Gyrodyne, LLC 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Cautionary Statements Concerning Forward – Looking Statements . The statements made in this Form 10-K, other materials the Company has filed or may file with the Securities and Exchange Commission, in each case that are not historical facts, contain “forward-looking information” within the meaning of the Private Securities Litigation Reform Act of 1995, and Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, both as amended, which can be identified by the use of forward-looking terminology such as “may,” “will,” “anticipates,” “expects,” “projects,” “estimates,” “believes,” “seeks,” “could,” “should,” or “continue,” the negative thereof, and other variations or comparable terminology as well as statements regarding the evaluation of strategic alternatives and liquidation contingencies. These forward-looking statements are based on the current plans and expectations of management and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those reflected in such forward-looking statements. Such risks and uncertainties include, but are not limited to, risks and uncertainties relating to our efforts to enhance the values of our remaining properties and seek the orderly, strategic sale of such properties as soon as reasonably practicable, the effect of economic and business conditions, risks inherent in the real estate markets of Suffolk and Westchester Counties in New York, the ability to obtain additional capital in order to enhance the value of the Flowerfield and Cortlandt Manor properties, the potential effects of the recent COVID-19 pandemic on our business, operations and timelines for seeking entitlements and pursuing the sale of our properties and distributions to our shareholders, risks and uncertainties associated with any litigation that may develop in connection with our efforts to sell our properties strategically, including related enhancement efforts, and other risks detailed from time to time in the Company’s SEC reports. These and other matters the Company discusses in this Report, or in the documents it incorporates by reference into this Report, may cause actual results to differ from those the Company describes. The Company assumes no obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise. Overview When we use the terms “Gyrodyne,” the “Company,” “we,” “us,” and “our,” we mean Gyrodyne, LLC and all entities owned or controlled by us, including non-consolidated entities. References to “common shares” in this report refer to Gyrodyne, LLC’s common shares representing limited liability company interests. We operate as a fully integrated, self-administered and self-managed real estate company focused on pursuing entitlements, owning, leasing and managing medical, commercial and industrial real estate. Our tenants include unrelated diversified entities with a recent emphasis on medical office parks and properties. Our properties are located in Suffolk and Westchester counties in New York, which are characterized by strong real estate markets. As of December 31, 2020, the consolidated portfolio consisted of two developed properties, consisting of 10 buildings with an aggregate of 161,356 rentable square feet. The Company also owns undeveloped land parcels adjacent to developed properties for which alternative entitlement plans are currently being considered in order to enhance the value of the relevant primary property. Factors Which May Influence Future Operations Our operating focus is on maximizing cashflows and market value of our operating properties while we are securing entitlements with the objective of enhancing the value of our remaining properties and maximizing distributions to our shareholders as soon as reasonably practicable. As of December 31, 2020, our properties were 75% leased to 32 tenants. As of December 31, 2019, our properties were 82% leased to 36 tenants. 27 Our leasing strategy for 2021 includes focusing on leasing vacant space, negotiating early renewals for leases scheduled to expire through 2021 and identifying new tenants or existing tenants seeking additional space. The Company is actively repositioning the Cortlandt Manor property toward long-term leases with a landlord option to terminate the leases early contingent on the new 100,000 square foot medical buildings’ completion date. The strategy will improve the value of the operating lot (Lot 1) as it will allow Gyrodyne to market lot one using a lower market-based cap rate plus a premium for development rights. Lease Expirations The following is a summary of lease expirations and related revenues of leases in place on December 31, 2020. This table assumes that none of the tenants’ exercise renewal options or early termination rights, if any, at or prior to the scheduled expirations: % of Gross Annual Number of Square Total Rental Revenues Leases Feet Annual Represented Fiscal Year End Expiring Expiring Rent By Such Leases 2021 10 16,000 $ 313,000 20.07 % 2022 12 18,000 240,000 15.44 % 2023 6 9,000 141,000 9.04 % 2024 - - - - % 2025 2 29,000 564,000 36.17 % Thereafter 3 26,000 300,000 19.28 % The success of our leasing strategy will be dependent upon the general economic conditions and more specifically real estate market conditions and trends in the United States and in our target markets of Suffolk and Westchester Counties in New York. We cannot give any assurance that leases will be renewed or that available space will be re-leased at rental rates equal to or above the current contractual rental rates. We actively manage the renewal process. Historically, this has resulted in a very low turnover rate with our tenants. As a result, the Company continues to actively manage lease termination dates and often approaches tenants up to one year in advance to gauge renewal interest and negotiate related leases. Where a termination is likely, the Company begins marketing the property prior to termination to timely identify the market rent for the specific space, expected vacancy period and market demanded tenant concessions and incentives. The Company may offer tenant concessions in the form of rent abatements rather than tenant improvements to maximize its working capital position. However, tenant improvement incentives may be offered in certain cases where concessions are not effective in meeting the demands of the existing or prospective tenant. During 2020, the Company did not incur any leasing fees or commissions but signed new leases and renewals for revenue commitments of approximately $860,000 with leases ranging from six months to three years. The Company has approximately 20% of its annual leasing revenue up for renewal in 2021, which compares favorably to 36% of leases up for renewal in 2020. General economic conditions, coupled with rental markets in which we operate, will dictate how rental rates on new leases and renewals will compare, favorably or unfavorably, to those leases that were signed in 2020. Critical Accounting Policies Gyrodyne intends to dissolve after it completes the disposition of all of its real property assets, applies the proceeds of such dispositions first to settle any debts and claims, pending or otherwise, against Gyrodyne, and then makes distributions to holders of Gyrodyne common shares. Therefore, effective September 1, 2015 Gyrodyne adopted the liquidation basis of accounting. This basis of accounting is considered appropriate when, among other things, liquidation of the entity is “imminent”, as defined in ASC 205-30, Presentation of Financial Statements Liquidation Basis of Accounting. Under the LLC Agreement, the Company may elect, in its sole discretion and without any separate approval by shareholders, to dissolve the Company at any time the value of the Company’s assets, as determined by the Company in good faith, is less than $1 million. The LLC Agreement also provides that the Company will dissolve, and its affairs wound up upon the sale, exchange or other disposition of all the real properties of the Company. As a result, liquidation is “imminent” in accordance with the guidance provided in ASC 205-30. 