying with related regulatory and reporting obligations, and (z) a fixed annual payment of $1,000,000 .
In addition to the annual payment of the greater of either the Market Rate Fee or the Cost Plus Fee (as defined in the 2019 AMA), the Company also is entitled on an annual basis to the following additional fees: (i) an incentive fee equal to 10 % of the free cash flow of each of the real estate assets comprising the Anchor Portfolio after calculating a compounding preferred return of 8 % on CDS invested capital; (ii) an investment origination fee equal to 1 % of raised capital, (iii) a leasing fee equal to $1.00 /sf for new leases and $0.50 /sf for renewals; and (iv) mutually agreeable loan origination fees related to the Anchor Portfolio.
The 2019 AMA will terminate on December 31, 2027 (“Initial Term”), an extension from the original termination date of December 31, 2022, and will automatically renew for successive additional one year terms (each an “Extension Term”) unless CDS delivers written notice of non-renewal of the 2019 AMA at least 180 days prior to the termination date of the Initial Term or any Extension Term. Twenty-four months after the effective date of the 2019 AMA, CDS is entitled to terminate the 2019 AMA without cause upon 180 days advance written notice to CAM. In the event of such a termination and in addition to the payment of any accrued annual fees due and payable as of the termination date under the 2019 AMA, CDS is required to pay a termination fee equal to (i) the Market Rate Fee or the Cost Plus Fee paid to CAM for the calendar year immediately preceding the termination , and (ii) a one-time payment of the Incentive Fee (as defined in the 2019 AMA) as if the CDS Portfolio were liquidated for fair market value as of the termination date; or the continued payment of the Incentive Fee as if a termination had not occurred.
Residential, Commercial and Parking Property Management Agreements
The Company entered into separate residential property management agreements with properties owned by CDS Entities under which the Company receives fees to manage and operate the properties, including tenant communications, leasing of apartment units, rent collections, building maintenance and day-to-day operations, engagement and supervision of contractors and vendors providing services for the buildings, and budget preparation and oversight.
The Company entered into separate commercial property and parking management agreements with properties owned by CDS Entities under which the Company receives fees to manage and operate the office and retail portions of the properties, including tenant communications, rent collections, building maintenance and day-to-day operations, engagement and supervision of contractors and vendors providing services for the buildings, and budget preparation and oversight.
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These property management agreements are each for year initial terms with successive, automatic year renewal terms, unless sooner terminated. The Company generally receives base management fees under these agreements based upon a percentage of gross rental revenues for the portions of the buildings being managed in addition to reimbursement of specified expenses, including employment expenses of personnel employed by the Company in the management and operation of each property.
Construction Management Agreements
The Company has construction management agreements with properties owned by CDS Entities under which the Company receives fees to provide certain construction management and supervision services, including construction supervision and management of the buildout of certain tenant premises. The Company receives a flat construction management fee for each engagement under a work authorization based upon the construction management or supervision fee set forth in the applicable tenant’s lease, which fee is generally 1 % to 4 % of the total costs (or total hard costs) of construction of the tenant’s improvements in its premises, or as otherwise agreed to by the parties.
Business Management Agreements
On April 30, 2019, CAM entered into a Business Management Agreement (the “BMA”) with Investors X, whereby CAM will provide Investors X with asset and professional services related to the wind down of the Company’s divested homebuilding operations and the continuation of services related to the Company’s divested land development activities. The aggregate fee payable to CAM from Investors X under the Management Agreement is $937,500 , payable in fifteen quarterly installments of $62,500 each.
The Hartford Investment
On December 30, 2019, the Company made an investment related to the purchase of the Hartford, a stabilized commercial office building located at 3101 Wilson Boulevard in the Clarendon area of Arlington County, Virginia. The Company’s initial investment related to the purchase of the Hartford is $1.2 million.
In conjunction with the investment, the Company entered into an operating agreement (“Original Operating Agreement”) with Comstock Partners, LC ("Partners") to form Comstock 3101 Wilson, LC (the “Hartford Owner”), to purchase the Hartford. Pursuant to the Original Operating Agreement, the Company holds a minority membership interest in the Hartford Owner and the remaining membership interests of the Hartford Owner is held by Partners, who is further the Manager of the Hartford Owner. At the closing of the acquisition of the Hartford, the Company received an acquisition fee of $500 thousand and is entitled to asset management, property management, construction management and leasing fees for its management of the Property pursuant to separate agreements between the Hartford Owner, or its affiliates, and the Company, or its affiliates. The Company is also entitled to an incentive fee related to the performance of the investment.
On February 7, 2020, the Company, Partners and DWF VI 3101 Wilson Member, LLC (“DWF”), an unaffiliated, third party, equity investor in the Hartford, entered into a limited liability company agreement (the “DWC Operating Agreement”) to form DWC 3101 Wilson Venture, LLC (“DWC”) to, among other things, acquire, own and hold all interests in the Hartford Owner. In furtherance thereof, on February 7, 2020, the Original Operating Agreement for the Hartford Owner was amended and restated (the “A&R Operating Agreement”) to memorialize the Company’s and Partners’ assignment of 100 % of its membership interests in the Hartford Owner to DWC. As a result thereof, DWC is the sole member of the Hartford Owner. The Company and Partners, respectively, hold minority membership interests in, and DWF holds the majority membership interest in, DWC. The Company’s ownership interest in the Hartford remains at 2.5 %.
Private Placements and Promissory Notes
On March 19, 2020, the Company entered into a Revolving Capital Line of Credit Agreement (the “Loan Documents”) with CDS, pursuant to which the Company secured a $10.0 million capital line of credit (the “Revolver”). Under the terms of the Loan Documents, the Revolver provides for an initial variable interest rate of the WSJ Prime Rate plus 1.00 % per annum on advances made under the Revolver, payable monthly in arrears. The five-year term facility allows for interim draws that carry a maturity date of 12 months from the initial date of the disbursement unless a longer initial term is agreed to by CDS. On March 27, 2020 the Company borrowed $5.5 million under the Revolver. On April 10, 2020, the capital provided to the Company by the Revolver was utilized to retire all of the Company’s 10 % corporate indebtedness maturing in 2020 owed to CGF.
See Note 8 - Debt for further description of the CGF Private Placement and the Revolver.
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Revenues from Related Parties
The following table details the revenue earned from related parties.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
Revenue by customer | |||||||||||||||||||||||||||||||||||
Related party | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
Commercial | |||||||||||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
16. UNCONSOLIDATED JOINT VENTURE
The Company accounts for its interest in its title insurance joint venture using the equity method of accounting and adjusts the carrying value for its proportionate share of earnings, losses and distributions. The investment in the unconsolidated joint venture was $32 thousand and $125 thousand as of June 30, 2020 and December 31, 2019, respectively, and is included within ‘Prepaid and other assets, net’ in the accompanying Consolidated Balance Sheets.
The Company’s share of earnings for the three and six months ended June 30, 2020 from this unconsolidated joint venture of $18 thousand and $15 thousand, respectively, is included in ‘Other income, net’ in the accompanying Consolidated Statement of Operations. During the six months ended June 30, 2020, the Company collected and recorded distributions of $108 thousand from this joint venture as a return on investment. There were no distributions recorded during the three months ended June 30, 2020.
The Company’s share of earnings for the three and six months ended June 30, 2019 from this unconsolidated joint venture of $10 thousand and $68 thousand, respectively, is included in ‘Other income, net’ in the accompanying Consolidated Statement of Operations. During the three and six months ended June 30, 2019, the Company collected and recorded distributions of 56 thousand and 114 thousand, respectively, from this joint venture as a return on investment.
Summarized financial information for the unconsolidated joint venture is as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
Statement of Operations: | |||||||||||||||||||||||||||||||||||
Total net revenue | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
Total expenses | |||||||||||||||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Comstock Holding Companies, Inc. share of net income | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
17. INCOME TAXES
For the three and six months ended June 30, 2020, the Company recognized deferred income tax expense of $1 thousand and $13 thousand, respectively. For the three and six months ended June 30, 2019, the Company recognized no 7 thousand and $10 thousand from discontinued operations. The effective tax rate for the six months ended June 30, 2020 and 2019 is (0.85 )% and (22.41 )%, respectively.
The Company currently has approximately $143 million in federal and state NOLs. If unused, these NOLs will begin expiring in 2027. Under Internal Revenue Code Section 382 (“Section 382”), if a change in ownership is triggered, the Company’s NOL assets and possibly certain other deferred tax assets may be impaired.
The Company assesses uncertain tax positions in accordance with ASC 740-10, Accounting for Uncertainties in Income Taxes. The Company has no
18. SEGMENT DISCLOSURES
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In our Asset Management segment, we focus on providing management services to a wide range of real estate owners and businesses that include a variety of commercial real estate uses, including apartments, hotels, office buildings, commercial garages, leased lands, retail stores, mixed-use developments, and urban transit-oriented developments. The properties and businesses we currently manage are located primarily along the Washington, D.C. Metro Silver Line in Fairfax and Loudoun Counties, but we also manage projects in other jurisdictions including Maryland and Virginia.
In our Real Estate Services segment, our experienced management team provides a wide range of real estate services in the areas of strategic corporate planning, capital markets, brokerage services, and environmental and design-based services. Our environmental services group provides consulting and engineering services, environmental studies, remediation services and provide site specific solutions for any project that may have an environmental impact, from environmental due diligence to site-specific assessments and remediation. The Real Estate Services segment operates in the Mid-Atlantic Region.
The following table includes the Company’s two reportable segments of Asset Management and Real Estate Services, excluding discontinued operations, for the three and six months ended June 30, 2020 and 2019.
Asset Management | Real Estate Services | Total | |||||||||||||||
| Three Months Ended June 30, 2020 | |||||||||||||||||
Gross revenue | $ | $ | $ | ||||||||||||||
| Gross profit | |||||||||||||||||
| Net income | |||||||||||||||||
Total assets | |||||||||||||||||
| Three Months Ended June 30, 2019 | |||||||||||||||||
Gross revenue | $ | $ | $ | ||||||||||||||
Gross profit (loss) | ( | ||||||||||||||||
Net income (loss) | ( | ( | |||||||||||||||
Total assets | |||||||||||||||||
| Six Months Ended June 30, 2020 | |||||||||||||||||
| Gross revenue | $ | $ | $ | ||||||||||||||
| Gross profit | |||||||||||||||||
| Net income | |||||||||||||||||
| Total assets | |||||||||||||||||
| Six Months Ended June 30, 2019 | |||||||||||||||||
| Gross revenue | $ | $ | $ | ||||||||||||||
| Gross profit | |||||||||||||||||
| Net income (loss) | ( | ||||||||||||||||
| Total assets | |||||||||||||||||
19. DISCONTINUED OPERATIONS
On April 30, 2019, the Company entered into a the MTA with CDS, an entity wholly owned by Christopher Clemente, the Chief Executive Officer of the Company, and FR54, LC (“FR54”), an entity also controlled by Mr. Clemente, that sets forth certain transactions to complete the Company’s previously announced exit from the homebuilding and land development business in favor of a migration to an asset management model. Refer to Note 14 – Consolidation of Variable Interest Entities for further discussion regarding the accounting related to discontinued operations.
The Company did no
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| Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | ||||||||||
Revenues | |||||||||||
Revenue—homebuilding | $ | $ | |||||||||
Total revenue | |||||||||||
Expenses | |||||||||||
Cost of sales—homebuilding | |||||||||||
Sales and marketing | |||||||||||
General and administrative | |||||||||||
Operating (loss) | ( | ( | |||||||||
Income tax expense | |||||||||||
Net (loss) from discontinued operations | ( | ( | |||||||||
Net income attributable to non-controlling interests | |||||||||||
Net (loss) attributable to Comstock Holding Companies, Inc. | $ | ( | $ | ( | |||||||
20. SUBSEQUENT EVENTS
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COMSTOCK HOLDING COMPANIES, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Please see “Cautionary Notes Regarding Forward-looking Statements” for more information. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors including, but not limited to, those discussed below and elsewhere in this report, particularly under the headings “Cautionary Notes Regarding Forward-looking Statements.” References to dollar amounts are in thousands except per share data, or as otherwise noted.
