| WELLSFORD REAL PROPERTIES INC Item 1A Risk Factors |
| An investment in our common stock involves a high degree of risk |
| The risks can generally be divided into three categories: risks relating to the Plan; risks relating to our properties and assets; and risks relating to our organization and structure |
| In addition to other information contained or incorporated into this Form 10-K, the following is a discussion of the risk factors that we believe are material at this time |
| These risks and uncertainties are not the only ones facing us and there may be additional matters that we are unaware of or that we currently consider immaterial |
| All of these could adversely affect our business, results of operations and financial condition and the timing and amount of liquidating distributions to our stockholders pursuant to the Plan |
| Risks related to the Plan Following the approval of the Plan by our stockholders on November 17, 2005, we completed the sale of our largest asset, the three residential rental phases of Palomino Park for dlra176cmam000cmam000 and on December 14, 2005, made an initial liquidating distribution of dlra14dtta00 per share to our stockholders |
| We cannot assure our stockholders of the timing, nature or amount of any further liquidating distributions |
| If our stockholders believe that we will be unable to complete our Plan in a timely manner or if liquidating distributions do not meet current estimates, the market price of our common stock may decline |
| Further, if we make additional liquidating distributions to our stockholders, our stock price will decline and our common shares will likely become less liquid |
| As a result of the adoption of the Plan, our basis of accounting has changed from the going-concern basis to that of the liquidation basis of accounting |
| Under the liquidation basis of accounting, assets are stated at their estimated net realizable value and liabilities are stated at their estimated settlement amounts, which estimates will be periodically reviewed and adjusted as appropriate |
| The valuation of assets at their net realizable value and liabilities at their anticipated settlement amounts represent estimates, based on present facts and circumstances, of the net realizable value of assets and the costs associated with carrying out the Plan and 13 _________________________________________________________________ dissolution based on certain assumptions |
| At December 31, 2005, the Company reported in the accompanying financial statements that its net assets in liquidation aggregated dlra56cmam569cmam000, or dlra8dtta74 per share based upon 6cmam471cmam179 common shares outstanding at December 31, 2005 |
| The actual values and costs associated with carrying out the Plan are expected to differ from this amount because of the inherent uncertainty and will be greater than or less than the amounts recorded |
| Such differences may be material |
| In particular, the estimates of the Companyapstas costs will vary with the length of time it operates |
| In addition, the estimate of net assets in liquidation in the accompanying Statement of Net Assets in Liquidation does not incorporate a present value discount except for projects under development |
| Accordingly, it is not possible to predict the aggregate amount which will ultimately be distributable to stockholders and no assurance can be given that the aggregate amount of liquidating distributions will equal or exceed the estimate of net assets in liquidation presented in the accompanying Statement of Net Assets in Liquidation or the price or prices at which the Companyapstas common stock has traded or is expected to trade in the future |
| Generally, equity and debt real estate investments are relatively difficult to buy and sell quickly |
| In addition, as a result of the adoption of the Plan, potential purchasers of our assets may try to take advantage of our liquidation process and offer less-than-optimal prices for our assets |
| We cannot predict how these factors and changes in local real estate markets and the national economy or other factors may affect the prices that we can obtain from the sales of single family homes and condominiums in the liquidation process or the timing of such sales |
| The actual amount available for liquidating distributions to our stockholders could be more or less than anticipated or could be delayed, depending on a number of other factors including (i) unknown liabilities or claims, (ii) unexpected or greater or lesser than expected expenses, and (iii) greater or lesser than anticipated net proceeds of asset sales |
| In addition, if we sold the land at East Lyme to another developer, or our joint venture interest in Claverack to our partner in that venture, the net proceeds from such a sale or sales may be less than the net proceeds that could have been received from the sale of completed residential units |
| The timing and amount of interim liquidating distributions (if any) and final liquidating distributions will depend on the timing and amount of proceeds the Company will receive upon the sale of the remaining assets and the extent to which reserves for current or future liabilities are required |
| Accordingly, there can be no assurance that there will be any liquidating distributions prior to a final liquidating distribution |
| Subsequent liquidating distributions could be made after the Company has been dissolved and its assets and liabilities have been transferred to a liquidating trust |
| The Board may abandon the Plan without further stockholder approval |
| Furthermore, the Board may modify the Plan as necessary, but any material amendment requires stockholder approval |
