| ONE LIBERTY PROPERTIES INC Item 1A Risk Factors |
| ------------ In addition to the other information contained or incorporated by reference in this Form 10-K, readers should carefully consider the following risk factors: Risks Related to Our Business - ----------------------------- The financial failure of our tenants would be likely to cause significant reductions in our revenues, our equity in earnings of unconsolidated joint ventures and in the value of our real estate portfolio |
| Based on 2006 contractual rental income, 85prca of our rental revenues are generated from properties which are leased to single tenants |
| Accordingly, the financial failure or other default of a tenant in non-payment of rent or property related expenses or the termination of a lease could cause a significant reduction in our revenues |
| Additionally, approximately 45prca of our rental revenues (excluding rental revenues from our joint ventures) for the year ended December 31, 2005 was derived from retail tenants and approximately 44prca of our 2006 contractual rental income will be derived from retail tenants |
| We also anticipate that significant revenues will be realized in 2006 by our two movie theater joint ventures |
| Weakening economic conditions in the retail or theater industries could result in the financial failure, or other default, of a significant number of our tenants and the tenants of our joint ventures |
| In 2004 and 2005 three retail tenants, each the only tenant at a retail property owned by us, filed for protection under Chapter II of the federal bankruptcy laws |
| One of these properties was vacant for approximately 17 months (until the property was sold in December 2005) after the tenant rejected the lease |
| This property was sold for a loss of dlra9cmam400, after we had previously recorded a valuation allowance aggregating dlra835cmam000 |
| With respect to the other two properties, each tenant rejected its lease, one property was vacant for approximately three months (until the property was sold in September 2005 for a gain of dlra639cmam000) and one property was sold in November 2005 for a gain of dlra369cmam000 (we did not experience a vacancy at this property) |
| In addition, a building owned by a joint venture in which we have a 50prca economic interest, was leased to a tenant which filed for protection under Chapter II The tenant rejected the lease in June 2004 and the property has been vacant since that time |
| It is possible that other tenants could file for protection under federal bankruptcy laws or state insolvency proceedings or could face similar difficulties in the future |
| In the event of a default by a tenant, we may experience delays in enforcing our rights as landlord and sustain a loss of revenues and substantial costs in protecting our investment |
| We may also face liabilities arising from the tenantapstas actions or omissions that would reduce our revenues and the value of our portfolio |
| Also, if we are unable to re-rent a property when an existing lease terminates, we receive no revenues from such property and are required to pay taxes, insurance and other operating expenses during the vacancy period, and could as a result experience a decline in the value of the property |
| A significant portion of our revenues and/or our 2006 contractual rental income is derived from five tenants |
| The default, financial distress or failure of any of these tenants could significantly reduce our revenues |
| ( a tenant at three separate locations) accounted for approximately 6dtta5prca, 6dtta1prca, and 5dtta2prca, respectively, of our rental revenues (excluding rental revenues from our joint ventures) for the year ended December 31, 2005 and account for 5dtta4prca, 5dtta8prca, and 5dtta2prca, respectively, of our 2006 contractual rental income |
| DSM Nutritional Products, Inc, a tenant at a property we acquired in September 2005 accounts for 6dtta3prca of our 2006 contractual rental income |
| Regal Cinemas, Inc, a tenant at four theaters owned by our movie theater joint ventures, accounted for 36prca of the total rental revenues of our joint ventures for the year ended December 31, 2005 and will account for 37prca of our share of projected rent payable in 2006 to our joint ventures |
| In addition, Regal Cinemas, Inc, is a tenant at a theater owned by us and accounted for approximately 4dtta3prca of our rental revenues for the year ended December 31, 2005 and accounts for 4prca of our 2006 contractual rental income |
| The default, financial distress or bankruptcy of any of these tenants could cause interruptions in the receipt or the loss of a significant amount of rental revenues and result in the vacancy of the property occupied by the defaulting tenant, which would significantly reduce our rental revenues (or the rental revenues of our joint ventures) and net income until the property is re-rented, and could decrease the ultimate sale value of the property |
| The inability to repay our indebtedness could reduce cash available for distributions and cause losses |
| As of December 31, 2005, we had outstanding approximately dlra167 million in long-term mortgage indebtedness, all of which is non-recourse (subject to standard carve-outs) |
| As of December 31, 2005, our ratio of mortgage debt to total assets was approximately 51prca |
| In addition, as of December 31, 2005, our joint ventures had approximately dlra74dtta5 million in total long-term mortgage indebtedness (all of which is non-recourse subject to standard carve-outs) |