Cautionary Notes Regarding Forward-looking Statements
This report includes forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by the use of words such as “anticipate,” “believe,” “estimate,” “may,” “likely,” “intend,” “expect,” “will,” “should,” “seeks” or other similar words or expressions. Forward-looking statements are based largely on our expectations and involve inherent risks and uncertainties, many of which are beyond our control. You should not place undue reliance on any forward-looking statement, which speaks only as of the date made. Some factors which may affect the accuracy of the forward-looking statements apply generally to the real estate industry, while other factors apply specifically to us. Any number of important factors could cause actual results to differ materially from those in the forward-looking statements including, without limitation: general economic and market conditions, including interest rate levels; our ability to service our debt; inherent risks in investment in real estate; our ability to compete in the markets in which we operate; economic risks in the markets in which we operate, including actions related to government spending; delays in governmental approvals and/or land development activity at our projects; regulatory actions; our ability to maintain compliance with stock market listing rules and standards; fluctuations in operating results; our anticipated growth strategies; shortages and increased costs of labor or building materials; natural disasters; our ability to raise debt and equity capital and grow our operations on a profitable basis; and our continuing relationships with affiliates.
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.
At this time, we cannot foresee whether the outbreak of COVID-19 will be effectively contained, nor can we predict the severity and duration of its impact. If the outbreak of COVID-19 is not effectively and timely controlled, our business operations and financial condition may be materially and adversely affected as a result of the deteriorating market outlook for the segments and the markets in which we operate, the slowdown in regional and national economic growth, weakened liquidity and financial condition of our customers or other factors that we cannot foresee. Some of the uncertainties related to the Company’s operations that are directly related to COVID-19 include, but are not limited to, the severity of the virus, the duration of the outbreak, governmental, business or other actions and their impacts on the Company and our clients, along with short and long term effects of consumer demand that may affect our clients financial position and consequently necessitate changes to our operations. As discussed in Note 15, the Company derives a substantial portion of its revenues from various related party entities associated with real estate properties. Any of these factors and other factors beyond our control could have an adverse effect on the overall business environment and cause our business to suffer in ways that we cannot predict at this time and that may materially and adversely impact our business, financial condition and results of operations. While we have not seen a significant impact to our results from COVID-19 to date, if the virus continues to cause significant negative impacts to economic conditions or consumer confidence, our revenues including our property management revenues, trade receivables, related party receivables, goodwill and our fair value investment in Investors X, results of operations, financial condition and liquidity could be adversely impacted.
Our actual results could differ materially from these projected or suggested by the forward-looking statements. The Company undertakes no obligation to update publicly or revise any forward-looking statements in light of new information or future events, except as required by law.
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We make available, free of charge, on our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practicable after these forms are filed with, or furnished to, the SEC. The information on or accessible through our website, www.comstockcompanies.com, is not incorporated by reference into this Quarterly Report on Form 10-Q.
Overview
Comstock Holding Companies, Inc. (“CHCI” or “the Company”) is a developer, operator, and asset manager of mixed-use and transit-oriented development properties in the greater Washington, D.C. metropolitan area, where we focus primarily on select high-growth urban and transitioning “sub-urban” markets. We provide a broad range of real estate asset management services, including development, construction management, leasing and property management services, to owners of real estate properties that we manage. We invest capital on behalf of our asset management clients and institutional real estate investors in office, retail, residential and mixed-use properties, generally retaining an economic interest for the Company and providing management services to those properties, enabling the Company to increase its assets under management (“AUM”) in order to realize competitive advantages of scale and enhance our overall returns. The Company also provides additional fee-based real estate services, including corporate planning, capital markets, brokerage, title insurance, design, and environmental consulting and engineering services, to properties in the Company’s managed portfolio and to other clients in the U.S. Mid-Atlantic Region.
As a vertically integrated real estate operating and investment company, we earn revenue from multiple sources, including fees generated from asset management services that we provide to our managed portfolio of real estate assets on behalf of our asset management clients, and fees from additional real estate related services, including environmental consulting and engineering services provided to our managed properties and unrelated third party clients in the Mid-Atlantic Region. In addition, the Company expects to generate revenue from co-investments with our partners in certain property acquisitions and from performance-based incentive compensation from certain assets in our managed portfolio. The Company can earn these incentive-based fees upon the occurrence of certain transaction-related events or when the performance of the subject properties meets defined performance metrics.
The services we provide pursuant to the asset management agreements covering our AUM properties vary by property, and include property management, development and construction management, leasing management, acquisition and disposition management, origination and negotiation of debt and equity facilities, risk management, and various other property-specific services. Substantially all of the properties included in our managed portfolio are covered by full-service asset management agreements encompassing substantially all aspects of development, construction, and operations management relating to the subject properties. A limited number of properties in our managed portfolio are covered by service-specific asset management contracts that focus our services on defined critical elements of operations, such as marketing, leasing, and construction management, where the property owner continues to manage other operating functions. The full-service asset management agreement for our Anchor Portfolio as defined below is a long-term contract with an original term of 10 years that provides for significant payments to Comstock in the case of early termination by the asset owner. The asset management agreement for the Hartford acquired in December 2019 as described below, the Company’s initial co-investment asset, is medium term in duration, and the duration of co-investment asset management agreements generally are expected to align with the duration of the applicable co-investment business plan. The co-investment business plans are property specific and therefore vary in expected duration but are generally expected to be between four and seven years. Our limited-service asset management agreements generally are anticipated to be short term in nature and do not include material early termination penalties. Presently, there are only one co-investment management agreement and one limited-service management agreement in place in addition to the management agreements covering our Anchor Portfolio.
Anchoring the Company’s asset management services platform is a long-term full service asset management agreement (the “2019 AMA”) with an affiliate of the Company’s Chief Executive Officer, Christopher Clemente, that encompasses the Anchor Portfolio.
The 2019 AMA provides the Company fee based revenue based on a general formula charging the greater of (i) the defined operating costs of the Company plus a base fee of $1,000,000 per annum and various supplemental fees or (ii) market rate fees delineated in the 2019 AMA.
Reston Station - Strategically located mid-way between Tysons Corner and Dulles International Airport, Reston Station is among the largest mixed use, transit-oriented developments in the Washington, DC area. Located at the terminus of Phase I of Metro’s Silver Line and encompassing nearly 40 acres spanning the Dulles Toll Road and surrounding Reston’s first Metro Station, Reston Station is already home to more than 1,000 residents and numerous businesses, including multiple retail establishments and popular restaurants. With more than one million square feet of completed and stabilized buildings, approximately four million square feet of additional development in various stages of entitlement, development and construction,
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and a 3,500-space underground parking garage and bus transit facility adjacent to the Wiehle-Reston-East Metro Station, the Reston Station neighborhood is leading the urban transformation of the Dulles Corridor.
Loudoun Station - Located at the terminus station on Metro’s Silver Line, minutes from Dulles International Airport, Loudoun Station represents Loudoun County’s first (and currently its only) Metro-connected development. Loudoun Station has approximately 600,000 square feet of mixed-use development completed, including hundreds of rental apartments, approximately 125,000 square feet of retail, restaurants, and entertainment venues, 50,000 square feet of Class A office, and a 1,500+ space commuter parking garage. Approximately two million square feet of additional development is slated for Loudoun Station. Located adjacent to Metro’s Ashburn Station, the Loudoun Station neighborhood represents Loudoun County’s beginning transformation into a transit connected community with direct connectivity to Dulles International Airport, Reston, Tysons Corner and downtown Washington, DC.
Our Business Strategy
In early 2018, the Company transitioned our business strategy and operating platform from being focused on the development and sale of residential homes to our current fee-based services model focused on commercial and mixed-use real estate primarily in the greater Washington, D.C. region. We generate base fees, incentive fees and profit participation by providing a broad range of real estate asset management services, including development, construction management, leasing and property management services, as well as acquisition and disposition services, employing our substantial experience in entitling, designing, developing, and managing a diverse range of properties. While our Anchor Portfolio, concentrated primarily along the rapidly growing Dulles Corridor in Northern Virginia, provides a stable, cost-plus fee structure foundation under the 2019 AMA, our business strategy includes expanding our total AUM by identifying high-quality office, retail, residential and mixed-use properties in the greater Washington, D.C. region and identifying institutional real estate investors that seek investment opportunities in such real estate assets while lacking the operational or local expertise needed to manage such properties. This approach enables the Company to generate earnings through the management of the Anchor Portfolio and provides the opportunity to increase earnings through the expansion of our managed portfolio of properties through additional acquisitions and related management agreements. Our acquisition strategy is currently focused on value-add, core, and core-plus opportunities and other opportunistic asset acquisitions. In addition to our asset management services, we provide a suite of real estate-related services to our managed real estate portfolio and to additional third-party clients, and we may seek to expand the services we offer through organic growth.
We believe that we have several strengths that distinguish our new business focus and strategy:
•Revenue Base. Our revenues are generated primarily from recurring asset management fees and additional real estate services fees. Our asset management agreements provide a highly visible and reliable source of revenue and position the Company to enhance bottom line results as the Company’s Anchor Portfolio and other assets under management expand.
•Management Services – During recent years, we have made several changes to our management team as we refocused our operating platform from residential home building to commercial real estate and asset management. As a result of this effort, our current management team has significant experience managing large-scale portfolios of real estate assets, including rental apartments, office buildings, hotels, commercial garages, leased lands, retail properties, mixed-use developments, and transit-oriented developments.
•Geographic Focus - The properties included in our Anchor Portfolio that we currently manage are located primarily in the Dulles Corridor, which is the location of the Silver Line, the first new rail line added to Washington D.C.’s Metro rail system in almost 20 years, which serves or will serve Arlington, Fairfax and Loudoun Counties in Virginia. Our property acquisition initiatives with institutional partners are focused on multiple high-growth areas throughout the Washington, D.C. region, and our first such acquisition, which closed in December 2019, is located in Arlington County, Virginia. We also provide environmental consulting and engineering services throughout a wider region stretching from the Washington, D.C. region to the Philadelphia, Pennsylvania, and New Jersey regions.
•Real Estate Services – In addition to the asset management services we provide in connection with our AUM, we also provide a variety of supplemental real estate services in the areas of strategic corporate planning, capital markets and financial consulting, commercial mortgage brokerage, title, design and environmental consulting and engineering services, and industrial hygiene services. Our environmental services group provides consulting and engineering services, environmental studies, remediation management services and site-specific solutions for properties that may require or benefit from
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environmental due diligence, site-specific assessments, and industrial hygiene services. Our real estate services business platform allows us to generate positive fee income from our highly-qualified personnel and serves as a potential catalyst for joint venture and strategic acquisition opportunities.
•Quality and Depth of Management - We have a highly-qualified and experienced management team with a broad base of deep expertise and a proven track record of providing services to our clients. Our services platform leverages the diverse capabilities and relationships of our management team developed over more than thirty years.
•Geographic Focus - Unlike many of our competitors with a national or international presence, we focus our efforts primarily on the greater Washington, D.C. metropolitan market, one of the most compelling real estate markets in the United States, with a near-term focus on the transit-oriented areas surrounding or proximate to the new Silver Line on Washington, D.C.’s Metro. The Company believes its significant presence in the Dulles Corridor and its in-depth understanding of high-density, mixed-use developments that are encouraged in these high-density transportation nodes give us unmatched insight into emerging trends that provide both short and long-term opportunities in these locales.
•The Company’s various business units work in concert to leverage the collective skill sets of our organization - The talent and experience of our personnel allow workflow flexibility and a multitasking approach to managing various projects. We believe that our focus and our business network in the Washington, D.C. market provides us with a competitive advantage in sourcing and executing on investment opportunities. While the Company has previously developed numerous properties in multiple key markets throughout the southeastern United States, and our management team has experience managing large national portfolios, we believe the greater Washington, D.C. market provides compelling growth opportunities for our business.
•Long Track Record - The Company and its management team have been active in the metropolitan Washington, D.C. region since 1985 and have developed, acquired, and managed thousands of residential units and millions of square feet of mixed-use properties throughout the region and in other key markets in the United States.
•Multiple Public-Private Partnerships - Affiliates of the Company have been selected by multiple local governments (including Fairfax County, Loudoun County, and the Town of Herndon, Virginia) to develop and manage large-scale mixed-use and transit facility developments through public-private partnerships at a time when local jurisdictions are focused on public-private partnerships as a means of leveraging private sector capabilities to meet public infrastructure development needs.