| Thus, we may decide to conduct the liquidation differently than as previously described, to the extent we are permitted to do so by Maryland law |
| Historically, our stock has been thinly traded |
| In the absence of an active public trading market, an investor may be unable to sell his or her common shares |
| Moreover, as a result of the adoption of the Plan, our common shares may no longer be eligible for listing on the American Stock Exchange ( "e AMEX "e ) |
| Being delisted by the AMEX would further decrease the market demand and liquidity for, and price of, our common shares |
| Under Maryland law, certain obligations or liabilities imposed by law on our stockholders, directors, or officers cannot be avoided by the dissolution of a company |
| For example, if we make liquidating distributions to our stockholders without making adequate provisions for payment of creditors &apos claims, our stockholders would be liable to the creditors to the extent of the unlawful distributions |
| The liability of any stockholder is, however, limited to the amounts previously received by such stockholder from us (and from any liquidating trust) |
| Accordingly, in such event, a stockholder could be required to return all liquidating distributions previously made to such stockholder and a stockholder could receive nothing from us under the Plan |
| Moreover, in the event a stockholder has paid taxes on amounts previously received as a liquidating distribution, a repayment of all or a portion of such amount could result in a stockholder incurring a net tax cost if the stockholderapstas repayment of an amount previously distributed does not cause a commensurate reduction in taxes payable |
| Therefore, to the extent that we have underestimated the size of our contingency reserve and liquidating 14 _________________________________________________________________ distributions to our stockholders have already been made, our stockholders may be required to return some or all of such liquidating distributions |
| We intend to close our transfer books on the date on which we file Articles of Dissolution with the State Department of Assessments and Taxation of Maryland (the "e Final Record Date "e ) |
| The Final Record Date is currently anticipated to be approximately 36 months after the approval of the Plan by our stockholders, which occurred on November 17, 2005, or such other time as our Board transfers all of our remaining assets into a liquidating trust |
| At that time, your common shares in the Company will be converted to interests in a liquidating trust which are likely to be non-transferable except in certain limited circumstances |
| At any time, we may transfer to a liquidating trust any assets not sold or distributed, subject to outstanding liabilities (as previously disclosed) |
| If a liquidating trust were established, we would distribute to the then holders of our common shares interests in the liquidating trust in proportion to the number of common shares owned by such stockholders |
| The distribution would be a taxable event to stockholders who are subject to US income tax, and there is not likely to be an accompanying distribution of cash or other assets with which to satisfy the resulting tax liability |
| A gain would be recognized to the extent the value of such liquidating distribution (based on the Companyapstas net assets at such time) is greater than such stockholderapstas basis in their common shares |
| In addition, such stockholders would be treated as the owners of a pro rata portion of each asset received by and held by the liquidating trust and would be required to take into account in computing taxable income a pro rata share of each item of income, gain and loss of the liquidating trust |
| Such stockholders would also recognize taxable gain or loss when all or part of their pro rata portion of an asset is disposed of for an amount greater or less than their pro rata portion of the tax basis of such asset at the time of its disposition |
| Historically, extraordinary corporate actions, such as the Plan, often lead to securities class action lawsuits being filed against a company |
| At March 13, 2006, we were not aware of any pending securities class action lawsuits relating to the Plan |
| However, in the event such litigation should occur, it is likely to be expensive and, even if we ultimately prevail, the process will be time consuming and will divert managementapstas attention from implementing the Plan and otherwise operating our business |
| If we do not prevail in any such lawsuit, we may be liable for damages, the validity of our stockholderapstas approval of the Plan may be challenged, or we may be unable to complete some transactions that we contemplate as part of the Plan |
| We cannot predict the outcome or the amount of expenses and damages but the amounts could have a material adverse effect on our business, results of operations and financial condition and the timing and amount of liquidating distributions to our stockholders |
| Risks related to our properties and assets The value of our real estate assets are subject to certain risks applicable to our assets and inherent in the real estate industry which, if they materialize, could have a material adverse effect on our business, results of operations and financial condition and the timing and amount of liquidating distributions to our stockholders and include: o downturns in the national, regional and local economies where our properties are located; o macroeconomic as well as specific regional and local market conditions; o competition from other for-sale housing developments; o local real estate market conditions, such as oversupply of, or reduction in demand for, residential homes and condominium units; o increased operating and construction costs, including insurance premiums, utilities, building materials, labor and real estate taxes; o increases in interest rates; and o cost of complying with environmental, zoning, and other laws |