28 Principles of consolidation - The consolidated financial statements include the accounts of Gyrodyne and all subsidiaries. All consolidated subsidiaries are wholly owned. All inter-company balances and transactions have been eliminated. Basis of Presentation - Liquidation Basis of Accounting – Under the liquidation basis of accounting the consolidated balance sheet and consolidated statements of operations, equity, comprehensive income and cash flows are no longer presented. The consolidated statements of net assets and changes in net assets are the principal financial statements presented under the liquidation basis of accounting. Under the liquidation basis of accounting, all the Company’s assets have been stated at their estimated net realizable value, or liquidation value, (which represents the estimated amount of cash that Gyrodyne will collect on the disposal of assets as it carries out the plan of liquidation), which is based on current contracts, estimates and other indications of sales value (predicated on current values). All liabilities of the Company, including those estimated costs associated with implementing the plan of liquidation, have been stated at their estimated settlement amounts. These amounts are presented in the accompanying statements of net assets. These estimates are periodically reviewed and adjusted as appropriate. There can be no assurance that these estimated values will be realized. Such amounts should not be taken as an indication of the timing or amount of future distributions or our actual dissolution. The valuation of assets at their net realizable value and liabilities at their anticipated settlement amount represent estimates, based on present facts and circumstances, of the net realizable value of the assets and the costs associated with carrying out the plan of liquidation. The actual values and costs associated with carrying out the plan of liquidation may differ from amounts reflected in the accompanying financial statements because of the plan’s inherent uncertainty. These differences may be material. In particular, the estimates of our costs will vary with the length of time necessary to complete the plan of liquidation, which is currently anticipated to be completed by December 31, 2022. The Company is in the process of pursuing entitlements and density, and our ability to obtain required permits and authorizations is subject to factors beyond our control, including environmental concerns of governmental entities, community groups and purchasers. The process will involve extensive analysis internally at the government entity level, as well as between government entities such as town planning departments and Gyrodyne and or purchasers, and will continue up until such time as entitlement and density decisions are made by the relevant government entities. The Company hopes to secure favorable decisions on entitlements, and density so that we can then seek the sale of our remaining properties at higher prices (than those achievable under their current entitlements) and then proceed with the liquidation and dissolution of the Company. Any deviation in use or density between what we are pursuing in our entitlement efforts and what is ultimately permitted could have a material impact on value. The Company expects the process of pursuing entitlements, density, sales, liquidation and dissolution could extend through December 31, 2022 with the ultimate timing to a certain extent managed by Gyrodyne but ultimately dependent and under the control of the applicable municipality’s planning board or other governmental authority and or purchasers. Accordingly, it is not possible to predict with certainty the timing or aggregate amount which may ultimately be distributed to common shareholders and no assurance can be given that the distributions will equal or exceed the estimate presented in the accompanying consolidated statements of net assets. The Company’s assumptions and estimates (including the sales proceeds of all its real estate holdings, selling costs, retention bonus payments, rental revenues, rental expenses, capital expenditures, land entitlement costs, general and administrative fees, director and officer liability and reimbursement, post liquidation insurance tail coverage policy and final liquidation costs) are based on completing the liquidation by December 31, 2022. As previously stated, on an ongoing basis, Gyrodyne evaluates the estimates and assumptions that can have a significant impact on the reported net assets and will update respective information accordingly for any costs and value associated with a change in the duration of the liquidation, as we cannot give any assurance on the timing of the ultimate sale of all the Company’s properties. Management Estimates – In preparing the consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) and the liquidation basis of accounting, management is required to make estimates and assumptions that affect the reported amounts of assets, including net assets, and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of receipts and expenditures for the reporting period. Actual results could differ from those estimates. The most significant estimates are the estimates on the net realizable value from the sale of our real estate, the estimated costs/time to pursue entitlements and the related timeline to complete the liquidation. Cash equivalents - The Company considers all certificates of deposits, money market funds, treasury securities and other highly liquid debt instruments purchased with short-term maturities to be cash equivalents. Allowance for doubtful accounts – Rent receivable is carried at net realizable value. Management makes estimates of the collectability of rents receivable. Management specifically analyzes receivables and historical bad debts, tenant concentrations, tenant creditworthiness, current economic trends, including the impact of the outbreak of the novel strain of coronavirus (COVID-19) on tenants’ business and changes in tenant payment patterns when evaluating the adequacy of the allowance for doubtful accounts. 