•Economic Drivers - Significant growth trends in demand for cyber security and other technology services in the government sector, as well as in the private sector, have generated substantial growth and attracted to Northern Virginia large tech companies, such as Microsoft, Google, and Amazon. In 2018, Northern Virginia was selected by Amazon as the location for its highly publicized “HQ2” search for a location to develop its second headquarters, which it has said will create tens of thousands of new jobs over the next several years. The Northern Virginia market has for a number of years captured a majority of the new jobs created in the Washington, D.C. metropolitan area, including corporate relocations and expansions, as well as numerous start-ups. Further, Northern Virginia’s significant data infrastructure, capable of serving the needs of the federal government and its defense and information contractors, has spurred the expansion and/or relocation of several federal government agencies, including the FBI, CIA, NSA, and the Customs and Border Patrol agency, to the Dulles Corridor. The Dulles Corridor has become known as the “Internet Capitol of the World”, because of its tremendous network of data centers, primarily located in Loudoun County, Virginia in the western portion of the Dulles Corridor. Loudoun County has experienced tremendous growth in data center development and has become the global leader in data center space while accounting for more than 40% of national data center space absorption in recent years.
•Diverse Employment Base - The diverse and well-educated employment base in the greater Washington, D.C. region, coupled with proximity to the federal government and the presence of well-established government contractors, is contributing to the attractiveness of the region to technology companies.
•Metro’s Silver Line - Phase I of Metro’s Silver Line opened in 2014, connecting Tysons Corner and Reston to Arlington, Virginia and downtown Washington, D.C. Phase II is scheduled to open in late 2020 or early 2021 and will extend service from the terminus of Phase I located in the center of the
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Company’s Reston Station development to Herndon, Dulles International Airport, and Loudoun County, Virginia, terminating at the Company’s Loudoun Station development.
•Regional Land Use Plans - Recent changes to Comprehensive Land Use Plans of Fairfax County and Loudoun County encourage high-density and mixed-use development proximate to the new Silver Line Metro Stations, resulting in compelling growth opportunities for the Company and its managed portfolio.
•Increased Demand for Transit-Oriented and Mixed-Use Developments - Recent trends indicate commercial tenants are increasingly seeking to locate (or relocate) offices to urban, mixed-use developments in “sub-urban” markets, such as Northern Virginia’s Dulles Corridor, and have demonstrated willingness to pay premium rents for commercial space at the Metro-accessible sites, such as those that make up a significant portion of the Company’s portfolio of managed assets. Additionally, demand for housing in transit-oriented, mixed-use neighborhoods has increased steadily over the past decade while home ownership rates have decreased and demand for high-quality rental housing has increased. The Company has been focused on these emerging trends for more than two decades and the Company, through the 2019 AMA, controls the development and asset management of a significant portfolio of high-profile assets at the forefront of the urban transformation taking place in the Dulles Corridor. With a stabilized portfolio and development pipeline that include millions of square feet of mixed-use and transit-oriented properties located at key Metro stations in the Dulles Corridor, the Company is well positioned to capitalize on trends that we believe will shape the future commercial real estate landscape and provide opportunities for significant growth and attractive returns to the Company.
Asset Management Services
2019 AMA
Effective January 1, 2019, the Company entered into an Amended and Restated Master Asset Management Agreement with CDS, an entity owned and controlled by the Company’s Chief Executive Officer, which provides the Company significant fees for services related to the development, marketing, and operations of the Anchor Portfolio of commercial and residential mixed-use real estate owned by CDS affiliates. The 2019 AMA covers two large-scale, transit-oriented, mixed-use developments in the Dulles Corridor: Reston Station and Loudoun Station, Virginia, as well as a mixed-use development asset located in Herndon, Virginia and other properties designated pursuant thereto from time to time. Separately, the Company also is party to fee-based management services arrangements with unrelated third parties, covering properties in Tysons Corner, Virginia and Rockville, Maryland.
Pursuant to the 2019 AMA, the Company provides asset management services related to the build out, lease-up and stabilization, and management of the Anchor Portfolio. CDS pays the Company and its subsidiaries annual fees equal to the greater of either (i) an aggregate amount equal to the sum of (a) an asset management fee equal to 2.5% of revenues generated by properties included in the Anchor Portfolio; (b) a construction management fee equal to 4% of all costs associated with Anchor Portfolio projects in development; (c) a property management fee equal to 1% of the Anchor Portfolio revenues, (d) an acquisition fee equal to up to 0.5% of the purchase price of acquired assets; and (f) a disposition fee equal to 0.5% of the sales price of an asset on disposition (collectively, the “Market Rate Fee”); or (ii) an aggregate amount equal to the sum of (x) the employment expenses of personnel dedicated to providing services to the Anchor Portfolio pursuant to the 2019 AMA, (y) the costs and expenses of the Company related to maintaining the public listing of its shares and complying with related regulator and reporting obligations, and (z) a fixed annual payment of $1,000,000 (collectively the “Cost Plus Fee”). The Company believes that the Cost-Plus Fee feature of the 2019 AMA provides a stable foundation of revenue to enable the Company to further expand its asset management business and AUM.
In addition to the annual payment of the greater of either the Market Rate Fee or the Cost Plus Fee, the Company also is entitled on an annual basis to the following additional fees: (i) an incentive fee equal to 10% of the free cash flow of each of the real estate assets comprising the Anchor Portfolio after calculating a compounding preferred return of 8% on CDS invested capital (the “Incentive Fee”); (ii) an investment origination fee equal to 1% of raised capital, (iii) a leasing fee equal to $1.00/sf for new leases and $0.50/sf for renewals; and (iv) mutually agreeable loan origination fees related to the Anchor Portfolio.
The 2019 AMA is a long-term agreement, with an initial term until December 31, 2027 (“Initial Term”), and will automatically renew for successive additional one-year terms (each, an “Extension Term”) unless CDS delivers written notice of non-renewal of the 2019 AMA at least 180 days prior to the termination date of the Initial Term or any Extension Term. For a period of twenty-four months after the April 30, 2019 effective date of the 2019 AMA, CDS is entitled to terminate the 2019 AMA without cause upon 180 days advance written notice to the Company. In the event of such a termination and in addition to
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the payment of any accrued annual fees due and payable as of the termination date under the 2019 AMA, in the event of any such termination, CDS is required to pay a termination fee to the Company equal to (i) the Market Rate Fee or the Cost Plus Fee paid to the Company for the calendar year immediately preceding the termination, and (ii) a one-time payment of the Incentive Fee as if the Anchor Portfolio were liquidated for fair market value as of the termination date, or at CDS’ election, the continued payment of the Incentive Fee as if a termination had not occurred.
Other Asset Management Agreements. The duration of our fee-based service agreements varies in nature. In addition to the long term nature of the 2019 AMA, our other asset management agreements for our co-investment opportunities are intended to cover the duration of the expected investment cycle of the portfolio property managed and are generally expected to last between four and seven years. However, these arrangements do not typically contain significant early-termination penalties. We also administer many various task-specific limited-service asset management agreements under short-term arrangements generally terminable at will.
Hartford Asset Management Agreement
On December 30, 2019, the Company made an investment related to the purchase of a stabilized commercial office building located at 3101 Wilson Boulevard in the Clarendon area of Arlington County, Virginia (the “Hartford”). The Company will retain a 2.5% equity interest in the asset at a cost of approximately $1.2 million. The Company has entered into management arrangements for the Hartford under which the Company will receive asset management, property management and construction management fees for the Company’s management and operation of the property and certain incentive fees relating to the performance of the investment.
Residential, Commercial and Parking Property Management Agreements
During the period of December 2017 through and including April 2020, the Company entered into separate residential property management agreements with properties in our Anchor Portfolio under which the Company receives fees to manage and operate the properties including tenant communications, leasing of apartment units, rent collections, building maintenance and day-to-day operations, engagement and supervision of contractors and vendors providing services for the buildings, and budget preparation and oversight.
During the period of May 2019 through and including April 2020, the Company entered into separate commercial property and parking management agreements with properties in our Anchor Portfolio under which the Company receives fees to manage and operate the office, retail and parking portions of the properties, including tenant communications, rent collections, building maintenance and day-to-day operations, engagement and supervision of contractors and vendors providing services for the buildings, and budget preparation and oversight.
These property management agreements are each for one year initial terms with successive, automatic one year renewal terms, unless sooner terminated. The Company generally receives base management fees under these agreements based upon a percentage of gross rental revenues for the portions of the buildings being managed in addition to reimbursement of specified expenses, including employment expenses of personnel employed by the Company in the management and operation of each property.
Construction Management Agreements
The Company has entered into construction management agreements with properties in our Anchor Portfolio under which the Company receives fees to provide certain construction management and supervision services, including construction supervision and management of the buildout of certain tenant premises. The Company receives a flat construction management fee for each engagement under a work authorization based upon the construction management or supervision fee set forth in the applicable tenant’s lease, which fee is generally 1% to 4% of the total costs (or total hard costs) of construction of the tenant’s improvements in its premises, or as otherwise agreed to by the parties.
Real Estate Services
In addition to the asset management services that the Company provides related to the Anchor Portfolio and other managed assets, the Company’s wholly owned subsidiaries, Comstock Real Estate Services and Comstock Environmental Services, LC (“Comstock Environmental”), provide real estate-related services to our asset management clients and third-party customers. These services include environmental consulting and engineering services, industrial hygiene services, and other consulting services in the U.S. Mid-Atlantic Region.
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Results of Operations
Three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019
Revenue – asset management
Revenue from asset management for the three months ended June 30, 2020 and 2019 was $4.1 million and $4.4 million, respectively. This represents a decrease of $299 thousand, or 6.7%, compared to prior year. Revenue decreased primarily due to proceeds from the Company's Paycheck Protection Plan loan (the "PPP Loan"). The proceeds from this PPP Loan were utilized primarily to cover employee costs that were not passed through to CDS. $1.2 million of the PPP Loan proceeds that otherwise would have been charged to customers were recognized as a contra-payroll expense, resulting in lower payroll costs and lower billable revenue. The revenue decrease was partially offset by increased headcount and other costs that are reimbursable from CDS under the 2019 AMA and were recognized as revenue along with growth in our property management business and other asset management fee streams including the BMA.
Revenue from asset management for the six months ended June 30, 2020 and 2019 was $9.6 million and $8.6 million, respectively. This represents an increase of $982 thousand, or 11.4%, compared to the prior year. Revenue increased primarily due to increased headcount and other costs that are reimbursable from CDS under the 2019 AMA and recognized as revenue along with growth in our property management business and other asset management fee streams including the BMA. Revenue increases were partially offset by proceeds from the PPP Loan. The proceeds from the PPP Loan were utilized primarily to cover employee costs that were not passed through to customers. $1.2 million of the PPP Loan proceeds that otherwise would have been charged to customers were recognized as a contra-payroll expense, resulting in lower payroll costs and lower billable revenue.
Revenue – real estate services
Revenue from real estate services for the three months ended June 30, 2020 and 2019 was $2.3 million and $0.9 million, respectively. This represents an increase in quarter over quarter revenues of $1.4 million or 159% growth. Revenue from real estate services for the six months ended June 30, 2020 and 2019 was $3.9 million and $1.6 million, respectively. This represents an increase in year-to-date revenues of $2.2 million or 137% growth. The increase in real estate services revenue for the three and six months ended June 30, 2020 is primarily attributable to continued organic growth of the size and count of customer contracts as well as increases in billable environmental consulting staff within our Comstock Environmental business unit.
Direct costs – asset management
Direct costs – asset management for the three months ended June 30, 2020 and 2019 was $3.2 million and $3.9 million, respectively. This 18.4% decrease amounts to a $0.7 million reduction to direct costs - asset management. The decrease in costs for the three months ended June 30, 2020 compared to 2019 was primarily attributable to recognition of the PPP Loan as a government grant. The grant was recognized during the quarter as the related payroll costs were incurred, and the Company has complied with all conditions attached to the grant.
Direct costs – asset management for the six months ended June 30, 2020 and 2019 was $7.8 million and $7.6 million, respectively. This 3.2% increase amounts to a $0.2 million increase to direct costs - asset management. This increase was primarily related to an increase in personnel expenses, primarily from headcount increases, as well as from the continued growth of our asset management operations. The increased costs was partially offset by the recognition of the PPP Loan as a government grant. The grant was recognized during the quarter as the related payroll costs were incurred, and the Company has complied with all conditions attached to the PPP Loan.
Direct costs – real estate services
Direct costs – real estate services for the three months ended June 30, 2020 and 2019 was $1.1 million and $0.9 million, respectively. Direct costs – real estate services for the six months ended June 30, 2020 and 2019 was $2.5 million and $1.4 million, respectively. For the three and six months ended June 30, 2020 and 2019 direct costs - real estate services increased $0.2 million and $1.1 million, respectively. The increase is primarily due to increased employment costs relating to our expanding footprint in the real estate consulting and environmental study fields partially offset by the recognition of the PPP Loan as a government grant. The grant was recognized during the quarter as the related payroll costs were incurred, and the Company has complied with all conditions attached to the PPP Loan.