| The mortgages on properties owned by each of our two "e movie theater "e joint ventures are cross collateralized |
| The risks associated with our debt and the debt of our joint ventures include the risk that cash flow for the properties securing the mortgage indebtedness will be insufficient to meet required payments of principal and interest |
| Further, if a property or properties are mortgaged to collateralize payment of indebtedness and we or any of our joint ventures is unable to make mortgage payments on the secured indebtedness, the lender could foreclose upon the property or properties resulting in a loss of revenues to us and a decline in the value of our portfolio |
| Even with respect to non-recourse indebtedness, the lender may have the right to recover deficiencies from us under certain circumstances that could result in a reduction in the amount of cash available to meet expenses and to make distributions to our stockholders and in a deterioration of our financial condition |
| If we are unable to refinance our borrowings at maturity at favorable rates or otherwise raise funds, our net income may decline or we may be forced to sell properties on disadvantageous terms, which would result in the loss of revenues and in a decline in the value of our portfolio |
| Only a small portion of the principal of our mortgage indebtedness and the mortgage indebtedness of our joint ventures will be repaid prior to maturity and neither we nor our joint ventures plan to retain sufficient cash to repay such indebtedness at maturity |
| Accordingly, in order to meet these obligations, we will have to use funds available under our credit line, if any, to refinance debt or seek to raise funds through the financing of unencumbered properties, sale of properties or sale of additional equity |
| Between January 2006 and December 31, 2010, we will have to refinance an aggregate of approximately dlra32 million of maturing debt, of which approximately dlra2dtta2 will have to be refinanced in 2006 and approximately dlra3dtta8 million will have to be refinanced in 2007 |
| Our joint ventures do not have maturing debt until 2012 |
| We can give no assurance that we (or our joint ventures) will be able to refinance this debt or arrange additional debt financing on unencumbered properties on terms as favorable as the terms of existing indebtedness, or at all |
| If interest rates or other factors at the time of refinancing result in interest rates higher than the interest rates currently being paid, interest expense would increase, which would adversely affect our net income, financial condition and the amount of cash available for distribution to stockholders |
| If we (or our joint ventures) are not successful in refinancing existing indebtedness or financing unencumbered properties, selling properties on favorable terms or raising additional equity, our cash flow (or the cash flow of a joint venture) will not be sufficient to repay all maturing debt when payments become due, and we (or a joint venture) may be forced to dispose of properties on disadvantageous terms, which would result in the loss of revenues and in a decline in the value of our portfolio |
| As of December 31, 2005, we had zero outstanding on our revolving credit facility |
| Depending on our acquisition program, we could borrow a significant amount under our credit facility in 2006 |
| The facility is guaranteed by all of our subsidiaries which own unencumbered properties and the shares of stock of all other subsidiaries are pledged as collateral |
| The risks associated with our revolving credit facility include the risk that our cash flow will be insufficient to meet required payments of interest |
| Also, we may be unable to negotiate a new facility at the maturity date and may be unable to pay off the amount then outstanding |
| This could result in a reduction in the amount of cash available to meet expenses and to make distributions to holders of our common stock |
| Increased borrowings could result in increased risk of default on our repayment obligations and increased debt service requirements |
| Our governing documents do not contain any limitation on the amount of indebtedness we may incur |
| However, the terms of our credit facility with Valley National Bank, Merchants Bank Division, Bank Leumi, USA, Manufacturers and Traders Trust Company and Israel Discount Bank of New York limit the total indebtedness that we may incur to an amount equal to approximately 70prca of the value (as defined) of our properties, among other limitations in the credit facility on our ability to incur additional indebtedness |
| Increased leverage could result in increased risk of default on our payment obligations related to borrowings and in an increase in debt service requirements, which could reduce our net income and the amount of cash available to meet expenses and to make distributions to holders of our common stock |
| If we are unable to re-rent properties upon the expiration of our leases, it could adversely affect our revenues and ability to make distributions, and could reduce the value of our portfolio |
| Substantially all of our revenues are derived from rental income paid by tenants at our properties |
| We cannot predict whether current tenants will renew their leases upon the expiration of their terms |
| In addition, we cannot predict whether current tenants will attempt to terminate their leases (including taking advantage of provisions of the federal bankruptcy laws), or whether defaults by tenants may result in termination of their leases prior to the expiration of their current terms |