29 Fair Value Measurements – The Company believes the concepts for determining net realizable value are consistent with the guidance for measuring fair value. As a result, the Company follows the guidance of FASB Accounting Standards Codification, Fair Value Measurements and Disclosures to determine the fair value of financial and non-financial instruments. The guidance defines fair value, establishes a hierarchy framework for measuring fair value and expands disclosures related to the fair value. The guidance establishes a hierarchy breaking down observable and unobservable inputs into three levels: Level 1 – observable inputs in an active market on or around the measurement date, Level 2 – observable inputs that are based on prices not quoted on active markets but corroborated by market data and Level 3 – unobservable inputs utilized when no other data is available. Estimated Distributions per Share – Under the liquidation basis of accounting, the Company reports estimated distributions per share data by dividing net assets by the number of shares outstanding. New accounting pronouncements - Management has evaluated the impact of newly issued accounting pronouncements, whether effective or not as of December 31, 2020, and has concluded that they will not have a material impact on the Company’s consolidated financial statements since the Company reports on a liquidation basis. Discussion of the Statement of Net Assets Net assets on December 31, 2020 and 2019 would result in estimated distributions of $22,487,944 and $31,369,637, or approximately $15.17 and $21.16 per common share, respectively, based on 1,482,680 shares outstanding. The decrease of $8,881,693 or $5.99 per share is mainly attributable to the decrease in the estimated liquidation value of the real estate, due to the current status of entitlement uses and market conditions, the extension of the liquidation period and additional land development costs, offset by a decrease in estimated selling costs and estimated retention bonus. More specifically, in response to the extensive public comments received during the Cortlandt Manor SEQR DGEIS public hearing process and input from the Cortlandt Manor Town Board, the Company amended the Cortlandt Manor site plan and subdivision application with the Town to develop the Cortlandt Manor property as follows: SUBDIVISION LOT # BUILDING SIZE/YIELD Medical office Lot #1 100,000 sft Retail (Lot #1) Medical Office Lot #2 1,500 sft 84,600 sft The original site plan, in response to the Town’s request, was a mixed-use plan comprising of 100,000 square feet of medical use, 4,000 square feet of retail and 200 units of multitenant residential use. The change in use from partly residential to mostly medical combined with the reduction in retail and the cancellation of the purchase and sale agreement on a portion of the Cortlandt Manor property resulted in a reduction of the estimated real estate value by approximately $3,820,000. The remaining decrease in value of approximately $5,400,000 is driven by the market decline in real estate value in Flowerfield that is directly related to and stems from the impact of the pandemic, including the termination of the BSL Agreement. The Town of Cortlandt has expressed preliminary demands for certain offsite improvements that are directly related to the higher traffic related to medical. Furthermore, the pandemic continues to adversely impact medical office but has created a significant demand for residential real estate. As a result, contingent on discussions with the Town of Cortlandt on the pandemic impact to the local market, we may further amend our site plan to include some residential component if doing so will provide a higher return with an equivalent timeline, although there can be no assurance that such amended plan will be approved. Additionally, the pandemic has also adversely impacted demand for office (inclusive of medical office) and hotel development “on spec”. The Company’s subdivision plan at Flowerfield will allow for any combination of aforementioned uses and is marketing the undeveloped lots accordingly to reflect such flexibility. The value degradation, of $9,220,000 net of the lower bonuses and selling costs of $1,767,038 and $439,203, respectively, directly reduced the estimated net assets in liquidation by $7,013,759 or $4.73 per share. The comparability of the Company’s net assets on December 31, 2020 to future measurement dates may be significantly impacted by the effects of the outbreak of the COVID-19 pandemic. 30 The cash balance at the end of the liquidation period (currently estimated to be December 31, 2022, although the estimated completion of the liquidation period may change), excluding any interim distributions, is estimated based on the December 31, 2020 cash balance of $1.63 million plus adjustments for the following items which are estimated through December 31, 2022: 1. The estimated cash receipts from the operation of the properties net of rental property related expenditures as well as costs expected to be incurred to preserve or improve the net realizable value of the property at its estimated gross sales proceeds. 2. Net proceeds from the sale of all the Company’s real estate holdings. 3. The general and administrative expenses and or liabilities associated with operations and the liquidation of the Company including severance, director and officer liability coverage including post liquidation tail policy coverage, and financial and legal fees to complete the liquidation. 4. Costs for the pursuit of the entitlement of the Flowerfield and Cortlandt Manor properties. 5. Retention bonus amounts. 6. Costs, including principal payments, net of draw-downs on the credit facilities to fund tenant improvements and working capital and related fees. The Company estimates the net realizable value of its real estate assets by using income and market valuation techniques. The Company may estimate net realizable values using market information such as broker opinions of value, appraisals, and recent sales data for similar assets or discounted cash flow models, which primarily rely on Level 3 inputs as defined under FASB ASC Topic No. 820, Fair Value Measurement. The cash flow models include estimated cash inflows and outflows over a specified holding period. These cash flows may include contractual rental revenues, projected future rental revenues and expenses and forecasted capital improvements and lease commissions based upon market conditions determined through discussion with local real estate professionals, experience the Company has with its other owned properties in such markets and expectations for growth. Capitalization rates and discount rates utilized in these models are estimated by management based upon rates that management believes to be within a reasonable range of current market rates for the respective properties based upon an analysis of factors such as property and tenant quality, geographical location and local supply and demand observations. To the extent the Company underestimates forecasted cash outflows (capital improvements, lease commissions and operating costs) or overestimates forecasted cash inflows (rental revenue rates), the estimated net realizable value of its real estate assets could be overstated. The Company estimates that it will incur approximately $1.5 million (included in the statements of net assets as part of the estimated liquidation and operating costs net of receipts) in land entitlement costs from January 2021 through the end of the liquidation period, currently estimated to conclude on or about December 31, 2022, in an effort to obtain entitlements, including special permits. The Company believes the commitment of these resources will enable the Company to position the properties for sale with all entitlements necessary to maximize the Flowerfield and Cortlandt Manor property values and resulting distributions. During the year ended December 31, 2020, the Company incurred approximately $1.0 million of land entitlement costs, consisting primarily of engineering fees. The Company believes the remaining balance of $1.5 million (approximately $321,000 of which the Company’s service vendors have agreed to defer until the first post subdivision property lot is sold) will be incurred from January 2021 through the end of the liquidation period. The Company does not intend to develop the properties but rather to commit resources to position the properties for sale in a timely manner with all entitlements necessary to achieve maximum pre-construction values. The costs and time frame to achieve the entitlements could change due to a range