General and administrative
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General and administrative expenses for the three months ended June 30, 2020 and 2019 was $634 thousand and $477 thousand, respectively. General and administrative expenses for the six months ended June 30, 2020 and 2019 was $1.2 million and $0.8 million, respectively. For the three and six months ended June 30, 2020 and 2019, general and administrative costs increased $157 thousand and $451 thousand, respectively. The increase is primarily attributable to increased headcount and associated equity compensation and personnel cost, that are not billable to customers within our Asset Management and Real Estate Services segments.
Selling and Marketing
Selling & marketing expenses for the three and six months ended June 30, 2020 was $216 thousand and $380 thousand, respectively. There were no selling and marketing expenses for the three and six months ended June 30, 2019. The increase is attributable to increased sales development programs launched by our Environmental business unit to grow the business.
Interest Expense
For the three months ended June 30, 2020 and 2019, the Company’s interest expense was $93 thousand and $116 thousand, respectively. The 19.8% reduction to interest expense quarter over quarter amounted to $23 thousand. The reduction in interest expense is primarily related to the retiring of the Comstock Growth Fund loan during the three months ended June 30, 2020.
For the six months ended June 30, 2020 and 2019, the Company’s interest expense was $257 thousand and $134 thousand, respectively. The 91.8% increase in interest expense for the year-to-date period amounted to a $123 thousand increase in interest expense. This is primarily driven by the MTA effective April 30, 2019. Prior to the MTA certain interest expense was capitalized to homebuilding projects and expensed when the projects were sold. After the MTA this interest expense is no longer capitalized into homebuilding projects.
Income taxes
For the three and six months ended June 30, 2020, the Company recognized deferred income tax expense of $13 thousand and $14 thousand, respectively. For the three and six months ended June 30, 2019 the Company did not recognize deferred income tax expense from continuing operations.
Liquidity and Capital Resources
We finance our Asset Management and Real Estate Services operations, capital expenditures, and business acquisitions with internally generated funds, borrowings from our credit facilities and long-term debt. Pursuant to the MTA, the Company transferred to CDS management of its Class A membership interests in Investors X, the entity owning the Company’s residual homebuilding operations in exchange for residual cash flows. The associated debt obligations were also transferred to CDS. See Note 8 in the accompanying consolidated financial statements for more details on our debt and credit facilities.
On March 19, 2020, the Company entered into a Revolving Capital Line of Credit Agreement (the “Loan Documents”) with CDS, pursuant to which the Company secured a $10.0 million capital line of credit (the “Revolver”). Under the terms of the Loan Documents, the Revolver provides for an initial variable interest rate of the WSJ Prime Rate plus 1.00% per annum on advances made under the Revolver, payable monthly in arrears. The five-year term facility allows for interim draws that carry a maturity date of 12 months from the initial date of the disbursement unless a longer initial term is agreed to by CDS. On March 27, 2020 the Company borrowed $5.5 million under the Revolver. The $5.5 million borrowing has a maturity date of April 30, 2023. On April 10, 2020, the capital provided to the Company by the Revolver was utilized to retire all of the Company’s 10% corporate indebtedness maturing in 2020 owed to Comstock Growth Fund, L.C.
On April 20, 2020, the Company was granted the PPP Loan in the aggregate amount of $1.95 million pursuant to the PPP under the CARES Act, which was enacted March 27, 2020. Under the terms of the PPP, PPP loans and accrued interest are forgivable after twenty-four weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the forgiveness period.
As of June 30, 2020, the Company has used the entire loan proceeds to fund its payroll and rent expenses. As a result, the Company believes that it has met the PPP eligibility criteria for forgiveness and has concluded that the loan represents, in substance, a government grant that is expected to be forgiven. As such, in accordance with IAS 20 “Accounting for Government
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Grants and Disclosure of Government Assistance”, the Company has recognized the entire loan amount as a reduction to the associated expenses as at June 30, 2020.
The Company does not anticipate taking any action that would cause any portion of the PPP Loan to be ineligible for forgiveness. However, to the extent that any amount is deemed unforgivable, such amount is payable over 2 to 5 years at an interest rate of 1%, with a deferral of payments for the first 6 months.
Cash Flow
We finance our Asset Management and Real Estate Services operations, capital expenditures, and business acquisitions with internally generated funds, borrowings from our credit facilities and long-term debt.
For the six months ended June 30, 2020, net cash used in operating activities was $656 thousand. Net cash used in operations activities was primarily related to the payment of accrued personnel costs. For the six months ended June 30, 2019, net cash provided by operating activities was $1.0 million primarily related to $1.6 million provided by discontinued operations.
Net cash provided by investing activities for the six months ended June 30, 2020 was $(73) thousand. This was primarily attributable to distributions from equity method investments of $717 thousand. Net cash used in investing activities was immaterial for the six months ended June 30, 2019.
Net cash used in financing activities for the six months ended June 30, 2020 was $1.0 million. This was primarily attributable to proceeds under the Revolver of $5.5 million partially offset by the retirement of debt. Net cash used in financing activities was immaterial for the six months ended June 30, 2019.
Critical Accounting Policies and Estimates
There have been no other significant changes to our critical accounting policies and estimates during the three months ended June 30, 2020 from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.
Recently Issued Accounting Standards
See Note 1 - Organization and Basis of Presentation to the accompanying consolidated financial statements included in this Quarterly Report on Form 10-Q.
Off Balance Sheet Arrangements
None.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We have evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of June 30, 2020. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of June 30, 2020.
Limitations on the Effectiveness of Controls
We do not expect that our disclosure controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.
Changes in Internal Control over Financial Reporting
In the fourth quarter of 2019 and first quarter of 2020, we identified a material weakness in our internal controls over financial reporting involving the review and reconciliation of debt balances and amortization of related debt discounts. To remediate the weakness described above, we (i) expanded our technical accounting resources and (ii) implemented more detailed reviews of debt reconciliations including the amortization of related debt discounts. No other changes have occurred in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended June 30, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information regarding legal proceedings is incorporated by reference from Note 10 - Commitments and Contingencies to the accompanying consolidated financial statements included in Part I of this Quarterly Report on Form 10-Q.
ITEM 6. EXHIBITS
| 3.1 | Amended and Restated Certificate of Incorporation (incorporated by reference to an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 16, 2015). | |||||||
| 3.2 | Amended and Restated Bylaws (incorporated by reference to an Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K filed with the Commission on March 31, 2005). | |||||||
| 3.3 | Certificate of Elimination of the Series A Junior Participating Preferred Stock of the Company filed with the Secretary of State of the State of Delaware on March 26, 2015 (incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K filed with the Commission on March 27, 2015). | |||||||
| 3.4 | Certificate of Designation of Series A Junior Participating Preferred Stock of the Company filed with the Secretary of State of the State of Delaware on March 26, 2015 (incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K filed with the Commission on March 27, 2015). | |||||||
| 3.5 | Certificate of Designation of Series B Non-Convertible Preferred Stock of the Company filed with the Secretary of State of the State of Delaware on December 29, 2015 (incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K filed on January 4, 2016). | |||||||
| 3.6 | Certificate of Designation of Series C Non-Convertible Preferred Stock of Comstock Holding Companies, Inc., filed with the Secretary of the State of Delaware on March 22, 2017 (incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K filed with the Commission on March 28, 2017). | |||||||
| 3.7 | Certificate of Amendment of Certificate of Designation of Series C Non-Convertible Preferred Stock of Comstock Holding Companies, Inc. filed with the Secretary of State of the State of Delaware on February 15, 2019 (incorporated by reference to an exhibit to the Registrant’s Current Report on Form 10-K filed with the Commission on March 29, 2019). | |||||||
| 3.8 | Certificate of Amendment of Amended and Restated Certificate of Incorporation of Comstock Holding Companies, Inc. (incorporated by reference to an exhibit to the Registrant’s Current Report on Form 10-K filed with the Commission on March 29, 2019). | |||||||
| 4.1 | Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-1, as amended, initially filed with the Commission on August 13, 2004 (File No. 333-118193)). | |||||||
| 10.1 | Promissory Note dated April 16, 2020 between Comstock Holding Companies, Inc. and MainStreet Bank pursuant to the Paycheck Protection Program authorized under the Coronavirus Aid, Relief and Economic Security Act (incorporated by reference to an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on May 28, 2020). | |||||||
| 10.2* | ||||||||
| 10.3* | ||||||||
31.1* | ||||||||
31.2* | ||||||||
32.1* | ||||||||
101* | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in eXtensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheet, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows and (iv) the Notes to the Consolidated Financial Statements. | |||||||
* Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
COMSTOCK HOLDING COMPANIES, INC. | |||||||||||
| Date: August 14, 2020 | By: | /s/ CHRISTOPHER CLEMENTE | |||||||||
Christopher Clemente Chairman and Chief Executive Officer (Principal Executive Officer) | |||||||||||
| Date: August 14, 2020 | By: | /s/ CHRISTOPHER GUTHRIE | |||||||||
Christopher Guthrie Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | |||||||||||
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Exhibit 10.2
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
This AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("Agreement") is effective this 27th day of April, 2020, between Comstock Holding Companies, Inc. (the "Employer") and Christopher Clemente (the "Executive").
WITNESSETH
WHEREAS, the Board of Directors of the Employer (the "Board") reviewed and approved entry into an employment agreement in December 2004 with Christopher Clemente as the Chief Executive Officer of the Employer (the “Original Employment Agreement”), and the Executive accepted the Original Employment Agreement by execution of the same; and
WHEREAS, the Employer and the Executive desire to modify the terms and conditions of the Original Employment Agreement as provided herein.
NOW THEREFORE, in consideration of the promises and the mutual agreements herein contained, the parties hereto, intending to be legally bound, hereby agree as follows:
1. DEFINITIONS
Those words and terms that have special meanings for purposes of this Agreement are specially defined through the use of parenthetical quotations and upper-lower case lettering. In addition, the following words and terms shall have the meanings set forth below for the purposes of this Agreement:
1.1. Cause. Termination of the Executive's employment for "Cause" shall mean termination based on any of the following: (a) conviction (or entering a plea of guilty or nolo contendere) of any felony or other crime involving misuse or misappropriation of money or other property, moral turpitude, or that results in Executive being incarcerated for more than sixty (60) consecutive days upon such conviction; or (b) conduct that is intentional in nature that materially injures the business or reputation of the Employer or that prevents the Executive from being able to adequately perform his job duties; or (c) failure of the Executive to perform to the best of his abilities a substantial portion of the Executive's duties and responsibilities assigned or delegated under this Agreement, which failure is not cured, in the reasonable judgment of the Board, within sixty (60) days after written notice given to the Executive by the Board, unless Executive demonstrates during that sixty (60) day period that Executive is taking affirmative steps to cure such failure and in such event Executive shall be entitled to an additional sixty (60) days to cure such failure; (d) any intentional and material breach by the Executive of any of the covenants set forth in the Confidentiality & Non-Competition Agreement of even date herewith; (e) gross negligence, willful gross misconduct or insubordination of the Executive; or (f) an intentional and material breach of any provision of this Agreement that is not cured, in the reasonable judgment of the Board, within sixty (60) days after written notice given to the Executive by the Board, unless Executive demonstrates during that sixty (60) day period that Executive is taking affirmative steps to cure such failure and in such event Executive shall be entitled to an additional sixty (60) days to cure such failure. Cause shall be determined in good faith by the affirmative and unanimous vote of of the whole Board (excluding the Executive if he is a member of the Board) after the Executive has been provided the opportunity to make a presentation to the Board (which presentation may be with counsel) and has been provided thirty (30) days to address any concerns raised by the Board during the presentation to the reasonable satisfaction of the Board.