| If tenants terminate or fail to renew their leases, or if leases terminate due to defaults or in the course of a bankruptcy proceeding, we may not be able to locate qualified replacement tenants and, as a result, we would lose a source of revenue while remaining responsible for the payment of our mortgage obligations and the expenses related to the properties, including real estate taxes and insurance |
| Even if tenants decide to renew their leases or we find replacement tenants, the terms of renewals or new leases, including the cost of required renovations or concessions to tenants, or the expense of reconfiguration of a single tenancy property for use by multiple tenants, may be less favorable than current lease terms and could reduce the amount of cash available to meet expenses and to make distributions to holders of our common stock |
| Uninsured and underinsured losses may affect the revenues generated by, the value of, and the return from, a property affected by a casualty or other claim |
| Substantially all of our tenants obtain, for our benefit, comprehensive insurance covering our properties in amounts that are intended to be sufficient to provide for the replacement of the improvements at each property |
| However, the amount of insurance coverage maintained for any property may not be sufficient to pay the full replacement cost of the improvements at the property following a casualty event |
| In addition, the rent loss coverage under the policy may not extend for the full period of time that a tenant may be entitled to a rent abatement as a result of, or that may be required to complete restoration following, a casualty event |
| In addition, there are certain types of losses, such as those arising from earthquakes, floods, hurricanes and terrorist attacks, that may be uninsurable or that may not be economically insurable |
| Changes in zoning, building codes and ordinances, environmental considerations and other factors also may make it impossible or impracticable for us to use insurance proceeds to replace damaged or destroyed improvements at a property |
| If restoration is not or cannot be completed to the extent, or within the period of time specified in certain of our leases, the tenant may have the right to terminate the lease |
| If any of these or similar events occur, it may reduce our revenues, or the value of, or our return from, an affected property |
| Our revenues and the value of our portfolio are affected by a number of factors that affect investments in real estate generally |
| We are subject to the general risks of investing in real estate |
| These include adverse changes in economic conditions and local conditions such as changing demographics, retailing trends and traffic patterns, declines in the rental rates, changes in the supply and price of quality properties and the market supply and demand of competing properties, the impact of environmental laws, security concerns, prepayment penalties applicable under mortgage financing, changes in tax, zoning, building code, fire safety and other laws, the type of insurance coverages available in the market, and changes in the type, capacity and sophistication of building systems |
| In particular, approximately 44prca of our 2006 contractual rental income will come from retail tenants; therefore vulnerable to any economic decline that negatively impacts the retail sector of the economy |
| Any of these conditions could have an adverse effect on our results of operations, liquidity and financial condition |
| Our revenues and the value of our portfolio are affected by a number of factors that affect investments in leased real estate generally |
| We are subject to the general risks of investing in leased real estate |
| These include the non-performance of lease obligations by tenants, improvements that will be costly or difficult to remove should it become necessary to re-rent the leased space for other uses, covenants in certain retail leases that limit the types of tenants to which available space can be rented (which may limit demand or reduce the rents realized on re-renting), rights of termination of leases due to events of casualty or condemnation affecting the leased space or the property or due to interruption of the tenantapstas quiet enjoyment of the leased premises, and obligations of a landlord to restore the leased premises or the property following events of casualty or condemnation |
| Any of these conditions could have an adverse impact on our results of operations, liquidity and financial condition |
| Our real estate investments are relatively illiquid and their values may decline |
| Real estate investments are relatively illiquid |
| Therefore, we will be limited in our ability to reconfigure our real estate portfolio in response to economic changes |
| We may encounter difficulty in disposing of properties when tenants vacate either at the expiration of the applicable lease or otherwise |
| If we decide to sell any of our properties, our ability to sell these properties and the prices we receive on their sale may be affected by many factors, including the number of potential buyers, the number of competing properties on the market and other market conditions, as well as whether the property is leased and if it is leased, the terms of the lease |
| As a result, we may be unable to sell our properties for an extended period of time without incurring a loss, which would adversely affect our results of operations, liquidity and financial condition |