of factors including a shift in the value of certain entitlements making it more profitable to pursue a different mix of entitlements and the dynamics of the real estate market. As a result, the Company has focused and will continue to focus its land entitlement efforts on achieving the highest and best use while considering the time necessary to achieve such entitlements. During the process of pursuing such entitlements, the Company may entertain offers from potential buyers who may be willing to pay premiums for the properties that the Company finds more acceptable from a timing or value perspective than completing the entitlement processes itself. The value of the real estate reported in the statement of net assets as of December 31, 2020 (predicated on current asset values) includes some but not all of the potential value impact that may result from the land entitlement efforts. There can be no assurance that our value enhancement efforts will result in property value increases that exceed the costs we incur in such efforts, or even any increase at all. The net assets on December 31, 2020 ($22,487,944) and 2019 ($31,369,637) results in estimated distributions of approximately $15.17 and $21.16, respectively, per common share (based on 1,482,680 shares outstanding), based on estimates and other indications of sales value (predicated on current assets values) which includes some but not all of the actual potential sales proceeds that may result directly or indirectly from our land entitlement efforts. Some of the additional value that may be derived from the land entitlement efforts is not included in the estimated distributions as of December 31, 2020 because the amount of such additional value that may result from such efforts are too difficult to predict with sufficient certainty. The Company believes the land entitlement efforts will enhance estimated distributions per share through the improved values (a large amount of which has already been included in the reported value for real estate held for sale) from the sales of the Flowerfield and Cortlandt Manor properties net of the costs to achieve the improved values and other expenses. This estimate of distributions includes projections of costs and expenses to be incurred during the period required to complete the plan of liquidation. There is inherent uncertainty with these projections, and they could change materially based on the timing of the sales, change in values of the Cortlandt Manor and/or Flowerfield properties (whether market driven or resulting from the land entitlement efforts) net of any bonuses (if such values exceed the minimum values required to pay bonuses under the retention bonus plan), favorable or unfavorable changes in the land entitlement costs, the performance of the underlying assets, the market for commercial real estate properties generally and any changes in the underlying assumptions of the projected cash flows. 31 The following table summarizes the estimates to arrive at the Net Assets as of December 31, 2020 (dollars are in millions). December 31, 2020 cash and cash equivalents balance $ 1.63 Restricted cash 0.17 Principal payments on loan (5.16 ) Free cash flow from rental operations 1.40 (i) General and administrative expenses (3.33 ) (ii) Land entitlement costs in pursuit of the highest and best use (1.49 ) (iii) Gross real estate proceeds 39.05 Selling costs on real estate (3.06 ) Retention bonus plan for directors, officers and employees (2.91 ) Final liquidation and dissolution costs (1.53 ) (iv) Other (2.28 ) (v) Net Assets $ 22.49 (vi) (i) The Company estimates the cash proceeds from rental operations net commissions and rental costs, inclusive of expenditures to preserve or improve the properties at its current estimated market value will total $1.40. (ii) The general and administrative expenses, excluding final liquidation costs, is estimated to be ($3.33). (iii) The Company is considering various options to maximize total distributions to our shareholders during the process of seeking entitlements and selling assets. The Company estimates that it will incur approximately $1.49 million (approximately $321,000 of which Company’s service vendors have agreed to defer until the first post subdivision property lot is sold) in costs over the liquidation period ending December 31, 2022 to obtain entitlements, inclusive of special permits that it believes will result in maximizing the values in the Flowerfield and Cortlandt Manor properties. The Company does not intend to develop the properties but rather to commit resources to position the properties for sale in a timely manner with all entitlements necessary to achieve maximum pre-construction values. During the process of pursuing such entitlements, the Company may entertain offers from potential buyers who may be willing to pay premiums for the properties that the Company finds more acceptable from a timing or value perspective than completing the entitlement processes. (iv) The costs represent all anticipated costs to liquidate the Company including D&O tail, severance and professional fees. (v) The Company estimates interest income will be offset by interest expense and the settlement of its working capital accounts resulting in a balance of $(2.28). (vi) The net assets on December 31, 2020 would result in distributions of approximately $15.17 per common share ($22.49 million with 1,482,680 shares outstanding). The Company believes the land entitlement costs will enhance estimated distributions per share through the improved values from the sales of the Flowerfield and Cortlandt Manor properties. This estimate of distributions include projections of costs and expenses to be incurred during the period required to complete the process of seeking entitlements and selling assets. There is inherent uncertainty with these projections, and they could change materially based on the timing of the sales, favorable or unfavorable changes in the land entitlement costs, the performance of the underlying assets and any changes in the underlying assumptions of the projected cash flows and the risks described above under “Risk Factors”. Discussion of Changes in Net Assets Gyrodyne’s strategy is to enhance the value of Flowerfield and Cortlandt Manor, by pursuing various entitlement opportunities, which the Gyrodyne Board believes will improve the chances of obtaining better values for such properties. The pursuit of the highest and best use of Flowerfield and Cortlandt Manor may involve other strategies to maximize the returns for our shareholders. Gyrodyne intends to dissolve after it completes the disposition of all of its real property assets, applies the proceeds of such dispositions first to settle any debts and claims, pending or otherwise, against Gyrodyne, and then makes distributions to holders of Gyrodyne common shares. Therefore, the Company includes in its financial statements the Consolidated Statement of Changes in Net Assets for the years ended December 31, 2020 and 2019, respectively, all of which is discussed below: Net assets on January 1, 2019 $ 26,846,670 Changes in net assets from January 1 through December 31, 2019: Remeasurement of assets and liabilities (7,545,763) (a) Change in value of real estate 12,068,730 Total change in net assets 4,522,637 Net assets on December 31, 2019 31,369,637 Changes in net assets for the year ended December 31, 2020 Remeasurement of assets and liabilities 338,307 (b) Change in value of real estate (9,220,000 ) Total change in net assets (8,881,693 ) Net assets on December 31, 2020 $ 22,487,944 (a) The increase in net assets during 2019 