1.2. Change in Control. "Change in Control" shall mean:
(i) the acquisition by any "person" or "group" (as defined in or pursuant to Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (other than (A) the Employer or any subsidiary thereof or (B) any employee benefit plan of the Employer or any subsidiary thereof, directly or indirectly, as "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of securities of the Employer representing more than fifty percent (50%) of either the then outstanding shares or the combined voting power of the then outstanding securities of the Employer;
(ii) during any period of twenty-four consecutive months, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period;
(iii) the stockholders of the Employer approve (A) a merger, consolidation or other business combination of the Employer with any other "person" or "group" (as defined in or pursuant to Sections 13(d) and 14(d) of the Exchange Act)
or affiliate thereof, other than a merger or consolidation that would result in the outstanding common stock of the Employer immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into common stock of the surviving entity or a parent or affiliate thereof) more than fifty percent (50%) of the outstanding common stock of the Employer or such surviving entity or a parent or affiliate thereof outstanding immediately after such merger, consolidation or other business combination, or (B) a plan of complete liquidation of the Employer or an agreement for the sale or disposition by the Employer of all or substantially all of it's assets (including if accomplished pursuant to the sale of shares of equity securities (including by any consolidation, merger or reorganization) of one or more subsidiaries of the Employer which collectively constitute all or substantially all of its assets); or
(iv) any other event or circumstance that is not covered by the foregoing subsections but that the Board determines to affect control of the Employer and with respect to which the Board adopts a resolution that the event or circumstance constitutes a Change in Control for purposes of this Agreement, provided, however, that a Change in Control shall not include (1) an event described in clause (i) above if the Executive is a beneficial owner, officer or director of the “person” or a member of the “group” acquiring control; (2) an event described in clause (ii) above if the Executive is a director after the change in at least two-thirds of the Board occurs; or (3) an event described in clause (iii) above if the Executive is a beneficial owner, officer or director of the “other person” or a member of the “group” acquiring control.
1.3. Disability. Termination by the Employer of the Executive's employment based on "Disability" shall mean termination because the Executive is unable to perform the essential functions of his/her position with or without accommodation due to a disability (as such term is defined in the Americans with Disabilities Act) for nine (9) months in the aggregate during any twelve month period. This definition shall be interpreted and applied consistent with the Americans with Disabilities Act, the Family and Medical Leave Act, and other applicable law.
1.4. Good Reason. Termination by the Executive of the Executive's employment for "Good Reason" shall mean termination by the Executive based on any one of the following:
1.4.1 Without the Executive's express written consent, a material adverse change made by the Employer in the Executive's functions, duties or responsibilities;
1.4.2. Without the Executive's express written consent, a reduction by the Employer in the Executive's Base Salary and/or Bonus as the same may be increased from time to time; or, except to the extent permitted by Section 3.4.1 hereof, a substantial and significant reduction in the amount of Employer's directors' and officers' insurance coverage or a material reduction in the package of fringe benefits provided to the Executive, taken as a whole;
1.4.3. Without the Executive's express written consent, the Employer fails to provide the Executive with an office and administrative support or requires the Executive to work in an office which is more than ten (10) miles from the location of the Employer's current principal executive office, except for required travel on business of the Employer to an extent substantially consistent with the Executive's business travel obligations; or
1.4.4. The failure by the Employer to obtain the assumption of and agreement to perform this Agreement by a successor as contemplated in Section 8.1 hereof; provided however , that any actions taken by the Employer to accommodate a disability of the Executive or pursuant to the Family and Medical Leave Act shall not be a "good reason" for purposes of this Agreement; and provided further that the continued employment of the Executive shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason.
1.5. Notice of Termination. Any purported termination of the Executive's employment by the Employer for any reason, or by the Executive for any reason shall be communicated by a written "Notice of Termination" to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a dated notice that (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated, (iii) specifies a Date of Termination; and (iv) is given in the manner specified in Section 8.2. "Date of Termination" as used in this Agreement shall mean the date specified in the Notice of Termination required by this Section.
2. EMPLOYMENT
2.1. Position and Term. The Employer hereby employs the Executive as Chief Executive Officer, reporting directly to the Board, and the Executive hereby accepts said employment and agrees to render such services to the Employer, on the terms and conditions set forth in this Agreement. Unless extended as provided in this Section 2.1, or terminated in
accordance with Section 5, this Agreement shall terminate five (5) years after the date first above-written; provided, however, that, while this Agreement is in effect, beginning one year following the date first above-written and continuing on each one year anniversary of the Agreement (the "Annual Renewal Date"), this Agreement shall be automatically extended for an additional one (1) year, unless the parties have re-negotiated the Agreement or one of the parties gives written notice of non-renewal in accordance with Section 8.2 hereof to the other party at least thirty (30) days prior to an Annual Renewal Date, in which event this Agreement shall continue in effect for the remaining term of the Agreement. Reference herein to the "Term" of this Agreement shall refer both to the initial term and any successive term, as the context requires. The parties expressly agree that designation of a term and renewal provisions in this Agreement does not in any way limit the right of the parties to terminate this Agreement at any time as hereinafter provided.
2.2. Duties. During the Term, and to the extent reasonably necessary to perform his duties hereunder, the Executive shall devote his full working time and attention and agrees to use his best efforts to further the interests of the Employer and to perform such services for the Employer as is consistent with his position and as directed, from time to time, by the Board. During the Term, and to the extent reasonably necessary to perform his duties hereunder, the Executive shall devote his full time, attention and energies to the business of the Employer and shall not be employed or involved in any other business activity that prevents the Executive from performing his duties hereunder. Subject to the foregoing, the following activities are permitted activities: (i) volunteer services for or on behalf of such religious, educational or non-profit organization as Executive may wish to serve, (ii) service as a director of as many as three (3) for-profit business entities, and (iii) such other activities as may be specifically approved by the Employer, including, but not limited to, the activity described on Schedule 2.2 hereto. This restriction shall not, however, preclude the Executive (i) from owning less than fifteen percent (15%) of the total outstanding shares of a publicly traded company or (ii) from employment in any capacity with affiliates of the Employer, nor shall any remuneration from such affiliates be considered in calculating the Base Salary (as defined in Section 3.1) due to Executive hereunder or any Bonus that may be due to Executive.
3. COMPENSATION AND BENEFITS
3.1. Base Salary. For services rendered hereunder by the Executive, the Employer shall compensate and pay Executive for his services during the Term at a minimum base salary of five hundred thousand dollars ($500,000) per year ("Base Salary"), which may be increased from time to time in such amounts as may be determined by the Board. Said Base Salary shall be payable in accordance with the Employer's regular payroll practices.
3.2. Bonus. In addition to his Base Salary, the Executive shall be eligible during the Term to receive an annual cash bonus determined by the Board based on the Employer's financial performance goals and taking into account a recommendation by the Employer's Compensation Committee ("Bonus"). Any Bonus shall be paid within seventy-five (75) days of the end of the Employer's fiscal year, and, provided the Employer's goals have been met, will be not less than one hundred percent (100%) of the Executive's Base Salary. The Executive must be employed at the end of the fiscal year but need not be employed by the Employer at the time of payment in order to receive any Bonus to which the Executive is otherwise entitled pursuant to the terms of this Section 3.2. Payment of any Bonus shall be subject to the provisions of Sections 5.1, 5.2, 5.3, 5.4, 5.5 and 5.6 hereof. The Executive is also an eligible participant in the Employer's equity incentive, employer stock purchase and any similar executive compensation plans the Employer may adopt from time to time. Any awards under such plans shall be determined by the Board, taking into account a recommendation by the Employer's Compensation Committee.
3.3. Withholding. All payments required to be made by the Employer hereunder to the Executive shall be subject to the withholding of such amounts, if any, relating to tax and other payroll deductions as the Employer may reasonably determine should be withheld for payment to the applicable taxing authorities pursuant to any applicable law or regulation. Employer shall make such payments to the applicable taxing authority when due.
3.4. Policies and Benefits.
3.4.1 Participation in Policies and Benefit Plans. Except as otherwise provided herein, during the Term, the Executive's employment shall be subject to the personnel policies that apply generally to the Employer's executive employees as the same may be interpreted, adopted, revised or deleted from time to time by the Employer in its sole discretion. Except as otherwise provided herein, during the Term, the Executive shall be entitled to participate in and receive the benefits of any benefit plans, benefits and privileges given to executive level employees of the Employer, to the extent commensurate with his then duties and responsibilities ("Benefit Plans") when and if such Benefit Plans are established by the Employer. The Employer shall not make any changes in such plans, benefits or privileges that would adversely affect the Executive's rights or benefits thereunder, unless such change occurs pursuant to a program applicable to all executive officers of the Employer and does not result in a proportionately greater adverse change in the rights of or benefits to the Executive as compared with any other executive officer
of the Employer. Nothing paid to the Executive under any plan or arrangement presently in effect or made available in the future shall be deemed to be in lieu of the Base Salary payable to the Executive pursuant to Section 3.1 hereof.
3.4.2 Director's and Officer's Liability Insurance. During the Term, the Employer shall provide the Executive with directors' and officers' liability insurance coverage in an amount determined by the Board to be appropriate and affordable and deemed reasonably acceptable by the Executive. In addition, after the expiration of this Agreement, the Employer shall provide the Executive with such directors' and officers' liability insurance coverage in an amount and for a period of time determined by the Board to be appropriate and affordable and deemed reasonably acceptable by the Executive.
3.4.3 Life Insurance. During the Term, the Employer shall provide the Executive with Life Insurance in accordance with the terms of any applicable life insurance plan established by the Employer.
3.4.4 Long-term Disability Insurance. During the Term, the Employer shall provide the Executive with Long-Term Disability Insurance in accordance with the terms of any applicable long-term disability plan established by the Employer.
4. SUPPORT AND EXPENSES
4.1. Office. The Employer shall provide the Executive with secretarial and support staff and furnished offices and conference facilities in the Reston, Virginia area, and in such other location, if any, in which the Executive hereafter agrees to perform services on behalf of the Employer, all of which shall be consistent with the Executive's duties and sufficient for the efficient performance of those duties as reasonably determined by Executive.
4.2. Expenses. The Employer shall reimburse the Executive or otherwise provide for or pay for all reasonable expenses incurred by the Executive in furtherance of, or in connection with the business of the Employer, including, but not by way of limitation, traveling expenses, communication expenses (including, but not limited to, reasonable expenses relating to the acquisition, installation and maintenance of telecommunications and computer networking facilities enabling Executive to perform his duties on behalf of the Employer from any of Executive's residences), and all reasonable entertainment expenses (whether incurred at the Executive's residence, while traveling or otherwise), subject to such reasonable documentation and other limitations as may be established by policies of the Employer and/or the Board. Additionally, Employer shall reimburse Executive for legal fees and related costs, up to a maximum of fifty thousand dollars ($50,000), incurred in connection with estate planning matters undertaken on behalf of Executive during each five (5) year period following this Amended and Restated Employment Agreement.
5. TERMINATION
5.1. Termination Due to Death. If the Executive's employment is terminated by reason of the Executive's death, the Employer shall (i) continue to pay the Executive's Base Salary then in effect for a period of twelve (12) months after the Date of Termination (after which time the Employer shall have no further obligation to pay Base Salary to the Executive) and (ii) within ninety (90) days of the Employer's last payment of Base Salary under this Section, or the end of the Employer's fiscal year during which the Executive's death occurs, whichever is earlier, pay, on a prorated basis if applicable, any earned but unpaid Bonus, determined as of the Date of Termination (using calendar days of service to the Company during the year of Executive's death as a percentage of 365 calendar days to determine the percentage of Bonus compensation). The entitlement of any beneficiary of the Executive to benefits under any benefit plan shall be determined in accordance with applicable law and the provisions of such plan. In lieu of payments to the Executive's estate following the Executive's death, the Executive may designate a beneficiary or beneficiaries to whom all payments which may be due under this Agreement will be made in the event of the Executive's death. Such designation shall be made on a form delivered to the Employer. The Executive shall have the right to change or revoke any such designation from time to time by filing a new designation or notice of revocation with the Employer, and no notice to any beneficiary nor consent by any beneficiary shall be required to effect any such change or revocation. If the Executive shall fail to designate a beneficiary before the Executive's death, or if no designated beneficiary survives the Executive, any payments which may be due under this Agreement following the Executive's death will be paid to the Executive's estate.
5.2. Termination Due to Disability. If the Executive is terminated due to Disability, the Employer shall (i) continue to pay the Executive's Base Salary then in effect for a period of twenty four (24) months after the Date of Termination (after which time the Employer shall have no further obligation to pay Base Salary to the Executive) and (ii) within ninety (90) days of the Employer's last payment of Base Salary under this Section, or the end of the Employer's fiscal year during which such Disability occurs, whichever is earlier, pay, two (2) times one hundred percent (100%) of the Bonus the Executive would have been entitled to had he remained in the employment of the Company until the end of the
Company’s fiscal year. The entitlement of the Executive to benefits under a plan described in Section 3.4.1 upon such termination shall be determined in accordance with applicable law and the provisions of such plan.