| The concentration of our properties in certain geographic areas may make our revenues and the value of our portfolio vulnerable to adverse changes in local economic conditions |
| We do not have specific limitations on the total percentage of our real estate properties that may be located in any one area |
| Consequently, properties that we own may be located in the same or a limited number of geographic regions |
| Approximately 36prca of our rental income (excluding our share of the rental income from our joint ventures) for the year ended December 31, 2005 were, and approximately 35prca of our 2006 contractual rental income will be, derived from properties located in New York and Texas |
| As a result, a decline in the economic conditions in these geographic regions, or in geographic regions where our properties may be concentrated in the future, may have an adverse effect on the rental and occupancy rates for, and the property values of, these properties, which could lead to a reduction in our rental income and in the value of these properties |
| Our inability to control our joint ventures could result in diversion of time and effort by our management and the inability to achieve the goals of the joint venture or the tenancy in common |
| We presently are a venturer in six joint ventures which own fourteen properties and we own 50prca of another property as tenant in common with a group of investors pursuant to a tenancy in common agreement |
| At December 31, 2005 our investment in unconsolidated joint ventures is approximately dlra27 million and the tenancy in common interest represents a net investment of approximately dlra500cmam000 by us |
| These investments may involve risks not otherwise present in investments made solely by us, including that our co-investors may have different interests or goals than we do, or that our co-investors may not be able or willing to take an action that is desired by us |
| Disagreements with or among our co-investors could result in substantial diversion of time and effort by our management team and the inability of the joint venture or the tenancy in common to successfully operate, finance, lease or sell properties as intended by our joint venture agreements or tenancy in common agreement |
| In addition, because we may, under the terms of our credit facility, invest a total of dlra90 million in joint ventures, we may invest a significant amount of our funds into joint ventures which ultimately may not be profitable as a result of disagreements with or among our co-investors |
| Our joint venture agreements and tenancy in common agreement contain provisions related to the transfer of our interest, resolution of disputes and future capital contributions that could limit our ability to liquidate our interest or adversely affect the value of our investments |
| The joint venture agreements entered into for each of our ventures generally provide that we cannot finance or transfer our interest in the joint venture without the consent of the other venturers |
| If we are unable to obtain the consent of our co-venturers to a proposed financing or transfer of our interest, we may be unable to dispose of such interest on favorable terms |
| The tenancy in common agreement provides each party with a right of first refusal in the event the other party decides to transfer its tenancy in common interest |
| The right of first refusal may make it more difficult for us to sell our interest in the property |
| In addition, the tenancy in common agreement requires the consent of the other parties to a proposed financing of the property |
| Our joint venture agreements and tenancy in common agreement also contain provisions governing disputes that could cause us to acquire the interest of co-investors on unfavorable terms or without adequate time to obtain satisfactory financing or cause us to sell our interest on terms that may be disadvantageous |
| In addition, if we fail to contribute any additional capital that we are required to contribute in the future to any of these investments, our interest may be reduced disproportionately, or a co-investor may elect to fund our portion of the capital contribution, which would result in that co-investor acquiring a preferred rate of return and a right to receive interest on the amount of such contribution |
| The occurrence of any of these events would adversely affect the value of our investment |
| Competition in the real estate business is intense and could reduce our revenues and harm our business |
| We compete for real estate investments with all types of investors, including domestic and foreign corporations and real estate companies, financial institutions, insurance companies, pension funds, investment funds, other REITs and individuals |
| Many of these competitors have significant advantages over us, including a larger, more diverse group of properties and greater financial and other resources |
| We have recently experienced increased competition for the acquisition of net leased properties |
| Our failure to compete successfully with these competitors could result in our inability to identify and acquire valuable properties and to achieve our growth objectives |
| Compliance with environmental regulations and associated costs could adversely affect our liquidity |
| Under various federal, state and local laws, ordinances and regulations, an owner or operator of real property may be required to investigate and clean up hazardous or toxic substances or petroleum product releases at the property and may be held liable to a governmental entity or to third parties for property damage and for investigation and cleanup costs incurred in connection with contamination |