was the result of an increase of $12.1 million ($8.14 per share) in the value of the properties that are the subject of the purchase and sale agreements with BSL St. James LLC and Sound Cortlandt, LLC, respectively, and other adjustments to the remaining properties, and partially offset by the increase in the expense reserve (the estimated costs in excess of receipts) per share by $7.5 million ($5.09 per share). The increase in the expense reserve is mainly the result of an extension in the estimated liquidation timeline of 18 months attributable to the pursuit of entitlements (and the associated costs), entitlement costs and an increase to the retention bonus payments and selling costs as a result of the increase in real estate value. (b) The decrease in net assets in liquidation during 2020 was the result of the one-year extension in timeline offset by the decrease in selling costs and retention bonus payments due to the decrease in real estate value. Based on the estimated real estate value of the Cortlandt property, the combined sales of the two Cortlandt lots will not exceed the adjusted floor under the retention bonus plan and therefore the above table only reflects the projected bonus on the Flowerfield property. 32 Estimated Range of Distributions Assuming Enhancement Efforts Effective September 1, 2015, Gyrodyne adopted the liquidation basis of accounting. Under the liquidation basis of accounting, all the Company’s assets are stated at their estimated net realizable value, or liquidation value (which represents the estimated amount of cash that Gyrodyne will collect on the disposal of assets as it carries out a plan of liquidation), based on estimates and other indications of sales value (predicated on current values). The Company is reporting that net assets in liquidation on December 31, 2020 are $22,487,944, or approximately $15.17 per common share based on 1,482,680 shares outstanding. The Company has been engaged in an effort to secure entitlements to its remaining properties which, if secured, we believe will enhance their value and result in greater liquidating distributions to our shareholders than otherwise achievable. Because the ultimate amount of enhanced value, if any, from such land entitlement efforts is speculative, our estimate of net assets in liquidation as presented in our Statements of Net Assets includes some but not all of the potential value that may result from such efforts. In our Quarterly Report for the quarter ended September 30, 2020, the Company disclosed its good faith estimate of a range of liquidating distributions that may be achievable through our efforts to secure entitlements under certain factors. The estimated range reflected the potential increased net value that may be derived from the Company’s land entitlement efforts while factoring in the probability of securing such entitlements under a time frame that will not extend past the end of 2022 (“Entitlement Enhanced Liquidating Distributions”). The amount of estimated Entitlement Enhanced Liquidating Distributions assumes the sale of property lots with sought after entitlements consistent with our subdivision applications. Estimating the amount of Entitlement Enhanced Liquidating Distributions is generally subject to greater uncertainty than estimating the amount of Net Assets in Liquidation which appears in our Statements of Net Assets. In both cases, actual results could deviate materially from such estimates as a result of the timing of property sales, change in values of the Cortlandt Manor and/or Flowerfield properties, favorable or unfavorable changes in land entitlement costs, performance of the underlying assets, the state of the market for commercial real estate properties generally and any changes in the underlying assumptions of projected cash flows. The estimate of Net Assets in Liquidation which appears in our Statements of Net Assets as of December 31, 2020 is based on estimates and other indications of sales value and predicated on current values. Estimating Entitlement Enhanced Liquidating Distributions requires us also to factor in the inherently speculative potential value that may result from our entitlement efforts. 33 Material events and changed market conditions since we reported our estimated range of Entitlement Enhanced Liquidating Distributions as of September 30, 2020 have at least temporarily made the exercise of providing such range guidance significantly more speculative. The Company believes the recent terminations of the two signed purchase agreements for portions of our remaining properties and the current economic uncertainty stemming from the dearth of commercial real estate development and acquisition activity in Suffolk and Westchester Counties have made the exercise of providing guidance on Entitlement Enhanced Liquidating Distributions too speculative and potentially misleading. Consequently, the Company has determined to discontinue providing quantitative guidance in the form of an estimated range of Entitlement Enhanced Liquidating Distributions, although the Company hopes to resume providing such guidance as soon as circumstances become more conducive to providing reliable guidance. The actual nature, amount and timing of all distributions will be determined by the Company in its sole discretion and will depend in part upon the Company’s ability to convert our remaining assets into cash in compliance with our obligations under the Stipulation entered into in connection with the class action lawsuit (See Item 3. Legal Proceedings - Putative Class Action Lawsuit ) and settle and pay our remaining liabilities and obligations. Liquidity and Capital Resources Cash Flows : As we pursue our plan to sell our properties strategically, including certain enhancement efforts, we believe that a main focus of management is to effectively manage our net assets through cash flow management of our tenant leases, maintaining or improving occupancy, and enhance the value of the Flowerfield and Cortlandt Manor properties via the pursuit of the associated change in entitlements. As the Company executes on the sale of assets, it will periodically review its capital needs and make prudent distribution decisions regarding any excess cash. Upon completion of these activities, Gyrodyne will distribute the remaining cash to its shareholders and then proceed to complete the dissolution of the Company, delist its shares from Nasdaq or other exchange platform and terminate its registration and reporting obligations under the Securities Exchange Act of 1934, as Amended (the “Exchange Act”). Gyrodyne is required to make adequate provisions to satisfy its known and unknown liabilities which could substantially delay or limit its ability to make future distributions to shareholders. The process of accounting for liabilities, including those that are currently unknown or whose amounts are uncertain may involve difficult valuation decisions which could adversely impact the amount or timing of any future distributions. We finance our operations through cash on hand, supplemented by cash available under the Company’s credit facilities. Certain of the Company’s major vendors (including land development vendors) have agreed to defer payment on 50% of their fees until the subdivided lot is sold. Additionally, on December 6, 2019, the Company’s Board of Directors approved the Gyrodyne, LLC Nonqualified Deferred Compensation Plan for Employees and Directors (the “DCP”) effective as of January 1, 2020. The plan is a nonqualified deferred compensation plan maintained for officers and directors of the Company. Under the DCP, officers and directors may elect to defer a portion of their compensation to the DCP and receive interest on such deferred payments at a fixed rate of 5%. All DCP benefits will be paid in a single lump sum cash payment on December 15, 2026, unless a Plan of Liquidation is established for Gyrodyne before the distribution date in which case all benefits will be paid in a single lump sum cash payment after execution of an amendment to terminate the DCP ( See Deferred Compensation Plan above) . 