| 15 _________________________________________________________________ We currently intend to continue to develop residential projects at Gold Peak, East Lyme and Claverack, through the subdivision, construction, and sale of condominium units or single family homes |
| Alternatively, or in combination, we may sell the East Lyme projects to another developer and sell our joint venture interest in Claverack to our partner in that venture, thus foregoing potential development profits associated with these properties |
| Our development and construction activities give rise to additional risks, which, if they materialize, could have a material adverse effect on our business, results of operations and financial condition and the timing and amount of liquidating distributions to our stockholders and include: o the possibility that we may abandon development opportunities after expending significant resources to determine feasibility; o the possibility that we may not obtain construction financing on reasonable terms and conditions or an increased number of building lots for the Claverack project, which would affect the number of single family homes we can build and sell; o the possibility that development, construction, and the sale of our projects, may not be completed on schedule resulting in increased debt service expense, construction costs and general and administrative expenses; o the inability to obtain, or costly delays in obtaining, zoning, land-use, building, occupancy and other required governmental permits and authorizations, which could delay or prevent commencement of development activities or delay completion of such activities; o the fact that properties under development or acquired for development usually generate little or no cash flow until completion of development and sale of a significant number of homes or condominium units and may experience operating deficits after the date of completion and until such homes or condominium units are sold; o increases in the cost of construction materials; and o the inability to obtain proceeds from borrowings on terms financially advantageous to us or raise alternate equity capital |
| Risks associated with the sale of properties which, if they materialize, could have a material adverse effect on our business, results of operations and financial condition and the timing and amount of liquidating distributions to our stockholders and include: o lack of demand by prospective buyers; o inability to find qualified buyers; o inability of buyers to obtain satisfactory financing; o lower than anticipated sale prices; and o the inability to close on sales of properties under contract |
| Furthermore, our estimate of the total liquidation value of the Company assumes a sale of Reis |
| As of March 13, 2006, Reis is currently considering offers from potential purchasers ranging between dlra90cmam000cmam000 and dlra100cmam000cmam000 to acquire 100prca of its stock |
| Based on these offers, in estimating the net realizable value for its investment in Reis, the Company utilized dlra90cmam000cmam000 of net proceeds in valuing Reis |
| If Reis is sold at that amount, the Company will receive approximately dlra20cmam000cmam000 of proceeds, subject to escrow holdbacks |
| While these potential sale proceeds are now reflected in the Companyapstas net realizable value presentation, there is no assurance that this transaction will be consummated |
| There is no assurance that if this current transaction is not consummated that Reis will sell the company to another party at the same price or at all |
| Separately, we only own a minority interest in Reis and therefore, we have no control over whether or when a sale would take place or at what price |
| It is likely that if we sold our interest in Reis outside of the context of the sale of Reis as an entity to a third party, we would receive a substantially discounted purchase price to reflect the fact that our interest represents a minority interest and is relatively illiquid |
| Any attempt to sell our interest independently of concurrent sales by other Reis stockholders may be restricted or impeded as a result of agreements made among Reisapstas stockholders or with Reis |
| These provisions may also decrease the value of the interest being sold |
| Furthermore, a portion of our ownership interest in Reis is through an entity in which we have two partners, all of whom must consent to any disposition of assets owned by that entity |
| 16 _________________________________________________________________ We have current and future obligations to creditors |
| Claims, liabilities and expenses from operations (such as operating costs, salaries, bonus and retention payments, directors &apos and officers &apos insurance, payroll and local taxes, legal, accounting and consulting fees and miscellaneous office expenses) will continue to be incurred through the liquidation process |
| As part of this process, we will attempt to satisfy any obligations with creditors remaining after the sale of our assets |
| These expenses will reduce the amount of assets available for ultimate distribution to our stockholders |
| To the extent our liabilities exceed the estimates that we have made, the amount of liquidating distributions to our stockholders will be reduced |
| Some of our development projects have incurred, and may incur, debt, in which case a third party lender would be entitled to cash flow generated by such investments until such debt is repaid |