5.3. Termination by Executive Other Than for Good Reason. In the event the Executive terminates this Agreement other than for Good Reason, compensation pursuant to Section 3.1 of this Agreement shall end as of the Date of Termination and any unpaid Bonus shall be forfeited by the Executive. The entitlement of the Executive to benefits under any Benefit Plan shall be determined in accordance with applicable law and the provisions of such plan.
5.4. Termination by the Employer Without Cause. If this Agreement is terminated by the Employer Without Cause pursuant to this Section 5.4, effective the Date of Termination, the Employer shall, subject to Section 9 hereof, (i) continue to pay the Executive's Base Salary then in effect for a period of forty-eight (48) months after the Date of Termination and (ii) within ninety (90) days of the Employer's last payment of Base Salary under this Section, or the end of the Employer's fiscal year during which such Termination Without Cause occurs, whichever is earlier, pay two (2) times one hundred percent (100%) of the Bonus the Executive would have been entitled to had he remained an employee of Employer until the end of Employer's fiscal year and during such time, Employer’s business objectives were achieved in a manner that would have entitled Executive to receive full Bonus compensation, including cash and equity awards. Thereafter, the Employer shall have no further obligation to pay compensation to the Executive under this Agreement; provided however, that upon a termination by the Employer pursuant to this Section 5.4 within the twenty four (24) full calendar months following the effective date of a Change in Control, the cash payment(s) due to Executive as described in this Section 5.4 shall be due and payable in full within thirty (30) days of the effective date of the Executive's Termination Without Cause. In addition, if the Executive elects to continue participation in any group medical, dental, vision and/or prescription drug plan benefits to which the Executive and/or Executive’s eligible dependents would be entitled under Section 4980B of the Code (COBRA), then for a period of forty eight (48) months after the Date of Termination (the “Welfare Benefits Continuation Period”), the Employer shall pay the excess of (i) the COBRA cost of such coverage over (ii) the amount that the Executive would have had to pay for such coverage if he had remained employed during the Welfare Benefits Continuation Period and paid the active employee rate for such coverage; provided, however, that (A) that if the Executive becomes eligible to receive group health benefits under a program of a subsequent employer or otherwise (including coverage available to Executive’s spouse), the Employer’s obligation to pay any portion of the cost of health coverage as described herein shall cease, except as otherwise provided by law; (B) the Welfare Benefits Continuation Period shall run concurrently with any period for which the Executive is eligible to elect health coverage under COBRA; (C) the Employer-paid portion of the monthly premium for such group health benefits, determined in accordance with Code Section 4980B and the regulations thereunder, shall be treated as taxable compensation by including such amount in the Executive’s income in accordance with applicable rules and regulations; (D) during the Welfare Benefits Continuation Period, the benefits provided in any one calendar year shall not affect the amount of benefits provided in any other calendar year (other than the effect of any overall coverage benefits under the applicable plans); (E) the reimbursement of an eligible taxable expense shall be made as soon as practicable but not later than December 31 of the year following the year in which the expense was incurred; and (F) Executive’s rights pursuant to this Section 5.4 shall not be subject to liquidation or exchange for another benefit.
5.5. Termination for Cause. Upon a Termination by the Employer for Cause as defined in Section 1.1 pursuant to this Section 5.5, the Employer shall have no further obligation to pay compensation (Base Salary or Bonus) to the Executive effective the Date of Termination. The entitlement of the Executive to benefits under a plan described in Section 3.4.1 upon such termination shall be determined in accordance with applicable law and the provisions of such plan.
5.6. Termination by the Executive for Good Reason. If the Executive terminates this Agreement for Good Reason, the Executive shall be entitled to receive the same payments and benefits specified in Section 5.4 of this Agreement. Upon a termination for Good Reason within the twelve (12) full calendar months following the effective date of a Change in Control, the Executive shall be entitled to the same expedited payments provided in Section 5.4. The entitlement of the Executive to benefits under a plan described in Section 3.4.1 upon such termination shall be determined in accordance with applicable law and the provisions of such plan.
5.7. Termination Due to Discontinuance of Business. Notwithstanding anything in this Agreement to the contrary, in the event the Employer's business is discontinued because rendered impracticable by substantial financial losses or lack of funding, as reasonably determined jointly by the Executive and a majority of the members of the Board of Directors, so long as the Executive is a member of the Board of Directors, this Agreement shall terminate as of the day the Employer determines to cease operation with the same force and effect as if such day of the month were originally set as the termination date hereof. In the event this Agreement is terminated pursuant to this Section 5.7, the Employer shall
have no further obligation to pay compensation to the Executive effective the Date of Termination. The entitlement of the Executive to benefits under a plan described in Section 3.4.1 upon such termination shall be determined in accordance with applicable law and the provisions of such plan. This Section 5.7 shall be void and of no effect in the event of a discontinuance that occurs within twelve (12) months after the effective date of a Change in Control.
5.8. Termination by Mutual Consent. Notwithstanding any of the foregoing provisions of this Section 5, if at any time during the course of this Agreement the parties by mutual consent decide to terminate it, they shall do so by separate agreement setting forth the terms and conditions of such termination.
5.9. Cooperation with Employer After Termination of Employment. Following termination of the Executive's employment for any reason, the Executive shall fully cooperate with the Employer in all matters relating to the winding up of his pending work on behalf of the Employer including, but not limited to, any litigation in which the Employer is involved, and the orderly transfer of any such pending work to other employees of the Employer as may be designated by the Employer. The Employer agrees to reimburse the Executive for any out-of-pocket expenses he incurs in performing any work on behalf of the Employer following the termination of his employment.
5.10. Withholding. All payments required to be made by the Employer to the Executive under Section 5 of this Agreement shall be subject to the withholding of such amounts, if any, relating to tax and other payroll deductions as the Employer may reasonably determine should be withheld for payment to the applicable taxing authorities pursuant to any applicable law or regulation. Employer shall make such payments to the applicable taxing authority when due.
6. CONFIDENTIALITY & NON-COMPETITION AGREEMENT
The parties hereto have entered into an Amended and Restated Confidentiality & Non-Competition Agreement dated April 27, 2020, which may be amended by the parties from time to time without regard to this Agreement. The Amended and Restated Confidentiality & Non-Competition Agreement contains provisions that are intended by the parties to survive and do survive termination or expiration of this Agreement.
7. EXECUTIVE'S REPRESENTATIONS AND WARRANTIES
7.1. No Conflict of Interest. The Executive warrants that, subject to Schedule 2.2 attached hereto, he is not, to the best of his knowledge and belief, involved in any situation that might create, or appear to create, a conflict of interest with his loyalty to or duties for the Employer, except as such may have been previously disclosed to Employer.
7.2. Notification of Materials or Documents from Other Employers. The Executive further warrants that he has not brought and will not bring to the Employer or use in the performance of his responsibilities at the Employer any materials or documents of a former employer that are not generally available to the public, unless he has obtained express written authorization from the former employer for their possession and use.
7.3. Notification of Other Post-Employment Obligations. The Executive also understands that, as part of his employment with the Employer, he is not to breach any obligation of confidentiality that he has to former employers, and he agrees to honor all such obligations to former employers during his employment with the Employer. The Executive warrants that he is subject to no employment agreement or restrictive covenant preventing full performance of his duties under this Agreement.
7.4. Indemnification For Breach. In addition to other remedies that the Employer might have for breach of this Agreement, the Executive agrees to indemnify and hold the Employer harmless from any breach of the provisions of this Section 7.
8. GENERAL PROVISIONS
8.1. Assignment. The Employer shall assign this Agreement and its rights and obligations hereunder in whole, but not in part, to any corporation or other entity with or into which the Employer may hereafter merge or consolidate or to which the Employer may transfer all or substantially all of its assets, if in any such case said corporation or other entity shall by operation of law or expressly in writing assume all obligations of the Employer hereunder as fully as if it had been originally made a party hereto, but may not otherwise assign this Agreement or its rights and obligations hereunder. The Executive may not assign or transfer this Agreement or any rights or obligations hereunder.
8.2. Notice. For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below:
| To the Employer: | Comstock Holding Companies, Inc. Employer Headquarters Address at time of Notice | |||||||||||||
| Attention: General Counsel | ||||||||||||||
| To the Executive: | Christopher Clemente | |||||||||||||
| Home Address as shown in the records of the Employer at time of Notice | ||||||||||||||
8.3. Amendment and Waiver. No amendment or modification of this Agreement shall be valid or binding upon (i) the Employer unless made in writing and signed by an officer of the Employer designated by the Board, and (ii) upon the Executive unless made in writing and signed by him.
8.4. Non-Waiver of Breach. No failure by either party to declare a default due to any breach of any obligation under this Agreement by the other, nor failure by either party to act quickly with regard thereto, shall be considered to be a waiver of any such obligation, or of any future breach.
8.5. Severability. In the event that any provision or portion of this Agreement, with the exception of Sections 2 and 3, shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect.
8.6. Governing Law. To the extent not preempted by federal law, the validity and effect of this Agreement and the rights and obligations of the parties hereto shall be construed and determined accordance with the law of the Commonwealth of Virginia.
8.7. Forum Selection and Consent to Jurisdiction. With respect to any litigation based on, arising out of, or in connection with this Agreement, the parties hereby expressly submit to the personal jurisdiction of the Fairfax County Circuit Court for the Commonwealth of Virginia and of the United States District Court for the Eastern District of Virginia. The parties hereby expressly waive, to the fullest extent permitted by law, any objection that they may now or hereafter have to the laying of venue of any such litigation brought in any such court referred to above, including without limitation any claim that any such litigation has been brought in an inconvenient forum.
8.8. Entire Agreement. This Agreement contains all of the terms agreed upon by the Employer and the Executive with respect to the subject matter hereof and supersedes all prior agreements, arrangements and communications between the parties dealing with such subject matter, whether oral or written.
8.9. Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the transferees, successors and assigns of the Employer, including any corporation or entity with which the Employer may merge or consolidate.
8.10. Headings. Numbers and titles to Sections hereof are for information purposes only and, where inconsistent with the text, are to be disregarded.
8.11. Counterparts. This agreement may be executed in counterparts, each of which shall be deemed an original, but all of which when taken together, shall be and constitute one and the same instrument.
9. TAX CODE SECTION 409A
9.1. General. This Agreement shall be interpreted and administered in a manner so that any amount or benefit payable hereunder shall be paid or provided in a manner that is either exempt from or compliant with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”) and applicable Internal Revenue Service guidance and Treasury Regulations issued thereunder. Nevertheless, the tax treatment of the benefits provided under the Agreement is not warranted or guaranteed. Neither the Employer nor its directors, officers, employees or advisers shall
be held liable for any taxes, interest, penalties or other monetary amounts owed by the Executive as a result of the application of Section 409A of the Code.
9.2. Definitional Restrictions. Notwithstanding anything in this Agreement to the contrary, to the extent that any amount or benefit that would constitute non-exempt “deferred compensation” for purposes of Section 409A of the Code (“Non-Exempt Deferred Compensation”) would otherwise be payable or distributable hereunder, or a different form of payment of such Non-Exempt Deferred Compensation would be effected, by reason of a Change in Control or the Executive’s Disability or termination of employment, such Non-Exempt Deferred Compensation will not be payable or distributable to the Executive, and/or such different form of payment will not be effected, by reason of such circumstance unless the circumstances giving rise to such Change in Control, Disability or termination of employment, as the case may be, meet any description or definition of “change in control event,” “disability” or “separation from service,” as the case may be, in Section 409A of the Code and applicable regulations (without giving effect to any elective provisions that may be available under such definition). This provision does not affect the dollar amount or prohibit the vesting of any Non-Exempt Deferred Compensation upon a Change in Control, Disability or termination of employment, however defined. If this provision prevents the payment or distribution of any Non-Exempt Deferred Compensation, or the application of a different form of payment, such payment or distribution shall be made at the time and in the form that would have applied absent the non-409A-conforming event.