34 We entered into a credit facility on March 21, 2018 which was amended and extended that will provide up to $3.0 million in financing for tenant improvements (the “Original Line”). The Company has drawn down approximately $2.2 million for tenant and associated common area improvements. The balance of the loan can be drawn upon to finance tenant improvements if required in the event, the Company signs additional leases or lease expansions with Stony Brook University or its affiliates (or other improvements subject to the bank’s approval) anytime during the Interest-Only Phase. On January 24, 2019, the Company secured a second loan evidenced by a secured non-revolving business line of credit and promissory note with the Original Line bank for up to $3,000,000 to provide access to additional working capital to fund entitlements and operations through final liquidation. The Company has drawn the full $3,000,000 (as of January 28, 2021). To secure access to additional working capital, the Company, through its subsidiary GSD Cortlandt, LLC (“GSD Cortlandt”) secured a loan evidenced by a non-revolving business line of credit agreement and promissory note with the Original Line bank for up to $2,500,000 which closed om July 16, 2020. The term is 24 months, with an option to extend for an additional 12 months. The interest rate is a variable rate equal to the daily highest prime rate published by the Wall Street Journal plus 100 basis points (1%), rounded up to the nearest 1/8 percent, but in no event less than four and three quarters percent (4.75%). The terms of the loan originally limited access to certain amounts, contingent upon GSD Cortlandt securing purchase agreements for one or both Cortlandt Property lots. On February 22, 2021, the loan was amended to remove such limitation on draws. Advances of $379,765 and $670,235, were drawn at closing and on January 28, 2021, respectively. Under the line, the balance of $1,450,000 is available upon the Lender’s discretion. We believe leveraging our capital improvements will allow us to continue focusing our cash on funding the pursuit of entitlements and our operations. The Company believes the combination of the investments in tenant improvements related to strategically important leases and the pursuit of entitlements will enable the Company to maximize the ultimate real estate value and the distributions per share. As of December 31, 2020, the Company had cash and cash equivalents totaling approximately $1.63 million. The Company anticipates that its current cash and cash equivalent balance and access to credit facilities will be adequate to fund its process of seeking entitlements and selling assets and subsequent dissolution. The $1.63 million of cash will be partially used to fund our efforts to generate the highest values for the Flowerfield and Cortlandt Manor properties while simultaneously pursuing the strategic sale of these properties. The pursuit of the highest values for Flowerfield and Cortlandt Manor may involve other investments and or other strategies to maximize the returns for our shareholders. The Company is estimating and reporting in the consolidated statements of net assets total gross cash proceeds from the sale of its assets of approximately $39.05 million. Based on the Company’s current cash balance and the above forecast, the Company estimates distributable cash stemming from the liquidation of the Company of approximately $22.49 million. The Company’s primary sources of funds are as follows: ● current cash and cash equivalents; ● rents and tenant reimbursements received on our remaining real estate operating assets; ● sale of assets; and ● credit facilities. Excluding gross proceeds from the sale of assets, the Company’s gross rents and tenant reimbursements net of rental expenses is less than the combined total annual general and administrative costs, capital expenditures and land entitlement costs creating a net use of cash on an annual basis through the liquidation process. The Company believes the cash and cash equivalents plus the proceeds from the sale of assets and funds available through its credit facilities will exceed the costs to complete the liquidation of the Company. In addition, the Company has and will continue to review operating activities for possible cost reductions throughout the liquidation process. Major elements of the Company’s cashflows for the year ended December 31, 2020 were as follows: Operating Cashflows: ● $2,432,540 in rent and reimbursements. ● ($1,506,037) in operating costs. Nonoperating Cashflows: ● $1,379,765 in loan proceeds. ● $86,100 Paycheck Protection Program loan forgiveness. ● ($200,093) of land entitlement costs incurred for the Cortlandt Manor property. ● ($813,873) of land entitlement costs incurred for the Flowerfield property. ● ($13,495) of capital expenditures on the real estate portfolio excluding those costs incurred for land entitlement. ● ($2,101,198) of corporate expenditures including interest expense. ● ($124,880) of costs incurred to secure non-revolving credit line. ● ($169,000) in restricted cash. ● $449,197 in changes in working capital. 35 Major elements of the Company’s cashflows for the year ended December 31, 2019 were as follows: Operating Cashflows: ● $2,600,047 in rent and reimbursements. ● ($1,536,010) in operating costs. Nonoperating Cashflows: ● $2,680,068 in loan proceeds. ● ($425,698) of land entitlement costs incurred for the Cortlandt Manor property. ● ($996,494) of land entitlement costs incurred for the Flowerfield property. ● ($616,230) of capital expenditures on the real estate portfolio excluding those costs incurred for land entitlement. ● ($14,573) of retention bonus payments made under the Retention Bonus Plan. ● ($2,074,888) of corporate expenditures including interest expense. ● ($92,926) of costs incurred to secure non-revolving credit line. ● ($359,678) in changes in working capital. Dispositions: Flowerfield - On May 11, 2020, the Company’s wholly owned subsidiary GSD Flowerfield, LLC entered into a Purchase and Sale Agreement (the “Non-Contiguous Property Agreement”) for the sale of a 5.0-acre parcel of vacant land (the “Non-Contiguous Property”) that is non-contiguous to and not part of the Flowerfield complex in Smithtown, New York for a purchase price of $500,000. Under the Non-Contiguous Property Agreement, $25,000 of the purchase price was deposited in escrow at signing with the $475,000 balance payable at closing, subject to Buyer’s right to terminate as described below. Under the Non-Contiguous Property Agreement: (i) Buyer will have the right during an investigation period to conduct a phase 1 environmental survey and or other related analysis. Buyer will have the right to terminate the Non-Contiguous Property Agreement, during the investigation period, by written notice to GSD Flowerfield if Buyer is not fully satisfied, in its sole discretion, as to the status of title, suitability of the property and all factors concerning same, in which case Buyer will have the right to receive a refund of its down payment; (ii) unless Buyer terminates the Non-Contiguous Property Agreement