| The cost of investigation, remediation or removal of hazardous or toxic substances may be substantial, and the presence of such substances, or the failure to properly remediate a property, may adversely affect our ability to sell or rent the property or to borrow money using the property as collateral |
| In connection with our ownership, operation and management of real properties, we may be considered an owner or operator of the properties and, therefore, potentially liable for removal or remediation costs, as well as certain other related costs, including governmental fines and liability for injuries to persons and property, not only with respect to properties we own now or may acquire, but also with respect to properties we have owned in the past |
| We cannot provide any assurance that existing environmental studies with respect to any of our properties reveal all potential environmental liabilities, that any prior owner of a property did not create any material environmental condition not known to us, or that a material environmental condition does not otherwise exist, or may not exist in the future, as to any one or more of our properties |
| If a material environmental condition does in fact exist, or exists in the future, it could have a material adverse impact upon our results of operations, liquidity and financial condition |
| Our senior management and other key personnel are critical to our business and our future success depends on our ability to retain them |
| We depend on the services of Fredric H Gould, chairman of our board of directors and chief executive officer, Patrick J Callan, Jr, our president, Lawrence G Ricketts, our vice president and other members of our senior management to carry out our business and investment strategies |
| Callan and Mr |
| Ricketts, devote substantially all of their business time to our company |
| The remainder of our senior management personnel share their services on a part-time basis with entities affiliated with us and located in the same executive offices under the Shared Services Agreement |
| As we expand, we will continue to need to attract and retain qualified senior management and other key personnel, both on a full-time and shared basis |
| The loss of the services of any of our senior management or other key personnel, or our inability to recruit and retain qualified personnel in the future, could impair our ability to carry out our business and investment strategies |
| We do not carry key main life insurance on members of our senior management |
| We have entered into a number of transactions with persons and entities affiliated with us and with certain of our officers and directors and we intend to enter into transactions with such persons in the future |
| In particular, during the year ended December 31, 2005, Majestic Property Management Corp, a company owned by Mr |
| Gould and in which certain of our executive officers are officers, received an aggregate of dlra131cmam000 for management fees and dlra156cmam000 for mortgage brokerage fees from our joint ventures |
| In addition in 2005, we paid Majestic Property Management Corp |
| approximately dlra1 million for mortgage brokerage fees, sales commissions, management fees and construction supervisory fees |
| Our policy is to insure that we receive terms in transactions with affiliates that are at least as favorable to us as similar transactions we would enter into with unaffiliated persons and these transactions have been approved by our Audit Committee and by a majority of our board of directors, including a majority of our independent directors |
| However, these transactions raise the potential that we may not receive terms as favorable as those that we would receive if the transactions were entered into with unaffiliated entities |
| We are required by certain of our net lease agreements to pay property related expenses that are not the obligations of our tenants |
| Under the terms of substantially all of our net lease agreements, in addition to satisfying their rent obligations, our tenants are responsible for the payment of real estate taxes, insurance and ordinary maintenance and repairs |
| However, in the case of certain leases, we may pay some expenses, such as the costs of environmental liabilities, roof and structural repairs, insurance and certain non-structural repairs and repairs and maintenance |
| If our properties incur significant expenses that must be paid by us under the terms of our lease agreements, our business, financial condition and results of operations will be adversely affected and the amount of cash available to meet expenses and to make distributions to holders of our common stock may be reduced |
| Compliance with the Americans with Disabilities Act could be costly |
| Under the Americans with Disabilities Act of 1990, all public accommodations must meet federal requirements for access and use by disabled persons |
| A determination that our properties do not comply with the Americans with Disabilities Act could result in liability for both governmental fines and damages |
| If we are required to make unanticipated major modifications to any of our properties to comply with the Americans with Disabilities Act, which are determined not to be the responsibility of our tenants, we could incur unanticipated expenses that could have an adverse impact upon our results of operations, liquidity and financial condition |