9.3. Six-Month Delay in Certain Circumstances. Notwithstanding anything in this Agreement to the contrary, if any amount or benefit that would constitute Non-Exempt Deferred Compensation would otherwise be payable or distributable under this Agreement by reason of the Executive’s separation from service during a period in which he is a Specified Employee (as defined below), then, subject to any permissible acceleration of payment by the Employer under Treas. Reg. Section 1.409A-3(j)(4)(ii) (domestic relations order), (j)(4)(iii) (conflicts of interest), or (j)(4)(vi) (payment of employment taxes): (i) the amount of such Non-Exempt Deferred Compensation that would otherwise be payable during the six-month period immediately following the Executive’s separation from service will be accumulated through and paid or provided on the first day of the seventh month following the Executive’s separation from service (or, if the Executive dies during such period, within 30 days after the Executive’s death) (in either case, the “Required Delay Period”); and (ii) the normal payment or distribution schedule for any remaining payments or distributions will resume at the end of the Required Delay Period. For purposes of this Agreement, the term “Specified Employee” has the meaning given such term in Code Section 409A and the final regulations thereunder. Notwithstanding the foregoing, any Non-Exempt Deferred Compensation that would otherwise be payable or distributable under this Agreement by reason of the Executive’s separation from service during a period in which he is a Specified Employee shall not be paid before the later of (i) 18 months following the date of this Amendment, or (ii) six months following the date of the Executive’s separation from service.
9.4. Treatment of Installment Payments. Subject to this Section 9, the payment of any termination benefits under Section 5 of this Agreement shall commence on the first payroll date to occur after the sixtieth (60th) day following the Executive’s date of termination. Each payment of termination benefits under Section 5 of this Agreement shall be considered a separate payment, as described in Treas. Reg. Section 1.409A-2(b)(2), for purposes of Section 409A of the Code.
9.5. Timing of Release of Claims. Whenever in this Agreement a payment or benefit is conditioned on the Executive’s execution of a release of claims, such release must be executed and all revocation periods shall have expired within 60 days after the Date of Termination; failing which such payment or benefit shall be forfeited. If such payment or benefit constitutes Non-Exempt Deferred Compensation, then, subject to subsection 9.3 above, such payment or benefit (including any installment payments) that would have otherwise been payable during such 60-day period shall be accumulated and paid on the 60th day after the Date of Termination provided such release shall have been executed and such revocation periods shall have expired. If such payment or benefit is exempt from Section 409A of the Code, the Employer may elect to make or commence payment at any time during such period.
9.6. Timing of Reimbursements and In-kind Benefits. If the Executive is entitled to be paid or reimbursed for any taxable expenses under Section 4.2 or Section 5.9, and such payments or reimbursements are includible in the Executive’s federal gross taxable income, the amount of such expenses reimbursable in any one calendar year shall not affect the amount reimbursable in any other calendar year, and the reimbursement of an eligible expense must be made no later than December 31 of the year after the year in which the expense was incurred. The Executive’s rights to payment or reimbursement of expenses pursuant to Section 5.9 shall expire at the end of the ten years after the Date of
Termination. No right of the Executive to reimbursement of expenses under Section 4.2 or Section 5.9 shall be subject to liquidation or exchange for another benefit.
9.7. Permitted Acceleration. The Employer shall have the sole authority to make any accelerated distribution permissible under Treas. Reg. Section 1.409A-3(j)(4) to the Executive of deferred amounts, provided that such distribution meets the requirements of Treas. Reg. Section 1.409A-3(j)(4).
IN WITNESS WHEREOF, the parties hereto have caused this Amended and Restated Employment Agreement to be duly executed on the date and year first written above.
| The Employer: | COMSTOCK HOLDING COMPANIES, INC. | |||||||||||||||||||
By: | ||||||||||||||||||||
| By: | Christopher Guthrie Chief Financial Officer | |||||||||||||||||||
| Christopher Guthrie | ||||||||||||||||||||
| Chief Financial Officer | ||||||||||||||||||||
| The Executive: | ||||||||||||||||||||
Christopher Clemente | Christopher Clemente | |||||||||||||||||||
Schedule 2.2
Employer-Permitted Activities
In connection with the Amended and Restated Employment Agreement, effective April 27, 2020, between the Employer and the Executive, the following shall be deemed specifically permitted and approved business activities within the purview of Section 2.2(ii) of the Employment Agreement:
Executive, whether in his individual capacity, through Comstock Partners, LC or an affiliated entity ("Comstock Partners") or as a partner, collaborator or co-venturer (without regard to whether the Executive is a majority owner of any such partnership, collaboration or joint venture), may engage in the business of:
(i) constriction, development of and/or ownership of real property, including but not limited to for sale or income-producing commercial or for-rent residential (such as apartment buildings) real estate investment properties, speculative land holdings and the related development of such speculative land holdings, and finished building pads related to for-sale single-family homes, townhomes or condominiums; and
(ii) secured real estate lending to unrelated third parties, where Executive or an entity owned or controlled by Executive, makes loans secured by real estate.
Exhibit 10.3
AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT
OF
COMSTOCK 3101 WILSON, LC
This AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT (this “Agreement”) of COMSTOCK 3101 WILSON, LC (the “Company”) is made and entered into as of February 7, by DWC 3101 Wilson Venture, LLC, a Delaware limited liability company (the “Member”).
R E C I T A L S:
WHEREAS, Christopher Clemente formed the Company by causing Articles of Organization (the “Articles”) to be filed with the Virginia State Corporation Commission (the “Commission”) pursuant to Chapter 12 of Title 13.1 of the Code of Virginia (the “Virginia Limited Liability Company Act”) on or about August 7, 2019;
WHEREAS, the Company was previously governed by that certain Limited Liability Company Agreement of COMSTOCK 3101 WILSON, LC, dated as of August 7, 2019, by and between Comstock Partners, LC a Virginia limited liability company (“CP”) and Comstock Holding Companies, Inc., a Delaware corporation (and together with CP, “Comstock”) (the “Prior LLC Agreement”);
WHEREAS, pursuant the Limited Liability Company Agreement of the Member dated on or about the date hereof, Comstock assigned one hundred percent (100%) of the membership interests in the Company to the Member;
WHEREAS, the Member desires to amend and restate the Prior LLC Agreement in its entirety, and to continue the Company as a limited liability company for the purposes and on the terms and conditions set forth in this Agreement.
NOW, THEREFORE, the Member hereby adopts the following as its “limited liability company agreement” (as that term is used in the Virginia Limited Liability Company Act):
1. Continuation. The Company was formed as a limited liability company under the Virginia Limited Liability Company Act. The Member hereby agrees to continue the Company as a limited liability company under the Virginia Limited Liability Company Act, upon the terms and subject to the conditions set forth in this Agreement. The Member is hereby authorized and directed to file any necessary amendments to the Articles of the Company with the Commission and such other documents as may be required or appropriate under the Virginia Limited Liability Company Act or the laws of any other jurisdiction in which the Company may conduct business or own property.
2. Name and Principal Place of Business.
(a) The name of the Company is COMSTOCK 3101 WILSON, LC. The Member may change the name of the Company or adopt such trade or fictitious names for use by the Company as the Member may from time to time determine. All business of the Company shall be conducted under such names and title to all assets or property owned by the Company shall be held in such names.
(b) The principal place of business and office of the Company shall be located at Comstock Companies, 1886 Metro Center Drive, Fourth Floor, Reston, Virginia 20190, or at such other place or places as the Member may from time to time designate.
3. Registered Agent and Registered Office. The name and address of the registered agent of the Company is Christopher Clemente, 1886 Metro Center Drive, Suite 400, Reston, Virginia 20190. The address of the principal office of the Company in Virginia is 1886 Metro Center Drive, Suite 400, Reston, Virginia 20190. The Company may change the resident agent and location of the Company’s principal office and may establish such additional offices as it may from time to time determine after appropriate filing with the Commission.
4. Term. The term of the Company shall be deemed to have commenced on the filing of the Articles with the Commission and shall continue until December 31, 2070, unless sooner terminated or further extended pursuant to the provisions of this Agreement by the Member.
5. Purpose. Subject to the terms and conditions set forth in Exhibit A attached hereto and Section 7(e) below, the purpose of the Company shall be:
(a) to own, operate, manage, control, direct, develop, lease, improve, construct, finance, refinance, market, sell, dispose of and otherwise deal with that certain property located at 3101 Wilson Boulevard, Arlington, Virginia (the “Property”); and
(b) to engage in any lawful act or activity and to exercise any powers permitted to limited liability companies organized under the laws of the Commonwealth of Virginia that are related or incidental to and necessary, convenient or advisable for the accomplishment of the above-mentioned purposes, including, without limitation, obtaining financings for the business.
6. Member. Member is the sole member of the Company and shall be shown as such on the books and records of the Company. Except as expressly permitted by this Agreement, no other person shall be admitted as a member of the Company, and no additional interest in the Company shall be issued, without the prior approval of the Member. The name and the address of the Member is as follows:
| Name | Address | |||||||
| DWC 3101 Wilson Venture, LLC | 1886 Metro Center Drive, Fourth Floor, Reston, Virginia 20190 | |||||||
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7. Management.
(a) Except as specifically limited herein (including, without limitation, pursuant to Section 7(e) below) or to the extent delegated by the written agreement of the Member, (i) the business and affairs of the Company shall be vested in and controlled by the Member, which shall have the exclusive power and authority, on behalf of the Company to take any action of any kind not inconsistent with this Agreement and to do anything and everything they deem necessary or appropriate to carry on the business of the Company, (ii) the Member shall have full, exclusive and complete discretion in the management and control of the Company for the purposes set forth above in Section 5, (iii) all decisions relating to the business and affairs of the Company including, without limitation, all decisions required or permitted to be made by the Member under this Agreement and all decisions required or permitted to be made by the Company as a member, partner or other beneficial owner of any other entity, may be made by, and all action proposed to be taken by or on behalf of the Company, may be taken by the Member, and (iv) the Member shall have full power and authority to execute all documents and take all other actions on behalf of the Company and thereby bind the Company with respect thereto.
(b) The implementation of decisions made by the Member may be through any person or entity selected by the Member. All decisions or actions taken by the Member hereunder shall be binding upon the Company. All approvals and consents required herein may be prospective or retroactive.
(c) The Member is, to the extent of its rights and powers set forth in this Agreement, an agent of the Company for the purpose of the Company’s business, and subject to Exhibit A attached hereto, the actions of the Member taken in accordance with such rights and powers shall bind the Company. The Member shall exercise its authority as such in its capacity as a Member of the Company. The Company shall not have any “managers” within the meaning of Section 18-101(10) of the Virginia Limited Liability Company Act.
(d) Officers.
(i) In furtherance of and not in limitation of the power and authority of the Member pursuant to Sections 7(a), (b) and (c) of this Agreement, the Member shall have the power and authority in its sole discretion to elect executive and other officers to manage the business and affairs of the Company on behalf of the Member and to delegate to such officers any or all of its power and authority under this Agreement. Following the appointment of any officers, the Member may, from time to time, in its sole discretion (1) appoint one or more additional officers, (2) remove, replace or substitute one or more officers and (3) limit or restrict the authority of one or more officers.
(ii) The officers, to the extent of their powers set forth in this Agreement or otherwise vested in them by action of the Member, are agents of the Company for the purpose of the Company’s business and the actions of the officers taken in accordance with such powers shall bind the Company.
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8. Initial Capital Contributions and Percentage Interests.
(a) The Member has made initial contributions to the capital of the Company.
(b) The Member shall have an interest in the Company expressed as a percentage of the whole (“Percentage Interest”), with the current Percentage Interest in the Company of the Member being as follows:
| Member | Percentage Interest | |||||||
| DWC 3101 Wilson Venture, LLC | 100% | |||||||
9. Additional Capital Contributions. The Member shall not be required to contribute any additional capital to the Company other than the initial contributions heretofore made. The Member will not have any obligation to restore any negative or deficit balance in its equity account maintained in its name by the Company, if any, including any negative or deficit balance in any such account upon liquidation and dissolution of the Company. Any additional funds required by the Company to meet its cash requirements shall, to the extent possible, be provided by Company borrowings from third parties, upon such terms and conditions as determined appropriate by the Member; provided, however, that in lieu of causing the Company to borrow from third parties, with the approval of the Member, the Member may from time to time make additional capital contributions to the Company.
10. Tax Matters. The Member is the sole owner of the Company for U.S. federal income tax purposes. Except as otherwise required by law, during such time as the Company shall have only one owner for U.S. federal income tax purposes, the following shall apply for federal tax purposes and for relevant state tax purposes, but only for such purposes: (i) in accordance with Section 301.7701-3(b)(1)(ii) of the Income Tax Regulations, the Company shall be disregarded as an entity separate from such owner; (ii) all items of income, gain, loss, deduction and credit of the Company shall be treated as recognized directly by such owner; and (iii) the assets and liabilities of the Company shall be treated as the assets and liabilities of such owner. At such time, if any, as the Company shall have more than one owner for U.S. federal income tax purposes, this Agreement shall be amended to provide the allocation of tax items among the Members.