on or prior to the end of the investigation period, the closing will occur on the 20th day following the earlier of (y) the Town of Smithtown’s granting of the Approvals (as defined in the Non-Contiguous Property Agreement and as described below); or (z) Buyer’s waiver of such Approvals. The Non-Contiguous Property Agreement is also contingent on the receipt of a Certificate of Correction/Subdivision Plan (“Correction Plan”) signed and approved by the Town of Smithtown and the Suffolk County Department of Health Services (“SCDHS”) for the Non-Contiguous Property and the recharge basin and building Permits Approval (as defined in the Non-Contiguous Property Agreement and as described below). The Approval condition requires that the Buyer obtain the Correction Plan to create the two parcels and the recharge basin (as generally depicted in the Non-Contiguous Property Agreement) within a specified time (the “Approval Period”) following the last day of the investigation period. The Correction Plan is specifically delineated in the Non-Contiguous Property Agreement. In March 2021, the Buyer received the Correction Plan signed and approved by the Town of Smithtown and the SCDHS for the Non-Contiguous Property and the recharge basin. As a result, the Company anticipates the closing to occur during the second quarter of 2021. Termination of Purchase Agreements: Flowerfield - On August 27, 2019, the Company’s wholly owned subsidiary GSD Flowerfield, LLC entered into a Purchase and Sale Agreement (the “BSL Agreement”) for the sale of a 9.0-acre parcel of vacant land (the “BSL Agreement Property”) in the Flowerfield complex in Smithtown, New York for $16,800,000 to BSL St. James LLC, a Delaware limited liability company (“BSL”). The Agreement provided that BSL would have the right to terminate the BSL Agreement by written notice to GSD Flowerfield prior to the expiration of a defined inspection period (which had been extended via amendments to the BSL Agreement) if BSL was not fully satisfied, in BSL’s sole discretion, as to the status of title, suitability of the Property and all factors concerning same, in which case BSL would have the right to receive a refund of its earnest money deposit. On March 16, 2021, the Company received a notice (the “BSL Termination Notice”) from BSL that it is terminating the BSL Agreement. The BSL Termination Notice referenced the foregoing termination right and requested the return of the earnest money deposit to BSL in accordance with the provisions of the BSL Agreement. 36 The BSL Agreement Property is included in the Company’s subdivision application with the Town of Smithtown, New York, to subdivide the entire Flowerfield property into eight separate parcels (one parcel of which is a catering hall facility sold by the Company in 2002). The Company believes the termination of the BSL Agreement should have no impact on the subdivision application, and will continue to actively market its entire Flowerfield property on the basis of eight subdivided lots subject to and contingent upon approvals for the subdivision and related entitlements. Cortlandt Manor. As of December 7, 2019, the Company’s wholly owned subsidiaries GSD Cortlandt, LLC, a New York limited liability company and Buttonwood Acquisitions, LLC (together the “Cortlandt Subsidiaries”), executed a Purchase and Sale Agreement (the “SC Agreement”) for the sale of approximately 4.5 acres of its real property located in Cortlandt Manor, New York, together with improvements thereon (the “SC Agreement Property”) to Sound Cortlandt, LLC, a Delaware limited liability company (“SC LLC” for a purchase price of $5,720,000. The SC Agreement provided that SC LLC would have the right to terminate the SC Agreement by written notice to the Cortlandt Subsidiaries prior to the expiration of a defined inspection period (which had been extended via amendments to the SC Agreement) if SC LLC was not fully satisfied, in SC LLC’s sole discretion, as to the status of title, suitability of the SC Agreement Property and all factors concerning same, in which case SC LLC would have the right to receive a refund of its earnest money deposit. On February 1, 2021, the Company received a notice (the “SC Termination Notice”) from SC, LLC that it is terminating the SC Agreement. The SC Termination Notice referenced the foregoing termination right and called for the Escrow Agent (as defined in the SC Agreement) to return the earnest money deposit immediately to SC LLC in accordance with the provisions of the SC Agreement. The Company has made applications to the Town of Cortlandt (the “Town”) for a zoning amendment to rezone the entire Cortlandt property (owned by the Cortlandt Subsidiaries) into a Town Medical Oriented District (an “MOD) and to seek approval for a unified site plan. The Company’s original site plan at the time of executing the SC Agreement sought to subdivide its entire Cortlandt Manor property into three parcels for the development of (i) a medical office building with retail, (ii) a multi-family residential housing project and (iii) an open space, passive recreation parcel. The SC Agreement Property, which was the subject of the SC Agreement, is on the subdivision parcel in the original site plan for medical office building with ancillary retail space, but not on the multi-family residential housing parcel or the open space, passive recreation parcel. In response to extensive public comments received during the Cortlandt Manor public hearing process and input from the Cortlandt Manor Town Board, the Company amended the site plan and subdivision application with the Town to reflect a two-lot subdivision comprising a combined total of 184,600 square feet of medical office space and 1,500 square feet of retail space. The Company believes that the Town Board is expected to adopt an MOD designation for the Company’s Cortlandt property (inclusive of the two-lot subdivision and conceptual site plan approval) in early 2022. COVID-19 : The following discussion is intended to provide shareholders with certain information regarding the impacts of the COVID-19 pandemic on the Company’s business and management’s efforts to respond to those impacts. Unless otherwise specified, the statistical and other information regarding the Company’s properties and tenants are estimates based on information available to the Company. As a result of the rapid development, fluidity and uncertainty surrounding this situation, the Company expects that such statistical and other information will change, potentially significantly, going forward, and may not be indicative of the actual impact of the COVID-19 pandemic on the Company’s business, operations, cash flows and financial condition for the year ended December 31, 2020 and future periods. The spread of COVID-19 is having a significant impact on the global economy, the U.S. economy, the economies of the local markets in which the Company’s properties are located and the broader financial markets. Nearly every industry has been impacted directly or indirectly and has come under severe pressure due to numerous factors, including preventative measures taken by local, state and federal authorities to alleviate the public health crisis such as mandatory business closures, quarantines, restrictions on travel and “shelter-in-place” or “stay-at-home” orders. These containment measures, which generally do not apply to businesses designated as “essential,” are affecting the operations of our tenants, and non-essential businesses generally forced to close. There is uncertainty as to the time, date and extent to which these restrictions will be relaxed or lifted, businesses of tenants that have closed, either voluntarily or by mandate, will reopen or when customers will re-engage with tenants as they have in the past. The Company’s properties and tenants have been impacted by these and other factors as follows: ● As of the date of this Annual Report on Form 10-K, both of the Company’s properties are open and the Company believes are operating in compliance with federal, state and local COVID-19 guidelines and mandates. Both of the Company’s properties feature tenants designated as “essential”. 