| As a result of such borrowings, we would be subject to certain risks normally associated with debt financing which, if they materialize, could have a material adverse effect on our business, results of operations and financial condition and the timing and amount of liquidating distributions to our stockholders, including the risk that cash flow from sales of homes or condominium units will be insufficient to meet required payments of principal and interest, the risk that existing debt will not be able to be refinanced, the risk that the terms of such refinancings will not be as favorable to us and the risk that we will not be able to obtain modifications to increase borrowing capacity on existing construction loans |
| Such borrowings will increase the risk of loss on an investment which utilizes borrowings |
| If we default on secured indebtedness, the lender may foreclose and we could lose our entire investment in the security for such loan |
| We currently have, and may incur additional indebtedness that bears interest at variable rates |
| Accordingly, if interest rates increase, so will our interest costs, which may have a material adverse effect on our business, results of operations and financial condition and the timing and amount of liquidating distributions to our stockholders |
| The Company has limited its exposure to existing variable rate debt by purchasing interest rate caps |
| The expiration dates of these interest rate caps occur before the estimated completion dates of the construction |
| Our debt obligations may require us to comply with a number of financial and other covenants on an ongoing basis |
| Some of those obligations may restrict our ability to make liquidating distributions to our stockholders, incur additional debt and engage in certain transactions and make certain types of investments and take other actions |
| In other cases, failure to comply with covenants may limit our ability to borrow funds or cause a default under one or more of our then existing loans, possibly causing acceleration of the unpaid principal balance |
| Neither our organizational documents nor those of entities in which we invest contain any limitation on the amount of debt incurred |
| Accordingly, we and such entities could incur significant amounts of debt, resulting in increases in debt service payments which could increase the risk of default on indebtedness |
| We have co-invested with third parties through partnerships, joint ventures or other entities including ventures where decisions require shared approval with third parties |
| Investments in partnerships, joint ventures, or other entities may, under certain circumstances, involve risks that would not be present were a third party not involved, including: the possibility that our partners or co-venturers might become bankrupt or otherwise fail to fund their share of required capital contributions; that such partners or co-venturers might at any time have economic or other business interests or goals which are inconsistent with our business interests or goals; that such partners or co-venturers may be in a position to take action contrary to our instructions, requests, policies or objectives; we cannot agree with our partners on the sale of properties; and we will not be able to exercise sole decision-making authority |
| In addition, we may in certain circumstances be liable for the actions of third- party partners or co-venturers |
| Uninsured and underinsured losses may affect the value of our properties or assets |
| There are certain types of losses, such as losses resulting from wars, terrorism, earthquakes, floods, hurricanes or other acts of God that may be uninsurable or not economically insurable |
| Should an uninsured loss or a loss in excess of insured limits occur, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to that property or asset |
| 17 _________________________________________________________________ Properties with environmental problems may create liabilities for us |
| Under Federal, state and local environmental laws, ordinances and regulations, we may be required to investigate and clean up the effects of releases of hazardous or toxic substances at our properties, regardless of our knowledge or responsibility, simply because of current or past ownership or operation of the real estate by us or by a joint venture in which we have an interest |
| If certain environmental problems arise, we may have to make substantial payments which could have a material adverse effect on our business, results of operations and financial condition and the timing and amount of liquidating distributions to our stockholders |
| Costs associated with the foregoing could be substantial and in extreme cases could exceed the value of the contaminated property |
| The presence of hazardous or toxic substances or the failure to properly remediate contamination could have a material adverse effect on our ability to borrow against or sell an affected property |
| In addition, applicable environmental laws create liens on contaminated sites in favor of the government for damages and costs it incurs in connection with a contamination |
| The one environmental problem of which we are aware relates to the East Lyme Land which was recently acquired |
| The land requires remediation of pesticides used on the property when it was an apple orchard, the cost of which has been considered in evaluating the carrying amount of the property at December 31, 2005 |
| Our properties are subject to various Federal, state and local regulatory requirements, such as state and local fire and life safety requirements and the Americans with Disabilities Act |
| If we fail to comply with these requirements, we could incur fines or be subject to private damage awards |