11. Distributions. After providing for the satisfaction of all the current debts and obligations of the Company and after any required payments on any loan or other financing, including, the Company shall make distributions of the Company’s net cash flow available for distribution, in each case as and when determined by the Member, including distributions of net cash flow from operations, net proceeds of any interim capital transaction and net proceeds available upon dissolution and winding up of the Company (in each case after establishment of appropriate and reasonable reserves, as determined by the consent of the Member in its sole and absolute discretion), to the Member. Notwithstanding anything to the contrary contained herein, the Company shall not make a distribution to the Member if such distribution would violate the Virginia Limited Liability Company Act or any other applicable law.
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12. Dissolution and Termination.
(a) The Company shall be dissolved and its business wound up upon the earlier to occur of any of the following events:
(i) The expiration of the term of the Company;
(ii) The written consent of the Member;
(iii) The death, retirement, resignation, expulsion, bankruptcy or dissolution of the Member or the occurrence of any other event which terminates the continued membership of the Member in the Company or;
(iv) The occurrence of any other event specified under the laws of the Commonwealth of Virginia as one effecting dissolution.
(b) Upon dissolution, the Company’s business shall be liquidated in an orderly manner. The Member shall act as the liquidator (unless the Member elects to appoint a liquidator) to wind up the business of the Company pursuant to this Agreement. If there shall be no Member, the successors-in-interest of the Member may approve one or more liquidators to act as the liquidator in carrying out such liquidation. In performing its duties, the liquidator is authorized to sell, distribute, exchange or otherwise dispose of the assets of the Company in accordance with the Virginia Limited Liability Company Act and in any reasonable manner that the liquidator shall determine to be in the best interest of the Member or its successors-in-interest.
(c) Notwithstanding anything to the contrary contained in this Section 12, upon the occurrence of any event that causes the Member to cease to be a member of the Company (other than (i) upon an assignment by the Member of all of its limited liability company interest in the Company and the admission of the transferee pursuant to Section 13(b) below, or (ii) the resignation of the Member and the admission of a replacement member of the Company pursuant to this Agreement), to the fullest extent permitted by law, the personal representative of the Member is hereby authorized to, and shall, within ninety (90) days after the occurrence of an event that terminated the continued membership of the Member in the Company, agree in writing (A) to continue the Company, and (B) to the admission of the personal representative or its nominee or designee, as the case may be, as a substitute member of the Company, effective as of the occurrence of the event that terminated the continued membership of the Member of the Company.
(d) Notwithstanding anything to the contrary contained in this Section 12, the bankruptcy or insolvency of the Member shall not cause the Member to cease to be a member of the Company and upon the occurrence of such an event, the Company shall continue without dissolution.
(e) Notwithstanding anything to the contrary contained in this Agreement, to the fullest extent permitted by applicable law, the Member hereby waives any right it might have
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to agree in writing to dissolve the Company upon the bankruptcy or insolvency of the Member, or the occurrence of an event that causes the Member to cease to be a member of the Company.
13. Transfers of Interests.
(a) Subject to Section 13(b) below, the Member shall have the right to sell, assign, pledge, transfer or otherwise dispose of all or any part of its interest in the Company.
(b) No transferee of all or any portion of the Member’s interest in the Company shall be admitted as a substitute or additional member of the Company unless (i) such transfer is in full compliance with any loan obtained by the Company, to the extent applicable, and (ii) such transferee shall have executed and delivered to the Company such instruments as the Member reasonably deems necessary and desirable to effectuate the admission of such transferee as a member of the Company and to confirm the agreement of such transferee to be bound by all the terms, conditions and provisions of this Agreement.
14. Indemnification. Neither the Member nor any officer appointed pursuant to the terms and conditions hereof (each a “Covered Person”) shall be liable to the Company for monetary damages for any losses, claims, damages or liabilities arising from any act or omission performed or omitted by it arising out of or in connection with this Agreement or the Company’s business or affairs, except for any such loss, claim, damage or liability primarily attributable to such Covered Person’s gross negligence or willful misconduct. The Company shall, to the fullest extent permitted by applicable law, indemnify, defend and hold harmless each Covered Person against any losses, claims, damages or liabilities to which such Covered Person may become subject in connection with any matter arising out of or in connection with this Agreement or the Company’s business or affairs, except for any such loss, claim, damage or liability primarily attributable to such Covered Person’s gross negligence or willful misconduct. If a Covered Person becomes involved in any capacity in any action, proceeding or investigation in connection with any matter arising out of or in connection with this Agreement or the Company’s business or affairs, the Company shall reimburse such Covered Person for its reasonable legal and other reasonable out-of-pocket expenses (including the cost of any investigation and preparation) as they are incurred in connection therewith, provided that such Covered Person shall promptly repay to the Company the amount of any such reimbursed expenses paid to it if it shall ultimately be determined that such Covered Person was not entitled to be indemnified by the Company in connection with such action, proceeding or investigation. If for any reason (other than the gross negligence or willful misconduct of a Covered Person) the foregoing indemnification is unavailable to a Covered Person, or insufficient to hold it harmless, then the Company shall contribute to the amount paid or payable by such Covered Person as a result of such loss, claim, damage, liability or expense in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and such Covered Person on the other hand or, if such allocation is not permitted by applicable law, to reflect not only the relative benefits referred to above but also any other relevant equitable considerations. The provisions of this Section 14 shall survive for a period of four years from the date of dissolution of the Company, provided that (i) if at the end of such period there are any actions, proceedings or investigations then pending, the applicable Covered Person may so notify the Company at
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such time (which notice shall include a brief description of each such action, proceeding or investigation and the liabilities asserted therein) and the provisions of this Section 14 shall survive with respect to each such action, proceeding or investigation set forth in such notice (or any related action, proceeding or investigation based upon the same or similar claim) until such date that such action, proceeding or investigation is finally resolved, and (ii) the obligations of the Company under this Section 14 shall be satisfied solely out of Company assets. Notwithstanding anything to the contrary contained in this Agreement, the obligations of the Company or any Covered Person under this Section 14 shall (i) be in addition to any liability which the Company or a Covered Person may otherwise have and (ii) inure to the benefit of the Member, each Covered Person, and their respective affiliates, members, directors, officers, employees, agents and affiliates and any successors, assigns, heirs and personal representatives of such persons.
15. Liability of the Member. Except as otherwise expressly provided in the Virginia Limited Liability Company Act, the debts, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the Company, and no Member or Covered Person shall be obligated personally for any such debt, obligation or liability of the Company solely by reason of being a Member or Covered Person, as applicable. Except as otherwise expressly provided in the Virginia Limited Liability Company Act, the liability of the Member shall be limited to the amount of capital contributions, if any, required to be made by the Member in accordance with the provisions of this Agreement, but only when and to the extent the same shall become due pursuant to the provisions of this Agreement.
16. Waiver of Partition and Nature of Interest In the Company. Except as otherwise expressly provided in this Agreement, the Member hereby irrevocably waives any right or power that the Member might have to cause the Company or any of its assets to be partitioned, to cause the appointment of a receiver for all or any portion of the assets of the Company, to compel any sale of all or any portion of the assets of the Company pursuant to any applicable law, or to file a complaint or to institute any proceeding at law or in equity to cause the termination, dissolution and liquidation of the Company. The Member shall not have any interest in any specific assets of the Company and the Member shall not have the status of a creditor with respect to any distribution pursuant to Section 11 hereof. The interests of the Member in this Company are personal property.
17. Books, Records, Accounting and Reports.
(a) Books and Records. The Company shall maintain, or cause to be maintained, in a manner customary and consistent with good accounting principles, practices and procedures, a comprehensive system of office records, books and accounts (which records, books and accounts shall be and remain the property of the Company) in which shall be entered fully and accurately each and every financial transaction with respect to the ownership and operation of the property of the Company. Such books and records of account shall be prepared and maintained at the principal place of business of the Company or such other place or places as may from time to time be determined by the Member. The Member or its duly authorized
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representative shall have the right to inspect, examine and copy such books and records of account at the Company’s office during reasonable business hours. A reasonable charge for copying books and records may be charged by the Company.
(b) Accounting and Fiscal Year. The books of the Company shall be kept using such methods as determined by the Member. The fiscal year of the Company shall be the same as the fiscal year of the Member.
(c) The Company Accountant. The Company shall retain as the regular accountant and auditor for the Company (the “Company Accountant”) such accounting firm designated by the Member. The fees and expenses of the Company Accountant shall be a Company expense.
(d) Reserves. The Member may, subject to such conditions as it shall determine, establish reserves for the purposes and requirements as they may deem appropriate.
(e) Tax Information. The Company shall provide the Member with all tax information necessary for the member to prepare its own tax filings, and such other tax related information requested by the Member, as soon as it is reasonably practicable.
18. Miscellaneous.
(a) Further Assurances. The Member agrees to execute, acknowledge, deliver, file, record and publish such further instruments and documents, and do all such other acts and things as may be required by law, or as may be required to carry out the intent and purposes of this Agreement.
(b) Notices. All notices, demands, consents, approvals, requests or other communications which any party to this Agreement may desire or be required to give hereunder (collectively, “Notices”) shall be in writing and shall be given by (i) personal delivery, (ii) facsimile transmission or (iii) a nationally recognized overnight courier service, fees prepaid, to such addresses as the Member may designate from time to time. A Notice sent in compliance with the provisions of this Section 18(b) shall be deemed given on the date of receipt.
(c) Successors and Assigns. Subject to the limitations, if any, set forth in Section 13 hereof, this Agreement shall be binding upon the parties hereto and their respective executors, administrators, legal representatives, heirs, successors and assigns, and shall inure to the benefit of the parties hereto and, except as otherwise provided herein, their respective executors, administrators, legal representatives, heirs, successors and assigns.
(d) Severability. In case any one or more of the provisions contained in this Agreement or any application thereof shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and other applications thereof shall not in any way be affected or impaired thereby.
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(e) Amendments. This Agreement may be amended only by a written instrument executed by the Member.
(f) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia applicable to agreements made and to be performed wholly within that Commonwealth.
(g) Captions. All titles or captions contained in this Agreement are inserted only as a matter of convenience and for reference and in no way define, limit, extend, or describe the scope of this Agreement or the intent of any provision in this Agreement.
(h) Creditors Not Benefited. Nothing contained in this Agreement is intended or shall be deemed to benefit any creditor of the Company or the Member, and no creditor of the Company shall be entitled to require the Company or the Member to solicit or accept any capital contribution for the Company or to enforce any right which the Company or the Member may have against the Member under this Agreement.
(i) Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be an original but all of which together shall constitute but one and the same agreement.
(j) Effectiveness. This Agreement shall become effective as of the date hereof.
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IN WITNESS WHEREOF, the party hereto has executed this Agreement as of the date set forth in the introductory paragraph hereof.
| MEMBER: | ||||||||
| DWC 3101 WILSON VENTURE, LLC | ||||||||
| a Delaware limited liability company | ||||||||
| By: | ||||||||
| Name: | ||||||||
| Title: | ||||||||
Signature Page to
Amended and Restated Limited Liability Company Agreement of
Comstock 3101 Wilson, LC
Exhibit 31.1
CERTIFICATION OF CHAIRMAN AND CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Christopher Clemente, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Comstock Holding Companies, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: August 14, 2020 | |||||
/s/ Christopher Clemente | |||||
Christopher Clemente Chairman and Chief Executive Officer (Principal Executive Officer) | |||||
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Christopher Guthrie, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Comstock Holding Companies, Inc.
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: August 14, 2020 | |||||
/s/ Christopher Guthrie | |||||
Christopher Guthrie Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | |||||
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Comstock Holding Companies, Inc. (the “Company”) for the quarter ended June 30, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of Christopher Clemente, Chairman and Chief Executive Officer of the Company, and Christopher Guthrie, Chief Financial Officer of the Company, certifies, to his best knowledge and belief, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that
(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: August 14, 2020 | /s/ Christopher Clemente | |||||||
Christopher Clemente Chairman and Chief Executive Officer | ||||||||
| Date: August 14, 2020 | /s/ Christopher Guthrie | |||||||
Christopher Guthrie Chief Financial Officer | ||||||||