37 ● Approximately 37% of the Company’s tenants (based on 2021 projected annual revenues) are either not-for-profit corporations or tenants that are neither medical offices nor part of or affiliated with SBU or SBU Hospital. The COVID-19 public health crisis may also adversely impact the timeline to secure entitlements and the sale of our real estate. Furthermore, the real estate market has and is expected to continue to be adversely affected which could further negatively impact the timing of sales and the resulting value of our real estate. The Company has taken a number of proactive measures to maintain the strength of its business and manage the impact of COVID-19 on the Company’s operations and liquidity, including the following: ● Along with the Company’s tenants and the communities they and the Company together serve, the health and safety of the Company’s employees and their families is a top priority. The Company has adapted its operations to protect employees, including by implementing a work from home policy, and the Company’s IT systems have enabled its team to work seamlessly. ● To enhance our liquidity position and maintain financial flexibility, the Company secured a loan for up to $2,500,000, evidenced by a non-revolving business line of credit agreement and promissory note, which closed on July 16, 2020. ● As of December 31, 2020, the Company has approximately $1.63 million in cash and cash equivalents, and an additional $3,340,167 available under its credit facilities of which $800,000 is only available for certain capital improvements. In January 2021, the Company drew an additional $1,090,167. ● The Company has taken proactive measures to manage costs, including securing agreements from certain of the Company’s major service vendors to defer approximately $651,000 of land development fees incurred to date plus approximately $321,000 of forecasted land development fees until the first post subdivision property lot is sold. The only significant expenditures the Company plans to make at this time on our properties relate to obtaining entitlements. Further, the Company expects that the only material capital expenditures at the Company’s properties will be tenant improvements and/or other leasing costs associated with existing and new leases. ● We adopted a Deferred Compensation Plan effective as of January 1, 2020 pursuant to which officers and directors may elect to defer a portion of their compensation until the earlier of December 15, 2026 or adoption of a Plan of Liquidation, as defined in the plan, together with interest on such deferred payments at a fixed rate of 5%. The extent of the impact of COVID-19 on the Company's operational and financial performance and ultimately its Net Asset Value, will depend on current and future developments, including the duration and spread of the outbreak and related governmental or other regulatory actions. The Company’s ability to operate seamlessly and limit any adverse impact on its forecasted net asset value will also depend, in part, on whether any of its key employees or key advisors are infected by the Coronavirus and become ill from COVID-19. The unanticipated loss or unavailability of key employees and advisors due to COVID-19 or any similar pandemic could harm our ability to operate our business or execute our business strategy. Healthcare: Our tenants in our Cortlandt Manor property are healthcare service providers. Furthermore, the Company has expanded its leasing relationship with Stony Brook University, Stony Brook University Hospital and affiliates of Stony Brook University Hospital at our Flowerfield property which may increase its exposure to the healthcare industry. The healthcare industry is subject to substantial regulation and faces increased regulation particularly relating to fraud, waste and abuse, cost control and healthcare management. The healthcare industry may experience a significant expansion of applicable federal, state or local laws and regulations, previously enacted or future healthcare reform, new interpretations of existing laws and regulations or changes in enforcement priorities, all of which could materially impact the business and operations of our tenants and therefore the marketability of our properties. 38 The Patient Protection and Affordable Care Act of 2010 (the “ACA”) impacted the healthcare marketplace by decreasing the number of uninsured individuals in the United States through the establishment of health insurance exchanges to facilitate the purchase of health insurance, expanded Medicaid eligibility, subsidized insurance premiums and included requirements and incentives for businesses to provide healthcare benefits. There have been executive, judicial and Congressional challenges to certain aspects of the ACA. Although the U.S. Supreme Court has not yet ruled on the constitutionally of the ACA, on January 28, 2021, President Biden issued an executive order that instructs certain governmental agencies to review and reconsider their existing policies and rules that limit access to healthcare, including among other policies that create unnecessary barriers to obtaining access to health insurance coverage through Medicaid or the ACA. It is unclear how the Supreme Court ruling, other such litigation, and the healthcare reform measures of the Biden administration will impact the ACA and the operations and financial condition of our medical office tenants, which in turn may adversely impact us. Our tenants are subject to extensive federal, state, and local licensure laws, regulations and industry standards governing business operations, the physical plant and structure, patient rights and privacy and security of health information. Our tenants’ failure to comply with any of these laws could result in loss of licensure, denial of reimbursement, imposition of fines or other penalties, suspension or exclusion from the government sponsored Medicare and Medicaid programs, loss of accreditation or certification, or closure of the facility. In addition, efforts by third-party payors, such as the Medicare and Medicaid programs and private insurance carriers, including health maintenance organizations and other health plans, impose greater discounts and more stringent cost controls upon healthcare provider operations (through changes in reimbursement rates and methodologies, discounted fee structures, the assumption by healthcare providers of all or a portion of the financial risk or otherwise). Our tenants may also face significant limits on the scope of services reimbursed and on reimbursement rates and fees, all of which could impact their ability to pay rent or other obligations to us. The Company is pursuing entitlements on the Cortlandt Manor and Flowerfield properties, the value of which may be adversely affected by the aforementioned factors. Property Value Enhancement See, “ Business — Property Value Enhancement — Cortlandt Manor ” and “— Flowerfield ”, above, for more detailed disclosure. Item 7A. Quantitative and Qualitative Disclosures About Material Risk. Not applicable.