| Compliance with requirements may require significant unanticipated expenditures by us |
| Such expenditures could have a material adverse effect on our business, results of operations and financial condition and the timing and amount of liquidating distributions to our stockholders |
| Risks related to our organization and structure We are dependent on key personnel |
| Jeffrey H Lynford has been Chairman of the Board since our formation in 1997 |
| He has also been our President and Chief Executive Officer since April 1, 2002 |
| Lynfordapstas employment agreement with us expires December 31, 2007 |
| We also depend on the services of David M Strong, our Senior Vice President for Development, specifically with respect to the Gold Peak project |
| Strongapstas employment agreement with us expires on December 31, 2007 |
| Lynford or Mr |
| Strong could have a material adverse effect on our business, including the terms and conditions under which we dispose of our assets and continued availability of bank loans, results of operations and financial condition and the timing and amount of liquidating distributions to our stockholders |
| Furthermore, Mr |
| Lynfordapstas contract provides that since the Company has disposed of all or substantially all of two of its business units, he is no longer required to devote substantially all of his time, attention and energies during business hours to the Companyapstas activities |
| He may now perform services for and engage in business activities with other persons so long as such services and activities do not prevent him from fulfilling his fiduciary responsibilities to the Company |
| As previously described herein, on January 27, 2006, a company which is owned by Mr |
| Lynford and others acquired the Beekman project from the Company |
| Our business operations and ability to complete the Plan in a timely manner and sell our assets for the estimated proceeds could be negatively impacted if we are unable to retain the services of Messrs |
| Lynford and Strong, as well as other key personnel, or hire suitable replacements |
| Lynford and Mr |
| Lowenthal, one of our directors, may have conflicts of interest |
| Lynford is the brother of Lloyd Lynford, a stockholder, director and the President of Reis |
| Lowenthal has served on the board of directors of Reis since the third quarter of 2000 |
| Our Board is divided into three classes, each consisting of one to three directors |
| The directors in each class serve for a three-year term with staggering expirations |
| This staggering may discourage offers for us or make an acquisition of us more difficult, even when an acquisition is in the best interest of our stockholders |
| Our charter authorizes the Board to establish one or more series of preferred shares and the preferences and other terms of such series |
| Although the Board has no intention to do so, it could issue a series of preferred 18 _________________________________________________________________ shares that could impede or prevent a merger, tender offer or other transaction that some, or a majority, of our stockholders might believe to be in their best interest |
| Under Maryland law, certain "e business combinations "e (including certain issuances of equity securities) between a Maryland corporation and any person who beneficially owns ten percent or more of the voting power of the corporationapstas shares or an affiliate thereof are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder |
| Our Board has exempted from the Maryland statute any business combinations with Messrs |
| Lynford and Lowenthal or any of their affiliates or any other person acting in concert or as a group with any of such persons and, consequently, the five-year prohibition and the supermajority vote requirements will not apply to business combinations between such persons and us |
| Currently, we believe that either we are not within the definition of "e investment company "e as that term is defined under the Investment Company Act of 1940 (the "e 1940 Act "e ) or, alternatively, may rely on one or more of the 1940 Actapstas exemptions |
| We intend to continue to conduct our operations in a manner that will exempt us from the registration requirements of the 1940 Act |
| If we were deemed to be an investment company because of our investment securities holdings, we must register as an investment company under the 1940 Act |
| The 1940 Act places significant restrictions on the capital structure and corporate governance of a registered investment company, and materially restricts its ability to conduct transactions with affiliates |
| Compliance with the 1940 Act could also increase our operating costs |
| Such changes could have a material adverse affect on our business, results of operations and financial condition and the timing and amount of liquidating distributions to our stockholders |
| The Company has net operating loss ( "e NOL "e ) carryforwards, for Federal income tax purposes, aggregating approximately dlra61cmam100cmam000 at December 31, 2005, which expire in the years 2007 through 2024 and are subject to an annual and aggregate limit on utilization of NOLs after an ownership change, pursuant to Section 382 of the Internal Revenue Code ( "e Section 382 "e ) |
| Ownership changes as set forth in Section 382 may have occurred during 2005 |
| Any limitation on the utilization of NOLs may be mitigated as a result of recognizing any net unrealized built-in gains that existed at ownership change dates |
| If the Company determines that such a change in ownership did occur during 2005, there would not be a material impact to the accompanying consolidated financial statements |