| We cannot assure you of our ability to pay dividends in the future |
| We intend to pay quarterly dividends and to make distributions to our stockholders in amounts such that all or substantially all of our taxable income in each year, subject to certain adjustments, is distributed |
| This, along with other factors, should enable us to quality for the tax benefits accorded to a REIT under the Internal Revenue Code of 1986, as amended |
| We have not established a minimum dividend payment level and our ability to pay dividends may be adversely affected by the risk factors described in this Annual Report |
| All distributions will be made at the discretion of our board of directors and will depend on our earnings, our financial condition, maintenance of our REIT status and such other factors as our board of directors may deem relevant from time to time |
| We cannot assure you that we will be able to pay dividends in the future |
| Risks Related to the REIT Industry - ---------------------------------- Failure to qualify as a REIT would result in material adverse tax consequences and would significantly reduce cash available for distributions |
| We believe that we operate so as to qualify as a REIT under the Internal Revenue Code of 1986, as amended |
| Qualification as a REIT involves the application of technical and complex legal provisions for which there are limited judicial and administrative interpretations |
| The determination of various factual matters and circumstances not entirely within our control may affect our ability to qualify as a REIT In addition, no assurance can be given that legislation, new regulations, administrative interpretations or court decisions will not significantly change the tax laws with respect to qualification as a REIT or the federal income tax consequences of such qualification |
| If we fail to quality as a REIT, we will be subject to federal, certain additional state and local income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates and would not be allowed a deduction in computing our taxable income for amounts distributed to stockholders |
| In addition, unless entitled to relief under certain statutory provisions, we would be disqualified from treatment as a REIT for the four taxable years following the year during which qualification is lost |
| The additional tax would reduce significantly our net income and the cash available for distributions to stockholders |
| We are subject to certain distribution requirements that may result in our having to borrow funds at unfavorable rates |
| To obtain the favorable tax treatment associated with being a REIT, we generally are required, among other things, to distribute to our stockholders at least 90prca of our ordinary taxable income (subject to certain adjustments) each year |
| To the extent that we satisfy these distribution requirements, but distribute less than 100prca of our taxable income we will be subject to federal corporate tax on our undistributed taxable income |
| In addition, we will be subject to a 4prca nondeductible excise tax on the amount, if any, by which certain distributions paid by us with respect to any calendar year are less than the sum of 85prca of our ordinary income, 95prca of our capital gain net income and 100prca of our undistributed income from prior years |
| As a result of differences in timing between the receipt of income and the payment of expenses, and the inclusion of such income and the deduction of such expenses in arriving at taxable income, and the effect of nondeductible capital expenditures, the creation of reserves and the timing of required debt service (including amortization) payments, we may need to borrow funds on a short-term basis in order to make the distributions necessary to retain the tax benefits associated with qualifying as a REIT, even if we believe that then prevailing market conditions are not generally favorable for such borrowings |
| Such borrowings could reduce our net income and the cash available for distributions to holders of our common stock |
| Compliance with REIT requirements may hinder our ability to maximize profits |
| In order to qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning among other things, our sources of income, the amounts we distribute to our stockholders and the ownership of our stock |
| We may also be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution |
| Accordingly, compliance with REIT requirements may hinder our ability to operate solely on the basis of maximizing profits |
| In order to qualify as a REIT, we must also ensure that at the end of each calendar quarter, at least 75prca of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets |
| Any investment in securities cannot include more than 10prca of the outstanding voting securities of any one issuer or more than 10prca of the total value of the outstanding securities of any one issuer |
| In addition, no more than 5prca of the value of our assets can consist of the securities of any one issuer, other than a qualified REIT security |
| If we fail to comply with these requirements, we must dispose of such portion of these securities in excess of these percentages within 30 days after the end of the calendar quarter in order to avoid losing our REIT status and suffering adverse tax consequences |
| This requirement could cause us to dispose of assets for consideration that is less than their true value and could lead to a material adverse impact on our results of operations and financial condition |